Callaway 2015 Annual Report Download - page 44

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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, 2015 and 2014 - Segment Profitability" and "Years Ended December 31, 2014 and 2013 - 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
sales can be affected from time to time by the early launch of product introductions related to the new golf season of the
subsequent year. This seasonality, and therefore quarter-to-quarter fluctuations, can be affected by many factors, including
the timing of new product introductions as well as weather conditions. In general, because of this seasonality, a majority of
the Company’s sales and most, if not all, of its profitability occurs during the first half of the year.
Foreign Currency. A significant portion of the Company’s business is conducted outside of the United States in currencies
other than the U.S. dollar. As a result, changes in foreign currency rates can have a significant effect on the Company’s financial
results. The Company enters into foreign currency forward contracts to mitigate the effects of changes in foreign currency
rates. While these foreign currency forward contracts can mitigate the effects of changes in foreign currency rates, they do
not eliminate those effects, which can be significant. These effects include (i) the translation of results denominated in foreign
currency into U.S. dollars for reporting purposes, (ii) the mark-to-market adjustments of certain intercompany balance sheet
accounts denominated in foreign currencies and (iii) the mark-to-market adjustments on the Company’s foreign currency
forward contracts. In general, the Company’s overall financial results are affected positively by a weaker U.S. dollar and are
affected negatively by a stronger U.S. dollar as compared to the foreign currencies in which the Company conducts its business.
During 2015, the Company’s reported net sales in regions outside the United States were negatively affected by the translation
of foreign currency sales into U.S. dollars based on 2015 exchange rates. If 2014 exchange rates were applied to 2015 reported
sales in regions outside the United States and all other factors were held constant, net sales in such regions would have been
$53.2 million higher than the net sales reported in 2015. Additionally, in general, the U.S. dollar has strengthened against the
foreign currencies in which the Company conducts its business, primarily the Japanese Yen. If this trend persists or if the U.S.
dollar further strengthens against these currencies, it could significantly adversely impact the Company's future results of
operations.
Executive Summary
Despite significant headwinds from unfavorable foreign currency exchange rates in 2015, the Company’s operational
performance, market share and brand momentum continued to improve. The success of the Company’s 2015 golf club product
line contributed to the Company achieving the number one dollar market share position in the United States in total golf clubs
(per Golf Datatech). In addition to improved operational performance, the Company also strengthened its balance sheet through
the retirement of its outstanding convertible debt in 2015.
The Company’s net sales in 2015 decreased 5% to $843.8 million compared to $886.9 million in 2014. As mentioned
above, foreign currency exchange rates had a significant adverse effect on the Company’s net sales, which negatively impacted
net sales by $53.2 million in 2015. On a constant currency basis, net sales for 2015 would have increased by 1% compared
to 2014. The sales growth in 2015 was tempered by a planned strategic shift in product launch timing, which adversely affected
first quarter net sales, and softer than expected market conditions in the Company’s international markets, particularly in Asia.
The Company’s gross profit as a percentage of net sales increased by 200 basis points, to 42.4% in 2015 compared to
2014. On a constant currency basis, gross margin would have increased by 510 basis points to 45.5% compared to the gross
margin reported in 2014. This increase was primarily due to more favorable product pricing and mix of higher margin products,