Callaway 2001 Annual Report Download - page 36

Callaway Golf Company
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Manufacturing Capacity The Company plans its manufacturing capacity
based upon the forecasted demand for its products. Actual demand for such
products may exceed or be less than forecasted demand. The Company’s
unique product designs often require sophisticated manufacturing tech-
niques, which can require significant start-up expenses and/or limit the
Company’s ability to quickly expand its manufacturing capacity to meet the
full demand for its products. If the Company is unable to produce sufficient
quantities of new products in time to fulfill actual demand, especially dur-
ing the Company’s traditionally busy season, it could limit the Company’s
sales and adversely affect its financial performance. On the other hand, the
Company invests in manufacturing capacity and commits to components
and other manufacturing inputs for varying periods of time, which can
limit the Company’s ability to quickly react if actual demand is less than
forecast. This could result in less than optimum capacity usage and/or in
excess inventories and related obsolescence charges that could adversely
affect the Company’s financial performance. In addition, if the Company
were to experience delays, difficulties or increased costs in its production of
golf clubs or golf balls, including production of new products needed to
replace current products, the Company’s future golf club or golf ball sales
could be adversely affected.
Dependence on Energy Resources The Company’s golf club and golf ball
manufacturing facilities use, among other resources, significant quantities of
electricity to operate. Many companies in California have experienced peri-
ods of blackouts during which electricity was not available. The Company
has experienced one blackout period to date, and it is possible the Company
will experience additional blackout periods. The Company has taken certain
steps to provide access to alternative power supplies for certain of its opera-
tions, and believes that these measures could mitigate any impact resulting
from possible future blackouts.
During the second quarter of 2001, the Company entered into a long-term
energy supply contract as part of a comprehensive strategy to ensure the unin-
terrupted supply of energy while capping electricity costs in the volatile
California energy market. To obtain a more favorable price and to assure ade-
quate supplies during times of peak loads, the Company agreed to purchase a
significantly greater supply of electricity than it expected to use in its business.
The Company had expected to be able to re-sell some or all of this excess sup-
ply and thereby reduce the net price of the electricity it uses in its business.
However, due to cooler than normal weather, government intervention and
market and regulatory imperfections, the market price for electricity in
California dropped significantly. As a result, the Company was unable to re-
sell the excess supply of electricity at favorable rates and thus the net cost of
the electricity used in the Company’s business was higher than expected. In
November 2001, the Company terminated its long-term supply contract and
is currently purchasing wholesale energy through the Company’s energy serv-
ice provider under short-term contracts. If energy rates were once again to
increase significantly, the Company’s energy costs would increase significant-
ly and adversely affect the Company’s results of operations.
Dependence on Certain Suppliers and Materials The Company is depend-
ent 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 man-
ufacturers in the event its regular suppliers are unable to provide components.
However, any significant production delay or disruption caused by the inabil-
ity 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 suppli-
ers for the materials it uses to make its golf balls. Many of the materials are cus-
tomized 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 assur-
ance 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 customers. If there were any such interruption in its 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. Any significant inter-
ruption 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.
The Company’s size has made it a large consumer of certain materials, includ-
ing 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 mate-
rials 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 signifi-
cant 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. For example, in 2002 Nike began marketing and sell-
ing golf clubs that will compete with the Company’s products, and several
manufacturers in Japan have announced plans to expand their businesses in
the United States. New product introductions, price reductions, extended pay-
ment terms and “close-outs” 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, 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% of the premium golf ball business. There are also
several other competitors, including Nike and Taylor Made, that have intro-
duced or will introduce golf ball designs that directly compete with the
Company’s products, and several manufacturers in Japan have announced their
plans to expand their businesses in the United States. Furthermore, as compe-
tition in this business increases, many of these competitors are discounting
substantially the prices of their products. In order for its golf ball business to
be successful, the Company will need to penetrate the market share held by
existing competitors, while competing with new entrants, and must do so at
prices that are profitable. There can be no assurance that the Company’s golf
balls will obtain the market acceptance necessary to be commercially successful.