Callaway 2003 Annual Report Download - page 52

CALLAWAY GOLF COMPANY 49
was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully trans-
ferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected
stock price volatility. Because the Company’s employee stock
options have characteristics significantly different from
those of traded options, and because changes in subjective
input assumptions can materially affect the fair value esti-
mates, in management’s opinion, the existing models do
not necessarily provide a reliable single measure of the fair
value of grants under the Company’s employee stock-based
compensation plans.
Compensation expense for non-employee stock-based com-
pensation awards is measured using the fair-value method.
Income Taxes
Current income tax expense is the amount of income taxes
expected to be payable for the current year. A deferred income
tax asset or liability is established for the expected future
consequences resulting from temporary differences in the
financial reporting and tax bases of assets and liabilities.
Deferred income tax expense (benefit) is the net change
during the year in the deferred income tax asset or liability.
Deferred taxes have not been provided on the cumulative
undistributed earnings of foreign subsidiaries since such
amounts are expected to be reinvested indefinitely. The
Company provides a valuation allowance for its deferred tax
assets when, in the opinion of management, it is more likely
than not that such assets will not be realized.
Interest and Other Income, Net
Interest and other income, net includes gains and losses on
foreign currency transactions, interest income, gains and losses
on investments to fund the deferred compensation plan, gains
and losses on the sale of marketable securities and losses
generated from the sale of the Company’s excess energy supply.
In 2003, the Company began classifying royalty income as a
component of net sales and royalty related expenses as a com-
ponent of selling expenses. Previously, royalty revenue and
the related expenses were recorded as a component of other
income. Prior periods have been reclassified to conform with
the current period presentation. The components of interest
and other income, net are as follows:
Years Ended December 31,
(In thousands) 2003 2002 2001
Net foreign currency gains $ 1,566 $ 2,046 $ 2,533
Net gains on deferred
compensation plan assets 1,608 156 1,462
Net gain (loss) on sale
of securities (93) 95 1,597
Net losses on excess energy sales — — (2,052)
Other 469 (26) 1,809
$ 3,550 $ 2,271 $ 5,349
Comprehensive Income
Components of comprehensive income are reported in the
financial statements in the period in which they are recog-
nized. The components of comprehensive income for the
Company include net income, unrealized gains or losses on
cash flow hedges, foreign currency translation adjustments and
unrealized gains or losses on marketable securities. Since the
Company has met the indefinite reversal criteria, it does not
accrue income taxes on foreign currency translation adjust-
ments. During 2003, no gains or losses were reclassified to
earnings as a result of the discontinuance of cash flow hedges.
The components of accumulated other comprehensive income
are as follows:
Years Ended December 31,
(In thousands) 2003 2002 2001
Unrealized gain (loss)
on cash-flow hedges $(1,669) $ (918) $ 4,040
Equity adjustment from
foreign currency translation 4,559 (2,837) (8,439)
Unrealized loss on
marketable securities — (92) —
$ 2,890 $(3,847) $ (4,399)
Segment Information
The Company’s operating segments are organized on the basis
of products and consist of Golf Clubs and Golf Balls. The Golf
Clubs segment consists primarily of Callaway Golf, Top-Flite
and Ben Hogan woods, irons, wedges and putters as well as
Odyssey putters and other golf-related accessories. The Golf