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MarketScreener Homepage  >  Equities  >  Nyse  >  Callaway Golf Company    ELY

CALLAWAY GOLF COMPANY

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

11/09/2020 | 05:01pm EST
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 in the 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 into U.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 ended September 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 in May 2020, in addition to other
non-recurring expenses. For the three and nine months ended September 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. In January 2019,
the Company completed the acquisition of JW Stargazer Holding GmbH, the owner of
the international, premium outdoor apparel, gear and accessories brand, Jack
Wolfskin. This acquisition 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.
On October 27, 2020, the Company entered into a definitive agreement to acquire
Topgolf 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 51 Steps, Inc., a Delaware 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


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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, includes Callaway Golf branded woods, hybrids, irons, wedges,
Odyssey putters, including Toulon Design putters by Odyssey, packaged sets,
Callaway Golf and Strata branded golf balls and sales of pre-owned golf clubs.
The Apparel, Gear and Other operating segment includes 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 Ended September 30, 2020 and 2019-Segment Profitability" and
"Operating Segment Results for the Nine Months Ended September 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


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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 of the
United States in currencies other than the U.S. dollar. As a result, changes in
foreign currency rates can have a significant effect on the Company's financial
results. The Company enters into foreign currency forward contracts to mitigate
the effects of changes in foreign currency rates. While these foreign currency
forward contracts can mitigate the effects of changes in foreign currency rates,
they do not eliminate those effects, which can be significant. These effects
include (i) the translation of results denominated in foreign currency into U.S.
dollars for reporting purposes, (ii) the mark-to-market adjustments of certain
intercompany balance sheet accounts denominated in foreign currencies and
(iii) the mark-to-market adjustments of the Company's foreign currency forward
contracts. In general, the Company's overall financial results are affected
positively by a weaker U.S. dollar and are affected negatively by a stronger
U.S. dollar as compared to the foreign currencies in which the Company conducts
its business.
Executive Summary to the Results of Operations and Financial Condition
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 in the United States and Europe,
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, in May 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 of
September 30, 2020 compared to $340.2 million as of September 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
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Three-Month Periods Ended September 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 Ended
September 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 in the 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 of the 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 in Japan 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 Ended September 30, 2020 and 2019-Segment Profitability" below.


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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 in May 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 in
May 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 ended September 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
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The table below presents a reconciliation of the Company's as-reported results
for the three months ended September 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 September 30, 2020

                                                                                    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 $ 0.54 $ (0.01 ) $ (0.02 ) $ (0.03 ) $ 0.60 Weighted-average shares outstanding

               96.6                  96.6             96.6                 96.6               96.6


                                                                  Three 

Months Ended September 30, 2019

                                                                Non-Cash Intangible
                                                                   Amortization         Acquisition and
                                                 As Reported       

Expense(1) Transition Costs(4) Non-GAAP Net income (loss) attributable to Callaway Golf Company

                                          $     31.1     $           

(0.9 ) $ (2.3 ) $ 34.3


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 May 2020.

(3) Other non-recurring charges primarily include redundant costs associated with

the Company's transition of its North America distribution center to a new

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 January 2019.



Operating Segment Results for the Three Months Ended September 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 $41.4 million (24.6%) increase in net sales of golf clubs to $209.4 million for the quarter ended September 30, 2020, compared to $168.0 million in the comparable period in 2019, was primarily due to an increase in sales volume across all product categories, combined with

                                       45
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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
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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 Ended September 30, 2020 and 2019
Net sales for the nine months ended September 30, 2020 decreased $174.3 million
(12.5%) to $1,214.8 million compared to $1,389.1 million for the nine months
ended September 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 ended September 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.


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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 $ 768.9$ 826.5$ (57.6 ) -7.0 % Apparel, Gear and Other 445.9 562.6 (116.7 ) -20.7 %

                        $ 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 Ended September 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 in the United States decreased $54.3 million (8.3%) to $603.8 million
during the nine months ended September 30, 2020 compared to the nine months
ended September 30, 2019. Net sales in regions outside of the United States
decreased 120.0 million (16.4%) to $611.0 million for the nine months ended
September 30, 2020 compared $731.1 million to the nine months ended September
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 ended September 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 ended
September 30, 2020 compared to 45.8% in the nine months ended September 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 in U.S. tariffs on
imports from China 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 Ended September 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 ended September 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 ended September 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


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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 ended September 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 ended September 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 in May 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 ended September
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 ended September 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 ended September 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 in May 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 ended September 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.


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The table below presents a reconciliation of the Company's as-reported results
for the nine months ended September 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 September 30, 2020

                                                       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 $ (0.92 )$ (1.80 )$ (0.03 ) $ (0.09 ) $ 0.98 Weighted-average shares outstanding 94.2

             94.2             94.2                 94.2                  96.1


                                                                 Nine 

Months Ended September 30, 2019

                                                              Non-Cash Purchase
                                                                 Accounting
                                                               Adjustments and
                                                                 Acquisition         Acquisition and
                                                   GAAP       

Amortization(1) Transition Expenses(5) Non-GAAP Net income (loss) attributable to Callaway Golf Company

                                   $    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 September 30, 2020 include the recognition of a $174.3

million impairment of the Jack Wolfskin goodwill and trade name, and the nine

months ended September 30, 2019 include the amortization of the inventory

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 May 2020.

(3) Other non-recurring charges primarily include redundant costs associated with

the Company's transition of its North America distribution center to a new

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 September 30, 2020 was calculated using diluted weighted average shares

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 January 2019, as well as

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 Ended September 30, 2020 and 2019
Golf Equipment
Golf equipment sales decreased $57.6 million (7.0%) to $768.9 million for the
nine-months ended September 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.


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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.


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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 $144.4 million increase

in reconciling items in the first nine months of 2020 compared to the same

period in 2019 includes the recognition of a $174.3 million impairment of the

Jack Wolfskin goodwill and trade name in 2020 (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) and a $4.2 million increase in

interest expense. These increases were partially offset by a $26.0 million

increase in other income primarily due to foreign currency and hedging

contract gains, combined with $10.7 million of amortization expense

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 ended September 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 in U.S. tariffs on imports from China. 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 ended September 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 at September 30, 2020 from $106.7 million at December 31, 2019,
primarily due to proceeds of $258.8 million from Convertible Notes issued in May
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 its North 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
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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 of September 30, 2020, the Company's net
accounts receivable increased to $239.7 million from $140.5 million as of
December 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 of September 30,
2020 increased $16.3 million compared to September 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 of September 30, 2020
compared to $456.6 million as of December 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 of
September 30, 2020 decreased by $15.5 million compared to the Company's
inventory as of September 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 in May 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
ended December 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 ended
March 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 of September 30, 2020, the Company had $636.9 million in cash and
availability under its credit facilities, which is an incr


                                       53
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ease of $296.7 million compared to September 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.
In October 2020, the Company entered into a definitive agreement to acquire
Topgolf 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.
In October 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 with Bank 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 of September 30, 2020, approximately 48% of the Company's cash was held in
regions outside of the United States. Due to changes enacted by the Tax Act in
December 2017, incremental U.S. federal income tax is no longer a consideration
if the Company were to repatriate cash to the United States outside of settling
intercompany balances. However, if the Company were to repatriate such cash, it
may need to pay incremental foreign withholding taxes which, subject to certain
limitations, generate foreign tax credits for use against the Company's U.S. tax
liability, if any. Additionally, the Company may need to pay certain state
income taxes. The Company continues to maintain its indefinite reinvestment
assertion with respect to most jurisdictions in which it operates because of
local cash requirements to operate its business.


                                       54
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Other Significant Cash and Contractual Obligations The table set forth below summarizes certain significant cash obligations as of September 30, 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)                    $   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 January 2019, to fund the purchase price of the Jack Wolfskin acquisition,

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

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

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

September 30, 2020, the Company had $442.8 million outstanding under the Term

Loan Facility, which is offset by unamortized debt issuance costs of $14.2

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

of September 30, 2020. For further discussion, see Note 6 "Financing

Arrangements" to the Notes to Consolidated Condensed Financial Statements in

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

(2) In August 2020, the Company entered into the 2020 Japan Term Loan Facility

for 2,000,000,000 Yen (or approximately U.S.$18,966,000 using the exchange

rate in effect as of September 30, 2020). The Company had 2,000,000,000 Yen

(or approximately U.S.$18,966,000 using the exchange rate in effect as of

September 30, 2020) outstanding under the Japan Term Loan Facility on the

Company's consolidated condensed balance sheet as of September 30, 2020. For

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

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

10-Q.

(3) In May 2020, the Company issued $258.8 million of 2.75% Convertibles Notes,

which mature on May 1, 2026 unless earlier redeemed or repurchased by the

Company or converted. As of September 30, 2020, the Company had $180.5

million outstanding under the Convertible Notes, net of unamortized debt

issuance costs of $5.7 million and debt discount of $72.6 million, as

presented on the Company's Consolidated Condensed Balance Sheet as of

September 30, 2020. For further discussion, see Note 6 "Financing

Arrangements" to the Notes to Consolidated Condensed Financial Statements in

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

(4) In August 2020, the Company entered into two new long-term financing

agreements in connection with the Company's investment initiatives at its

North American Distribution Center in Roanoke, Texas, and in addition, to

improve its manufacturing capabilities at its golf ball manufacturing

facility in Chicopee, Massachusetts, the Company entered into a series of

long-term financing agreements (collectively, the "Equipment Notes") between

2017 and 2020 that are secured by certain equipment at this facility. As of

September 30, 2020, the Company had a combined $33.9 million outstanding

under these Equipment Notes. For further discussion, see Note 6 "Financing

Arrangements" to the Notes to Consolidated Condensed Financial Statements in

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

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

September 30, 2020, finance lease liabilities of $0.3 million were recorded

    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 $28.0

million and $170.7 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.

(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 September 30, 2020. Amounts exclude uncertain income tax

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

For further discussion, see Note 13 "Income Taxes" to the Notes to

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

10-Q.



During its normal course of business, the Company has made certain indemnities,
commitments and guarantees under which it may be required to make payments in
relation to certain transactions. These include (i) intellectual property
indemnities to the Company's customers and licensees in connection with the use,
sale and/or license of Company products or trademarks, (ii) indemnities to
various lessors in connection with facility leases for certain claims arising
from such facilities or leases, (iii) indemnities to vendors and service
providers pertaining to the goods or services provided to the Company or based
on the negligence or willful misconduct of the Company, and (iv) indemnities
involving the accuracy of representations and warranties in certain contracts.
In addition, the Company has made contractual commitments to each of its
officers and certain other employees providing for severance payments upon the
termination of employment. The Company has also issued guarantees in the form of
a standby letter of credit 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 ended September 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
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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 ending December 31, 2020.
Off-Balance Sheet Arrangements
The Company has no material off-balance sheet arrangements as defined in
Regulation S-K Item 303(a)(4)(ii).
Critical Accounting Policies and Estimates
There have been no material changes to the Company's critical accounting
policies and estimates from the information provided in Part II, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," included in the Company's Form 10-K for the fiscal year ended
December 31, 2019, except for the Company's adoption of the Accounting Standards
Update No 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement
of Credit Losses on Financial Instruments" which became effective as of January
1, 2020. For further discussion on the adoption of this new accounting standard
please see Note 1 "Basis of Presentation" to the Notes to Consolidated Condensed
Financial Statements in Part I, Item 1 of this Form 10-Q.
Item 3.  Quantitative and Qualitative Disclosures about Market Risk
The Company uses derivative financial instruments to mitigate its exposure to
changes in foreign currency exchange rates and interest rates. Transactions
involving these financial instruments are with creditworthy banks, primarily
banks that are party to the Company's credit facilities (see Note 6 "Financing
Arrangements" to the Notes to Consolidated Condensed Financial Statements in
Part 1, Item 1 of this Form 10-Q). The use of these instruments exposes the
Company to market and credit risk which may at times be concentrated with
certain counterparties, although counterparty nonperformance is not anticipated.
Foreign Currency Fluctuations
Information about the Company's foreign currency hedging activities is set forth
in Note 17 "Derivatives and Hedging," to the Notes to Consolidated Condensed
Financial Statements included in Part I, Item 1, of this Form 10-Q, which is
incorporated herein by this reference.
As part of the Company's risk management procedure, a sensitivity analysis model
is used to measure the potential loss in future earnings of market-sensitive
instruments resulting from one or more selected hypothetical changes in interest
rates or foreign currency values. The sensitivity analysis model quantifies the
estimated potential effect of unfavorable movements of 10% in foreign currencies
to which the Company was exposed at September 30, 2020 through its foreign
currency forward contracts.
At September 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 on September 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 of September 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 of September 30, 2020.
Changes in Internal Control over Financial Reporting. During the quarter ended
September 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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