Callaway 2008 Annual Report Download - page 46

Results of Operations
Overview of Business and Seasonality
The Company designs, manufactures and sells high quality golf clubs and golf balls and also sells golf and
lifestyle apparel, golf footwear, golf bags, gloves, eyewear and other golf-related accessories. The Company
designs its products to be technologically advanced and in this regard invests a considerable amount in research
and development each year. The Company’s products are designed for golfers of all skill levels, both amateur
and professional.
The Company has two operating segments that are organized on the basis of products, namely the golf clubs
segment and golf balls segment. The golf clubs segment consists primarily of Callaway Golf, Top-Flite and Ben
Hogan woods, hybrids, irons, wedges and putters as well as Odyssey putters. This segment also includes other
golf-related accessories described above and royalties from licensing of the Company’s trademarks and service
marks as well as sales of pre-owned golf clubs. The golf balls segment consists primarily of Callaway Golf and
Top-Flite golf balls. As discussed in Note 17 “Segment Information” to the Notes to Consolidated Financial
Statements, the Company’s operating segments exclude a significant amount of corporate general administrative
expenses and other income (expense) not utilized by management in determining segment profitability. While the
Company’s golf clubs segment has been profitable, the Company’s golf balls segment has historically reported
annual operating losses for all periods until 2007. The Company’s golf balls segment results of operations have
improved significantly from a loss of $52.7 million for the year ended December 31, 2003 (including charges of
$24.1 million for Top-Flite integration initiatives) to profitability of $6.9 million for the year ended
December 31, 2008 (including charges of $6.7 million related to the gross margin improvement initiatives). The
Company is continuing to take actions to improve the profitability of its golf ball business, including the
consolidation of its golf ball production operations into other existing locations. As a result of this consolidation,
the Company announced the closure of its ball manufacturing facility in Gloversville, New York in May 2008.
In most of the Company’s key markets, 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 also
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 also 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. In general, however, because of this seasonality, a majority of the
Company’s sales and most, if not all, of its profitability generally occurs during the first half of the year.
Approximately half of the Company’s business is conducted outside of the United States and is conducted in
currencies other than the U.S. dollar. For reporting purposes, transactions conducted in foreign currencies must
be translated into U.S. dollars based upon applicable foreign currency exchange rates. Fluctuations in foreign
currency rates therefore can have a significant effect on the Company’s reported financial results. In general, the
Company’s 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. The
Company’s hedging activities can mitigate but do not eliminate the effects of the foreign currency fluctuations.
Overall, during 2008, the Company’s reported financial results generally benefited from foreign currency rates.
During the second half of the year, however, the U.S. dollar began to strengthen and the translation of foreign
currency exchange rates had a negative impact on the Company’s third and fourth quarter results. If the dollar
continues to strengthen as compared to the currencies in which the Company conducts business, the Company’s
future reported financial results would be significantly adversely affected.
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