Callaway 2008 Annual Report Download - page 61

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No. 18, “The Equity Method of Accounting for Investments in Common Stock” and reflected the investment
balance in other long-term assets in the consolidated balance sheet as of December 31, 2008 and 2007 included in
this Form 10-K. In February 2008, the Company and another GEI shareholder entered into an arrangement to
provide collateral in the form of a letter of credit in the amount of $8.0 million for a loan that was issued to a
subsidiary of GEI. As of December 31, 2008, this letter of credit was scheduled to expire one year from the date
of issuance. In January 2009, the Company and the same GEI shareholder extended this letter of credit for an
additional year. The Company is currently responsible for $5.5 million of the total guaranteed amount.
In addition, at December 31, 2008, the Company had total outstanding commitments on non-cancelable
operating leases of approximately $31.7 million related to certain warehouse, distribution and office facilities,
vehicles as well as office equipment. Lease terms range from 1 to 9 years expiring at various dates through
November 2017, with options to renew at varying terms.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company uses derivative financial instruments for hedging purposes to limit its exposure to changes in
foreign currency exchange rates. Transactions involving these financial instruments are with creditworthy banks,
including the banks that are parties to the Company’s Line of Credit (see Note 8 “Financing Arrangements” to
the Notes of the Consolidated Financial Statements). The use of these instruments exposes the Company to
market and credit risk which may at times be concentrated with certain counterparties. Although counterparty
nonperformance is not anticipated, the current turmoil in the global financial markets could increase the risk of
nonperformance. 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 (see
Note 9 “Derivatives and Hedging” to the Notes to Consolidated Financial Statements) that could impact the
Company’s results of operations. The Company’s risk management strategy includes the use of derivative
financial instruments, including forwards and purchase 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’s hedging
activities can reduce, but will not eliminate, the effects of foreign currency fluctuations. The extent to which the
Company’s hedging activities mitigate the effects of changes in foreign currency exchange rates varies based
upon many factors, including the amount of transactions being hedged. The Company generally only hedges a
limited portion of its international transactions. Based upon current rates, management expects that foreign
currency rates for financial reporting purposes will have a significant negative impact upon the Company’s
consolidated reported financial results in 2009 compared to 2008 (see above, “Certain Factors Affecting
Callaway Golf Company” contained in Item 1A and “Results of Operations” contained in Item 7).
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, Canadian Dollar, and Australian Dollar. For most currencies, 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 from time to time 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 may include anticipated intercompany sales of inventory denominated
in foreign currencies, payments due on intercompany transactions from certain wholly-owned foreign
subsidiaries, payments due from customers that are denominated in foreign currencies, and anticipated sales by
the Company’s wholly-owned European subsidiary for certain Euro denominated transactions. Hedged
transactions are denominated primarily in European currencies, Japanese Yen, Canadian Dollars and Australian
Dollars. Pursuant to its foreign exchange hedging policy, the Company may hedge anticipated transactions and
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