Callaway 2008 Annual Report Download - page 25

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A disruption in the service or a significant increase in the cost of the Company’s primary delivery and
shipping services for its products and component parts could have a material adverse effect on the Company’s
business.
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. 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. The Company’s inbound and outbound
shipments are particularly dependent upon air carrier facilities at Los Angeles International Airport and ship
service facilities at the Port of Los Angeles (Long Beach). If there is any significant interruption in service by
such providers or at other significant airports or shipping ports, the Company may be unable to engage
alternative suppliers or to receive or ship goods through alternate sites in order to deliver its products or
components in a timely and cost-efficient manner. As a result, the Company could experience manufacturing
delays, increased manufacturing and shipping costs, and lost sales as a result of missed delivery deadlines and
product demand cycles. Any significant interruption in UPS services, air carrier services or ship services could
have a material adverse effect upon the Company’s business. Furthermore, if the cost of delivery or shipping
services were to increase significantly and the additional costs could not be covered by product pricing, 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 effect 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.
Accessories. The Company’s accessories include golf bags, golf gloves, golf footwear, golf and lifestyle
apparel and other items. The Company faces significant competition in every region with respect to each of these
product categories. In most cases, the Company is not the market leader with respect to its accessory markets.
The Company’s golf ball business has a concentrated customer base. The loss of one or more of the
Company’s top 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 5%, of the Company’s consolidated revenues in 2008, and 3% in both
2007 and 2006. On a segment basis, the Company’s golf ball customer base is much more concentrated than its
golf club customer base. In 2008, the top five golf ball customers accounted for approximately 20% 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.
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