Callaway 2002 Annual Report Download - page 30

CALLAWAY GOLF COMPANY 27
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 techniques, 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 quan-
tities of new products in time to fulfill actual demand, especially
during 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
forecasted demand. 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. In 2001, some companies in California, including the
Company, experienced periods of blackouts during which
electricity was not available. The Company has taken certain
steps to provide access to alternative power supplies for certain
of its operations, and believes that these measures could
mitigate any impact resulting from possible future blackouts.
The Company is currently purchasing wholesale energy through
the Company’s energy service provider under short-term
contracts. If energy rates were once again to increase signifi-
cantly, the Company’s energy costs could increase significantly
and adversely affect the Company’s results of operations.
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 were unable to provide 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 opera-
tions. 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 substan-
tially all ground shipments of products to its U.S. customers.
The Company uses air carriers and ships for most of its inter-
national 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 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 marketplace
in competition with other users of such materials. While the
Company has been successful in obtaining its requirements for