Callaway 2014 Annual Report Download - page 43

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basis over the vesting period for stock options. Compensation expense for SARs is recognized on a straight-line basis over
the vesting period based on an award’s estimated fair value, which is remeasured at the end of each reporting period. Once
vested, SARs continued to be remeasured to fair value until they are exercised.
The Company records compensation expense for restricted stock awards and restricted stock units (collectively “restricted
stock”) based on the estimated fair value of the award on the date of grant. The estimated fair value is determined based on
the closing price of the Company’s common stock on the date of grant multiplied by the number of shares awarded.
Compensation expense is recognized on a straight-line basis over the vesting period, reduced by an estimated forfeiture rate.
Phantom stock units are a form of share-based awards that are indexed to the Company’s stock and are settled in cash.
Compensation expense for Phantom Stock Units is recognized on a straight-line basis over the vesting period based on the
award’s estimated fair value. Fair value is remeasured at the end of each interim reporting period through the award’s settlement
date and is based on the closing price of the Company’s stock.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is contained in Note 2 “Significant Accounting Policies” in
the Notes to Consolidated Financial Statements in this Form 10-K, which is incorporated herein by this reference.
Results of Operations
Overview of Business, Seasonality and Foreign Currency
Products. The Company designs, manufactures and sells high quality golf clubs, golf balls, golf bags and other golf-
related accessories. The Company designs its products to be technologically advanced and in this regard invests a considerable
amount in research and development each year. The Company’s golf products are designed for golfers of all skill levels, both
amateur and professional.
Operating Segments. The Company has two reportable operating segments that are organized on the basis of products,
namely the golf clubs segment and golf balls segment. The golf clubs segment consists of Callaway Golf woods, hybrids,
irons and wedges and Odyssey putters. This segment also includes other golf-related accessories described above and royalties
from licensing of the Company’s trademarks and service marks as well as sales of pre-owned golf clubs. The golf balls segment
consists of Callaway Golf balls that are designed, manufactured and sold by the Company. As discussed in Note 19 “Segment
Information” in the Notes to Consolidated Financial Statements in this Form 10-K, the Company’s operating segments exclude
a significant amount of corporate general administrative expenses and other income (expense) not utilized by management
in determining segment profitability.
Cost of Sales. The Company’s cost of sales is comprised primarily of material and component costs, distribution and
warehousing costs, and overhead. Due to the recent actions taken in connection with the Cost Reduction Initiatives to improve
manufacturing efficiencies, a greater percentage of the Company's manufacturing costs became variable in nature and will
fluctuate with sales volumes. With respect to the Company's operating segments, variable costs for golf clubs represent
approximately 85% to 95% of cost of sales, and for golf balls, approximately 75% to 85%. Of these variable costs, material
and component costs represent approximately 85% to 95% for golf clubs and approximately 75% to 85% for golf balls. On
a consolidated basis, over 85% of total cost of sales is variable in nature, and of this amount, over 85% is comprised of material
and component costs. Generally, the relative significance of the components of cost of sales does not vary materially from
these percentages from period to period. See "Years Ended December 31, 2014 and 2013 - Segment Profitability" and "Years
Ended December 31, 2013 and 2012 - "Segment Profitability" below for further discussion of gross margins.
Seasonality. In most of the regions where the Company does business, the game of golf is played primarily on a seasonal
basis. Weather conditions generally restrict golf from being played year-round, except in a few markets, with many of the
Company’s on-course customers closing for the cold weather months. The Company’s business is therefore subject to seasonal
fluctuations. In general, during the first quarter, the Company begins selling its products into the golf retail channel for the
new golf season. This initial sell-in generally continues into the second quarter. The Company’s second-quarter sales are
significantly affected by the amount of reorder business of the products sold during the first quarter. The Company’s third-
quarter sales are generally dependent on reorder business but are generally less than the second quarter as many retailers begin
decreasing their inventory levels in anticipation of the end of the golf season. The Company’s fourth-quarter sales are generally
less than the other quarters due to the end of the golf season in many of the Company’s key markets. However, fourth-quarter