Callaway 2003 Annual Report Download - page 31

28 CALLAWAY GOLF COMPANY
significant disruption in their business as a result of a
pan
demic disease, the Company’s ability to obtain the neces-
sary
components to make its products could be significantly
adversely affected. In addition, the outbreak of any such
disease generally restricts the travel to and from such
countries making it more difficult in general to manage the
Company’s international operations.
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 favorable economic conditions and
when consumers are feeling confident and prosperous.
Adverse economic conditions in the United States or in the
Company’s international markets (which represent almost
half of the Company’s total sales), or a decrease in pros-
perity among consumers, or even a decrease in consumer
confidence as a result of anticipated adverse economic
conditions, could cause consumers to forgo or to postpone
purchasing new golf products. Such forgone or postponed
purchases could have a material adverse effect upon the
Company.
The Company believes that the current economic conditions
in many of the countries where the Company conducts busi-
ness, although beginning to show signs of improvement,
generally remain unfavorable to the golf industry. Many peo-
ple in the United States have lost a substantial amount of
wealth in the stock market, including some who have lost all
or substantially all of their retirement savings. Furthermore,
in the United States, there have been announcements by
companies of significant reductions in force, and others are
possible, and consumers are less likely to purchase new golf
equipment when they are unemployed. The Company
believes that these adverse conditions have adversely
affected the
Company’s sales and will continue to do so
until such con
ditions improve.
Foreign Currency Risk
Almost half of the Company’s sales are international sales. As a
result, the Company conducts transactions in approximately 12
currencies worldwide. Conducting business in such various
currencies increases the Company’s exposure to fluctuations in
foreign currency exchange rates relative to the U.S. dollar.
Changes in exchange rates may positively or negatively affect
the Company’s financial results. Overall, the Company is
generally negatively affected by a stronger U.S. dollar in relation
to the foreign currencies in which the Company conducts
business. Conversely, overall, the Company is generally positively
affected by a weaker U.S. dollar relative to such foreign cur-
rencies. For the effect of foreign currencies on the Company’s
financial results for the current reporting periods, see above
“Results of Operations.”
The effects of foreign currency fluctuations can be significant.
The Company therefore engages in certain hedging activities to
mitigate the impact of foreign currency fluctuations over time
on the Company’s financial results. The Company’s hedging
activities reduce, but do not eliminate, the effects of such
foreign currency fluctuations. Factors that could affect the
effectiveness of the Company’s hedging activities include
accuracy of sales forecasts, volatility of currency markets and
the availability of hedging instruments. Since the hedging
activities are designed to reduce volatility, they not only reduce
the negative impact of a stronger U.S. dollar but they also
reduce the positive impact of a weaker U.S. dollar. For the
effect of the Company’s hedging activities during the current
reporting periods, see below “Quantitative and Qualitative
Disclosures about Market Risk.”
The Company’s future financial results could be significantly
negatively affected if the value of the U.S. dollar increases
relative to the foreign currencies in which the Company
conducts business. The degree to which the Company’s financial
results are affected will depend in part upon the effectiveness
or ineffectiveness of the Company’s hedging activities.
Growth Opportunities
Golf Clubs. In order for the Company to significantly 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