TOPGOLF CALLAWAY BRANDS CORP. 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. InJanuary 2019 , the Company completed the acquisition ofJW 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, includesCallaway 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 EndedMarch 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 34 -------------------------------------------------------------------------------- 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 ofthe United States in currencies other than theU.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 intoU.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 weakerU.S. dollar and are affected negatively by a strongerU.S. dollar as compared to the foreign currencies in which the Company conducts its business. Executive Summary to the Results of Operations and Financial ConditionThe Company's golf equipment and soft goods businesses in the first quarter of 2020 were significantly, adversely impacted by the COVID-19 outbreak, which theWorld Health Organization declared a pandemic in earlyMarch 2020 . The pandemic resulted in the temporary closure of many of the Company's facilities around the world, including its headquarters in theU.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 inMay 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 inAsia . In the first quarter of 2020, despite the severe business disruptions caused by COVID-19, the 35 -------------------------------------------------------------------------------- Company's businesses inJapan andKorea delivered revenue growth. The Company's golf and apparel businesses inChina 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 EndedMarch 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 forJapan andKorea , 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 EndedMarch 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 inthe 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 ofthe 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 inJapan andKorea 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
-------------------------------------------------------------------------------- the sales decline related to COVID-19, combined with an increase inU.S. tariffs on imports fromChina , as well as non-recurring redundant costs as the Company transitioned itsNorth 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 EndedMarch 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 EndedMarch 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 --------------------------------------------------------------------------------
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
quarter of 2020 compared to the first quarter of 2019 was primarily due to an
increase of
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
quarter of 2019 related to the acquisition of Jack Wolfskin, which was
completed in
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 inU.S. tariffs on imports fromChina , as well as non-recurring redundant costs as the Company transitioned itsNorth 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 itsNorth America distribution center to a new facility. Financial Condition The Company's cash and cash equivalents increased$59.9 million to$166.6 million atMarch 31, 2020 from$106.7 million atDecember 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 inMay 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 -------------------------------------------------------------------------------- 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 ofMarch 31, 2020 , the Company's net accounts receivable increased to$259.5 million from$140.5 million as ofDecember 31, 2019 . This increase reflects the timing of golf products launched during the first quarter of 2020. The Company's net accounts receivable as ofMarch 31, 2020 decreased$26.3 million compared toMarch 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 ofMarch 31, 2020 compared to$456.6 million as ofDecember 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 ofMarch 31, 2020 increased by$30.4 million compared to the Company's inventory as ofMarch 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, inMay 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 endedDecember 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, throughApril 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 ofMarch 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 inApril 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 inthe United States and internationally. Additionally, inMay 2020 , the Company issued$258.8 million in aggregate principal amount of the 2026 Notes. With this increased liquidity, cost reduction actions, the Company's geographic diversity and the strength of its brands, the Company 40
-------------------------------------------------------------------------------- believes is has adequate liquidity to sustain its business through this crisis. Information about the Company's credit facilities and long-term borrowings is presented in Note 6 "Financing Arrangements" to the Notes to Consolidated Condensed Financial Statements included in Part I, Item 1, of this Form 10-Q, which is incorporated herein by this reference. As ofMarch 31, 2020 , approximately 40% of the Company's cash was held in regions outside ofthe United States . Due to changes enacted by the Tax Act inDecember 2017 , incrementalU.S. federal income tax is no longer a consideration if the Company were to repatriate cash tothe United States outside of settling intercompany balances. However, if the Company were to repatriate such cash, it may need to pay incremental foreign withholding taxes which, subject to certain limitations, generate foreign tax credits for use against the Company'sU.S. tax liability, if any. Additionally, the Company may need to pay certain state income taxes. The Company continues to maintain its indefinite reinvestment assertion with respect to most jurisdictions in which it operates because of local cash requirements to operate its business. Other Significant Cash and Contractual Obligations The table set forth below summarizes certain significant cash obligations as ofMarch 31, 2020 that will affect the Company's future liquidity. Payments Due By Period Less than More than Total 1 Year 1-3 Years 3-5 Years 5 Years (in millions) Term Loan Facility(1)$ 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
the Company entered into a Credit Agreement which provides for a Term Loan B
facility in an aggregate principal of
Loan Facility, which is offset by unamortized debt issuance costs of
million as presented on the Company's consolidated condensed balance sheet as
of
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
financing agreements (the "equipment notes") between 2017 and 2020 that are
secured by certain equipment at this facility. As of
Company had a combined
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
payable and accrued expenses and
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
2020, short-term and long-term operating lease liabilities of
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
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 endedMarch 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 endingDecember 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 -------------------------------------------------------------------------------- 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 endedDecember 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 ofJanuary 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 atMarch 31, 2020 through its foreign currency forward contracts. AtMarch 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 onMarch 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 ofMarch 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 ofMarch 31, 2020 . 43 -------------------------------------------------------------------------------- Changes in Internal Control over Financial Reporting. During the quarter endedMarch 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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