Callaway 2015 Annual Report Download - page 43

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27
can mitigate the effects of changes in foreign currency exchange rates, they do not eliminate those effects, which can be
significant. For all contracts that qualify as cash flow hedges, the Company records gains and losses either in earnings as a
component of cost of goods sold or as a component of other comprehensive income or loss. Gains and losses on derivatives
that are not elected for hedge accounting treatment or that do not meet hedge accounting requirements are recorded in earnings
in other income (expense).
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is contained in Note 2 “Summary of Significant Accounting
Policies” in the Notes to Consolidated Financial Statements in this Form 10-K, which is incorporated herein by this
reference.
Discussion of non-GAAP Measures
In addition to the financial results contained in this report, which have been prepared and presented in accordance with
accounting principles generally accepted in the United States (“GAAP”), the Company has also included supplemental
information concerning the Company’s financial results on a non-GAAP basis. This non-GAAP information includes certain
of the Company’s financial results on a constant currency basis. This constant currency information estimates what the
Company’s financial results would have been without changes in foreign currency exchange rates. This information is
calculated by taking the current period local currency results and translating them into U.S. Dollars based upon the foreign
currency exchange rates for the applicable comparable prior period. The calculation excludes foreign currency net gains and
losses recognized in other income (expense) from translation of transactions denominated in foreign currencies and foreign
currency gains and losses recognized from the Company's hedging contracts. It does not include any other effect of changes
in foreign currency rates on the Company’s results or business.
The Company has included in this report information to reconcile this non-GAAP information to the most directly
correlated GAAP information. The non-GAAP information presented in this report should not be considered in isolation or
as a substitute for any measure derived in accordance with GAAP. The non-GAAP information may also be inconsistent with
the manner in which similar measures are derived or used by other companies. Management uses such non-GAAP information
for financial and operational decision-making purposes and as a means to evaluate period over period comparisons of the
underlying performance of its business and in forecasting the Company’s business going forward. Management believes that
the presentation of such non-GAAP information, when considered in conjunction with the most directly comparable GAAP
information, provides additional useful comparative information for investors in their assessment of the underlying
performance of the Company’s business.
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 and Strata balls that are designed, manufactured and sold by the Company. As discussed in Note
18 “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 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