Callaway 2015 Annual Report Download - page 52

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36
and putter products launched in 2014, and (ii) the net unfavorable impact of changes in foreign currency rates year over year.
The increase in operating expenses during 2014 compared to 2013 was primarily due to an increase in marketing expenses,
as discussed above.
Pre-tax income in the Company’s golf balls operating segment improved to $15.2 million for 2014 from pre-tax loss of
$3.4 million for 2013. This increase was attributable to an increase in gross margin as well as an increase in net sales as
discussed above, combined with a slight decrease in operating expenses. The increase in gross margin was primarily driven
by (i) the launch of the premium Speed Regime golf balls in 2014 with no comparable premium launch in 2013, combined
with an increase in average selling prices on value-priced golf balls; and (ii) cost savings from improved manufacturing and
distribution efficiencies. These increases were partially offset by the net unfavorable impact of changes in foreign currency
rates year over year.
Financial Condition
The Company’s cash and cash equivalents increased $12.2 million to $49.8 million at December 31, 2015, from $37.6
million at December 31, 2014. Cash generated from operating activities decreased by $6.3 million to $30.6 million during
2015 compared to cash generated of $36.9 million during 2014. The decrease in cash generated from operating activities was
primarily due to the timing of inventory purchases in support of new product launches, in addition to the timing of cash
collections. In 2015, the Company used its cash and cash equivalents as well as cash generated from operations to pay down
outstanding borrowings on the ABL Facility, as well as to fund $14.4 million in capital expenditures, $3.1 million in a note
receivable and $0.9 million in investments in golf-related ventures. Management expects to fund the Company’s future
operations from current cash balances and cash provided by its operating activities combined with borrowings under its credit
facilities, as deemed necessary (see Note 3 "Financing Arrangements" in the Notes to Consolidated Financial Statements in
this Form 10-K for further information on the ABL Facility).
The Company’s accounts receivable balance fluctuates throughout the year as a result of the general seasonality of the
Company’s business. The Company’s accounts receivable balance will generally be at its highest during the first and second
quarters and decline significantly during the third and fourth quarters as a result of an increase in cash collections and lower
sales. As of December 31, 2015, the Company’s net accounts receivable increased $5.8 million to $115.6 million from $109.8
million as of December 31, 2014. This increase was primarily attributable to an increase in net sales in the fourth quarter of
2015 compared to the fourth quarter of 2014, combined with a decrease in the reserve for doubtful accounts.
The Company’s inventory balance also fluctuates throughout the year as a result of the general seasonality of the
Company’s business. Generally, the Company’s buildup of inventory levels begins during the fourth quarter and continues
heavily into the first quarter as well as into the beginning of the second quarter in order to meet demand during the height of
the golf season. Inventory levels start to decline toward the end of the second quarter and are at their lowest during the third
quarter. Inventory levels are also impacted by the timing of new product launches. The Company’s inventories increased
slightly by $1.7 million to $208.9 million as of December 31, 2015 from $207.2 million as of December 31, 2014. Inventories
as a percentage of the trailing 12 months net sales increased to 24.8% as of December 31, 2015 compared to 23.4% as of
December 31, 2014.
Liquidity and Capital Resources
The information set forth in Note 3 “Financing Arrangements,” in the Notes to Consolidated Financial Statements in
this Form 10-K, is incorporated herein by this reference.
Liquidity
The Company’s principal sources of liquidity consist of its existing cash balances, funds expected to be generated from
operations and its credit facilities. The Company experienced negative cash flows from operations in 2012 and 2013. During
the second half of 2012, the Company implemented significant changes to its business, including among other things, steps
designed to increase product sales as well as initiatives designed to reduce the Company’s manufacturing costs and operating
expenses. As a result of these initiatives, the Company's net sales and gross margin have increased and in 2014 and 2015, the
Company generated positive cash flows from operations. Based upon the Company’s current cash balances, its estimates of
funds expected to be generated from operations in 2016, and current and projected availability under its credit facilities, the
Company believes that it will be able to finance current and planned operating requirements, capital expenditures, contractual
obligations and commercial commitments for at least the next 12 months.