Callaway 2000 Annual Report Download - page 24

Callaway Golf Company | 24
which electricity was not available. Although the Company has
not yet experienced any such black-outs, the Company expects
that it will experience some black-out periods. If the black-out
periods are significant, the Company will experience significant
disruptions in its manufacturing operations as the Company would
be unable to manufacture any product during such black-out peri-
ods. Any extended or recurring disruptions could have a material
adverse affect upon the Company.
Furthermore, the shortage of electricity is also resulting in
increased prices for electricity. The Company has tried to mitigate
fluctuations in electricity prices by entering into long-term con-
tracts at fixed rates. The Company’s current contract expires this
summer and the Company is currently negotiating a new contract.
The Company expects that the new contracted rate will be higher
than its current rate. If the Company is unable to enter into a new
contract for a reasonable rate, the Company’s expenses for elec-
tricity could increase significantly. Such an increase could have a
significant adverse affect upon the Company’s cost of goods sold
and results of operations.
In addition to electricity, the Company also uses natural gas
to run the golf club and golf ball manufacturing facilities. There
is currently a shortage of natural gas which has caused prices to
increase significantly. The Company expects this shortage to
continue at least through the cold weather months when
demand for gas is greatest. Although the Company does not
expect any interruptions in its supply of natural gas, if the
prices continue to increase, such increased prices could have a
significant adverse affect upon the Company’s cost of goods sold
and results of operations.
Dependence on Certain Vendors and Materials
The Company is dependent on a limited number of suppliers for
its clubheads and shafts, some of which are single-sourced. In
addition, some of the Company’s products require specifically
developed manufacturing techniques and processes which make it
difficult to identify and utilize alternative suppliers quickly. The
Company believes that suitable clubheads and shafts could be
obtained from other manufacturers in the event its regular sup-
pliers are unable to provide components. However, any significant
production delay or disruption caused by the inability of current
suppliers to deliver or the transition to other suppliers could have
a material adverse impact on the Company’s results of operations.
The Company is also single-sourced or dependent on a limited
number of suppliers for the materials it uses to make its golf balls.
Many of the materials, including the golf ball cover, are cus-
tomized for the Company. Any delay or interruption in such sup-
plies could have a material adverse impact upon the Company’s
golf ball business. If the Company did experience any such delays
or interruptions, there is no assurance that the Company would be
able to find adequate alternative suppliers at a reasonable cost or
without significant disruption to its business.
The Company uses United Parcel Service (“UPS”) for substan-
tially all ground shipments of products to its U.S. customers. The
Company is continually reviewing alternative methods of ground
shipping to supplement its use and reduce its reliance on UPS. To
date, a limited number of alternative vendors have been identified
and are being used by the Company. Nevertheless, any interrup-
tion in UPS services could have a material adverse effect on the
Company’s sales and results of operations.
The Company’s size has made it a large consumer of certain
materials, including titanium alloys and carbon fiber. The
Company does not make these materials itself, and must rely on
its ability to obtain adequate supplies in the world marketplace in
competition with other users of such materials. While the
Company has been successful in obtaining its requirements for
such materials thus far, there can be no assurance that it always
will be able to do so. An interruption in the supply of such mate-
rials or a significant change in costs could have a material adverse
effect on the Company.
Competition
Golf Clubs. The worldwide market for premium golf clubs is
highly competitive, and is served by a number of well-established
and well-financed companies with recognized brand names, as
well as new companies with popular products. New product intro-
ductions, price reductions and “close-outs” by competitors con-
tinue to generate increased market competition. While the
Company believes that its products and its marketing efforts con-
tinue to be competitive, there can be no assurance that success-
ful marketing activities by competitors will not negatively impact
the Company’s future sales.
Golf Balls. The premium golf ball business is also highly com-
petitive, and may be becoming even more competitive. There are
a number of well-established and well-financed competitors,
including one competitor with an estimated market share in
excess of 50% of the premium golf ball business. There are also
several recent entrants into the golf ball business, including Nike.
Many of these competitors have introduced or will introduce golf
ball designs that directly compete with the Company’s products.
MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS