Callaway 2014 Annual Report Download - page 56

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40
only hedges a limited portion of its international transactions. Foreign currency rates for financial reporting purposes had a
negative impact upon the Company’s consolidated reported financial results in 2014 compared to 2013 (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.
Through December 31, 2014, the Company did not designate foreign currency exchange contracts as derivatives that
qualify for hedge accounting under ASC 815, “Derivatives and Hedging” and as such, changes in the fair value of the contracts
were recognized in earnings in the period of change. Beginning in January 2015, the Company entered into certain foreign
currency exchange contracts designated as derivatives that qualify for hedge accounting. At December 31, 2014, 2013 and
2012, the notional amounts of the Company’s foreign currency exchange contracts used to hedge the exposures discussed
above were approximately $62.9 million, $42.3 million and $137.1 million, respectively. At December 31, 2014 and 2013,
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, 2014 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, was $6.8 million at December 31, 2014. 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. Outstanding borrowings under the ABL Facility
accrue interest as described in Note 4 “Financing Arrangements” in the Notes to Consolidated Financial Statements in this
Form 10-K. 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 a 10% increase in interest rates would be $0.3 million over a 12 month period.
Item 8. Financial Statements and Supplementary Data
The Company’s Consolidated Financial Statements as of December 31, 2014 and 2013 and for each of the three years
in the period ended December 31, 2014, together with the report of the Company's independent registered public accounting
firm, are included in this Annual Report on Form 10-K beginning on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures. The Company carried out an evaluation, under the supervision and with the
participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer,
of the effectiveness, as of December 31, 2014, of the Company’s disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2014.