Callaway 2005 Annual Report Download - page 25

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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 difficult 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 sufficient quantities of new products in time to
fulfil actual demand, which could limit the Company’s sales and adversely affect its financial 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 affect
the Company’s financial 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 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 otherwise) 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’s size has made it a large consumer of certain materials, including steel, titanium alloys,
carbon fiber 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 significant change in costs could have a material adverse effect on the Company.
The Company’s golf club and golf ball manufacturing facilities use, among other resources, significant
quantities of electricity to operate. An interruption in the supply of electricity or a significant increase in the cost
of electricity could have a significant adverse effect upon the Company’s results of operations.
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 ship services 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 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 ship services into or out of the United States could
have a material adverse effect upon the Company (see below “International Risks”).
Competition
Golf Clubs. The golf club business is highly competitive, and is served by a number of well-established and
well-financed companies with recognized brand names. New product introductions, price reductions,
consignment sales, extended payment terms, “closeouts” (including closeouts of products that were recently
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