Callaway 2002 Annual Report Download - page 50

CALLAWAY GOLF COMPANY 47
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
adjustments. During 2002, the Company recorded $4,958,000,
net of tax benefit of $2,829,000, related to net unrealized losses
on cash flow hedges. During 2002, gains of $171,000 were
reclassified to earnings as a result of the discontinuance of
cash flow hedges. The components of accumulated other
comprehensive income are as follows:
Segment Information
The Company utilizes the management approach to report
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 primarily consists of
Callaway Golf titanium and stainless steel metal woods and
irons, Callaway Golf and Odyssey putters and wedges and golf-
related accessories. The Golf Balls segment consists of golf
balls that are designed, manufactured and sold by the
Company. The Company also discloses information about
geographic areas. This information is presented in Note 13.
Diversification of Credit Risk
The Company’s financial instruments that are subject to
concentrations of credit risk consist primarily of cash equiva-
lents, marketable securities, trade receivables and foreign
currency contracts.
The Company may invest its excess cash in money market
accounts and U.S. Government securities and has established
guidelines relative to diversification and maturities in an effort
to maintain safety and liquidity. These guidelines are periodically
reviewed and modified to take advantage of trends in yields and
interest rates.
The Company operates in the golf equipment industry and
primarily sells its products to golf equipment retailers, directly
and through wholly-owned domestic and foreign subsidiaries,
and to foreign distributors. The Company performs ongoing
credit evaluations of its customers’ financial condition and
generally requires no collateral from these customers. The
Company maintains reserves for estimated credit losses, which
it considers adequate to cover any such losses. Furthermore,
managing customer-related credit risk is more difficult in
regions outside of the United States. During 2002, 2001 and
2000, approximately 45%, 46% and 46%, respectively, of the
Company’s net sales were made in regions outside of the United
States. An adverse change in either economic conditions abroad or in
the Company’s relationship with significant foreign retailers
could significantly increase the Company’s credit risk related
to its international operations.
The Company enters into forward exchange rate contracts and
put or call options for the purpose of hedging foreign exchange
rate exposures on existing or anticipated transactions. In the
event of a failure to honor one of these contracts by one of the
banks with which the Company has contracted, management
believes any loss would be limited to the exchange rate differ-
ential from the time the contract was made until the time it
was compensated.
During the second quarter of 2001, the Company entered into a
long-term, fixed-price, fixed-capacity, energy supply contract
as part of a comprehensive strategy to ensure the uninterrupted
supply of energy while capping electricity costs in the volatile
California energy market. During the fourth quarter of 2001, the
energy supplier filed for bankruptcy protection and the
Company notified the energy supplier that, among other
things, the energy supplier was in default of the energy supply
contract and that based upon such default, and for other reasons,
the Company was terminating the energy supply contract. As
Ye ar Ended Decem be r 31,
(In thousands) 2002 2001 2000
Unrealized gains (losses)
on cash flow hedges $ (918) $ 4,040 $ (954)
Equity adjustment from
foreign currency translation (2,837) (8,439) (5,142)
Unrealized losses on
marketable securities (92) — —
$ (3,847) $(4,399) $(6,096)