Callaway 2012 Annual Report Download - page 63

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Foreign Currency Fluctuations
In the normal course of business, the Company is exposed to gains and losses resulting from fluctuations in
foreign currency exchange rates relating to transactions of its international subsidiaries, including certain balance
sheet exposures (payables and receivables denominated in foreign currencies) (see Note 18 “Derivatives and
Hedging” to the Notes to Consolidated Financial Statements in this Form 10-K). 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 South 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. Foreign currency rates for financial reporting purposes had a negative impact upon the
Company’s consolidated reported financial results in 2012 compared to 2011 (see “Risk Factors” 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 12
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, 2012, 2011 and 2010, the notional amounts of
the Company’s foreign currency exchange contracts used to hedge the exposures discussed above were
approximately $137.1 million, $165.5 million and $314.2 million, respectively. At December 31, 2012 and 2011,
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, 2012 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 $14.8 million at December 31, 2012. 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.
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