Callaway 2012 Annual Report Download - page 31

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The seasonality of the Company’s business could be exacerbated by the adverse effects of unusual or severe
weather conditions as well as by severe weather conditions caused by climate change on the Company’s
business.
Due to the seasonality of the Company’s business, the Company’s business can be significantly adversely
affected by unusual or severe weather conditions and by severe weather conditions caused by climate change.
Unfavorable weather conditions generally result in fewer golf rounds played, which generally results in reduced
demand for all golf products, and in particular, golf balls. Furthermore, catastrophic storms can negatively affect
golf rounds played both during the storms and 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.
Goodwill and intangible assets represent a significant portion of the Company’s total assets and any
impairment of these assets could negatively impact our results of operations and shareholders’ equity.
The Company’s goodwill and intangible assets consist of goodwill from acquisitions, trade names,
trademarks, service marks, trade dress, patents, and other intangible assets.
Accounting rules require the evaluation of the Company’s goodwill and intangible assets with indefinite
lives for impairment at least annually or whenever events or changes in circumstances indicate that the carrying
value of such assets may not be recoverable. Such indicators include a sustained decline in the Company’s stock
price or market capitalization, adverse changes in economic or market conditions or prospects, and changes in the
Company’s operations.
An asset is considered to be impaired when its carrying value exceeds its fair value. The Company
determines the fair value of an asset based upon the discounted cash flows expected to be realized from the use
and ultimate disposition of the asset. If in conducting an impairment evaluation the Company determines that the
carrying value of an asset exceeded its fair value, the Company would be required to record a non-cash
impairment charge for the difference between the carrying value and the fair value of the asset. If a significant
amount of the Company’s goodwill and intangible assets were deemed to be impaired, the Company’s results of
operations and shareholders’ equity would be significantly adversely affected.
The Company’s ability to utilize all or a portion of its U.S. deferred tax assets may be limited significantly if
the Company experiences an “ownership change.”
The Company has a significant amount of U.S. federal and state deferred tax assets, which include net
operating loss carryforwards and other losses. The Company’s ability to utilize the losses to offset future taxable
income may be limited significantly if the Company were to experience an “ownership change” as defined in
section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). In general, an ownership change
will occur if there is a cumulative increase in ownership of the Company’s stock by “5-percent shareholders” (as
defined in the Code) that exceeds 50 percentage points over a rolling three-year period. The determination of
whether an ownership change has occurred for purposes of Section 382 is complex and requires significant
judgment. The extent to which the Company’s ability to utilize the losses is limited as a result of such an
ownership change depends on many variables, including the value of the Company’s stock at the time of the
ownership change. The Company continues to monitor changes in ownership. If such a cumulative increase did
occur in any three year period and the Company were limited in the amount of losses it could use to offset
taxable income, the Company’s results of operations and cash flows would be adversely impacted.
Changes in equipment standards under applicable Rules of Golf could adversely affect the Company’s
business.
The Company seeks to have its new golf club and golf ball products satisfy the standards published by the
USGA and The R&A in the Rules of Golf because these standards are generally followed by golfers, both
professional and amateur, within their respective jurisdictions. The USGA publishes rules that are generally
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