Callaway 2003 Annual Report Download - page 34

CALLAWAY GOLF COMPANY 31
of worldwide golf ball manufacturing capacity. As competition
in this business increases, many of these competitors are
substantially discounting the prices of their products and/or
increasing advertising, tour or other promotional support. This
increased competition has resulted in significant expenses in
both tour and advertising support and product development. In
order for its golf ball business to be successful, the Company
will need to integrate the acquired Top-Flite assets with its golf
ball manufacturing operations and must produce golf balls at
prices and costs that are reasonable and must sell a sufficient
amount of golf balls of both brands in excess of such costs to
be profitable.
On a consolidated basis, no one customer that distributes golf
clubs or balls in the United States accounted for more than 4%
of the Company’s revenues in 2003, 2002 or 2001. On a segment
basis, the golf ball customer base is much more concentrated
than the golf club customer base. In 2004, it is expected that
the top five golf ball customers will account for over 25% of the
total golf ball sales. A loss of one or more of these customers
could have a significant adverse effect upon the Company’s golf
ball sales.
Market Acceptance of Products
A golf manufacturer’s ability to compete is in part dependent
upon its ability to satisfy the various subjective requirements of
golfers, including a golf club’s and golf ball’s look and “feel,” and
the level of acceptance that a golf club and ball have among
professional and recreational golfers. The subjective preferences
of golf club and ball purchasers are difficult to predict and may
be subject to rapid and unanticipated changes. In addition, the
Company’s products have tended to incorporate significant inno-
vations in design and manufacture, which have often resulted in
higher prices for the Company’s products relative to other products
in the marketplace. There can be no assurance that a significant
percentage of the public will always be willing to pay such
premium prices for golf equipment or that the Company will be
able to continue to design and manufacture premium products
that achieve market acceptance in the future. For example, in
2002, the Company introduced the Big Bertha C4 Driver made
of compression-cured carbon composite. Despite the product’s
excellent performance, this product did not meet the Company’s
sales expectations and is indicative of the risks associated with
the subjective preferences of golfers. In general, there can be no
assurance as to how long the Company’s golf clubs and golf balls
will maintain market acceptance and therefore no assurance that
the demand for the Company’s products will permit the
Company to experience growth in sales, or maintain historical
levels of sales, in the future.
New Product Introduction and Product Cyclicality
The Company believes that the introduction of new, innovative golf
clubs and golf balls is important to its future success. A major portion
of the Company’s revenues is generated by products that are less
than two years old. The Company faces certain risks associated with
such a strategy. For example, in the golf industry, new models and
basic design changes in golf equipment are frequently met with
consumer rejection. In addition, prior successful designs may
be 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 nega-
tively impact the Company’s revenues unless unit sales increase.
The rapid introduction of new golf club or golf ball products by the
Company could result in close-outs of existing inventories at both
the wholesale and retail levels. Such close-outs can result 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
have a product life cycle of approximately two years. These
products generally sell significantly better in the first year after
introduction as compared to the second year. In certain markets,
such as Japan, the decline in sales during the second year is
even more significant. The Company’s titanium metal wood
products generally sell at higher price points than its comparable
steel metal wood products. Historically, the Company’s wood
products generally have achieved better gross margins than its
comparable iron products. The Company’s sales and gross margins
for a particular period may be negatively or positively affected
by the mix of new products sold in such period.
Seasonality and Adverse Weather Conditions
In addition to the effects of product cycles described above, the
Company’s business is also subject to the effects of seasonal
fluctuations. The Company’s first quarter sales generally represent
the Company’s sell-in to the golf retail channel of its products for