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MarketScreener Homepage  >  Equities  >  Nyse  >  Callaway Golf Company    ELY

CALLAWAY GOLF COMPANY

(ELY)
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CALLAWAY GOLF : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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05/11/2020 | 03:34pm EDT
The following discussion should be read in conjunction with the Consolidated
Condensed Financial Statements and the related notes that appear elsewhere in
this report. See also "Important Notice to Investors Regarding Forward-Looking
Statements" on page 2 of this report.
Results of Operations
Overview of Business, Seasonality and Foreign Currency
Business and Products
The Company designs, manufactures and sells a full line of high quality golf
equipment, including golf clubs and golf balls, and apparel, gear and other
products. The Company designs its golf products to be technologically advanced
and in this regard invests a considerable amount in research and development
each year. The Company designs its golf products for golfers of all skill
levels, both amateur and professional. In addition, the Company designs and
develops a full line of high quality soft goods, including golf bags, apparel,
footwear and other golf accessories. In 2017, the Company expanded its soft
goods lines with the acquisitions of OGIO and TravisMathew. Under the OGIO
brand, the Company offers a full line of premium personal storage gear for sport
and personal use, a line of performance outerwear for men, and golf and apparel
accessories. TravisMathew offers a full line of premium golf and lifestyle
apparel as well as footwear and accessories. In January 2019, the Company
completed the acquisition of JW Stargazer Holding GmbH, the owner of the
international, premium outdoor apparel, gear and accessories brand, Jack
Wolfskin. This acquisition to further enhanced the Company's lifestyle category
and provides a platform for future growth in the active outdoor and urban
outdoor categories. The Company's soft goods under the Callaway, OGIO,
TravisMathew and Jack Wolfskin brands are largely designed and developed
internally.
Operating and Reportable Segments
The Company has two operating and reportable segments, namely Golf Equipment and
Apparel, Gear and Other.
The Golf Equipment operating segment, which is comprised of golf club and golf
ball products, includes Callaway Golf branded woods, hybrids, irons, wedges,
Odyssey putters, including Toulon Design putters by Odyssey, packaged sets,
Callaway Golf and Strata branded golf balls and sales of pre-owned golf clubs.
The Apparel, Gear and Other operating segment includes the newly acquired Jack
Wolfskin outdoor apparel, gear and accessories business, the TravisMathew golf
and lifestyle apparel and accessories business, and the Callaway and OGIO
businesses, which consist of golf apparel and accessories, storage gear for
sport and personal use, and royalties from licensing of the Company's trademarks
and service marks for various soft goods products.
For further information about the Company's segments, see Note 19 "Segment
Information" to the Notes to Consolidated Condensed Financial Statements in Part
I, Item 1 of this Form 10-Q.
Cost of Sales
The Company's cost of sales is comprised primarily of material and component
costs, distribution and warehousing costs, and overhead. Historically, over 85%
of the Company's manufacturing costs, primarily material and component costs,
are variable in nature and fluctuate with sales volumes. With respect to the
Company's Golf Equipment operating segment, variable costs as a percentage of
cost of sales range between 85% to 95% for golf club products and 70% to 80% for
golf ball products. Variable costs for soft goods in the Apparel, Gear and Other
operating segment are generally greater than 85% as fewer fixed costs are used
in the manufacturing of soft goods products. Generally, the relative
significance of the components of cost of sales does not vary materially from
these percentages from period to period. See "Operating Segments Results for the
Three Months Ended March 31, 2020 and 2019-Segment Profitability" below for
further discussion of gross margins.
Seasonality
Golf Equipment
In most of the regions where the Company conducts business, the game of golf is
played primarily on a seasonal basis. Weather conditions generally restrict golf
from being played year-round, except in a few markets, with many of the
Company's on-course customers closing for the cold weather months. The Company's
golf equipment business is therefore subject to seasonal fluctuations. In
general, during the first quarter, the Company begins selling its golf club and
golf ball products into the golf retail channel for the new golf season. This
initial sell-in generally continues into the second quarter. Second-quarter
sales are significantly affected by the amount of reorder business of the
products sold during the first quarter. Third-quarter


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sales are generally dependent on reorder business but can also include smaller
new product launches, typically resulting in lower sales than the second quarter
as many retailers begin decreasing their inventory levels in anticipation of the
end of the golf season. Fourth-quarter sales are generally less than the other
quarters due to the end of the golf season in many of the Company's key regions.
However, third-quarter sales can be affected by a mid-year product launch, and
fourth-quarter sales can be affected from time to time by the early launch of
product introductions related to the new golf season of the subsequent year.
This seasonality, and therefore quarter-to-quarter fluctuations, can be affected
by many factors, including the timing of new product introductions as well as
weather conditions. In general, because of this seasonality, a majority of the
Company's sales from its Golf Equipment operating segment and most, if not all,
of its profitability from this segment generally occurs during the first half of
the year.
Apparel, Gear and Other
Sales of the Company's golf and lifestyle apparel, gear and accessories
generally follow the same seasonality as golf equipment, and are therefore
generally higher during the first half of the year when the game of golf is
mostly played. Sales of outdoor apparel, footwear and equipment related to the
Company's newly acquired Jack Wolfskin business focuses primarily on outerwear
and consequently experiences stronger sales for such products during the
cold-weather months and the corresponding prior sell-in periods. Therefore,
sales of Jack Wolfskin products are generally greater during the second half of
the year.
Foreign Currency
A significant portion of the Company's business is conducted outside of the
United States in currencies other than the U.S. dollar. As a result, changes in
foreign currency rates can have a significant effect on the Company's financial
results. The Company enters into foreign currency forward contracts to mitigate
the effects of changes in foreign currency rates. While these foreign currency
forward contracts can mitigate the effects of changes in foreign currency rates,
they do not eliminate those effects, which can be significant. These effects
include (i) the translation of results denominated in foreign currency into U.S.
dollars for reporting purposes, (ii) the mark-to-market adjustments of certain
intercompany balance sheet accounts denominated in foreign currencies and
(iii) the mark-to-market adjustments of the Company's foreign currency forward
contracts. In general, the Company's overall financial results are affected
positively by a weaker U.S. dollar and are affected negatively by a stronger
U.S. dollar as compared to the foreign currencies in which the Company conducts
its business.
Executive Summary to the Results of Operations and Financial Condition
The Company's golf equipment and soft goods businesses in the first quarter of
2020 were significantly, adversely impacted by the COVID-19 outbreak, which the
World Health Organization declared a pandemic in early March 2020. The pandemic
resulted in the temporary closure of many of the Company's facilities around the
world, including its headquarters in the U.S., sales offices, distribution
centers, manufacturing facilities and retail locations. As a result of these
regulatory responses, portions of the Company's worldwide business operated, and
continues to operate, on a limited basis. This had a significant adverse impact
on the Company's net sales in the first quarter of 2020, most notably in its
retail and wholesale businesses. Prior to the COVID-19 pandemic, in the first
quarter of 2020 through early March, the Company continued to deliver strong
results due to continued brand momentum and the strength of its 2020 product
lines in its golf equipment business, combined with the continued success of the
TravisMathew lifestyle apparel business, which delivered sales growth in the
first quarter of 2020 compared to the first quarter of 2019, despite the
operational challenges caused by COVID-19.
In response to the adverse effects of COVID-19 on the Company's business, the
Company has been proactively taking actions to protect its employees, reduce
costs, maximize liquidity, and conserve cash. These actions include an almost
20% reduction in planned operating expenses and capital expenditures by reducing
discretionary spending and infrastructure costs, including a voluntary reduction
in compensation by the Company's executive officers, senior management, and its
Board of Directors. The Company also implemented other programs to maximize cash
and liquidity, including proactive programs to reduce inventory and the
suspension of open market stock repurchases. In addition, during the first
quarter of 2020, the Company obtained an additional $40.0 million in loan
commitments and in May 2020 the Company successfully issued $258.8 million of
convertible senior notes, with net proceeds to the Company of approximately $218
million after the cost of certain capped call transactions and certain
transaction costs.
Although it is unclear what the full impact of the COVID-19 pandemic will be on
society, the global economy and the Company's business, the Company is starting
to see some signs of recovery, primarily in the regions that were first affected
by COVID-19, namely in Asia. In the first quarter of 2020, despite the severe
business disruptions caused by COVID-19, the


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Company's businesses in Japan and Korea delivered revenue growth. The Company's
golf and apparel businesses in China are also rebounding relatively well,
exceeding the Company's expectations in April. In addition, the Company's
e-commerce business for both golf equipment and soft goods exceeded expectations
globally and is partially offsetting the decline in the Company's retail and
wholesale businesses.
The Company believes that with its enhanced liquidity and cost reduction
initiatives, combined with its geographic diversity and the strength of its
brands, that it will be able to sustain its business through this crisis.
Three-Month Periods Ended March 31, 2020 and 2019
Due to COVID-19, net sales for the first quarter of 2020 decreased $73.9 million
(14.3%) to $442.3 million compared to $516.2 million in the first quarter of
2019. This decline reflects a decrease in sales in both of the Company's
operating segments compared to the first quarter of 2019, and in every product
category and across most major geographic regions, except for Japan and Korea,
which increased period over period. Net sales in the Golf Equipment operating
segment decreased $31.9 million or 9.9% to $291.7 million, and net sales in the
Apparel, Gear and Other operating segment decreased $42.0 million or 21.8%, both
compared to the first quarter in 2019. Fluctuations in foreign currencies had an
unfavorable impact on net sales of $3.8 million in the first quarter of 2020.
The Company's net sales by operating segment are presented below (dollars in
millions):
                               Three Months Ended March 31,                Decline
                                     2020                   2019      Dollars    Percent
Net sales:
Golf Equipment          $         291.7                   $ 323.6$ (31.9 )    -9.9  %
Apparel, Gear and Other           150.6                     192.6      (42.0 )   -21.8  %
                        $         442.3                   $ 516.2$ (73.9 )   -14.3 %


For further discussion of each operating segment's results, see "Operating
Segments Results for the Three Months Ended
March 31, 2020 and 2019" below.
Net sales information by region is summarized as follows (dollars in millions):
                                                                                                Constant
                                                                                                Currency
                                           Three Months Ended                                  Growth vs.
                                                March 31,             Growth / (Decline)          2019
                                            2020         2019         Dollars      Percent      Percent
Net sales:
United States                            $   217.5$ 249.0$    (31.5 )     -12.6 %      -12.6%
Europe                                        96.7       126.6          (29.9 )     -23.6 %      -21.5%
Japan                                         77.3        73.2            4.1         5.6 %       4.5%
Rest of World                                 50.8        67.4          (16.6 )     -24.6 %      -21.7%
                                         $   442.3$ 516.2$    (73.9 )     -14.3 %      -13.6%


Net sales in the United States decreased $31.5 million (12.6%) to $217.5 million
during the first quarter of 2020 compared to $249.0 million in the first quarter
of 2019. The Company's sales in regions outside of the United States decreased
$42.4 million (15.9%) to $224.8 million during the first quarter of 2020
compared to $267.2 million in the first quarter of 2019. Foreign currency
fluctuations had an unfavorable impact of $3.8 million on net sales during the
first quarter of 2020 relative to the same period in the prior year. The general
decrease in net sales by region was primarily due to the business challenges
caused by the COVID-19 pandemic. This decrease was partially offset by an
increase in net sales in Japan and Korea as a result of brand momentum in both
the golf equipment and apparel businesses.
Gross profit decreased $42.8 million (17.9%) to $195.7 million in the first
quarter of 2020 compared to $238.4 million in the first quarter of 2019. Gross
profit as a percentage of net sales ("gross margin") decreased 200 basis points
to 44.2% in the first quarter of 2020 compared to 46.2% in the first quarter of
2019. The decrease in gross profit was primarily due to the decreased sales and
business challenges caused by the COVID-19 pandemic. The decline in gross margin
was largely due to


                                       36
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the sales decline related to COVID-19, combined with an increase in U.S. tariffs
on imports from China, as well as non-recurring redundant costs as the Company
transitioned its North America distribution center to a new facility. This
decline was partially offset by amortization expense recognized in the first
quarter of 2019 related to the inventory step-up from the Jack Wolfskin
acquisition.
For further discussion of gross margin, see "Results of Operations-Overview of
Business and Seasonality-Cost of Sales" above and "Operating Segments Results
for the Three Months Ended March 31, 2020 and 2019-Segment Profitability" below.
Selling expenses decreased $8.2 million to $111.1 million (25.1% of net sales)
in the first quarter of 2020 compared to $119.3 million (23.1% of net sales) in
the first quarter of 2019. This decrease was primarily due to a decline in media
spend due to the impacts of COVID-19, and a decrease in tour expenses.
General and administrative expenses decreased $6.2 million to $30.7 million
(6.9% of net sales) in the first quarter of 2020 compared to $36.9 million (7.2%
of net sales) in the first quarter of 2019. This decrease was primarily due to
$4.7 million of non-recurring acquisition and transition costs incurred in the
first quarter of 2019 related to the acquisition of Jack Wolfskin, combined with
a decrease in employee costs in the first quarter of 2020 due a reduction in
accrued incentive compensation expense and stock compensation expense both due
to the business challenges caused by the COVID-19 pandemic.
Research and development expenses increased $0.7 million to $13.2 million (3.0%
of net sales) in the first quarter of 2020 compared to $12.5 million (2.4% of
net sales) in the first quarter of 2019, primarily due to an increase in golf
ball engineering costs.
Interest expense decreased by $0.6 million to $9.2 million in the first quarter
of 2020 compared to $9.8 million in the first quarter of 2019 primarily due to
repayments on the Company's Term Loan Facility in the second quarter of 2019,
partially offset by an increase in outstanding borrowings on the Company's
credit facilities (see Note 6 "Financing Arrangements" to the Notes to
Consolidated Condensed Financial Statements included in Part I, Item 1, of this
Form 10-Q).
Other income increased by $8.4 million to $6.5 million in the first quarter of
2020 compared to other expense of $1.9 million in the first quarter of 2019,
primarily due to an increase in net foreign currency gains from non-designated
foreign currency hedging contracts in the first quarter of 2020, combined with a
net foreign currency loss recognized in the first quarter of 2019 due to a
foreign currency forward contract that was put in place to mitigate the risk of
foreign currency fluctuations on the acquisition of Jack Wolfskin, which was
denominated in Euros.
The Company's provision for income taxes decreased by $0.4 million to $9.2
million in the first quarter of 2020, compared to $9.6 million in the first
quarter of 2019 primarily due to a decrease in pre-tax income. As a percentage
of pre-tax income, the Company's income tax rate increased to 24.1% compared to
16.5% in the first quarter of 2019 primarily due to a shift in the mix of
foreign versus domestic earnings relative to the prior year combined with a
decline in projected pre-tax results as a result of the COVID-19 pandemic. For
further discussion see Note 13 "Income Taxes" to the Notes to Consolidated
Condensed Financial Statements in Part I, Item 1 of this Form 10-Q.
Net income for the first quarter of 2020 decreased $19.7 million to $28.9
million compared to $48.6 million in the first quarter of 2019. Diluted earnings
per share decreased $0.20 to $0.30 in the first quarter of 2020 compared to
$0.50 in the first quarter of 2019.
Operating Segment Results for the Three Months Ended March 31, 2020 and 2019
Golf Equipment
Golf Equipment sales decreased $31.9 million to $291.7 million in the first
quarter of 2020 compared to $323.6 million in the first quarter of 2019 due to a
$10.6 million (4.0%) decrease in golf club sales and a $21.3 million (34.5%)
decrease in golf ball sales. Sales of Golf Equipment were negatively impacted by
the business challenges caused by the COVID-19 pandemic which began in mid-March
of 2020. The negative impact from the pandemic was partially offset by strong
sales in January, February and early March, due to the success of the core line
of Mavrik golf clubs, which appeal to a larger segment of the market compared to
the premium line of golf clubs launched in the first quarter of 2019.


                                       37
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Net sales information for the Golf Equipment operating segment by product category is summarized as follows (dollars in millions):

               Three Months Ended
                    March 31,                   Decline
                 2020           2019      Dollars    Percent
Net sales:
Golf Clubs $    251.2$ 261.8$ (10.6 )      -4.0  %
Golf Balls       40.5            61.8      (21.3 )     -34.5  %
           $    291.7$ 323.6$ (31.9 )      -9.9  %


The $10.6 million (4.0%) decrease in net sales of golf clubs to $251.2 million
for the quarter ended March 31, 2020, compared to $261.8 million in the
comparable period in 2019, was primarily due a decline in sales volume in irons
and putters due to the business challenges caused by the COVID-19 pandemic,
partially offset by an increase in sales volume in woods due to the earlier
launch timing of hybrid products in the first quarter of 2020 compared to a more
staggered launch cadence throughout 2019. The decline in sales volume was
partially offset by an increase in average selling prices driven by the launch
of the Stroke Lab Black and Triple Track putters in the first quarter of 2020 at
higher average selling prices relative to the Stroke Lab putters launched in
2019.
Net sales of golf balls decreased $21.3 million (34.5%) to $40.5 million for the
quarter ended March 31, 2020 compared to $61.8 million in the comparable period
in 2019 primarily due to a decline in sales volume and business challenges
caused by the COVID-19 pandemic.
Apparel, Gear and Other
Net sales of Apparel, Gear and Other decreased $41.9 million to $150.6 million
in the first quarter of 2020 compared to $192.5 million in the first quarter of
2019 due to an $18.9 million (19.6%) decrease in apparel sales and a $23.0
million (23.9%) decrease in sales of gear, accessories and other.
Net sales information for the Apparel, Gear and Other operating segment is
summarized as follows (dollars in millions):
                               Three Months Ended
                                    March 31,                    Decline
                                 2020           2019      Dollars     Percent
Net sales:
Apparel                    $     77.3$  96.2$  (18.9 )     -19.6  %
Gear, Accessories, & Other       73.3            96.3       (23.0 )     -23.9  %
                           $    150.6$ 192.5$  (41.9 )     -21.8  %


Net sales of apparel decreased $18.9 million (19.6%) to $77.3 million in the
first quarter of 2020 compared to the first quarter of 2019, primarily due to a
decline in sales of Jack Wolfskin outdoor apparel as a result of the business
challenges caused by the COVID-19 pandemic, primarily in Europe and China, the
two main markets for Jack Wolfskin products. This decline was partially offset
by an increase in the apparel business in Japan and an increase in the
TravisMathew business in the United States despite the impact of the COVID-19
pandemic.
Net sales of gear, accessories and other decreased $23.0 million (23.9%) to
$73.3 million for the first quarter of 2020 compared to $96.3 million in the
first quarter of 2019 due to the business challenges caused by the COVID-19
pandemic.


                                       38
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Segment Profitability
Profitability by operating segment is summarized as follows (dollars in
millions):
                               Three Months Ended
                                    March 31,                  Decline
                                2020         2019(1)     Dollars     Percent
Income before income taxes:
Golf Equipment              $    58.6$  70.6$ (12.0 )    -17.0  %
Apparel, Gear and Other          (3.8 )        22.1       (25.9 )   -117.2  %
Reconciling items(2)            (16.8 )       (34.6 )      17.8       51.4  %
                            $    38.0$  58.1$ (20.1 )    -34.6  %




(1) The Company continues to refine its expense allocation methodology between

operating segments. As a result, the Company reclassified certain information

technology expenses between the segments in the first quarter of 2019 in

order to conform with the current presentation.

(2) Reconciling items represent corporate general and administrative expenses and

other income (expense) not included by management in determining segment

profitability. The $17.9 million decrease in reconciling items in the first

quarter of 2020 compared to the first quarter of 2019 was primarily due to an

increase of $8.3 million in net gains recognized on hedging contracts

combined with a decrease, primarily in employee costs, in general and

administrative expenses, both in the first quarter of 2020, in addition to

non-recurring acquisition charges of $4.7 million recognized in the first

quarter of 2019 related to the acquisition of Jack Wolfskin, which was

completed in January 2019.



Pre-tax income from the Golf Equipment operating segment decreased $12.0 million
(17.0%) to $58.6 million in the first quarter of 2020 from $70.6 million in the
first quarter of 2019. This decrease was primarily due to a $20.9 million
decrease in gross profit (a decline of 180 basis points in gross margin),
partially offset by an $8.9 million decrease in operating expenses. The decrease
in gross profit was primarily due to the decreased sales and business challenges
caused by the COVID-19 pandemic. The decline in gross margin was largely due to
the sales decline related to COVID-19, combined with an increase in U.S. tariffs
on imports from China, as well as non-recurring redundant costs as the Company
transitioned its North America distribution center to a new facility. The
decrease in operating expenses was primarily due to a decline in media spend and
the cancellation of golf tournaments both related to the COVID-19 pandemic.
Pre-tax income in the Company's Apparel, Gear and Other operating segment
decreased $25.9 million (117.2%) to a pre-tax loss of $3.8 million in the first
quarter of 2020 compared to pre-tax income of $22.1 million in the first quarter
of 2019. This decrease was primarily due to a $25.9 million decrease in gross
profit or a decline of 470 basis points in gross margin. The decrease in gross
profit was primarily due to the decreased sales and business challenges caused
by the COVID-19 pandemic. The decline in gross margin was largely due to the
sales decline related to COVID-19 and non-recurring redundant costs as the
Company transitioned its North America distribution center to a new facility.
Financial Condition
The Company's cash and cash equivalents increased $59.9 million to $166.6
million at March 31, 2020 from $106.7 million at December 31, 2019. Cash used in
operating activities improved to $93.7 million in the first three months of 2020
compared to $120.6 million in the first three months of 2019 primarily due to an
increase in product launches during the fourth quarter of 2019 compared to 2018
resulting in increased cash collections during the first quarter of 2020
compared to the same period in the prior year. This was partially offset by a
decline in net income period over period due to the operational challenges
caused by the COVID-19 pandemic in the first quarter of 2020. During the first
three months of 2020, the Company used its cash and cash equivalents combined
with borrowings from its credit facilities to fund its operations and capital
expenditures of $17.0 million, primarily in its golf ball manufacturing plant to
increase capacity and improve its manufacturing capabilities, repurchase shares
of its common stock for $21.9 million, and repay its long-term debt. Management
expects to fund the Company's future operations from current cash balances and
cash provided by its operating activities combined with borrowings under its
current and future credit facilities, the completion of the issuance of the 2026
Notes in May 2020, and other available sources of capital, as deemed necessary.
See Note 6 "Financing Arrangements" to the Notes to Consolidated Condensed
Financial Statements in Part I, Item 1 and "Liquidity and Capital Resources" in
Part I, Item 2 of this Form 10-Q for further information on the Company's credit
facilities and the Term Loan Facility.


                                       39
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The Company's accounts receivable balance fluctuates throughout the year as a
result of the general seasonality of the Company's business and is also affected
by the timing of new product launches. With respect to the Company's Golf
Equipment business, the accounts receivable balance will generally be at its
highest during the first and second quarters due to the seasonal peak in the
golf season, and it will generally decline significantly during the third and
fourth quarters as a result of an increase in cash collections and lower sales.
The Company's Apparel, Gear and Other Accounts receivable balances are expected
to be higher during the second half of the year due to the seasonal nature of
the Jack Wolfskin business, with a significant portion of its products geared
toward the fall/winter season. As of March 31, 2020, the Company's net accounts
receivable increased to $259.5 million from $140.5 million as of December 31,
2019. This increase reflects the timing of golf products launched during the
first quarter of 2020. The Company's net accounts receivable as of March 31,
2020 decreased $26.3 million compared to March 31, 2019 primarily due to a
decrease of $73.9 million (14.3%) in net sales period over due to the
operational challenges caused by the COVID-19 pandemic in the first quarter of
2020.
The Company's inventory balance fluctuates throughout the year as a result of
the general seasonality of the Company's business and is also affected by the
timing of new product launches. With respect to the Company's Golf Equipment
business, the buildup of inventory levels generally begins during the fourth
quarter and continues heavily into the first quarter as well as into the
beginning of the second quarter in order to meet demand during the height of the
golf season. Inventory levels are also impacted by the timing of new product
launches as well as the success of new products. Apparel, Gear and Other
inventory levels start to build in the second quarter and continues into the
third and fourth quarters due to the seasonal nature of the Company's Jack
Wolfskin business, as many products are geared toward the fall/winter season.
The Company's inventory decreased to $412.7 million as of March 31, 2020
compared to $456.6 million as of December 31, 2019. This decrease was primarily
due to operational challenges with the Company's supply chain caused by the
COVID-19 pandemic. The Company's inventory as of March 31, 2020 increased by
$30.4 million compared to the Company's inventory as of March 31, 2019 primarily
due to higher inventory levels resulting from lower sales in the first quarter
of 2020 due to the operational challenges caused by the COVID-19 pandemic.
Liquidity and Capital Resources
The Company's principal sources of liquidity consist of its existing cash
balances, funds expected to be generated from operations and its credit
facilities. Additionally, in May 2020, the Company issued $258.8 million in
aggregate principal amount of the 2026 Notes. Based upon the Company's current
cash balances, its estimates of funds expected to be generated from operations
in 2020, and current and projected availability under its current or future
credit facilities, the Company believes that it will be able to finance current
and planned operating requirements, capital expenditures, required debt
repayments and contractual obligations and commercial commitments for at least
the next 12 months from the issuance of this Form 10-Q. The Company also
received in early May proceeds from its convertible note offering discussed
below, which will also significantly increase the Company's liquidity.
The Company's ability to generate sufficient positive cash flows from operations
is subject to many risks and uncertainties, including future economic trends and
conditions, demand for the Company's products, foreign currency exchange rates,
and other risks and uncertainties applicable to the Company and its business
(see "Risk Factors" contained in Part I, Item 1A of its Annual Report on Form
10-K for the year ended December 31, 2019, in addition to an update to Risk
Factors concerning the negative impact of the COVID-19 pandemic on the Company's
business contained in Part II, Item 1A of this Form 10-Q). Given the uncertain
duration of the COVID-19-related impact, the Company has been proactively taking
actions to significantly reduce costs, maximize liquidity and conserve cash for
as long as may be required in light of current conditions, For example, through
April 30, 2020, the Company had achieved an almost 20% reduction in planned
operating expenses and capital expenditures through efforts to reduce
discretionary spending and infrastructure costs on a worldwide basis, including
voluntary reductions in compensation by the Board of Directors, the Chief
Executive Officer and other members of senior management. As of March 31, 2020,
the Company had $259.4 million in cash and availability under its credit
facilities. While the Company believes its cash and credit facilities are
adequate to sustain its business through this crisis, the Company continues to
consider other available sources of capital as market conditions and programs
present themselves. During the first quarter of 2020, the Company added $40
million of available loan commitments and in April 2020, amended the ABL
Facility and Term Loan Facility to increase its flexibility to opportunistically
take advantage of other available sources of capital, including capital markets
and government sponsored programs for which the Company may qualify in the
United States and internationally.
Additionally, in May 2020, the Company issued $258.8 million in aggregate
principal amount of the 2026 Notes. With this increased liquidity, cost
reduction actions, the Company's geographic diversity and the strength of its
brands, the Company


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believes is has adequate liquidity to sustain its business through this crisis.
Information about the Company's credit facilities and long-term borrowings is
presented in Note 6 "Financing Arrangements" to the Notes to Consolidated
Condensed Financial Statements included in Part I, Item 1, of this Form 10-Q,
which is incorporated herein by this reference.
As of March 31, 2020, approximately 40% of the Company's cash was held in
regions outside of the United States. Due to changes enacted by the Tax Act in
December 2017, incremental U.S. federal income tax is no longer a consideration
if the Company were to repatriate cash to the United States outside of settling
intercompany balances. However, if the Company were to repatriate such cash, it
may need to pay incremental foreign withholding taxes which, subject to certain
limitations, generate foreign tax credits for use against the Company's U.S. tax
liability, if any. Additionally, the Company may need to pay certain state
income taxes. The Company continues to maintain its indefinite reinvestment
assertion with respect to most jurisdictions in which it operates because of
local cash requirements to operate its business.
Other Significant Cash and Contractual Obligations
The table set forth below summarizes certain significant cash obligations as of
March 31, 2020 that will affect the Company's future liquidity.
                                                                   Payments Due By Period
                                                         Less than                                       More than
                                            Total         1 Year         1-3 Years       3-5 Years        5 Years
                                                                        (in millions)
Term Loan Facility(1)                    $   445.2$       3.6$       9.6$       9.6$     422.4
Interest on term loan facility               136.3            24.2            47.8            46.8            17.5
Equipment notes(2)                            28.3             6.2            12.3             6.8             3.0
Interest on equipment notes                    2.1             0.8             0.9             0.3             0.1
ABL Facility                                 300.2           300.2               -               -               -
Japan ABL Facility                            35.3            35.3               -               -               -
Finance leases, including imputed
interest(3)                                    1.1             0.5             0.4             0.1             0.1
Operating leases, including imputed
interest(4)                                  268.6            29.3            64.1            48.6           126.6
Unconditional purchase obligations(5)        115.2            52.4            49.7            13.1               -
Uncertain tax contingencies(6)                 7.4             0.6             0.9             1.1             4.8
Other long term liabilities                    7.9             0.4             0.9             0.9             5.7
Total                                    $ 1,347.6$     453.5$     186.6$     127.3$     580.2

(1) In January 2019, to fund the purchase price of the Jack Wolfskin acquisition,

the Company entered into a Credit Agreement which provides for a Term Loan B

facility in an aggregate principal of $480.0 million, which was issued less

$9.6 million in original issue discount and other transaction fees. As of

March 31, 2020, the Company had $445.2 million outstanding under the Term

Loan Facility, which is offset by unamortized debt issuance costs of $14.9

million as presented on the Company's consolidated condensed balance sheet as

of March 31, 2020. For further discussion, see Note 6 "Financing

Arrangements" to the Notes to Consolidated Condensed Financial Statements in

Part I, Item 1 of this Form 10-Q.

(2) In connection with the Company's investment initiatives to improve its

manufacturing capabilities at its golf ball manufacturing facility in

Chicopee, Massachusetts, the Company entered into a series of long-term

financing agreements (the "equipment notes") between 2017 and 2020 that are

secured by certain equipment at this facility. As of March 31, 2020, the

Company had a combined $28.3 million outstanding under these equipment notes.

For further discussion, see Note 6 "Financing Arrangements" to the Notes to

Consolidated Condensed Financial Statements in Part I, Item 1 of this Form

10-Q.

(3) Amounts represent future minimum payments under financing leases. At March

31, 2020, finance lease liabilities of $0.5 million were recorded in accounts

payable and accrued expenses and $0.5 million were recorded in other

long-term liabilities in the accompanying consolidated condensed balance

sheets. For further discussion, see Note 2 "Leases" to the Notes to

Consolidated Condensed Financial Statements in Part I, Item 1 of this Form

10-Q.

(4) The Company leases certain manufacturing facilities, distribution centers,

warehouses, office facilities, vehicles and office equipment under operating

leases. The amounts presented in this line item represent commitments for

minimum lease payments under non-cancelable operating leases. At March 31,

2020, short-term and long-term operating lease liabilities of $28.5 million





                                       41
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and $176.0 million, respectively, were recorded in the accompanying consolidated
condensed balance sheets. For further discussion, see Note 2 "Leases" to the
Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this
Form 10-Q.
(5) During the normal course of its business, the Company enters into agreements

to purchase goods and services, including purchase commitments for production

materials, endorsement agreements with professional golfers and other

endorsers, employment and consulting agreements, and intellectual property

licensing agreements pursuant to which the Company is required to pay royalty

fees. It is not possible to determine the amounts the Company will ultimately

be required to pay under these agreements as they are subject to many

variables including performance-based bonuses, severance arrangements, the

Company's sales levels, and reductions in payment obligations if designated

minimum performance criteria are not achieved. The amounts listed approximate

minimum purchase obligations, base compensation, and guaranteed minimum

royalty payments the Company is obligated to pay under these agreements. The

actual amounts paid under some of these agreements may be higher or lower

than the amounts included. In the aggregate, the actual amount paid under

these obligations is likely to be higher than the amounts listed as a result

of the variable nature of these obligations. In addition, the Company also

enters into unconditional purchase obligations with various vendors and

suppliers of goods and services in the normal course of operations through

purchase orders or other documentation or that are undocumented except for an

invoice. Such unconditional purchase obligations are generally outstanding

for periods less than a year and are settled by cash payments upon delivery

of goods and services and are not reflected in this line item.

(6) Amount represents the current and non-current portions of uncertain income

tax positions as recorded on the Company's consolidated condensed balance

sheet as of March 31, 2020. Amounts exclude uncertain income tax positions

that the Company would be able to offset against deferred taxes. For further

discussion, see Note 13 "Income Taxes" to the Notes to Consolidated Condensed

Financial Statements in Part I, Item 1 of this Form 10-Q.



During its normal course of business, the Company has made certain indemnities,
commitments and guarantees under which it may be required to make payments in
relation to certain transactions. These include (i) intellectual property
indemnities to the Company's customers and licensees in connection with the use,
sale and/or license of Company products or trademarks, (ii) indemnities to
various lessors in connection with facility leases for certain claims arising
from such facilities or leases, (iii) indemnities to vendors and service
providers pertaining to the goods or services provided to the Company or based
on the negligence or willful misconduct of the Company, and (iv) indemnities
involving the accuracy of representations and warranties in certain contracts.
In addition, the Company has made contractual commitments to each of its
officers and certain other employees providing for severance payments upon the
termination of employment. The Company has also issued guarantees in the form of
a standby letter of credit in the amount of $1.4 million primarily as security
for contingent liabilities under certain workers' compensation insurance
policies.
The duration of these indemnities, commitments and guarantees varies, and in
certain cases may be indefinite. The majority of these indemnities, commitments
and guarantees do not provide for any limitation on the maximum amount of future
payments the Company could be obligated to make. Historically, costs incurred to
settle claims related to indemnities have not been material to the Company's
financial position, results of operations or cash flows. In addition, the
Company believes the likelihood is remote that payments under the commitments
and guarantees described above will have a material effect on the Company's
financial condition. The fair value of indemnities, commitments and guarantees
that the Company issued during the three months ended March 31, 2020 was not
material to the Company's financial position, results of operations or cash
flows.
In addition to the contractual obligations listed above, the Company's liquidity
could also be adversely affected by an unfavorable outcome with respect to
claims and litigation that the Company is subject to from time to time (see Note
14 "Commitments & Contingencies" to the Notes to Consolidated Condensed
Financial Statements in Part I, Item 1 and "Legal Proceedings" in Part II,
Item 1 of this Form 10-Q).
Capital Expenditures
The Company does not currently have any material commitments for capital
expenditures. Previously, the Company announced it would invest an estimated
$55.0 million in capital expenditures in 2020. Due to the COVID-19 pandemic, the
Company is taking actions to significantly reduce costs, including reductions in
capital expenditures. As such, the Company revised its estimate of capital
expenditures to be in the range of approximately $32.5 million to $37.5 million
for the year ending December 31, 2020.
Off-Balance Sheet Arrangements
The Company has no material off-balance sheet arrangements as defined in
Regulation S-K Item 303(a)(4)(ii).


                                       42
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Critical Accounting Policies and Estimates
There have been no material changes to the Company's critical accounting
policies and estimates from the information provided in Part II, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," included in the Company's Form 10-K for the fiscal year ended
December 31, 2019, except for the Company's adoption of the Accounting Standards
Update ("ASU") No 2016-13, "Financial Instruments-Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments" which became effective as
of January 1, 2020. For further discussion on the adoption of this new
accounting standard please see Note 1 "Basis of Presentation" to the Notes to
Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q.
Item 3.  Quantitative and Qualitative Disclosures about Market Risk
The Company uses derivative financial instruments to mitigate its exposure to
changes in foreign currency exchange rates and interest rates. Transactions
involving these financial instruments are with creditworthy banks, primarily
banks that are party to the Company's credit facilities (see Note 6 "Financing
Arrangements" to the Notes to Consolidated Condensed Financial Statements in
Part 1, Item 1 of this Form 10-Q). The use of these instruments exposes the
Company to market and credit risk which may at times be concentrated with
certain counterparties, although counterparty nonperformance is not anticipated.
Foreign Currency Fluctuations
Information about the Company's foreign currency hedging activities is set forth
in Note 17 "Derivatives and Hedging," to the Notes to Consolidated Condensed
Financial Statements included in Part I, Item 1, of this Form 10-Q, which is
incorporated herein by this reference.
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 March 31, 2020 through its foreign currency
forward contracts.
At March 31, 2020, the estimated maximum loss from the Company's foreign
currency forward contracts, calculated using the sensitivity analysis model
described above, was $32.2 million. The Company believes that such a
hypothetical loss from its foreign currency forward 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 credit facilities and
long-term borrowing commitments. Outstanding borrowings under these credit
facilities and long-term borrowing commitments accrue interest as described in
Note 6 "Financing Arrangements" to the Notes to Consolidated Condensed Financial
Statements in Part I, Item 1, and in "Liquidity and Capital Resources" in Part
I, Item 2 of this Form 10-Q. The Company's long-term borrowing commitments are
subject to interest rate fluctuations, which could be material to the Company's
cash flows and results of operations. In order to mitigate this risk, the
Company enters into interest rate hedges as part of its interest rate risk
management strategy. Information about the Company's interest rate hedges is
provided in Note 17 "Derivatives and Hedging" to the Notes to Consolidated
Condensed Financial Statements in Part I, Item 1 of this Form 10-Q. In order to
determine the impact of unfavorable changes in interest rates on the Company's
cash flows and result of operations, the Company performed a sensitivity
analysis as part of its risk management procedures. The sensitivity analysis
quantified that the incremental expense incurred by a 10% increase in interest
rates would be $0.8 million over the 12-month period ending on March 31, 2020.
Item 4.  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 March 31, 2020, of the Company's disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended). 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 March 31, 2020.


                                       43
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Changes in Internal Control over Financial Reporting. During the quarter ended
March 31, 2020, there were no changes in the Company's internal control over
financial reporting that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.


                                       44

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