Callaway 2009 Annual Report Download - page 62

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Hedging” to the Notes to Consolidated Financial Statements). In addition, the Company is exposed to gains and
losses resulting from the translation of the operating results of the Company’s international subsidiaries into U.S.
dollars for financial reporting purposes. As part of its strategy to manage the level of exposure to the risk of
fluctuations in foreign currency exchange rates, the Company uses derivative financial instruments in the form of
foreign currency forward contracts and put and call option contracts (“foreign currency exchange contracts”) to
hedge transactions that are denominated primarily in British Pounds, Euros, Japanese Yen, Canadian Dollars,
Australian Dollars and Korean Won. 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.
Foreign currency exchange contracts are used only to meet the Company’s objectives of offsetting gains and
losses from foreign currency exchange exposures with gains and losses from the contracts used to hedge them in
order to reduce volatility of earnings. 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.
As a result of the turmoil in the global financial markets during 2009, foreign currency rates for financial
reporting purposes had 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 does not enter into foreign currency
exchange contracts for speculative purposes. Foreign currency exchange contracts generally mature
within twelve months from their inception.
The Company does not designate foreign currency exchange contracts as derivatives that qualify for hedge
accounting under ASC 815, “Derivatives and Hedging.” As such, changes in the fair value of the contracts are
recognized in earnings in the period of change. At December 31, 2009, 2008 and 2007, the notional amounts of
the Company’s foreign currency exchange contracts used to hedge the exposures discussed above were
approximately $101.7 million, $23.7 million and $31.1 million, respectively. At December 31, 2009 and 2008,
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, 2009 through its foreign currency exchange contracts.
The estimated maximum one-day loss from the Company’s foreign currency exchange contracts, calculated
using the sensitivity analysis model described above, is $11.1 million at December 31, 2009. The portion of the
estimated loss associated with foreign currency exchange contracts that offset the remeasurement gain and loss of
the related foreign currency denominated assets and liabilities is $11.1 million at December 31, 2009 and would
impact earnings. The Company believes that such a hypothetical loss from its foreign currency exchange
contracts would be partially 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 9 “Financing Arrangements”
to the Consolidated Financial Statements). Outstanding borrowings under the Line of Credit accrue interest at the
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