Callaway 2006 Annual Report Download - page 27

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products. Furthermore, 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. If there were any significant interruption
in such services, the Company may be unable to engage alternative suppliers to deliver its products or
components in a timely and cost-efficient manner. 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.
In addition, if the cost of these shipping services were to increase significantly, the Company’s operating results
could be significantly adversely affected.
The Company faces intense competition in each of its markets.
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
commercially successful, and significant tour and advertising spending by competitors continue to generate
intense market competition. Furthermore, continued downward pressure on pricing in the market for new clubs
could have a significant adverse affect on the Company’s pre-owned club business as the gap narrows between
the cost of a new club and a pre-owned club. Successful marketing activities, discounted pricing, consignment
sales, extended payment terms or new product introductions by competitors could negatively impact the
Company’s future sales.
Golf Balls. The golf ball business is also highly competitive. There are a number of well-established and
well-financed competitors, including one competitor with an estimated U.S. market share of approximately 50%.
As competition in this business increases, many of these competitors are increasing advertising, tour or other
promotional support. This increased competition has resulted in significant expenses for the Company in both
tour and advertising support and product development. Unless there is a change in competitive conditions, these
competitive pressures and increased costs will continue to adversely affect the profitability of the Company’s
golf ball business.
The Company’s golf ball business has a concentrated customer base. The loss of one or more of these
significant customers could have a significant negative impact on this business.
On a consolidated basis, no one customer that distributes the Company’s golf clubs or golf balls in the
United States accounted for more than 3% of the Company’s revenue in 2006 and 4% in both 2005 and 2004. On
a segment basis, the Company’s golf ball customer base is much more concentrated than its golf club customer
base. In 2006, the top five golf ball customers accounted for approximately 21% of the Company’s total golf ball
sales in the United States. A loss of one or more of these customers could have a significant adverse effect upon
the Company’s golf ball sales.
A reduction in discretionary consumer spending could reduce sales of the Company’s products.
The Company sells golf clubs, golf balls and golf accessories. These products are recreational in nature and
are therefore discretionary purchases for consumers. Consumers are generally more willing to make discretionary
purchases of golf products during favorable economic conditions and when consumers are feeling confident and
prosperous. Discretionary spending is also affected by many other factors, including general business conditions,
interest rates, the availability of consumer credit, taxation and consumer confidence in future economic
conditions. Purchases of the Company’s products could decline during periods when disposable income is lower,
or during periods of actual or perceived unfavorable economic conditions. Any significant decline in general
economic conditions or uncertainties regarding future economic prospects that adversely affect discretionary
consumer spending, whether in the United States or in the Company’s international markets (which represent
almost half of the Company’s total sales), could result in reduced sales of the Company’s products.
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