Callaway 2003 Annual Report Download - page 39

36 CALLAWAY GOLF COMPANY
would have a significant adverse effect upon the Company’s
ability to operate its business. Although the Company has
taken steps to mitigate the effect of any such disruptions,
there is no assurance that such steps would be adequate in a
particular situation. Consequently, a significant or extended
disruption in the operation of the Company’s information
systems could have a material adverse effect upon the
Company’s operations and therefore financial performance
and condition.
The Company is exposed to foreign currency exchange rate
risk inherent primarily in its sales commitments, anticipated
sales and assets and liabilities denominated in currencies other
than the U.S. dollar. The Company transacts business in 12
currencies worldwide, of which the most significant to its
operations are the European currencies, Japanese Yen, Korean
Won, Canadian Dollar, and Australian Dollar. For most cur-
rencies, the Company is a net receiver of foreign currencies
and, therefore, benefits from a weaker U.S. dollar and is
adversely affected by a stronger U.S. dollar relative to those
foreign currencies in which the Company transacts significant
amounts of business.
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 antic-
ipated intercompany sales of inventory denominated in foreign
currencies, payments due on intercompany 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 management policies. Pursuant to its foreign
exchange hedging policy, the Company may hedge anticipated
transactions and the related receivables and payables denomi-
nated in foreign currencies using forward foreign currency
exchange rate contracts and put or call options. Foreign
cur
rency derivatives 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 12
months from their inception.
At December 31, 2003, 2002 and 2001, the notional amounts
of the Company’s foreign exchange contracts were approxi-
mately $91.2 million, $134.8 million and $157.0 million,
Quantitative and Qualitative
Disclosures About Market Risk
The Company uses derivative financial instruments for hedging
purposes to limit its exposure to changes in foreign exchange
rates. Transactions involving these financial instruments are
with credit-worthy firms. The use of these instruments exposes
the Company to market and credit risk which may at times be
concentrated with certain counterparties, although counter-
party nonperformance is not anticipated. The Company also
utilized a derivative commodity instrument, the Enron
Contract, to manage electricity costs in the volatile California
energy market during the period of June 2001 through
November 2001. Pursuant to its terms, the Enron Contract was
terminated. The Company is also exposed to interest rate risk
from its credit facility.
Foreign Currency Fluctuations
In the normal course of business, the Company is exposed to
foreign currency exchange rate risks that could impact the
Company’s results of operations. The Company’s risk
man
agement strategy includes the use of derivative financial
instruments, including forwards and purchased options, to
hedge certain of these exposures. The Company’s objective is to
offset gains and losses resulting from these exposures with
gains and losses on the derivative contracts used to hedge
them, thereby reducing volatility of earnings. The Company
does not enter into any trading or speculative positions with
regard to foreign currency related derivative instruments.