Callaway 2004 Annual Report Download - page 42

addition, prior successful designs have been rendered obsolete within a relatively short period of time as new
products are introduced into the marketplace. Further, any new products that retail at a lower price than prior
products may negatively impact the Company's revenues unless unit sales increase. The rapid introduction of
new golf club or golf ball products by the Company has resulted in close-outs of existing inventories at both
the wholesale and retail levels. Such close-outs have resulted in reduced margins on the sale of older products,
as well as reduced sales of new products, given the availability of older products at lower prices.
The Company's newly introduced golf club products generally, but not always, have a product life cycle of
up to two years. These products generally sell signiÑcantly better in the Ñrst year after introduction as
compared to the second year. In certain markets, such as Japan, the decline in sales occurs sooner in the
product cycle and is more signiÑcant. The Company's fusion woods generally sell at higher price points than
its titanium metal woods, and its titanium metal woods generally sell at higher price points than its steel metal
woods. Historically, the Company's wood products generally have achieved better gross margins than its iron
products. However, price compression in the woods market has made this diÅerential less, and at times gross
margins on woods may be less than other products. The Company's sales and gross margins for a particular
period may be negatively or positively aÅected by the mix of new products sold in such period.
Manufacturing Capacity
The Company plans its manufacturing capacity based upon the forecasted demand for its products. The
nature of the Company's business makes it diÇcult to quickly adjust its manufacturing capacity if actual
demand for its products exceeds or is less than forecasted demand. If actual demand for its products exceeds
the forecasted demand, the Company may not be able to produce suÇcient quantities of new products in time
to fulÑll actual demand, which could limit the Company's sales and adversely aÅect its Ñnancial performance.
On the other hand, if actual demand is less than the forecasted demand for its products, this could result in
less than optimum capacity usage and/or in excess inventories and related obsolescence charges that could
adversely aÅect the Company's Ñnancial performance.
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 speciÑcally developed manufacturing
techniques and processes which make it diÇcult 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 Ñnancial diÇculties or otherwise) are unable or fail to provide suitable
components. However, there could be a signiÑcant 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 Ñnd adequate alternative suppliers at a reasonable cost or
without signiÑcant disruption to its business.
The Company's size has made it a large consumer of certain materials, including steel, titanium alloys,
carbon Ñber and rubber. 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 at a reasonable price. An interruption in the supply of the
materials used by the Company or a signiÑcant change in costs could have a material adverse eÅect on the
Company.
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 shipping services for most of its international shipments
of products. Any signiÑcant interruption in UPS, air carrier or shipping services could have a material adverse
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