Callaway 2001 Annual Report Download - page 35

Callaway Golf Company
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has a contingent liability related to the New York City facility (see Notes 11
and 12 to the Consolidated Financial Statements).
Certain Factors Affecting Callaway Golf Company
The financial statements contained in this report and the related discussion
describe and analyze the Company’s financial performance and condition for
the periods indicated. For the most part, this information is historical. The
Company’s prior results, however, are not necessarily indicative of the
Company’s future performance or financial condition. The Company there-
fore has included the following discussion of certain factors which could
affect the Company’s future performance or financial condition. These factors
could cause the Company’s future performance or financial condition to dif-
fer materially from its prior performance or financial condition or from man-
agement’s expectations or estimates of the Company’s future performance or
financial condition. These factors, among others, should be considered in
assessing the Company’s future prospects and prior to making an investment
decision with respect to the Company’s stock.
Terrorist Activity and Armed Conflict Terrorist activities and armed con-
flicts (such as the attacks on the World Trade Center and the Pentagon, the
incidents of Anthrax poisoning and the military actions in Afghanistan)
would likely have a significant adverse effect upon the Company’s business.
Such events would likely have an adverse effect upon an already fragile world
economy (discussed below) and would likely adversely affect the level of
demand for the Company’s products as consumer’s attention and interest are
diverted from golf and become focused on these events and the economic,
political, and public safety issues and concerns associated with such events.
Also, such events could adversely affect the Company’s ability to manage its
supply and delivery logistics. If such events caused a significant disruption in
domestic or international air, ground or sea shipments, the Company’s abil-
ity to obtain the materials necessary to produce and sell its products and to
deliver customer orders also could be materially adversely affected.
Furthermore, such events have negatively impacted tourism. If this negative
impact upon tourism continues, the Company’s sales to retailers at resorts
and other vacation destinations would be materially adversely affected.
Adverse Global Economic Conditions The Company sells golf clubs, golf
balls and golf accessories. These products are recreational in nature and are
therefore discretionary purchases for consumers. Consumers are generally
more willing to make discretionary purchases of golf products during favor-
able economic conditions. An adverse change in economic conditions in the
United States or in the Company’s international markets (which represent
almost half of the Company’s total sales), or even a decrease in consumer
confidence as a result of anticipated adverse changes in economic conditions,
could cause consumers to forgo or to postpone purchasing new golf prod-
ucts. Such forgone or postponed purchases could have a material adverse
effect upon the Company.
The economic conditions in many of the Company’s key markets around the
world are currently viewed by many as uncertain or troubled. In the United
States, there have been many announcements by companies of large-scale
reductions in force and others are expected. Consumers are less likely to pur-
chase new golf equipment when they are unemployed. Furthermore, even if
economic conditions were to improve during the latter part of 2002, the
Company’s sales in 2002 may not experience a corresponding improvement
because the golf selling season would largely be over.
Foreign Currency Risks Almost half of the Company’s sales are interna-
tional sales. As a result, the Company conducts transactions in approxi-
mately 12 currencies worldwide. Conducting business in such various cur-
rencies increases the Company’s exposure to devaluations of foreign curren-
cies relative to the U.S. dollar which adversely impacts the Company’s results
of operations. The Company’s results in 2001 were significantly affected neg-
atively by the strength of the U.S. dollar versus other foreign currencies as
compared to the prior year. Continued weakness in such foreign currencies
during 2002 would have a significant negative effect upon the Company.
The Company tries to mitigate its exposure to foreign currency fluctuations by
engaging in certain hedging activities. The Company’s hedges reduce, but do
not eliminate, the affects of such foreign currency fluctuations on the
Company’s results of operations. For example, the Company successfully
entered into hedges for certain transactions it anticipated to occur during
2001. These hedging activities mitigated, but did not eliminate, the negative
effects of foreign currency fluctuations on the hedged transactions that
occurred during such period. Despite the Company’s successful hedge transac-
tions, decreases in foreign currency exchange rates adversely impacted net sales
for the year ended December 31, 2001 by approximately $32.9 million (as
measured by applying 2000 exchange rates to 2001 net sales). If the Company
does not successfully hedge future transactions, the adverse effects of foreign
currency devaluations would increase. (See below Item 3, Quantitative and
Qualitative Disclosures about Market Risk — Foreign Currency Fluctuations).
Growth Opportunities Golf Clubs. In order for the Company to significant-
ly grow its sales of golf clubs, the Company must either increase its share of
the market for golf clubs or the market for golf clubs must grow. The
Company already has a significant share of the worldwide premium golf club
market and therefore opportunities for additional market share may be lim-
ited. The Company does not believe there has been any material increase in
participation or the number of rounds played in 1999, 2000 or 2001. In fact,
Golf Datatech reports that the number of rounds played declined 9 out of 12
months in 2001. Furthermore, the Company believes that since 1997 the
overall worldwide premium golf club market has generally not experienced
substantial growth in dollar volume from year to year. There is no assurance
that the overall dollar volume of the worldwide premium golf club market
will grow, or that it will not decline, in the future. The Company’s future club
sales growth therefore may be limited unless there is growth in the worldwide
premium golf club market or it can grow its already significant market share.
Golf Balls. The Company began selling its golf balls in February 2000 and
does not have as significant of a market share as it does in the club business.
Although opportunities exist for the acquisition of additional market share
in the golf ball market, such market share is currently held by some well-
established and well-financed competitors. There is no assurance that the
Company will be able to obtain additional market share in this very compet-
itive golf ball market. If the Company is unable to obtain additional market
share, its golf ball sales growth may be limited.
Golf Ball Costs The cost of entering the golf ball business has been signifi-
cant. To date, the development of the Company’s golf ball business has had a
significant negative impact on the Company’s cash flows, financial position
and results of operations. The Company will need to produce and sell golf
balls in large volumes to cover its costs and become profitable in 2002.
Although the Company’s golf ball operations have shown significant
improvement during 2001, there is no assurance that the Company will be
able to achieve the sales or production efficiencies necessary to make its golf
ball business profitable. Until the golf ball business becomes profitable, the
Company’s results of operations, cash flows and financial position will con-
tinue to be negatively affected.