Callaway 2011 Annual Report Download - page 60

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of changes in foreign currency exchange rates varies based upon many factors, including the amount of
transactions being hedged. Foreign currency rates for financial reporting purposes had a significant positive
impact upon the Company’s consolidated reported financial results in 2011 compared to 2010 (see above,
“Certain Risk 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, 2011, 2010 and 2009, the notional amounts of
the Company’s foreign currency exchange contracts used to hedge the exposures discussed above were
approximately $165.5 million, $314.2 million and $101.7 million, respectively. At December 31, 2011 and 2010,
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, 2011 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 $18.1 million at December 31, 2011. 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 ABL Facility (see Note 10 “Financing Arrangements”
to the Notes to Consolidated Financial Statements in this Form 10-K). The interest rate applicable to outstanding
loans under the ABL Facility fluctuates depending on the Company’s trailing-twelve month EBITDA (as defined
by the ABL Facility) combined with the Company’s “availability ratio” (as defined below). The interest rate
applicable to outstanding loans under the U.S. facility is based on a calculation of either the U.S. Prime Rate or
the British Bankers Association LIBOR Rate as published by Reuters (“LIBOR”) plus an applicable margin of
1.25% to 2.75%. The interest rate applicable to outstanding loans under the Canadian facility is based on a
calculation of either the Base Rate publicly announced by Bank of America Canada or Canada’s Prime Rate plus
a margin of 1.25% to 2.75%. The interest rate applicable to outstanding loans under the U.K. facility is based on
a calculation of the U.S. Prime Rate plus an applicable margin of 2.25% and 2.75%.
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 incremental expense incurred by an increase of 10% in interest rates would be nominal over a
twelve month period.
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