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. Discussion of Non-GAAP Measures In addition to the financial results contained in this report, which have been prepared and presented in accordance with the accounting principles generally accepted inthe United States ("GAAP"), the Company has also included supplemental information concerning the Company's financial results on a non-GAAP basis. This non-GAAP information includes certain of the Company's financial results on a constant currency basis. This constant currency information estimates what the Company's financial results would have been without changes in foreign currency exchange rates. This information is calculated by taking the current period local currency results and translating them intoU.S. dollars based upon the foreign currency exchange rates for the applicable comparable prior period. In addition, this non-GAAP information includes certain of the Company's financial results without certain non-cash charges recognized in the three and nine months endedSeptember 30, 2020 , including, the recognition of an impairment loss on Jack Wolfskin goodwill and other intangible assets, amortization expense of intangible assets associated with the Jack Wolfskin, OGIO and TravisMathew acquisitions, and the discount amortization of the Convertible Notes issued inMay 2020 , in addition to other non-recurring expenses. For the three and nine months endedSeptember 30, 2019 , non-GAAP financial results exclude certain non-cash charges, including purchase accounting amortization expense associated with the Jack Wolfskin acquisition and amortization expense of intangible assets associated with the Jack Wolfskin, OGIO and TravisMathew acquisitions, in addition to transaction and transition costs in connection with the Jack Wolfskin acquisition. The Company has included in this report information to reconcile this non-GAAP information to the most directly comparable GAAP information. The non-GAAP information presented in this report should not be considered in isolation or as a substitute for any measure derived in accordance with GAAP. The non-GAAP information may also be inconsistent with the manner in which similar measures are derived or used by other companies. Management uses such non-GAAP information for financial and operational decision-making purposes and as a means to evaluate period over period comparisons of the underlying performance of its business and in forecasting the Company's business going forward. Management believes that the presentation of such non-GAAP information, when considered in conjunction with the most directly comparable GAAP information, provides additional useful comparative information for investors in their assessment of the underlying performance of the Company's business. 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 sells 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 and 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 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. OnOctober 27, 2020 , the Company entered into a definitive agreement to acquireTopgolf International, Inc. ("Topgolf") in an all-stock transaction, pursuant to an Agreement and Plan of Merger (the "Merger Agreement") by and among the Company, Topgolf and 51Steps, Inc. , aDelaware corporation and wholly-owned subsidiary of Callaway ("Merger Sub"). The Merger Agreement provides that, among other matters, and subject to the satisfaction or waiver of the conditions set forth in the 40
-------------------------------------------------------------------------------- Merger Agreement, the Company will acquire Topgolf by way of a merger of Merger Sub with and into Topgolf, with Topgolf surviving as a wholly-owned subsidiary of Callaway (the "Merger"). We currently estimate that we will issue approximately 90 million shares of our common stock to the stockholders of Topgolf (excluding the Company) for 100% of the outstanding equity of Topgolf, using an exchange ratio based on an equity value of Topgolf of approximately$1.986 billion (or approximately$1.745 billion excluding Topgolf shares currently held by the Company) and a price per share of the Company's common stock fixed at$19.40 per share. Upon completion of the Merger, the former Topgolf stockholders (other than the Company) are expected to own approximately 48.5% of the combined company on a fully diluted basis. The Merger is expected to close in the first quarter of 2021, subject to shareholder approval and other customary conditions. 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 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 Segment Results for the Three Months EndedSeptember 30, 2020 and 2019-Segment Profitability" and "Operating Segment Results for the Nine Months EndedSeptember 30, 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 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 41 -------------------------------------------------------------------------------- of outdoor apparel, footwear and equipment related to the 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 Condition Net sales in the first nine months of 2020 decreased$174.3 million or 12.5% to$1,214.8 million compared to the same period in 2019. This decrease reflects the challenges the Company faced primarily during the first half of 2020, at the height of the worldwide regulatory restrictions around COVID-19, which included the temporary closure of the Company's retail locations, manufacturing facilities and distribution centers at varying times. The Company began to see signs of improvement coming out of the second quarter of 2020, and in the third quarter of 2020, the Company experienced record sales due to an unprecedented demand for golf equipment, particularly inthe United States andEurope , combined with a significantly faster than anticipated recovery in its soft goods business. This surge in the popularity of golf resulted in net sales of$475.6 million in the third quarter of 2020, a$49.3 million or 11.6% increase compared to the third quarter of 2019. Net sales of golf equipment increased$56.8 million or 27.0% to$267.3 million in the third quarter of 2020 due to increased interest in the game of golf, as it supports an active and healthy way of life that is compatible with social distancing. This increase was slightly offset by a decline in sales of soft goods, which decreased by$7.4 million or 3.4% to$208.3 million in the third quarter of 2020. Despite this decline, soft goods sales are recovering faster than anticipated since the end of the second quarter of 2020, particularly the Company's TravisMathew and Jack Wolfskin brands, which have benefited from increased outdoor consumer activity. Although the Company anticipates some level of volatility to continue into the fourth quarter of 2020, the Company is encouraged that sales in all of its businesses are improving. In response to the adverse effects of COVID-19 on the Company's business, the Company has taken proactive actions to protect its employees, reduce costs, maximize liquidity, and conserve cash. Reductions in discretionary spending and infrastructure costs, including a reduction in workforce, temporary reduction in salaries and certain benefits for all employees, and voluntary reductions in compensation by the Board of Directors, the Chief Executive Officer and other members of senior management, have resulted in a significant reduction in planned operating expenses and capital expenditures. As a result of these cost reduction initiatives, in the third quarter and the first nine months of 2020, the Company realized savings in operating expenses of$13.7 million (9.1%) and$63.9 million (13.3%), respectively, as compared to the comparative periods in 2019. The Company also implemented other programs to maximize cash and liquidity, including proactive programs to reduce inventory combined with the suspension of open market stock repurchases and the Company's quarterly dividend. Additionally, inMay 2020 , the Company issued convertible senior notes, with net proceeds to the Company of approximately$218 million . As the result of the improved business performance, cost cutting efforts, and the cash from the convertible notes, the Company's liquidity, including cash and availability under its credit facilities, increased to$636.9 million as ofSeptember 30, 2020 compared to$340.2 million as ofSeptember 30, 2019 . The Company's diluted earnings per share for the third quarter of 2020 was$0.54 compared to$0.32 in the third quarter of 2020. Earnings per share in the first nine months of 2020 resulted in a loss per share of$0.92 compared to diluted earnings per share of$1.13 in the comparative period of 2019. Excluding the impairment charge the Company recorded on the Jack Wolfskin goodwill and trade name during the second quarter of 2020, and other non-recurring and non-cash charges discussed in more detail below, on a non-GAAP basis, the Company's diluted earnings per share was$0.60 and$0.98 in the third quarter and first nine months of 2020, respectively, compared to non-GAAP diluted earnings per share of$0.98 and$1.35 in the respective comparative periods of 2019. 42 -------------------------------------------------------------------------------- Three-Month Periods EndedSeptember 30, 2020 and 2019 Net sales for the third quarter of 2020 increased$49.4 million (11.6%) to$475.6 million compared to$426.2 million in the third quarter of 2019. This improvement was largely driven by strong demand for golf equipment due to the surge in popularity of golf, as consumers looked to engage in outdoor activities that are compatible with social distancing. This increase was partially offset by a decline in soft goods sales, primarily due to a decline in retail traffic caused by COVID-19, which negatively impacted the Company's retail and wholesale channels. By operating segment, in the third quarter of 2020, net sales of Golf Equipment increased$56.8 million or 27.0% to$267.3 million , and net sales of Apparel, Gear and Other declined$7.4 million or 3.4%, both compared to the third quarter of 2019. Fluctuations in foreign currencies had a favorable impact on net sales of$8.2 million in the third quarter of 2020. The Company's net sales by operating segment are presented below (dollars in millions): Three Months Ended September 30, Growth/(Decline) 2020 2019 Dollars Percent Net sales: Golf Equipment$ 267.3 $ 210.5 $ 56.8 27.0 % Apparel, Gear and Other 208.3 215.7 (7.4 ) -3.4 %$ 475.6 $ 426.2 $ 49.4 11.6 % For further discussion of each operating segment's results, see "Operating Segment Results for the Three Months EndedSeptember 30, 2020 and 2019" below. Net sales information by region is summarized as follows (dollars in millions): Constant Currency Growth/( Three Months Ended Decline) vs. September 30, Growth/(Decline) 2019 2020 2019 Dollars Percent Percent Net sales: United States$ 214.6 $ 161.6 $ 53.0 32.8 % 32.8% Europe 134.7 133.4 1.3 1.0 % -3.9% Japan 56.6 64.2 (7.6 ) -11.8 % -13.0% Rest of World 69.7 67.0 2.7 4.0 % 2.5%$ 475.6 $ 426.2 $ 49.4 11.6 % 9.7% Net sales inthe United States increased$53.0 million (32.8%) to$214.6 million during the third quarter of 2020 compared to$161.6 million in the third quarter of 2019. This increase was largely driven by an increase in golf equipment sales. The Company's sales in regions outside ofthe United States decreased$3.6 million (1.4%) to$261.0 million during the third quarter of 2020 compared to$264.6 million in the third quarter of 2019. This decrease was largely driven by a$7.6 million (-11.8%) decline inJapan due to a decrease in product launches in the third quarter of 2020 compared to the third quarter of 2019. Foreign currency fluctuations had a favorable impact of$8.2 million on net sales during the third quarter of 2020 relative to the same period in the prior year. Gross profit increased$9.3 million (4.9%) to$200.7 million in the third quarter of 2020 compared to$191.4 million in the third quarter of 2019. Gross profit as a percentage of net sales ("gross margin") decreased 270 basis points to 42.2% in the third quarter of 2020 compared to 44.9% in the third quarter of 2019. The decline in gross margin was driven primarily by the negative impact of COVID-19 on the Company's soft goods retail sales (which generally have higher gross margins), and inventory reduction initiatives. These decreases were partially offset by the favorable impact of changes in foreign currency rates in the third quarter of 2020 compared to the same period in 2019, and a higher mix of e-commerce sales, which generally also have higher gross margins. For further discussion of gross margin, see "Results of Operations-Overview of Business and Seasonality-Cost of Sales" above and "Operating Segment Results for the Three Months EndedSeptember 30, 2020 and 2019-Segment Profitability" below. 43 -------------------------------------------------------------------------------- Selling expenses decreased$8.1 million to$93.9 million (19.7% of net sales) in the third quarter of 2020 compared to$102.0 million (23.9% of net sales) in the third quarter of 2019. This 8.0% decrease was primarily due the Company's planned cost reductions in response to the COVID-19 pandemic, including a$5.5 million reduction in travel and entertainment and employee costs. General and administrative expenses declined$3.2 million to$33.2 million (7.0% of net sales) in the third quarter of 2020 compared to$36.4 million (8.5% of net sales) in the third quarter of 2019. This 8.8% decrease was primarily due to a$1.9 million reduction in non-recurring costs, primarily related to business integration costs incurred in the third quarter of 2019 in connection with the Jack Wolfskin acquisition, a$1.8 million decrease in bad debt expense, and a$1.4 million decline in employee costs and travel expense as a result of the Company's planned cost reduction initiatives implemented in the second quarter of 2020. These decreases were partially offset by an increase in legal and other professional fees. Research and development expenses decreased$2.4 million to$10.1 million (2.1% of net sales) in the third quarter of 2020 compared to$12.5 million (2.9% of net sales) in the third quarter of 2019, primarily due to declines of$1.4 million in employee costs and$0.4 million in employee travel as a result of the Company's planned cost reduction initiatives implemented in the second quarter of 2020. Interest expense increased by$3.3 million to$12.9 million in the third quarter of 2020 compared to$9.6 million in the third quarter of 2019 primarily due to an increase in the Company's net debt position, primarily resulting from the issuance of$258.8 million in convertible notes inMay 2020 . 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$4.8 million to$7.0 million in the third quarter of 2020 compared to$2.2 million in the third quarter of 2019, primarily due to an increase in net foreign currency transaction gains, partially offset by a decrease in net gains from non-designated foreign currency hedging contracts in the third quarter of 2020 compared to the third quarter of 2019. The Company's provision for income taxes increased by$3.3 million to$5.4 million in the third quarter of 2020, compared to$2.1 million in the third quarter of 2019. As a percent of pre-tax income, the Company's income tax rate increased to 9.3% in the third quarter of 2020 compared to 6.4% in the third quarter of 2019 primarily due to a shift in the mix of foreign versus domestic earnings relative to the prior year. 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 third quarter of 2020 increased$21.4 million to$52.4 million compared to$31.0 million in the third quarter of 2019. Diluted earnings per share increased$0.22 to$0.54 in the third quarter of 2020 compared to$0.32 in the third quarter of 2019. On a non-GAAP basis, excluding the after-tax non-cash intangible amortization expenses related to the Jack Wolfskin, TravisMathew and OGIO acquisitions, non-cash amortization expense of the discount on the convertible notes issued inMay 2020 , other non-recurring charges, and acquisition and transition costs related to Jack Wolfskin, the Company's net income and diluted earnings per share for the three months endedSeptember 30, 2020 would have been$58.0 million and$0.60 , respectively, compared to net income of$34.3 million and diluted earnings per share of$0.36 for the comparative period in 2019. The increase in non-GAAP earnings in 2020 was primarily due to an increase in operating income resulting from an increase in net sales in the third quarter of 2020 compared to the third quarter of 2019, and the impact of the Company's planned cost reduction initiatives implemented in the second quarter of 2020. 44 -------------------------------------------------------------------------------- The table below presents a reconciliation of the Company's as-reported results for the three months endedSeptember 30, 2020 and 2019 to the Company's non-GAAP results reported above for the same periods (in millions, except per share information). Three
Months Ended
Non-Cash
Amortization
Non-Cash Intangible of Discount on
Amortization Convertible Other Non-Recurring
As Reported Expense(1) Notes(2) Charges(3) Non-GAAP
Net income (loss) attributable to
Callaway Golf Company $ 52.4 $ (1.0 ) $ (1.9 ) $ (2.7 ) $ 58.0 Diluted earnings (loss) per share
96.6 96.6 96.6 96.6 96.6
Three
Months Ended
Non-Cash Intangible
Amortization Acquisition and
As Reported
Expense(1) Transition Costs(4) Non-GAAP
Net income (loss) attributable to
$ 31.1 $
(0.9 ) $ (2.3 )
Diluted earnings (loss) per share$ 0.32 $ (0.01 )$ (0.03 ) $ 0.36 Weighted-average shares outstanding 96.3 96.3 96.3 96.3
(1) Includes the non-cash amortization expense of intangible assets in connection
with the acquisitions of Jack Wolfskin, TravisMathew and OGIO.
(2) Represents the non-cash amortization of the discount on the convertible notes
issued in
(3) Other non-recurring charges primarily include redundant costs associated with
the Company's transition of its
facility, and severance charges associated with workforce reductions due to
the COVID-19 pandemic.
(4) Represents non-recurring costs associated with the acquisition of Jack
Wolfskin completed in
Operating Segment Results for the Three Months EndedSeptember 30, 2020 and 2019 Golf Equipment Golf Equipment net sales increased$56.8 million to$267.3 million in the third quarter of 2020 compared to$210.5 million in the third quarter of 2019 due to a$41.4 million (24.6%) increase in golf club sales and a$15.4 million (36.2%) increase in golf ball sales. This improvement was primarily due to an increase in the popularity of golf as a safe outdoor activity compatible with social distancing, combined with an improvement in the Company's e-commerce business, which increased significantly compared to the third quarter of 2019. Net sales information for the Golf Equipment operating segment by product category is summarized as follows (dollars in millions): Three Months Ended September 30, Growth 2020 2019 Dollars Percent Net sales: Golf Clubs$ 209.4 $ 168.0 $ 41.4 24.6 % Golf Balls 57.9 42.5 15.4 36.2 %$ 267.3 $ 210.5 $ 56.8 27.0 %
The
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an increase in average selling prices in the woods and putters product
categories, partially offset by a decline in the irons product category. The
increase in sales volume was driven by an increase in popularity in golf as a
result of heightened demand for outdoor, socially-distanced activities. The
increase in average selling prices in the woods and putters categories was
primarily due to the current year launch of the Mavrik line of fairway woods,
which have a higher average selling price compared to the Epic Flash fairway
woods launched in the prior year, and the Triple Track and Stroke Lab Black
putters, which launched at a higher price compared to the Stroke Lab putters
launched in the prior year. The decline in the average selling prices of irons
was primarily due to lower average selling prices of Mavrik irons launched in
the current year compared to the Apex and Epic Forged Star irons launched in
2019.
Net sales of golf balls increased $15.4 million (36.2%) to $57.9 million for the
quarter ended September 30, 2020 compared to $42.5 million in the comparable
period in 2019, primarily due to increases in sales volume and average selling
prices. The increase in sales volume was driven by an increase in popularity of
golf as a result of heightened demand for outdoor, socially-distanced
activities. The increase in average selling prices was due to an increase in
sales of the Chrome Soft 2020 line of golf balls launched in the current year,
which have higher selling prices compared to the predecessor models sold in the
prior year.
Apparel, Gear and Other
Net sales of Apparel, Gear and Other decreased $7.4 million to $208.3 million in
the third quarter of 2020 compared to $215.7 million in the third quarter of
2019 due to a $14.4 million (10.3%) decrease in apparel sales, partially offset
by a $7.0 million (9.2%) increase in sales of gear, accessories and other. The
decrease in apparel sales was primarily due to a decline in Jack Wolfskin
apparel sales in Europe and China . While sales of Jack Wolfskin apparel improved
in the third quarter of 2020 compared to the second quarter in 2020, sales are
down compared to the third quarter of 2019 due to a decline in retail traffic
caused by COVID-19, which impacted sales in the retail and wholesale channels.
This decrease was partially offset by an increase in sales of TravisMathew
apparel products, which was primarily driven by significant increases in the
e-commerce and wholesale channels compared to the third quarter in 2019.
Net sales information for the Apparel, Gear and Other operating segment is
summarized as follows (dollars in millions):
Three Months Ended
September 30, Growth/(Decline)
2020 2019 Dollars Percent
Net sales:
Apparel $ 125.6 $ 140.0 $ (14.4 ) -10.3 %
Gear, Accessories, & Other 82.7 75.7 7.0 9.2 %
$ 208.3 $ 215.7 $ (7.4 ) -3.4 %
Net sales of apparel decreased $14.4 million (10.3%) to $125.6 million in the
third quarter of 2020 compared to the third quarter of 2019, due to a decline in
sales for Jack Wolfskin-branded apparel as a result of the continued business
challenges, primarily in the retail sector, caused by the COVID-19 pandemic
during the third quarter of 2020. This decline was partially offset by an
increase in sales of TravisMathew apparel due to strong e-commerce sales in the
United States .
Net sales of gear, accessories and other increased $7.0 million (9.2%) to $82.7
million for the third quarter of 2020 compared to $75.7 million in the third
quarter of 2019, primarily due to an increase in demand for Callaway-branded
golf bags and golf gloves.
46--------------------------------------------------------------------------------
Segment Profitability Profitability by operating segment is summarized as follows (dollars in millions):
Three Months Ended
September 30, Growth/(Decline)
2020 2019 Dollars Percent
Income before income taxes:
Golf Equipment $ 56.8 $ 23.1 $ 33.7 145.9 %
Apparel, Gear and Other 25.9 34.9 (9.0 ) -25.8 %
Reconciling items(1) (24.9 ) (24.8 ) (0.1 ) 0.4 %
$ 57.8 $ 33.2 $ 24.6 74.1 %
(1) Reconciling items include corporate general and administrative expenses,
other income (expense), and non-recurring charges not included by management
in determining segment profitability.
Pre-tax income from the Golf Equipment operating segment increased$33.7 million (145.9%) to$56.8 million in the third quarter of 2020 from$23.1 million in the third quarter of 2019. This increase was primarily due to a$25.8 million increase in gross profit (an increase of 20 basis points in gross margin) driven by an increase in net sales as discussed above, combined with a$7.9 million decrease in operating expenses. The decline in operating expenses was primarily due to decreases in employee travel and tour expenses resulting from travel restrictions and canceled golf tournaments caused by the COVID-19 pandemic, combined with a decrease in employee costs resulting from the Company's planned cost reduction initiatives in response to the COVID-19 pandemic. Pre-tax income in the Company's Apparel, Gear and Other operating segment decreased$9.0 million (25.8%) to$25.9 million in the third quarter of 2020 compared to$34.9 million in the third quarter of 2019. This decrease was primarily due to a$14.1 million decrease in gross profit (a decline of 510 basis points in gross margin), partially offset by a$5.1 million decrease in operating expenses. The decline in gross margin was driven primarily by the negative impact of COVID-19 on the Company's soft goods retail sales (which generally have higher gross margins), and inventory reduction initiatives. These decreases were partially offset by the favorable impact of changes in foreign currency rates in the third quarter of 2020 compared to the same period in 2019, and a higher mix of e-commerce sales, which also have higher gross margins. The decline in operating expenses was primarily due to decreases in employee travel resulting from travel restrictions caused by the COVID-19 pandemic, combined with a decrease in employee costs resulting from the Company's planned cost reduction initiatives in response to the COVID-19 pandemic. Nine-Month Period EndedSeptember 30, 2020 and 2019 Net sales for the nine months endedSeptember 30, 2020 decreased$174.3 million (12.5%) to$1,214.8 million compared to$1,389.1 million for the nine months endedSeptember 30, 2019 . This decline was due to the negative impact of the COVID-19 pandemic on the Company's golf equipment and soft goods businesses during the first half of 2020 resulting from the temporary closure of all non-essential businesses as mandated by government authorities. During the third quarter of 2020, the demand for golf equipment increased as the sport became popular as a safe outdoor, social-distancing activity in the COVID-19 environment. For the nine months endedSeptember 30, 2020 , net sales decreased in all product categories and across all major geographic regions. This decline was partially offset by an improvement in the Company's e-commerce business, which increased compared to the same period in 2019. By operating segment, in the first nine months of 2020, net sales of Golf Equipment decreased$57.6 million or 7.0% to$768.9 million , and net sales of Apparel, Gear and Other decreased$116.7 million or 20.7% to$445.9 million , both compared to the first nine months in 2019. Fluctuations in foreign currencies had a favorable impact on net sales of$2.1 million in the first nine months of 2020. 47 -------------------------------------------------------------------------------- The Company's net sales by operating segment are presented below (dollars in millions): Nine Months Ended September 30, Decline 2020 2019 Dollars Percent
Net sales:
Golf Equipment
$ 1,214.8 $ 1,389.1 $ (174.3 ) -12.5 % For further discussion of each operating segment's results, see below "Operating Segment Results for the Nine Months EndedSeptember 30, 2020 and 2019." Net sales information by region is summarized as follows (dollars in millions): Constant Currency Nine Months Ended Decline vs. September 30, Decline 2019 2020 2019 Dollars Percent Percent Net sales: United States$ 603.8 $ 658.1 $ (54.3 ) -8.3 % -8.3% Europe 281.5 341.6 (60.1 ) -17.6 % -18.5% Japan 158.5 193.1 (34.6 ) -17.9 % -19.0% Rest of World 171.0 196.3 (25.3 ) -12.9 % -11.4%$ 1,214.8 $ 1,389.1 $ (174.3 ) -12.5 % -12.7% Net sales inthe United States decreased$54.3 million (8.3%) to$603.8 million during the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . Net sales in regions outside ofthe United States decreased 120.0 million (16.4%) to$611.0 million for the nine months endedSeptember 30, 2020 compared$731.1 million to the nine months endedSeptember 30, 2019 . Fluctuations in foreign currencies had a favorable impact on international net sales of$2.1 million in the first nine months 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 disruption caused by the COVID-19 pandemic. Gross profit decreased$118.2 million (18.6%) to$518.5 million for the nine months endedSeptember 30, 2020 compared to$636.6 million in the same period of 2019. Gross margin decreased 310 basis points to 42.7% for the nine months endedSeptember 30, 2020 compared to 45.8% in the nine months endedSeptember 30, 2019 . The decline in gross margin was primarily due to (i) the negative impact of fixed costs on the lower sales base caused by the temporary shut-down of the Company's distribution centers and manufacturing facilities in the first half of 2020 as a result of the COVID-19 pandemic; (ii) inventory reduction initiatives in the Company's soft goods business; and (iii) an increase inU.S. tariffs on imports fromChina on golf equipment. These declines were partially offset by a higher mix of e-commerce sales, which have higher gross margins. In addition, gross margin in the first nine months of 2020 benefited from a reduction in non-recurring expenses related to non-cash purchase accounting adjustments recognized in 2019 related to the Jack Wolfskin acquisition. For further discussion of gross margin, see above "Results of Operations-Overview of Business and Seasonality-Cost of Sales" and see below "Operating Segments Results for the Nine Months EndedSeptember 30, 2020 and 2019-Segment Profitability." Selling expenses decreased by$49.3 million to$285.1 million (23.5% of net sales) during the nine months endedSeptember 30, 2020 compared to$334.4 million (24.1% of net sales) in the comparable period of 2019. This 14.7% decrease was primarily due to the Company's planned reduction in operating expenses in response to the decline in sales caused by the COVID-19 pandemic. These reductions consisted of a$25.7 million decline in marketing and tour expenses, a$10.9 million decline in employee costs, and a$6.2 million decline in employee travel expenses, as well as an overall decline in variable expenses. These decreases were partially offset by severance charges of$1.4 million due to workforce reductions initiated in the second quarter of 2020. General and administrative expenses decreased by$9.7 million to$99.0 million (8.1% of net sales) during the nine months endedSeptember 30, 2020 compared to$108.7 million (7.8% of net sales) in the comparable period of 2019. This 8.9% decrease was primarily due to a$7.2 million decline in employee costs as a result of the Company's planned cost reduction initiatives implemented during the first nine m 48
-------------------------------------------------------------------------------- onths of 2020, which resulted in a reduction in workforce, a temporary reduction in salaries and certain benefits, and a decrease in accrued incentive compensation expense. The Company's results for the first nine months of 2020 also benefited from a$6.2 million reduction in non-recurring costs, primarily related to the acquisition and integration of the Jack Wolfskin business incurred in the first nine months of 2019. These decreases were partially offset by an increase of$1.1 million in severance charges due to workforce reductions initiated in the second quarter of 2020, as well as increases in legal and professional fees, and depreciation expense. Research and development expenses decreased by$4.8 million to$33.4 million (2.7% of net sales) during the nine months endedSeptember 30, 2020 compared to$38.2 million (2.7% of net sales) in the comparable period of 2019, primarily due to a$3.7 million decline in employee costs resulting from the Company's planned cost reduction initiatives implemented during the first nine months of 2020, and a$0.9 million decline in travel and entertainment as a result of travel restrictions related to the COVID-19 pandemic. These decreases were partially offset by an increase of$0.6 million in severance charges due to workforce reductions initiated in the second quarter of 2020. Due to the significant business disruption and macro-economic impact of the COVID-19 pandemic on the Company's financial results, the Company performed a quantitative assessment of its goodwill and non-amortizing intangible assets during the second quarter of 2020, which resulted in an impairment charge of$174.3 million (see Note 9 "Goodwill and Intangible Assets to the Notes to Consolidated Condensed Financial Statements included in Part I, Item 1, of this Form 10-Q). Interest expense increased by$4.2 million to$34.4 million during the nine months endedSeptember 30, 2020 compared to$30.2 million in the comparable period of 2019, primarily due to the issuance of$258.8 million in convertible notes inMay 2020 (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 to$27.5 million during the nine months endedSeptember 30, 2020 compared to$1.5 million in the comparable period of 2019. This increase was due to a$20.5 million increase in net foreign currency transaction gains, and a$5.5 million increase, primarily in net hedging contract gains, due to a$3.2 million net loss recognized in 2019 from the settlement of a hedging contract in connection with the Jack Wolfskin acquisition. The Company's provision for income taxes decreased$12.3 million to$6.6 million for the nine months endedSeptember 30, 2020 , compared to$18.9 million in the comparable period of 2019. As a percent of pre-tax income (loss), the Company's effective tax rate for the first nine months of 2020 decreased to -8.2% compared to 14.8% in the comparable period of 2019. This decrease was primarily due to the goodwill impairment charge recorded during the second quarter of 2020, which is non-deductible for tax purposes combined with an overall decline in pre-tax earnings in the first nine months of 2020 compared to the same period in 2019. 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 (loss) for the nine months endedSeptember 30, 2020 decreased$195.0 million to a net loss of$86.4 million compared to net income of$108.6 million in the comparable period of 2019. Diluted earnings (loss) per share decreased$2.05 to a loss per share of$0.92 in the first nine months of 2020 compared to earnings per share of$1.13 in the same period in 2019. On a non-GAAP basis, excluding the after-tax loss from the impairment of the Jack Wolfskin goodwill and certain other intangible assets, after-tax non-cash acquisition amortization expenses related to the Jack Wolfskin, TravisMathew and OGIO acquisitions, non-cash amortization expense of the discount on the convertible notes issued inMay 2020 , other non-recurring charges and acquisition and transition costs related to Jack Wolfskin, the Company's net income and diluted earnings per share for the nine months endedSeptember 30, 2020 would have been$94.2 million and$0.98 per share, respectively, compared to$129.8 million and$1.35 per share, respectively, for the comparative period in 2019. The decrease in non-GAAP earnings in 2020 was primarily due to the business disruptions and challenges caused by the COVID-19 pandemic during the first nine months of 2020, which resulted in a significant decline in net sales and operating income compared to the same period in 2019, partially offset by the Company's planned cost reduction initiatives, combined with an increase in net foreign currency transaction gains. 49 -------------------------------------------------------------------------------- The table below presents a reconciliation of the Company's as-reported results for the nine months endedSeptember 30, 2020 and 2019 to the Company's non-GAAP results reported above for the same periods (in millions, except per share information). Nine
Months Ended
Non-Cash Non-Cash
Acquisition Amortization
Amortization of Discount on
and Impairment Convertible Other Non-Recurring
GAAP Charges(1) Notes(2) Charges(3) Non-GAAP(4)
Net income (loss) attributable to
Callaway Golf Company $ (86.4 ) $ (169.1 ) $ (3.0 ) $ (8.5 ) $ 94.2 Diluted earnings (loss) per share
94.2 94.2 94.2 96.1
Nine
Months Ended
Non-Cash Purchase
Accounting
Adjustments and
Acquisition Acquisition and
GAAP
Amortization(1) Transition Expenses(5) Non-GAAP
Net income (loss) attributable to
$ 108.6 $ (11.0 ) $ (10.2 )$ 129.8 Diluted earnings (loss) per share$ 1.13 $ (0.11 ) $ (0.11 )$ 1.35 Weighted-average shares outstanding 96.2 96.2 96.2 96.2
(1) Includes the non-cash amortization expense of intangible assets in connection
with the acquisitions of Jack Wolfskin, TravisMathew and OGIO. In addition,
the nine months ended
million impairment of the Jack Wolfskin goodwill and trade name, and the nine
months ended
valuation step-up in connection with the Jack Wolfskin acquisition.
(2) Represents the non-cash amortization of the discount on the convertible notes
issued in
(3) Other non-recurring charges primarily include redundant costs associated with
the Company's transition of its
facility, severance charges associated with workforce reductions due to the
COVID-19 pandemic, and the recognition of a deferred gain from a cash flow
hedge that was discontinued in the second quarter of 2020.
(4) Total diluted earnings per share on a non-GAAP basis for the nine months
ended
outstanding, as earnings on a non-GAAP basis resulted in net income after
giving effect to the non-recurring and non-cash charges discussed above.
(5) Represents non-recurring transaction fees and transition costs associated
with the acquisition of Jack Wolfskin completed in
other non-recurring advisory fees, and a net loss from the remeasurement of a
foreign currency forward contract in connection with the acquisition of Jack
Wolfskin.
Operating Segment Results for the Nine Months EndedSeptember 30, 2020 and 2019 Golf Equipment Golf equipment sales decreased$57.6 million (7.0%) to$768.9 million for the nine-months endedSeptember 30, 2020 compared to$826.5 million for the same period in 2019 due to a$37.0 million (5.7%) decline in golf club sales and$20.6 million (11.9%) decline in golf ball sales. These declines were due to the business disruptions and challenges caused by the COVID-19 pandemic during the first nine months of 2020. This was offset by an improvement in the Company's e-commerce business, which increased significantly compared to 2019. 50 --------------------------------------------------------------------------------
Net sales information for the Golf Equipment operating segment by product category is summarized as follows (dollars in millions):
Nine Months Ended
September 30, Decline
2020 2019 Dollars Percent
Net sales:
Golf Clubs $ 616.6 $ 653.6 $ (37.0 ) -5.7 %
Golf Balls 152.3 172.9 (20.6 ) -11.9 %
$ 768.9 $ 826.5 $ (57.6 ) -7.0 %
Net sales of golf clubs decreased $37.0 million (5.7%) to $616.6 million for the
nine months ended September 30, 2020 compared to the same period in the prior
year primarily due to a decline in sales volume and average selling prices. The
decline in sales volume was due to the business disruptions caused by the
COVID-19 pandemic. This decline was partially offset by an increase in sales
during the third quarter of 2020 driven by an increase in the popularity of golf
as a result of heightened demand for outdoor, socially-distanced activities. The
decline in average selling prices was primarily due to the current year launch
of the Mavrik line of drivers and irons, which have a lower average selling
price compared to the Epic Flash drivers and Apex irons launched in 2019,
combined with a shift in sales mix to lower margin pre-owned products.
Net sales of golf balls decreased $20.6 million (11.9%) to $152.3 million for
the nine months ended September 30, 2020 compared to the same period in the
prior year due to a decline in sales volume and average selling prices. The
decline in sales volume was due to the business disruptions caused by the
COVID-19 pandemic. This decline was partially offset by an increase in sales in
the third quarter driven by an increase in the popularity of golf as a result of
heightened demand for outdoor, socially-distanced activities. The decline in
average selling prices was due to a shift in sales mix to lower priced golf
balls as a result of supply constraints of premium golf balls due to the
temporary shut-down of the Company's golf ball manufacturing facility in the
United States , primarily in the second quarter of 2020, due to COVID-19
mandates.
Apparel, Gear and Other
Apparel, Gear and Other sales decreased $116.7 million to $445.9 million during
the nine months ended September 30, 2020 compared to $562.6 million for the same
period in 2019, due to a $70.2 million (22.7%) decrease in apparel sales and a
$46.5 million (18.4%) decrease in sales of gear, accessories and other. These
decreases were due to the temporary closure of many of the Company's wholesale
customers and direct retail locations as a result of the COVID-19 pandemic,
primarily during the first half of 2020. This decline was offset by an
improvement in the Company's e-commerce business in the first nine months of
2020, which increased significantly compared to same period in 2019.
Net sales information for the Apparel, Gear and Other segment is summarized as
follows (dollars in millions):
Nine Months Ended
September 30, Decline
2020 2019 Dollars Percent
Net sales:
Apparel $ 239.2 $ 309.4 $ (70.2 ) -22.7 %
Gear, Accessories, & Other 206.7 253.2 (46.5 ) -18.4 %
$ 445.9 $ 562.6 $ (116.7 ) -20.7 %
Net sales of apparel decreased $70.2 million (22.7%) to $239.2 million for the
nine months ended September 30, 2020 compared to the same period in 2019 due to
a decline in sales across all apparel brands as a result of the business
challenges caused by the COVID-19 pandemic during the first nine months of 2020.
Net sales of gear, accessories and other decreased $46.5 million (18.4%) to
$206.7 million for the nine months ended September 30, 2020 compared to the same
period in 2019 due to the business challenges caused by the COVID-19 pandemic
during the first nine months of 2020.
51
--------------------------------------------------------------------------------
Segment Profitability
Profitability by operating segment is summarized as follows (dollars in
millions):
Nine Months Ended
September 30, Decline
2020 2019 Dollars Percent
Income before income taxes:
Golf Equipment $ 144.6 $ 148.8 $ (4.2 ) -2.8 %
Apparel, Gear and Other 10.4 68.9 (58.5 ) -84.9 %
Reconciling items(1) (234.8 ) (90.4 ) (144.4 ) 159.7 %
$ (79.8 ) $ 127.3 $ (207.1 ) -162.7 %
(1) Reconciling items represent corporate general and administrative expenses,
net interest expense, other income and non-recurring expenses not included by
management in determining segment profitability. The
in reconciling items in the first nine months of 2020 compared to the same
period in 2019 includes the recognition of a
Jack Wolfskin goodwill and trade name in 2020 (see Note 9 "
Intangible Assets to the Notes to Consolidated Condensed Financial Statements
included in Part I, Item 1, of this Form 10-Q) and a
interest expense. These increases were partially offset by a
increase in other income primarily due to foreign currency and hedging
contract gains, combined with
recognized in 2019 related to the inventory valuation step-up from the Jack
Wolfskin acquisition.
Pre-tax income from the Golf Equipment operating segment decreased$4.2 million (2.8%) to$144.6 million for the nine months endedSeptember 30, 2020 from$148.8 million in the comparable period in the prior year. This decrease was primarily due to a$44.0 million decrease in gross profit (a decline of 230 basis points in gross margin), partially offset by a$39.8 million decrease in operating expenses. The decline in gross margin was largely due to lower sales and the negative impact of fixed costs on the lower sales base caused by the temporary shut-down of the Company's distribution centers and manufacturing facilities during the first half of 2020 as a result of the COVID-19 pandemic, in addition to an increase inU.S. tariffs on imports fromChina . The decrease in operating expenses was primarily due to decreases in marketing expenses and employee costs resulting from the Company's cost reduction initiatives in response to the decline in sales period over period, in addition to decreases in employee travel costs and tour expense resulting from travel restrictions and canceled golf tournaments caused by the COVID-19 pandemic. Pre-tax income from the Apparel, Gear and Other operating segment decreased$58.5 million (84.9%) to$10.4 million for the nine months endedSeptember 30, 2020 from$68.9 million in the comparable period in the prior year. This decrease was primarily due to a$77.9 million decrease in gross profit (a decline of 540 basis points in gross margin), partially offset by a$19.4 million decrease in operating expenses. The decline in gross margin was primarily due to lower sales and the negative impact of fixed costs on the lower sales base caused by the temporary shut-down of the Company's distribution centers and retail locations primarily during the first half of 2020 as a result to the COVID-19 pandemic, in addition to inventory reduction initiatives. These declines were partially offset by a higher mix of direct to consumer e-commerce sales, which have higher gross margins. The decrease in operating expenses was primarily due to decreases in marketing expenses and employee costs resulting from the Company's cost reduction initiatives in response to the decline in sales period over period, in addition to a decrease in employee travel costs due to the COVID-19 pandemic. Financial Condition The Company's cash and cash equivalents increased$180.0 million to$286.7 million atSeptember 30, 2020 from$106.7 million atDecember 31, 2019 , primarily due to proceeds of$258.8 million from Convertible Notes issued inMay 2020 , partially offset by a decline in net income period over period due to the adverse effects of the COVID-19 pandemic on the Company's business during 2020. During the first nine months of 2020, the Company used its cash and cash equivalents combined with the proceeds from the issuance of the Convertible Notes to fund its operations, repay$122.5 million of amounts outstanding under its credit and long-term debt facilities, fund capital expenditures of$30.9 million , primarily for the Company's transition of itsNorth America distribution center to a new facility, as well as in its golf ball manufacturing plant to increase capacity and improve its manufacturing capabilities, invest$20.0 million in golf-related ventures, and repurchase shares of its common stock for$22.1 million . In addition, in connection with the Convertible Notes, the Company paid a premium of$31.8 million for capped call 52 -------------------------------------------------------------------------------- transactions, which are expected to generally reduce the potential dilution to the Company's common stock upon any conversion of the notes. 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 as well as from 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. 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 ofSeptember 30, 2020 , the Company's net accounts receivable increased to$239.7 million from$140.5 million as ofDecember 31, 2019 . This increase was primarily due to an increase in demand for golf equipment as the result of the increased popularity of golf in the current COVID-19 environment. The Company's net accounts receivable as ofSeptember 30, 2020 increased$16.3 million compared toSeptember 30, 2019 primarily due to an increase in net sales of$49.3 million (11.6%) in the third quarter of 2020 compared to the third quarter of 2019 primarily due to an increase in demand for golf equipment as the result of the increased popularity of golf in the current COVID-19 environment. 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$324.9 million as ofSeptember 30, 2020 compared to$456.6 million as ofDecember 31, 2019 . This decrease was primarily due to an increase in demand for golf equipment as the result of the increased popularity of golf in the current COVID-19 environment, combined with the general seasonality of the Company's business. The Company's inventory as ofSeptember 30, 2020 decreased by$15.5 million compared to the Company's inventory as ofSeptember 30, 2019 primarily due an increase in demand for golf equipment as the popularity of golf increased in the third quarter of 2020. Liquidity and Capital Resources The Company's principal sources of liquidity consist of its existing cash balances, including cash from the issuance of Convertible Notes inMay 2020 , funds expected to be generated from operations and funds from its credit facilities. Based upon the Company's current cash balances, its estimates of funds expected to be generated from operations in 2020, as well as from 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's ability to generate sufficient positive cash flows from operations is subject to many risks and uncertainties, including future economic trends and conditions, the future economic impact from the COVID-19 pandemic, 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 updates to the Risk Factors concerning the negative impact of the COVID-19 pandemic on the Company's business contained in Part II, Item 1A of its Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2020 and on this Form 10-Q). Given the uncertain duration of the COVID-19-related impact, the Company has proactively taken actions to significantly reduce costs, maximize liquidity and conserve cash for as long as may be required in light of current conditions. Through the end of the third quarter of 2020, the Company achieved significant savings in planned reductions in operating expenses and capital expenditures by reducing discretionary spending and infrastructure costs on a worldwide basis, which included a reduction in workforce and a temporary reduction in salaries and certain benefits, in addition to voluntary reductions in compensation by the Board of Directors, the Chief Executive Officer and other members of senior management. As ofSeptember 30, 2020 , the Company had$636.9 million in cash and availability under its credit facilities, which is an incr 53 -------------------------------------------------------------------------------- ease of$296.7 million compared toSeptember 30, 2019 . 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. InOctober 2020 , the Company entered into a definitive agreement to acquireTopgolf International, Inc. ("Topgolf") in an all-stock transaction (see to Note 5 "Business Combinations" to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q). In connection with the merger with Topgolf, the Company anticipates it will assume an estimated$555 million in long-term debt, net of cash. The Company believes that with its continued strong cash generation and increased liquidity, its geographic diversity and the strength of its brands, it will be able to fund Topgolf's growth while simultaneously paying down debt. InOctober 2020 , the Company amended its ABL Facility in order to permit the consummation of the merger with Topgolf. The amendment designates Topgolf and its subsidiaries as excluded subsidiaries under the ABL Facility and amends certain covenants and other provisions to allow the Company to make certain investments in, and enter into certain transactions with Topgolf, among other things. In addition, the Company entered into a debt financing commitment letter (the "Debt Commitment Letter") and related fee letters withBank of America, N.A . and other lenders party to the Debt Commitment Letter (the "Commitment Parties"), to arrange and solicit consents from the Term Lenders to amend the Term Loan Facility to permit the consummation of the merger with Topgolf and certain other transactions contemplated in the Merger Agreement. In the event the Company cannot obtain the consents from the Term Lenders, the Commitment Parties committed to arrange and provide the Company with a secured term loan facility for$442.8 million on terms substantially similar to the existing Term Loan Facility, as proposed to be modified by the Term Loan Amendment, and including certain other changes. As ofSeptember 30, 2020 , approximately 48% 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. 54 --------------------------------------------------------------------------------
Other Significant Cash and Contractual Obligations
The table set forth below summarizes certain significant cash obligations as of
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) $ 442.8 $ 4.8 $ 9.6 $ 9.6 $ 418.8
Interest on Term Loan Facility 112.4 21.7 43.1 42.2 5.4
2020 Japan Term Loan Facility(2) 19.0 3.8 7.6 7.6 -
Interest on Japan Term Loan Facility 0.4 0.1 0.2 0.1 -
Convertible Notes(3) 258.8 - - - 258.8
Equipment Notes(4) 33.9 8.3 15.4 7.9 2.3
Interest on Equipment Notes 2.3 0.9 1.0 0.3 0.1
ABL Facility 28.8 28.8 - - -
Japan ABL Facility 1.4 1.4 - - -
Finance leases, including imputed
interest(5) 0.8 0.1 0.5 0.2 -
Operating leases, including imputed
interest(6) 259.6 10.6 67.5 50.9 130.6
Unconditional purchase obligations(7) 70.7 36.8 32.3 1.6 -
Uncertain tax contingencies(8) 7.7 0.5 1.1 1.0 5.1
Total $ 1,238.6 $ 117.8 $ 178.3 $ 121.4 $ 821.1 (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
for
rate in effect as of
(or approximately
Company's consolidated condensed balance sheet as of
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) In
which mature on
Company or converted. As of
million outstanding under the Convertible Notes, net of unamortized debt
issuance costs of
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.
(4) In
agreements in connection with the Company's investment initiatives at its
North American Distribution Center in
improve its manufacturing capabilities at its golf ball manufacturing
facility in
long-term financing agreements (collectively, the "Equipment Notes") between
2017 and 2020 that are secured by certain equipment at this facility. As of
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.
(5) Amounts represent future minimum payments under financing leases. At
in accounts payable and accrued expenses and $0.5 million were recorded in
other long-term l
55--------------------------------------------------------------------------------
iabilities 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. (6) 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 September
30, 2020, short-term and long-term operating lease liabilities of
million and
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.
(7) 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.
(8) 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
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 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 and nine months endedSeptember 30, 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). 56 -------------------------------------------------------------------------------- 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$35.0 million to$40.0 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). 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 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 atSeptember 30, 2020 through its foreign currency forward contracts. AtSeptember 30, 2020 , the estimated maximum loss from the Company's foreign currency forward contracts, calculated using the sensitivity analysis model described above, was$17.2 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 57
-------------------------------------------------------------------------------- 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$1.9 million over the 12-month period ending onSeptember 30, 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 ofSeptember 30, 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 ofSeptember 30, 2020 . Changes in Internal Control over Financial Reporting. During the quarter endedSeptember 30, 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. 58
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