Callaway 2008 Annual Report Download - page 62

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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 reducing 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, 2008 and 2007, the notional amounts of the Company’s foreign exchange contracts used to
hedge outstanding balance sheet exposures (including payments due on intercompany transactions from certain
wholly-owned foreign subsidiaries and payments due from customers that are denominated in foreign
currencies), were approximately $23.7 million and $31.1 million, respectively. At December 31, 2008 and 2007,
there were no outstanding foreign exchange contracts designated as cash flow hedges for anticipated sales
denominated in foreign currencies.
As part of the Company’s risk management procedure, a sensitivity analysis model is used to measure the
potential loss in future earnings of market-sensitive instruments resulting from one or more selected hypothetical
changes in interest rates or foreign currency values. The sensitivity analysis model quantifies the estimated
potential effect of unfavorable movements of 10% in foreign currencies to which the Company was exposed at
December 31, 2008 through its derivative financial instruments.
The estimated maximum one-day loss from the Company’s foreign currency derivative financial
instruments, calculated using the sensitivity analysis model described above, is $2.6 million at December 31,
2008. The portion of the estimated loss associated with the foreign exchange contracts that offset the
remeasurement gain and loss of the related foreign currency denominated assets and liabilities is $2.6 million at
December 31, 2008 and would impact earnings. The Company believes that such a hypothetical loss from its
derivatives would be offset by increases in the value of the underlying transactions being hedged.
The sensitivity analysis model is a risk analysis tool and does not purport to represent actual losses in
earnings that will be incurred by the Company, nor does it consider the potential effect of favorable changes in
market rates. It also does not represent the maximum possible loss that may occur. Actual future gains and losses
will differ from those estimated because of changes or differences in market rates and interrelationships, hedging
instruments and hedge percentages, timing and other factors.
Interest Rate Fluctuations
The Company is exposed to interest rate risk from its Line of Credit (see Note 8 “Financing Arrangements”
to the Consolidated Financial Statements). Outstanding borrowings accrue interest at the Company’s election,
based upon the Company’s consolidated leverage ratio and trailing four quarters’ EBITDA, of (i) the higher of
(a) the Federal Funds Rate plus 50.0 basis points or (b) Bank of America’s prime rate, or (ii) the Eurodollar Rate
(as defined in the agreement governing the Line of Credit) plus a margin of 50.0 to 125.0 basis points.
As part of the Company’s risk management procedures, a sensitivity analysis was performed to determine
the impact of unfavorable changes in interest rates on the Company’s cash flows. The sensitivity analysis
quantified that the estimated potential cash flows impact would be approximately $1.3 million in additional
interest expense if interest rates were to increase by 10% over a twelve month period.
Item 8. Financial Statements and Supplementary Data
The Company’s Consolidated Financial Statements as of December 31, 2008 and 2007 and for each of the
three years in the period ended December 31, 2008, together with the reports of our independent registered public
accounting firm, are included in this Annual Report on Form 10-K on pages F-1 through F-36.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
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