Callaway 2012 Annual Report Download - page 62

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declines and incurred significant losses, including negative cash flows from operations in 2012. As discussed
above, during 2012, the Company implemented significant changes to its business, including among other things,
steps designed to increase product sales as well as initiatives designed to reduce the Company’s manufacturing
costs and operating expenses. The Company believes these initiatives will increase the Company’s cash flows
from operations in 2013. Based upon the Company’s current cash balances, its estimates of funds expected to be
generated from operations in 2013, and current and projected availability under the ABL Facility, the Company
believes that it will be able to finance current and planned operating requirements, capital expenditures,
contractual obligations and commercial commitments for at least the next 12 months.
The Company’s ability to generate sufficient positive cash flows from operations is subject to many risks
and uncertainties, including future economic trends and conditions, the success of the Company’s 2012 change
initiatives (as discussed above in the Executive Summary), demand for the Company’s products, foreign
currency exchange rates, and other risks and uncertainties applicable to the Company and its business (see “Risk
Factors” contained in Item 1A). While management believes the 2012 Cost Reduction Initiatives will be
effective, no assurance can be given that the Company will be able to generate sufficient operating cash flows in
the future or maintain or grow its existing cash balances. If the Company is unable to generate sufficient cash
flows to fund its business due to a further decline in sales or otherwise and is unable to reduce its manufacturing
costs and operating expenses to offset such decline, the Company will need to increase its reliance on the ABL
Facility for needed liquidity. If the ABL Facility is not then available or sufficient and the Company could not
secure alternative financing arrangements, the Company’s future operations would be significantly, adversely
affected.
As of December 31, 2012, a significant portion of the Company’s total cash is held in regions outside of the
U.S. Outside of settling intercompany balances during the normal course of operations, the Company may
repatriate funds from its foreign subsidiaries. The Company has not, nor does it anticipate the need to, repatriate
funds to the United States to satisfy domestic liquidity needs arising in the ordinary course of business, including
liquidity needs associated with its domestic debt service requirements. As such, the Company considers the
undistributed earnings of its foreign subsidiaries to be indefinitely reinvested and, accordingly, no U.S. income
taxes have been provided thereon. If in the future the Company decides to repatriate such foreign earnings, it
would need to accrue and pay incremental U.S. federal and state income tax, reduced by the current amount of
available U.S. federal and state net operating loss and tax credit carryforwards.
Capital Resources
The Company does not currently have any material commitments for capital expenditures.
Off-Balance Sheet Arrangements
At December 31, 2012, the Company had total outstanding commitments on non-cancelable operating leases
of approximately $34.0 million related to certain warehouse, distribution and office facilities, vehicles as well as
office equipment. Lease terms range from one to six years expiring at various dates through August 2018, with
options to renew at varying terms.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company uses derivative financial instruments for hedging purposes to limit its exposure to changes in
foreign currency exchange rates. Transactions involving these financial instruments are with creditworthy banks,
including the bank that is party to the Company’s ABL Facility (see Note 4 “Financing Arrangements” to the Notes
to the Consolidated Financial Statements in this Form 10-K). The use of these instruments exposes the Company to
market and credit risk which may at times be concentrated with certain counterparties, although counterparty
nonperformance is not anticipated. The Company is also exposed to interest rate risk from its ABL Facility.
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