Callaway 2005 Annual Report Download - page 28

Seasonality and Adverse Weather Conditions
In addition to the effects of product cycles described above, the Company’s business is also subject to the
effects of seasonal fluctuations. The Company’s first quarter sales generally represent the Company’s sell-in to
the golf retail channel of its golf club products for the new golf season. Orders for many of these sales are
received during the fourth quarter of the prior year. The Company’s second and third quarter sales generally
represent re-order business for golf clubs. Sales of golf clubs during the second and third quarters are
significantly affected not only by the sell-through of the Company’s products that were sold into the channel
during the first quarter but also by the sell-through of the products of the Company’s competitors. Retailers are
sometimes reluctant to re-order the Company’s products in significant quantity when they already have excess
inventory of the Company’s or its competitors’ products. The Company’s sales of golf balls are generally
associated with the level of rounds played in the areas where the Company’s products are sold. Therefore, golf
ball sales tend to be greater in the second and third quarters, when the weather is good in most of the Company’s
key markets and rounds played are up. Golf ball sales are also stimulated by product introductions as the retail
channel takes on initial supplies. Like golf clubs, re-orders of golf balls depend on the rate of sell-through. The
Company’s sales during the fourth quarter are generally significantly less than the other quarters because in
general in many of the Company’s principal markets less people are playing golf during that time of year due to
cold weather. Furthermore, it previously was the Company’s practice to announce its new product line at the
beginning of each calendar year. In recent years, the Company has departed from that practice and now generally
announces its new product line in the fourth quarter to allow retailers to plan better. Such early announcements of
new products could cause golfers, and therefore the Company’s customers, to defer purchasing additional golf
equipment until the Company’s new products are available. Such deferments could have a material adverse effect
upon sales of the Company’s current products and/or result in close out sales at reduced prices.
Because of these seasonal trends, the Company’s business can be significantly adversely affected by unusual
or severe weather conditions. Unfavorable weather conditions generally result in less golf rounds played, which
generally results in less demand for golf clubs and golf balls. Furthermore, catastrophic storms can negatively
affect golf rounds played not only during the storms but also for a significant period of time afterward as storm
damaged golf courses are repaired and golfers focus on repairing the damage to their homes, businesses and
communities. Consequently, sustained adverse weather conditions, especially during the warm weather months,
could materially affect the Company’s sales.
Conformance with the Rules of Golf
New golf club and golf ball products generally seek to satisfy the standards established by the USGA and
R&A because these standards are generally followed by golfers within their respective jurisdictions. The USGA
rules are generally followed in the United States, Canada and Mexico, and the R&A rules are generally followed
in most other countries throughout the world.
The Rules of Golf as published by the R&A and the USGA are virtually the same except with respect to the
regulation of “driving clubs.” The R&A rules currently permit driver clubheads with greater flexibility (as
measured by a specific test) than are permitted under the USGA rules. As a result, in jurisdictions where the
R&A rules are followed, the Company (like many of its competitors) has marketed and sold drivers that conform
to the R&A rules but not the USGA rules (the “Plus Drivers”). In those jurisdictions where the USGA rules are
followed, the Company markets and sells its standard drivers that conform to both the R&A and the USGA rules.
All of the Company’s other products are believed to conform to both the USGA and R&A rules.
Effective January 1, 2008, the more flexible clubheads such as those used for the Plus Drivers will not be
conforming under the generally applicable Rules of Golf as published by the R&A. It is not clear what effect the
change in rules will have upon demand for Plus Drivers in R&A jurisdictions as 2008 approaches or subsequent
to the implementation of the new restrictions. It is possible that some jurisdictions and/or golfers will choose not
to follow the R&A’s changes and will instead continue to use Plus Drivers. This uncertainty adversely affects the
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