Callaway 2008 Annual Report Download - page 16

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(consisting of a core and cover) or a multilayer golf ball (consisting of two or more components in addition to the
cover). The Company’s golf ball products include covers that incorporate a traditional dimple pattern as well as
covers that incorporate innovative designs, including the Company’s proprietary HEX Aerodynamics (i.e., a
series of hexagons and pentagons separated by tubular ridges), dimple-in-dimple and deep dimple technologies.
The Company’s products compete at all price levels in the golf ball category. In general, the Company’s
multilayer 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 footwear,
recreational club sets, headwear, towels, umbrellas, eyewear and other accessories, as well as sales of pre-owned
products through Callaway Golf Interactive, Inc. Additionally, this product category includes royalties from
licensing of the Company’s trademarks and service marks on products such as golf and lifestyle apparel, watches,
travel gear, rangefinders and practice aids.
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 2008, 2007 and 2006, the Company invested $29.4 million, $32.0 million and $26.8 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 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 golf
robots, launch monitors, a proprietary virtual test center, a proprietary performance analysis system, an indoor
test range and other methods to develop and test its products. Through the use of these technologies, 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 at the Company’s
facilities in Carlsbad, California and at various other third-party sites outside of the United States. The
Company’s products are assembled using components obtained from suppliers both internationally and within
the United States. Significant progress has been made in automating certain facets of the manufacturing process
during the last few years and continued emphasis will be placed on automated manufacturing by the Company.
However, the overall golf club assembly process remains fairly labor intensive, and requires extensive global
supply chain coordination.
Golf Balls
During 2008, most of the Company’s golf balls were manufactured at the Company’s facilities in Chicopee,
Massachusetts. In connection with the Company’s gross profit improvement initiatives and its actions to improve
the profitability of its golf ball business, the Company has taken actions to consolidate its golf ball operations
3