Callaway 2014 Annual Report Download - page 28

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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 were able to experience any such delays or interruptions, the Company may
not be able to find adequate alternative suppliers at a reasonable cost or without significant disruption to its business.
A significant disruption in the operations of the Company’s golf club assembly and golf ball manufacturing and assembly
facilities could have a material adverse effect on the Company’s sales, profitability and results of operations.
A significant disruption at any of the Company’s golf club or golf ball manufacturing facilities or distribution centers
in the United States and in regions outside the United States could materially and adversely affect the Company’s sales,
profitability and results of operations.
Regulations related to “conflict minerals” require the Company to incur additional expenses and could limit the supply
and increase the cost of certain metals used in manufacturing the Company’s products.
In August 2012, the Commission adopted rules requiring disclosure related to sourcing of specified minerals, known as
conflict minerals, that are necessary to the functionality or production of products manufactured or contracted to be
manufactured by public companies. The rules require companies to, under specified circumstances, undertake due diligence,
disclose and report whether or not such minerals originated from the Democratic Republic of Congo or an adjoining country. The
Company’s products may contain some of the specified minerals. As a result, the Company will incur additional expenses in
connection with complying with the rules, including with respect to any due diligence that is required under the rules. In
addition, the implementation of the rules could adversely affect the sourcing, supply and pricing of materials used in the
Company’s products. There may only be a limited number of suppliers offering “conflict free” conflict minerals, and the
Company cannot be certain that it will be able to obtain necessary “conflict free” conflict minerals from such suppliers in
sufficient quantities or at competitive prices. Because the Company’s supply chain is complex, the Company may also not be
able to sufficiently verify the origins of the relevant minerals used in the Company’s products through the due diligence
procedures that the Company implements, which may harm the Company’s reputation.
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 or a significant disruption at shipping ports 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 ocean shipping 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. If there is any significant interruption in service by such providers or at 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, ship services or at shipping ports
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 materially adversely affected.
The Company faces intense competition in each of its markets and if it is unable to maintain a competitive advantage, loss
of market share, revenue, or profitability may result.
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 over 50%. The Company’s competitors continue
to incur significant costs in the areas of advertising, tour and other promotional support. The Company believes that to be