Callaway 2006 Annual Report Download - page 81

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CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
reversal criteria, it does not accrue income taxes on foreign currency translation adjustments. During 2005 and
2006, 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:
December 31,
2006 2005
Unrealized gain on cash flow hedges ............................................. $ — $ 290
Equity adjustment from foreign currency translation ................................. 11,135 3,087
$11,135 $3,377
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,
hybrids, irons, wedges and putters as well as Odyssey putters, pre-owned clubs, other golf-related accessories and
royalty and other income. The Golf Balls segment consists primarily of Callaway Golf, Top-Flite and Ben Hogan
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 16.
Diversification of Credit Risk
The Company’s financial instruments that are subject to concentrations of credit risk consist primarily of
cash equivalents, trade receivables and foreign currency contracts.
The Company historically invests its excess cash in money market accounts and short-term 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 (including pro shops at golf courses and off course retailers), sporting goods retailers and mass
merchants, 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. Managing customer-related credit risk is more difficult in regions outside of
the United States. During 2006, 2005 and 2004, approximately 44%, 44% and 42%, 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.
From time to time, the Company enters into foreign currency exchange 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 differential from the time the contract was made until the
time it was settled.
F-13