Callaway 2003 Annual Report Download - page 33

30 CALLAWAY GOLF COMPANY
the Company’s energy service provider under short-term
contracts. From time to time, legislation has been introduced
that would restrict the Company’s ability to purchase wholesale
energy through its energy service provider. If any such legisla-
tion were passed, the Company may be required to purchase
energy from the local public utility, which could cause the
Company’s cost of energy to increase. If the Company’s costs
of energy were to increase as a result of such legislation or oth-
erwise, the Company’s results of operations would be adverse-
ly affected.
Dependence on Certain Suppliers 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 suppliers (because of financial difficulties or other-
wise) are unable or fail to provide suitable components.
However, there could be a significant production delay or
disruption caused by the inability of current suppliers to deliver
or the transition to other suppliers, which in turn 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 are customized for the Company.
Any delay or interruption in such supplies 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 substantially
all ground shipments of products to its U.S. customers. The
Company uses air carriers and ships for most of its international
shipments of products. Any significant interruption in UPS, air
carrier or ship services could have a material adverse effect
upon the Company’s ability to deliver its products to its
cus
tomers. If there were any significant interruption in such
services, there is no assurance that the Company could engage
alternative suppliers to deliver its products in a timely and
cost-efficient manner. In addition, many of the components
the Company uses to build its golf clubs, including clubheads
and shafts, are shipped to the Company via air carrier and ship
services. Any significant interruption in UPS services, air
carrier services or shipping services into or out of the United
States could have a material adverse effect upon the Company
(see also below “International Risks”).
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 market-
place 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
the materials used by the Company 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
introductions, price reductions, consignment sales, extended
payment terms and “close-outs” (including close-outs of products
that were recently commercially successful) by competitors
continue to generate increased market competition. While the
Company believes that its products and its marketing efforts
continue to be competitive, there can be no assurance that
successful marketing activities, discounted pricing, consignment
sales, extended payment terms or new product introductions
by competitors will not negatively impact the Company’s
future sales.
Golf Balls. The premium golf ball business is also highly
competitive 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%. Furthermore, worldwide sales
of golf balls have been declining due to declines in the number
of golf rounds played and other factors, resulting in a surplus