Callaway 2002 Annual Report Download - page 56

For derivative instruments that are designated and qualify as
cash flow hedges, the effective portion of the gain or loss on the
derivative 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 recog-
nized in earnings. During the years ended December 31, 2002,
2001 and 2000, the Company recorded the following activity in
accumulated other comprehensive income:
During the year ended December 31, 2002, gains of $171,000
were reclassified into earnings as a result of the discontinuance
of cash flow hedges. During the years ended December 30, 2001
and 2000, no gains or losses were reclassified into earnings as a
result of the discontinuance of cash flow hedges.
As of December 31, 2002, $1,362,000 of deferred net losses related
to derivative instruments designated as cash flow hedges were
included in accumulated other comprehensive income. These
derivative instruments hedge transactions that are expected to
occur within the next twelve months. As the hedged transac-
tions are completed, the related deferred net gain or loss is
reclassified from accumulated other comprehensive income
into earnings. The Company does not expect that such reclas-
sifications would 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 in interest and other income, net. For
foreign currency contracts designated as cash flow hedges,
hedge effectiveness is measured using the spot rate. Changes
Ye ar Ended Decem be r 31,
(In thousands) 2002 2001 2000
Beginning OCI balance
related to cash flow hedges $ 6,424 $ (1,599) $ —
Add: Net gain/(loss) initially
recorded in OCI (3,923) 10,950 (1,599)
Deduct: Net gain/(loss)reclassified
from OCI into earnings 3,863 2,927 —
Ending OCI balance related
to cash flow hedges $ (1,362) $ 6,424 $ (1,599)
CALLAWAY GOLF COMPANY 53
Foreign Currency Exchange Contracts
The Company enters into foreign exchange contracts to
hedge against exposure to changes in foreign currency
exchange rates. Such contracts are designated at inception
to the related foreign currency exposures being hedged,
which include anticipated intercompany sales of inventory
denominated in foreign currencies, payments due on inter-
company transactions from certain wholly-owned foreign
subsidiaries, and anticipated sales by the Company’s wholly-
owned European subsidiary for certain Euro-denominated
transactions. Hedged transactions are denominated primarily in
British Pounds, Euros, Japanese Yen, Korean Won, Canadian
Dollars and Australian Dollars. To achieve hedge accounting,
contracts must reduce the foreign currency exchange rate
risk otherwise inherent in the amount and duration of the
hedged exposures and comply with established risk manage-
ment policies. Pursuant to its foreign exchange hedging
policy, the Company may hedge anticipated transactions and
the related receivables and payables denominated in foreign
currencies using forward foreign currency exchange rate
contracts and put or call options. Foreign currency deriva-
tives are used only to meet the Company’s objectives of
minimizing variability in the Company’s operating results
arising from foreign exchange rate movements. The
Company does not enter into foreign exchange contracts for
speculative purposes. Hedging contracts mature within
twelve months from their inception.
At December 31, 2002, 2001 and 2000, the notional amounts
of the Company’s foreign exchange contracts were approximately
$134,782,000, $156,961,000 and $118,236,000, respectively. Of
the total contracts outstanding at December 31, 2002, 2001
and 2000, notional amounts of approximately $84,843,000,
$122,550,000 and $107,779,000, respectively, were designated
as cash flow hedges. The Company estimates the fair values
of derivatives 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, 2002, the fair
value of foreign currency-related derivatives was recorded as
current assets of $127,000 and current liabilities of
$2,637,000. At December 31, 2001, the fair value of foreign
currency-related derivatives was recorded as current assets
of $8,762,000.