Callaway 2003 Annual Report Download - page 40

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CALLAWAY GOLF COMPANY 37
respectively. The Company estimates the fair values of deriv-
atives based on quoted market prices or pricing models using
current market rates, and records all derivatives on the balance
sheet at fair value. At December 31, 2003, the fair values of
foreign currency-related derivatives were recorded as current
assets of $0.1 million and current liabilities of $0.8 million. At
December 31, 2002, the fair values of foreign currency-related
derivatives were recorded as current assets of $0.1 million and
current liabilities of $2.6 million.
At December 31, 2003, 2002 and 2001, the notional amounts
of the Company’s foreign exchange contracts designated as
cash flow hedges were approximately $44.4 million,
$84.8
million and $122.6 million, respectively. For derivative
instruments that are designated and qualify as cash flow
hedges, the effective portion of the gain or loss on the deriv-
ative instrument is initially recorded in accumulated other
comprehensive income (“OCI”) as a separate component of
shareholders’ equity and subsequently reclassified into earnings
in the period during which the hedged transaction is recognized
in earnings. During the years ended December 31, 2003, 2002
and 2001, the Company recorded the following hedging
activity in OCI:
Years Ended December 31,
(In millions) 2003 2002 2001
Beginning OCI balance
related to cash flow hedges $ (1.4) $ 6.4 $ (1.6)
Add: Net gain (loss)
initially recorded in OCI (3.8) (3.9) 10.9
Deduct: Net gain (loss)
reclassified from OCI
into earnings (2.7) 3.9 2.9
Ending OCI balance related
to cash flow hedges $ (2.5) $ (1.4) $ 6.4
During the years ended December 31, 2003 and 2001, no gains
or losses were reclassified into earnings as a result of the
discontinuance of cash flow hedges. During the year ended
December 31, 2002, gains of $0.1 million were reclassified into
earnings as a result of the discontinuance of cash flow hedges.
As of December 31, 2003, $2.5 million of deferred net losses
related to derivative instruments designated as cash flow
hedges were included in OCI. These derivative instruments
hedge transactions that are expected to occur within the next
12 months. As the hedged transactions are completed, the
related deferred net gain or loss is reclassified from OCI into
earnings. The Company does not expect that such reclassifications
will have a material effect on the Company’s earnings, as any
gain or loss on the derivative instruments generally would
be offset by the opposite effect on the related underlying
transactions.
The ineffective portion of the gain or loss for derivative instru-
ments that are designated and qualify as cash flow hedges is
immediately reported as a component of interest and other
income. For foreign currency contracts designated as cash flow
hedges, hedge effectiveness is measured using the spot rate.
Changes in the spot-forward differential are excluded from
the test of hedging effectiveness and are recorded currently in
earnings as a component of interest and other income. During
the years ended December 31, 2003, 2002 and 2001, the
Company recorded net gains of $0.1 million, $0.4 million and
$2.0 million, respectively, as a result of changes in the spot-
forward differential. Assessments of hedge effectiveness are
performed using the dollar offset method and applying a
hedge effectiveness ratio between 80% and 125%. Given that
both the hedged item and the hedging instrument are evaluated
using the same spot rate, the Company anticipates the hedges
to be highly effective. The effectiveness of each derivative is
assessed quarterly.
At December 31, 2003, 2002 and 2001, the notional amounts
of the Company’s foreign exchange contracts used to hedge
outstanding balance sheet exposures were approximately
$46.8 million, $49.9 million and $34.4 million, respectively.
The gains and losses on foreign currency contracts used to
hedge balance sheet exposures are recognized as a component
of interest and other income in the same period as the
remeasurement gain and loss of the related foreign currency
denominated assets and liabilities and thus offset these gains
and losses. During the years ended December 31, 2003, 2002
and 2001, the Company recorded net losses of $6.8 million and
$8.1 million and net gains of $4.5 million, respectively, due to
net realized and unrealized gains and losses on contracts used
to hedge balance sheet exposures.