Callaway 2006 Annual Report Download - page 90

CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 denominated in foreign currencies using
forward foreign currency exchange rate contracts and put or call options. Foreign currency 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 which may include derivatives that do not meet the criteria for hedge
accounting. The Company does not enter into foreign exchange contracts for speculative purposes. Hedging
contracts mature within twelve months from their inception.
At December 31, 2006, 2005 and 2004, the notional amounts of the Company’s foreign exchange contracts
used to hedge outstanding balance sheet exposures were approximately $32,470,000, $35,624,000 and
$52,736,000, respectively. 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 with
changes in fair value recorded in the statement of operations. At December 31, 2006, the fair values of foreign
currency-related derivatives were recorded as current assets of $219,000 and current liabilities of $58,000. At
December 31, 2005, the fair values of foreign currency-related derivatives were recorded as current assets of
$512,000 and current liabilities of $511,000. The gains and losses on foreign currency contracts used to manage
balance sheet exposures are recognized as a component of other income (expense) in the same year as the
remeasurement gain and loss of the related foreign currency denominated assets and liabilities and thus generally
offset these gains and losses. During 2006 and 2004, the Company recorded net losses of $2,064,000 and
$4,577,000, respectively, and during 2005, a net gain of $4,222,000, due to net realized and unrealized gains and
losses on contracts used to manage balance sheet exposures that do not qualify for hedge accounting. These net
realized and unrealized contractual gains and losses are used by the Company to offset actual foreign currency
transactional net gains of $2,315,000 and 5,415,000 as of December 31, 2006 and 2004, respectively, and
transactional net losses of $6,663,000 as of December 31, 2005. At December 31, 2006, 2005 and 2004, there
were no foreign exchange contracts designated as cash flow hedges.
Note 10. Earnings Per Common Share
The schedule below summarizes the elements included in the calculation of basic and diluted earnings (loss)
per common share for the years ended December 31, 2006, 2005 and 2004.
Year Ended December 31,
2006 2005 2004
(In thousands, except per share data)
Net income (loss) ....................................... $23,290 $13,284 $(10,103)
Weighted-average shares outstanding:
Weighted-average shares outstanding—Basic ............. 67,732 68,646 67,721
Dilutive securities ................................... 771 593 —
Weighted-average shares outstanding—Diluted ............... 68,503 69,239 67,721
Earnings (loss) per common share:
Basic ............................................. $ 0.34 $ 0.19 $ (0.15)
Diluted ............................................ $ 0.34 $ 0.19 $ (0.15)
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