Callaway 2000 Annual Report Download - page 29

Callaway Golf Company | 29
near future, a large demand from its customers to transact in euro.
Additionally, the Company does not believe that it will incur
material costs specifically associated with manually processing
data or preparing its business systems to operate in either the
transitional period or beyond. However, there can be no assurance
that the conversion of EMU Member States to euro will not have
a material adverse effect on the Company and its operations.
Market Risk
The Company is exposed to the impact of foreign currency fluctu-
ations due to its international operations and certain export sales.
The Company is exposed to both transactional currency/functional
currency and functional currency/reporting currency exchange
rate risks. The Company’s foreign currency exposures include most
European currencies, Japanese yen, Canadian dollars and Korean
won. In the normal course of business, the Company employs
established policies and procedures to manage its exposure to fluc-
tuations in the value of foreign currencies. Pursuant to its foreign
exchange hedging policy, the Company may use forward foreign
currency exchange rate contracts to hedge certain firm commit-
ments and the related receivables and payables. Foreign currency
derivatives are used only to the extent considered necessary to
meet the Company’s objectives and the Company does not enter
into forward contracts for speculative purposes. During 2000, the
Company entered into such contracts on behalf of three of its
wholly-owned subsidiaries, Callaway Golf Europe Ltd., Callaway
Golf K.K. and Callaway Golf Canada Ltd. The Company also hedged
certain euro-denominated accounts receivable in 2000. Also pur-
suant to its foreign exchange hedging policy, in the fourth quarter
of 2000, the Company began hedging anticipated intercompany
sales of inventory denominated in foreign currencies using forward
foreign currency exchange rate contracts. The effect of these prac-
tices is to minimize variability in the Company’s operating results
arising from foreign exchange rate movements. These foreign
exchange contracts generally do not subject the Company to risk
due to exchange rate movements because gains and losses on these
contracts offset losses and gains on the transactions being hedged,
and the Company does not engage in hedging contracts which
exceed the amounts of these transactions.
Additionally, the Company is exposed to interest rate risk from
its Accounts Receivable Facility and Amended Credit Agreement (see
Notes 4 and 5 to the Company’s Consolidated Financial Statements)
which are indexed to the London Interbank Offering Rate and
Redwood Receivables Corporation Commercial Paper Rate. No
amounts were advanced or outstanding under these facilities at
December 31, 2000.
Sensitivity analysis is the measurement of potential loss in
future earnings of market sensitive instruments resulting from
one or more selected hypothetical changes in interest rates or for-
eign currency values. The Company used a sensitivity analysis
model to quantify the estimated potential effect of unfavorable
movements of 10% in foreign currencies to which the Company
was exposed at December 31, 2000 through its derivative finan-
cial instruments.
The sensitivity analysis model is a risk analysis tool and does
not purport to represent actual losses in earnings that will be
incurred by the Company, nor does it consider the potential effect
of favorable changes in market rates. It also does not represent
the maximum possible loss that may occur. Actual future gains
and losses will differ from those estimated because of changes or
differences in market rates and interrelationships, hedging instru-
ments and hedge percentages, timing and other factors.
At December 31, 2000, the estimated maximum one-day loss in
earnings from the Company’s foreign-currency derivative financial
instruments, calculated using the sensitivity analysis model
described above, is $13.9 million attributable to hedges of antici-
pated intercompany sales and $0.9 million attributable to hedges
of balance sheet exposures. The Company believes that such a
hypothetical loss from its derivatives would be offset by increases
in the value of the underlying transactions being hedged.
Notes 4 and 5 to the Consolidated Financial Statements outline
the principal amounts, if any, and other terms required to evaluate
the expected cash flows and sensitivity to interest rate changes.