Callaway 2014 Annual Report Download - page 30

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weather. Furthermore, the Company generally announces its new product line in the fourth quarter to allow retailers to plan
for the new golf season. 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 or result in closeout sales at reduced prices.
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 the Company's 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 change 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 followed in the United States, Canada and
Mexico, and The R&A publishes rules that are generally followed in most other countries throughout the world. However,
the Rules of Golf as published by The R&A and the USGA are virtually the same and are intended to be so pursuant to a Joint
Statement of Principles issued in 2001.