Callaway 2006 Annual Report Download - page 19

well as covers that incorporate non-traditional designs, including the Company’s proprietary HEX Aerodynamics
(i.e., a series of hexagons and pentagons separated by tubular ridges and dimple-in-dimple technology). The
Company’s products compete at all price levels in the golf ball category. In general, the Company’s multi-layer
golf balls sell at higher price points than its 2-piece golf balls. All of the Company’s current golf ball products
conform to the current rules of the USGA and the R&A.
Accessories and Other. This product category includes sales of golf bags, golf gloves, golf headwear, golf
footwear, golf towels, golf umbrellas and other golf accessories, as well as sales of pre-owned products through
Callaway Golf Interactive, Inc., which was acquired in May 2004. Additionally, this product category includes
royalties from licensing of the Company’s trademarks and service marks on products such as golf apparel,
watches, travel gear and eyewear.
Product Design and Development
Product design at the Company is a result of the integrated efforts of its brand management, research and
development, manufacturing and sales departments, all of which work together to generate new ideas for golf
equipment. The Company has not limited itself in its research efforts by trying to duplicate designs that are
traditional or conventional and believes it has created a work environment in which new ideas are valued and
explored. In 2006, 2005 and 2004, the Company invested $26.8 million, $27.0 million and $30.6 million,
respectively, in research and development. The Company intends to continue to invest substantial amounts in its
research and development activities in connection with its development of new golf club and golf ball products.
The Company has the ability to create and modify product designs by using computer aided design (“CAD”)
software, computer aided manufacturing (“CAM”) software and computer numerical control milling equipment.
CAD software enables designers to develop computer models of new product designs. CAM software is then
used by engineers to translate the digital output from CAD computer models so that physical prototypes can be
produced. Further, the Company utilizes a variety of testing equipment and computer software, including a golf
robot, launch monitors, a proprietary virtual test center, a proprietary performance analysis system, an indoor test
range and other destructive and non-destructive methods to develop and test its products. Through the use of this
technology, the Company has been able to accelerate and make more efficient the design, development and
testing of new golf clubs and golf balls.
For certain risks associated with product design and development, see below, “Certain Factors Affecting
Callaway Golf Company” contained in Item 1A.
Manufacturing
Golf Clubs
The Company’s drivers, fairway woods, hybrids, irons, wedges and putters are assembled primarily at the
Company’s facilities in Carlsbad, California. A smaller portion of these products are assembled outside of the
United States. The Company’s products are assembled using components obtained from suppliers both within the
United States and internationally. Although significant progress has been made at automating certain facets of the
manufacturing process during the last few years, the overall golf club assembly process remains labor intensive,
and requires extensive global supply chain coordination.
Golf Balls
Prior to the Top-Flite Acquisition in September 2003, Callaway Golf manufactured golf balls in its
Carlsbad, California facility and Top-Flite manufactured golf balls primarily in its Chicopee, Massachusetts and
Gloversville, New York facilities. Following the Top-Flite Acquisition, the Company began consolidating all
golf ball manufacturing operations. The consolidation allowed the Company to eliminate positions and eliminate
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