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 six months endedJune 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 six months endedJune 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 develops a full line of high quality soft goods, including golf bags, apparel, footwear and other golf accessories. In 2017, the Company expanded its soft goods lines with the acquisitions of OGIO and TravisMathew. Under the OGIO brand, the Company offers a full line of premium personal storage gear for sport and personal use 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 to further enhanced the Company's lifestyle category and provides a platform for future growth in the active outdoor and urban outdoor categories. The Company's soft goods under the Callaway, OGIO, TravisMathew and Jack Wolfskin brands are largely designed and developed internally. Operating and Reportable Segments The Company has two operating and reportable segments, namely Golf Equipment and Apparel, Gear and Other. 39
-------------------------------------------------------------------------------- The Golf Equipment operating segment, which is comprised of golf club and golf ball products, includesCallaway Golf branded woods, hybrids, irons, wedges, Odyssey putters, including Toulon Design putters by Odyssey, packaged sets,Callaway Golf and Strata branded golf balls and sales of pre-owned golf clubs. The Apparel, Gear and Other operating segment includes the newly acquired Jack Wolfskin outdoor apparel, gear and accessories business, the TravisMathew golf and lifestyle apparel and accessories business, and the Callaway and OGIO businesses, which consist of golf apparel and accessories, storage gear for sport and personal use, and royalties from licensing of the Company's trademarks and service marks for various soft goods products. For further information about the Company's segments, see Note 19 "Segment Information" to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q. Cost of Sales The Company's cost of sales is comprised primarily of material and component costs, distribution and warehousing costs, and overhead. Historically, over 85% of the Company's manufacturing costs, primarily material and component costs, are variable in nature and fluctuate with sales volumes. With respect to the Company's Golf Equipment operating segment, variable costs as a percentage of cost of sales range between 85% to 95% for golf club products and 70% to 80% for golf ball products. Variable costs for soft goods in the Apparel, Gear and Other operating segment are generally greater than 85% as fewer fixed costs are used in the manufacturing of soft goods products. Generally, the relative significance of the components of cost of sales does not vary materially from these percentages from period to period. See "Operating Segment Results for the Three Months EndedJune 30, 2020 and 2019-Segment Profitability" and "Operating Segment Results for the Six Months EndedJune 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 of outdoor apparel, footwear and equipment related to the Company's newly acquired Jack Wolfskin business focuses primarily on outerwear and consequently experiences stronger sales for such products during the cold-weather months and the corresponding prior sell-in periods. Therefore, sales of Jack Wolfskin products are generally greater during the second half of the year. Foreign Currency A significant portion of the Company's business is conducted outside ofthe United States in currencies other than theU.S. dollar. As a result, changes in foreign currency rates can have a significant effect on the Company's financial results. The Company enters into foreign currency forward contracts to mitigate the effects of changes in foreign currency rates. While these foreign currency forward contracts can mitigate the effects of changes in foreign currency rates, they do not eliminate those effects, which can be significant. These effects include (i) the translation of results denominated in foreign currency into 40 --------------------------------------------------------------------------------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 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 During the second quarter and first six months of 2020, the Company's golf equipment and soft goods businesses were significantly adversely impacted by the COVID-19 pandemic in all markets and regions. The second quarter continued to be a challenging environment as worldwide regulatory restrictions were at their height, which included the temporary closure of the Company's retail locations, manufacturing facilities and distribution centers at varying times, resulting in disruptions in product production and the Company's ability to ship the products to its customers. As a result of these disruptions, net sales decreased$149.7 million (33.5%) to$297.0 million in the second quarter of 2020 as compared to$446.7 million for the same period in 2019, and decreased$223.6 million (23.2%) to$739.3 million in the first six months of 2020 as compared to$962.9 million for the same period in 2019. Despite these decreases, the Company's golf equipment and soft goods businesses recovered more quickly than expected at the end of the second quarter and into the third quarter of 2020. Although golf courses remained closed during the earlier part of the second quarter in some major markets, particularlythe United States andEurope , the Company started to see signs of recovery in the latter part of the second quarter as golf courses started to reopen, prompting an increase in participation from new and returning golfers, as the game of golf supports an active and healthy way of life that is compatible with social distancing. Direct-to-consumer sales of soft goods during the second quarter of 2020 were also better than expected due to a significant surge of on-line sales compared to the second quarter of 2019, as consumers turned to e-commerce to purchase items they would have otherwise purchased in person. While the Company is encouraged by these signs of recovery, the Company expects the duration of the COVID-19 pandemic and the continued negative impact on the Company's business to result in lower projected revenue, gross margin and operating income for the remainder of fiscal 2020 and potentially beyond. As a result, the Company determined that there were indicators of impairment and proceeded with a quantitative assessment of goodwill for all reporting units during the second quarter of 2020, which resulted in an impairment charge of$174.3 million related to the Jack Wolfskin goodwill and trade name. While the Company remains optimistic of the revenues and cost synergies that the Jack Wolfskin business will provide in the long-term, the realization of these opportunities have been delayed due to the uncertain economic impacts created by the COVID-19 pandemic. 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 second quarter and the first six months of 2020, the Company realized savings in operating expenses of$36.4 million (22.5%) and$50.2 million (15.2%), 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. In addition, inMay 2020 , the Company successfully issued$258.8 million of convertible senior notes, with net proceeds to the Company of approximately$218 million after deducting the cost of capped call transactions and other transaction costs. The Company's earnings per share for the second quarter and first six months of 2020 resulted in losses per share of$1.78 and$1.47 , respectively, compared to diluted earnings per share of$0.30 and$0.81 in the comparative respective periods of 2019. Excluding the impairment loss and the impact of other one-time charges discussed in more detail below, on a non-GAAP basis, the Company's earnings per share were$0.06 and$0.38 in the second quarter and first six months of 2020, respectively, compared to non-GAAP earnings per share of$0.37 and$0.99 in the respective comparative periods of 2019. The Company is pleased that it was able to achieve positive non-GAAP earnings despite the global challenges caused by COVID-19. Looking ahead, the impact of the COVID-19 pandemic on the Company's business in the short-term and long-term remains unclear. The Company believes it has taken the necessary steps to mitigate the impacts from the pandemic on its business and to sustain its business through this crisis by reducing costs and enhancing its liquidity in order to be well positioned, both operationally and financially, in the short and long-term. The Company remains hopeful for an end to the pandemic and 41
-------------------------------------------------------------------------------- is encouraged that its golf and outdoor lifestyle businesses support an active and healthy way of life that is compatible with a world of social distancing. Three-Month Periods EndedJune 30, 2020 and 2019 Net sales for the second quarter of 2020 decreased$149.7 million (33.5%) to$297.0 million compared to$446.7 million in the second quarter of 2019. This decline was due to the continued negative impact of the COVID-19 pandemic on the Company's golf equipment and soft goods businesses during the second quarter of 2020, resulting from the temporary closure of all non-essential businesses as mandated by government authorities. Net sales decreased in all product categories and across all major geographic regions. By sales channel, the Company's wholesale and retail businesses had the largest decline in sales, despite the reopening of the retail sector in certain regions during the second quarter. This decline was partially offset by an improvement in the Company's e-commerce business, which increased significantly compared to the second quarter of 2019. By operating segment, net sales of Golf Equipment decreased$82.4 million or 28.2% to$209.9 million , and net sales of Apparel, Gear and Other decreased$67.3 million or 43.6%, both compared to the second quarter in 2019. Fluctuations in foreign currencies had an unfavorable impact on net sales of$2.3 million in the second quarter of 2020. The Company's net sales by operating segment are presented below (dollars in millions): Three Months Ended June 30, Decline 2020 2019 Dollars Percent Net sales: Golf Equipment $ 209.9$ 292.3 $ (82.4 ) -28.2 % Apparel, Gear and Other 87.1 154.4 (67.3 ) -43.6 % $ 297.0$ 446.7 $ (149.7 ) -33.5 % For further discussion of each operating segment's results, see "Operating Segment Results for the Three Months EndedJune 30, 2020 and 2019 below. Net sales information by region is summarized as follows (dollars in millions): Constant Currency Three Months Ended June Decline vs. 30, Decline 2019 2020 2019 Dollars Percent Percent Net sales: United States$ 171.7 $ 247.4 $ (75.7 ) -30.5 % -30.5% Europe 50.1 81.6 (31.5 ) -38.6 % -37.5% Japan 24.6 55.7 (31.1 ) -55.8 % -56.8% Rest of World 50.6 62.0 (11.4 ) -18.4 % -15.3%$ 297.0 $ 446.7 $ (149.7 ) -33.5 % -33.0% Net sales inthe United States decreased$75.7 million (30.5%) to$171.7 million during the second quarter of 2020 compared to$247.4 million in the second quarter of 2019. The Company's sales in regions outside ofthe United States decreased$74.0 million (37.1%) to$125.3 million during the second quarter of 2020 compared to$199.3 million in the second quarter of 2019. Foreign currency fluctuations had an unfavorable impact of$2.3 million on net sales during the second quarter of 2020 relative to the same period in the prior year. The general decrease in net sales by region was primarily due to the continued business disruption caused by the COVID-19 pandemic. Gross profit decreased$84.8 million (41.0%) to$122.1 million in the second quarter of 2020 compared to$206.8 million in the second quarter of 2019. Gross profit as a percentage of net sales ("gross margin") decreased 520 basis points to 41.1% in the second quarter of 2020 compared to 46.3% in the second quarter of 2019. The decline in gross margin was primarily due to (i) a decrease in net sales and business challenges caused by COVID-19; (ii) the negative impact of fixed costs on a lower sales base caused by the temporary shut-down of the Company's distribution centers and manufacturing facilities as a result of COVID-19; (iii) an unfavorable shift in sales mix due to a decrease in higher margin retail sales resulting from temporary store closures, combined with an increase in sales of lower margin products, including packaged sets, entry level 42 -------------------------------------------------------------------------------- golf balls and pre-owned product as a result of an increase in new and returning golfers; and (iv) an increase inU.S. tariffs on imports fromChina . These declines were partially offset by a higher mix of e-commerce sales, which 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 EndedJune 30, 2020 and 2019-Segment Profitability" below. Selling expenses decreased$32.9 million to$80.2 million (27.0% of net sales) in the second quarter of 2020 compared to$113.1 million (25.3% of net sales) in the second quarter of 2019. This 29.1% decrease was primarily due to the Company's planned reduction in operating expenses in response to the adverse effect on the Company's business caused by COVID-19 resulting in a$19.5 million decline in marketing and tour expenses, a$7.7 million decline in employee costs, including severance charges of$1.3 million due to workforce reductions in the second quarter of 2020, and a$2.2 million decline in travel and entertainment expenses, as well as an overall decline in variable expenses. General and administrative expenses declined$0.4 million to$35.0 million (11.8% of net sales) in the second quarter of 2020 compared to$35.4 million (7.9% of net sales) in the second quarter of 2019. This decrease was primarily due to a$3.5 million decline in employee costs, net of severance charges of$0.5 million , as a result of the Company's planned cost reduction initiatives during the second quarter 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. In addition, travel and entertainment decreased$1.0 million due to travel restrictions caused by the COVID-19 pandemic. The Company's results for the second quarter of 2020 also benefited from a$1.4 million reduction in non-recurring costs, primarily related to acquisition and business integration costs incurred in the second quarter of 2019. These decreases were partially offset by an increase in legal and bad debt expense. Research and development expenses decreased$3.1 million to$10.0 million (3.4% of net sales) in the second quarter of 2020 compared to$13.1 million (2.9% of net sales) in the second quarter of 2019, primarily due to a$1.8 million decline in employee costs, net of severance charges of$0.6 million , as a result of the Company's planned cost reduction initiatives during the second quarter 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. In addition, travel and entertainment decreased$0.3 million due to travel restrictions caused by the COVID-19 pandemic. Due to the significant business disruption and macro-economic impact of COVID-19 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 resulting 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$1.5 million to$12.3 million in the second quarter of 2020 compared to$10.7 million in the second quarter of 2019 primarily due to an increase in the Company's net debt position 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 by$12.8 million to$14.0 million in the second quarter of 2020 compared to other income of$1.2 million in the second quarter of 2019, primarily due to an$11.0 million gain recognized in the second quarter of 2020 related to a discontinued cash flow hedge, combined with a decline in net foreign currency losses from non-designated foreign currency hedging contracts in the second quarter of 2020 compared to the second quarter of 2019. The Company's provision for income taxes decreased by$15.1 million to a$7.9 million benefit in the second quarter of 2020, compared to a provision of$7.2 million in the second quarter of 2019. As a percent of pre-tax income (loss), the Company's income tax rate decreased to 4.5% in the second quarter of 2020 compared to 20.0% in the second quarter of 2019. This decrease was primarily due to the impairment charge recorded during the second quarter of 2020 to write down certain Jack Wolfskin goodwill and intangible assets to their estimated fair values, combined with an overall reduction in pre-tax earnings in the second quarter of 2020 compared to the second quarter of 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 for the second quarter of 2020 decreased$196.6 million to a net loss of$167.7 million compared to net income of$28.9 million in the second quarter of 2019. Diluted earnings per share decreased$2.08 to a loss per share of$1.78 in the second quarter of 2020 compared to earnings per share of$0.30 in the second quarter of 2019. 43
-------------------------------------------------------------------------------- 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 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 endedJune 30, 2020 would have been$5.3 million and$0.06 , respectively, compared to net income of$35.1 million and diluted earnings per share of$0.37 for the comparative period in 2019. The decrease in non-GAAP earnings in 2020 was primarily due the business disruptions and challenges caused by the COVID-19 pandemic in the second quarter of 2020, which resulted in a significant decline in net sales and operating income compared to the second quarter of 2019, partially offset by the Company's planned cost reduction initiatives combined with an increase in foreign currency hedging gains. The table below presents a reconciliation of the Company's as-reported results for the three months endedJune 30, 2020 and 2019 to the Company's non-GAAP results reported above for the same periods (in millions, except per share information). Three Months Ended June 30, 2020 Non-Cash Non-Cash Intangible Amortization Amortization of Discount on and Impairment Convertible Other Non-Recurring As Reported Charges(1) Notes(2) Charges(3) Non-GAAP Net income (loss) attributable to Callaway Golf Company$ (167.7 ) $ (167.3 ) $ (1.2 ) $ (4.5 )$ 5.3
Diluted earnings (loss) per share
94.1 94.1 94.1 94.1 94.1
Three Months Ended
Non-Cash Intangible
Amortization Acquisition and
As Reported
Expense(1) Transition Costs(4) Non-GAAP
Net income (loss) attributable to
$ 28.9 $
(5.0 ) $ (1.2 )
Diluted earnings (loss) per share$ 0.30 $ (0.05 )$ (0.02 ) $ 0.37 Weighted-average shares outstanding 95.9 95.9 95.9 95.9
(1) Includes the non-cash amortization expense of intangible assets in connection
with the acquisitions of Jack Wolfskin, TravisMathew and OGIO. In addition,
the three months ended
million impairment of the Jack Wolfskin goodwill and trade name, and the
three 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) Represents non-recurring costs associated with the acquisition of Jack
Wolfskin completed in
Operating Segment Results for the Three Months EndedJune 30, 2020 and 2019 Golf Equipment Golf Equipment net sales decreased$82.4 million to$209.9 million in the second quarter of 2020 compared to$292.3 million in the second quarter of 2019 due to a$67.7 million (30.3%) decline in golf club sales and a$14.7 million (21.4%) decline in golf ball sales. These decreases were due to the continued business disruptions and challenges caused by the COVID-19 pandemic during the second quarter of 2020, which had an adverse impact on the Company's wholesale business. 44 --------------------------------------------------------------------------------
This was slightly offset by an improvement in the Company's e-commerce business, which increased significantly compared to the second 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
June 30, Decline
2020 2019 Dollars Percent
Net sales:
Golf Clubs $ 156.0 $ 223.7 $ (67.7 ) -30.3 %
Golf Balls 53.9 68.6 (14.7 ) -21.4 %
$ 209.9 $ 292.3 $ (82.4 ) -28.2 %
The $67.7 million (30.3%) decrease in net sales of golf clubs to $156.0 million
for the quarter ended June 30, 2020 , compared to $223.7 million in the
comparable period in 2019, was primarily due to a decline in sales volume and
average selling prices across all product categories. The decline in sales
volume was due to the temporary closure of many of the Company's retail partner
locations as a result of the COVID-19 pandemic. 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 of lower priced pre-owned products.
Net sales of golf balls decreased $14.7 million (21.4%) to $53.9 million for the
quarter ended June 30, 2020 compared to $68.6 million in the comparable period
in 2019 primarily due to a decline in sales volume due to the temporary closure
of many of the Company's retail partner locations as a result of the COVID-19
pandemic, in addition to a decline in average selling prices due to a shift in
sales mix to lower priced golf balls as a result of supply constraints of
premium golf balls. This was due to the temporary shut-down of the golf ball
manufacturing facility in the United States caused by COVID-19 mandates.
Apparel, Gear and Other
Net sales of Apparel, Gear and Other decreased $67.3 million to $87.1 million in
the second quarter of 2020 compared to $154.4 million in the second quarter of
2019 due to a $36.9 million (50.4%) decrease in apparel sales and a $30.4
million (37.4%) decrease in sales of gear, accessories and other. These
decreases were due to the temporary closure of many of the Company's wholesale
and direct retail locations as a result of the COVID-19 pandemic during the
first half of 2020. This decline was slightly offset by an improvement in the
Company's e-commerce business during the second quarter of 2020, which increased
significantly compared to the second quarter of 2019.
Net sales information for the Apparel, Gear and Other operating segment is
summarized as follows (dollars in millions):
Three Months Ended
June 30, Decline
2020 2019 Dollars Percent
Net sales:
Apparel $ 36.3 $ 73.2 $ (36.9 ) -50.4 %
Gear, Accessories, & Other 50.8 81.2 (30.4 ) -37.4 %
$ 87.1 $ 154.4 $ (67.3 ) -43.6 %
Net sales of apparel decreased $36.9 million (50.4%) to $36.3 million in the
second quarter of 2020 compared to the second quarter of 2019, due to a decline
in sales across all apparel brands as a result of the continued business
challenges caused by the COVID-19 pandemic during the second quarter of 2020.
Net sales of gear, accessories and other decreased $30.4 million (37.4%) to
$50.8 million for the second quarter of 2020 compared to $81.2 million in the
second quarter of 2019 due to the continued business challenges caused by the
COVID-19 pandemic during the second quarter of 2020.
45
--------------------------------------------------------------------------------
Segment Profitability
Profitability by operating segment is summarized as follows (dollars in
millions):
Three Months Ended
June 30, Decline
2020 2019 Dollars Percent
Income before income taxes:
Golf Equipment $ 29.2 $ 55.7 $ (26.5 ) -47.6 %
Apparel, Gear and Other (11.7 ) 11.3 (23.0 ) -203.5 %
Reconciling items(1) (193.1 ) (30.9 ) (162.2 ) 524.9 %
$ (175.6 ) $ 36.1 $ (211.7 ) -586.4 %
(1) Reconciling items represent corporate general and administrative expenses and
other income (expense) not included by management in determining segment
profitability. The
quarter of 2020 compared to the second quarter of 2019 was primarily due to
the recognition of a
and trade name (see Note 9 "
Consolidated Condensed Financial Statements included in Part I, Item 1, of
this Form 10-Q), partially offset by an
recognized in the second quarter of 2020 related to a discontinued cash flow
hedge.
Pre-tax income from the Golf Equipment operating segment decreased$26.5 million (47.6%) to$29.2 million in the second quarter of 2020 from$55.7 million in the second quarter of 2019. This decrease was primarily due to a$49.5 million decrease in gross profit (a decline of 520 basis points in gross margin), partially offset by a$23.1 million decrease in operating expenses. The decline in gross margin was primarily due to (i) lower sales and the negative impact of fixed costs on a lower sales base caused by the temporary shut-down of the Company's distribution centers and manufacturing facilities for a significant portion of the second quarter in 2020 as a result of COVID-19; (ii) an increase in sales of lower margin products, including packaged sets, entry level golf balls and pre-owned product as a result of an increase in new and returning golfers; and (iii) an increase inU.S. tariffs on imports fromChina . These decreases were partially offset by a higher mix of e-commerce sales, which have higher gross margins. The decline in operating expenses was primarily due to decreases in marketing expenses and 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$23.0 million (203.5%) to a pre-tax loss of$11.7 million in the second quarter of 2020 compared to pre-tax income of$11.3 million in the second quarter of 2019. This decrease was primarily due to a$37.2 million decrease in gross profit (a decline of 480 basis points in gross margin), partially offset by a$14.2 million decrease in operating expenses. The decline in gross margin was primarily due to (i) lower sales and the negative impact of fixed costs on a lower sales base caused by the temporary shut-down of the Company's distribution centers and retail locations as a result to the COVID-19 pandemic; and (ii) an unfavorable shift in sales mix due to a decrease in higher margin retail sales resulting from temporary store closures. These decreases were partially offset by a higher mix of e-commerce sales, which have higher gross margins. The decline in operating expenses was primarily due to decreases in marketing expenses and employee costs resulting from the Company's planned cost reduction initiatives in response to the COVID-19 pandemic. Six-Month Period EndedJune 30, 2020 and 2019 Net sales for the six months endedJune 30, 2020 decreased$223.6 million (23.2%) to$739.3 million compared to$962.9 million for the six months endedJune 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. These business disruptions mostly began late in the first quarter of 2020 and continued during the second quarter of 2020. Net sales decreased in all product categories and across all major geographic regions. By sales channel, the Company's wholesale and retail businesses had the largest decline in sales, despite the limited reopening of the retail sector later in the second quarter in most 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 six months of 2020, net sales of Golf Equipment decreased$114.4 million or 18.6% to$501.6 million , 46
-------------------------------------------------------------------------------- and net sales of Apparel, Gear and Other decreased$109.2 million or 31.5%, both compared to the first six months in 2019. Fluctuations in foreign currencies had an unfavorable impact on net sales of$6.1 million in the first six months of 2020. The Company's net sales by operating segment are presented below (dollars in millions): Six Months Ended June 30, Decline 2020 2019 Dollars Percent
Net sales: Golf Equipment$ 501.6 $ 616.0 $ (114.4 ) -18.6 % Apparel, Gear and Other 237.7 346.9 (109.2 ) -31.5 %$ 739.3 $ 962.9 $ (223.6 ) -23.2 % For further discussion of each operating segment's results, see below "Operating Segment Results for the Six Months EndedJune 30, 2020 and 2019." Net sales information by region is summarized as follows (dollars in millions): Constant Currency Six Months Ended Decline vs. June 30, Decline 2019 2020 2019 Dollars Percent Percent Net sales: United States$ 389.2 $ 496.4 $ (107.2 ) -21.6 % -21.6% Europe 146.8 208.2 (61.4 ) -29.5 % -27.8% Japan 102.0 128.9 (26.9 ) -20.9 % -22.0% Rest of World 101.3 129.4 (28.1 ) -21.7 % -18.6%$ 739.3 $ 962.9 $ (223.6 ) -23.2 % -22.6% Net sales inthe United States decreased$107.2 million (21.6%) to$389.2 million during the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . Net sales in regions outside ofthe United States decreased$116.4 million (25.0%) to$350.1 million for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . Fluctuations in foreign currencies had an unfavorable impact on international net sales of$6.1 million in the first half 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$127.5 million (28.6%) to$317.7 million for the six months endedJune 30, 2020 compared to$445.3 million in the same period of 2019. Gross profit as a percentage of net sales ("gross margin") decreased 320 basis points to 43.0% in the first half of 2020 compared to 46.2% in the first half of 2019. The decline in gross margin was primarily due to (i) a decrease in net sales and business challenges caused by COVID-19; (ii) the negative impact of fixed costs on a lower sales base caused by the temporary shut-down of the Company's distribution centers and manufacturing facilities as a result of COVID-19; (iii) an unfavorable shift in sales mix due to a decrease in higher margin retail sales resulting from temporary store closures, combined with an increase in sales of lower margin products, including packaged sets, entry level golf balls and pre-owned product as a result of an increase in new and returning golfers; and (iv) an increase inU.S. tariffs on imports fromChina . 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 half 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, offset by warehouse consolidation costs incurred in 2020. 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 Six Months EndedJune 30, 2020 and 2019-Segment Profitability." Selling expenses decreased by$41.2 million to$191.2 million (25.9% of net sales) during the six months endedJune 30, 2020 compared to$232.4 million (24.1% of net sales) in the comparable period of 2019. This 17.7% decrease was primarily due to the Company's planned reduction in operating expenses in response to the adverse effect on the Company's business caused by COVID-19 resulting in a$28.2 million decline in marketing and tour expenses, a$7.3 million decline in employee 47 -------------------------------------------------------------------------------- costs, which includes severance charges of$1.3 million due to workforce reductions in the second quarter of 2020, and a$2.9 million decline in travel and entertainment expenses, as well as an overall decline in variable expenses. General and administrative expenses decreased by$6.6 million to$65.7 million (8.9% of net sales) during the six months endedJune 30, 2020 compared to$72.4 million (7.5% of net sales) in the comparable period of 2019. This 9.1% decrease was primarily due to a$5.9 million decline in employee costs, net of severance charges of$0.5 million , as a result of the Company's planned cost reduction initiatives during the first half 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 six months of 2020 also benefited from a$5.9 million reduction in non-recurring costs, primarily related to the acquisition and business integration costs incurred in the first six months of 2019. These decreases were partially offset by an increase in legal and bad debt expense. Research and development expenses decreased by$2.4 million to$23.3 million (3.1% of net sales) during the six months endedJune 30, 2020 compared to$25.6 million (2.7% of net sales) in the comparable period of 2019, primarily due to a$1.8 million decline in employee costs, net of severance charges of$0.6 million , and a$0.6 million decline in travel and entertainment resulting from the Company's planned cost reduction initiatives during the first half of 2020. Due to the significant business disruption and macro-economic impact of COVID-19 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 resulting 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$0.9 million to$21.5 million during the six months endedJune 30, 2020 compared to$20.6 million in the comparable period of 2019, primarily due to an increase in the Company's net debt position 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 (expense) increased to other income of$20.5 million during the six months endedJune 30, 2020 compared to other expense of$0.8 million in the comparable period of 2019 due to$11.0 million in gains recognized inJune 2020 on discontinued cash flow hedges, in addition to a$9.6 million increase in net gains on non-designated foreign currency contracts. The Company's provision for income taxes decreased$15.6 million to$1.2 million for the six months endedJune 30, 2020 , compared to$16.8 million in the comparable period of 2019. As a percent of pre-tax income (loss), the Company's effective tax rate in the first six months of 2020 decreased to 4.5% compared to 20.0% in the comparable period of 2019. This decrease was primarily due to the impairment charge recorded during the second quarter of 2020 to write down certain goodwill and intangible assets to their estimated fair values, combined with an overall reduction in pre-tax earnings in the first six 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 six months endedJune 30, 2020 decreased$216.4 million to a loss of$138.8 million compared to income of$77.6 million in the comparable period of 2019. Diluted earnings (loss) per share decreased$2.28 to a loss per share of$1.47 in the first six months of 2020 compared to earnings per share of$0.81 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 six months endedJune 30, 2020 would have been$27.8 million and$0.29 per share, respectively, compared to$95.6 million and$0.99 per share for the comparative period in 2019. The decreased non-GAAP earnings in 2020 was primarily due the business disruptions and challenges caused by the COVID-19 pandemic during the first half 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 foreign currency hedging gains. 48
-------------------------------------------------------------------------------- The table below presents a reconciliation of the Company's as-reported results for the six months endedJune 30, 2020 and 2019 to the Company's non-GAAP results reported above for the same periods (in millions, except per share information). Six Months Ended June 30, 2020 Non-Cash Non-Cash Acquisition Amortization of Amortization Discount on Other and Impairment Convertible Non-Recurring GAAP Charges(1) Notes(2) Charges(3) Non-GAAP Net income (loss) attributable to Callaway Golf Company ($138.8 ) ($168.2 ) ($1.2 )$2.8 $27.8
Diluted earnings (loss) per share (
($0.01 )$0.03 $0.29 Weighted-average shares outstanding 94.2 94.2 94.2 94.2 94.2 Six Months Ended June 30, 2019 Non-Cash Purchase Accounting Adjustments and Acquisition
Acquisition and Transition
GAAP Amortization(1) Expenses(4) Non-GAAP
Net income (loss) attributable to Callaway
Golf Company $77.6 ($10.1 ) ($7.9 ) $95.6
Diluted earnings (loss) per share $0.81 ($0.10 ) ($0.08 ) $0.99
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 six months ended
million impairment of the Jack Wolfskin goodwill and trade name, and the six
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) 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 Six Months EndedJune 30, 2020 and 2019 Golf Equipment Golf equipment sales decreased$114.4 million (18.6%) to$501.6 million for the six-months endedJune 30, 2020 compared to$323.6 million for the same period in 2019 as a result of decreases of$78.3 million (16.1%) in golf club sales and$36.1 million (27.7%) in golf ball sales. These decreases were due to the business disruptions and challenges caused by the COVID-19 pandemic during the first half of 2020, which had an adverse impact on the Company's wholesale business. This was slightly offset by an improvement in the Company's e-commerce business, which increased significantly compared to 2019. 49 --------------------------------------------------------------------------------
Net sales information for the Golf Equipment operating segment by product category is summarized as follows (dollars in millions):
Six Months Ended
June 30, Decline
2020 2019 Dollars Percent
Net sales:
Golf Clubs $ 407.3 $ 485.6 $ (78.3 ) -16.1 %
Golf Balls 94.3 130.4 (36.1 ) -27.7 %
$ 501.6 $ 616.0 $ (114.4 ) -18.6 %
Net sales of golf clubs decreased $78.3 million (16.1%) to $407.3 million for
the six months ended June 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 temporary closure of many of the
Company's retail partner locations as a result of the COVID-19 pandemic. 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 of lower margin pre-owned products.
Net sales of golf balls decreased $36.1 million (27.7%) to $94.3 million for the
six months ended June 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 temporary closure of many of the Company's retail partner
locations as a result of the COVID-19 pandemic. 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
golf ball manufacturing facility in the United States caused by COVID-19
mandates.
Apparel, Gear and Other
Apparel, Gear and Other sales decreased $109.2 million to $237.7 million in the
six months ended June 30, 2020 compared to $346.9 million for the same period in
2019 due to a $55.8 million (32.9%) decrease in apparel sales and a $53.4
million (30.1%) decrease in gear, accessories and other sales. These decreases
were due to the temporary closure of many of the Company's wholesale and direct
retail locations as a result of the COVID-19 pandemic during the first half of
2020. This decline was slightly offset by an improvement in the Company's
e-commerce business in the first half 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):
Six Months Ended
June 30, Decline
2020 2019 Dollars Percent
Net sales:
Apparel $ 113.6 $ 169.4 $ (55.8 ) -32.9 %
Gear, Accessories, & Other 124.1 177.5 (53.4 ) -30.1 %
$ 237.7 $ 346.9 $ (109.2 ) -31.5 %
Net sales of apparel decreased $55.8 million (32.9%) to $113.6 million for the
six months ended June 30, 2020 compared to the same period of the prior year 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 six months of 2020.
Net sales of gear, accessories and other decreased $53.4 million (30.1%) to
$124.1 million for the six months ended June 30, 2020 compared to the same
period in the prior year due to the business challenges caused by the COVID-19
pandemic during the first six month of 2020.
50
--------------------------------------------------------------------------------Segment Profitability Profitability by operating segment is summarized as follows (dollars in millions):
Six Months Ended
June 30, Growth/(Decline)
2020 2019 Dollars Percent
Income before income taxes:
Golf Equipment $ 87.8 $ 125.7 $ (37.9 ) -30.2 %
Apparel, Gear and Other (15.5 ) 34.0 (49.5 ) -145.6 %
Reconciling items(1) (209.9 ) (65.5 ) (144.4 ) 220.5 %
$ (137.6 ) $ 94.2 $ (231.8 ) -246.1 %
(1) Reconciling items represent corporate general and administrative expenses and
other income (expense) not included by management in determining segment
profitability. The
half of 2020 compared to the same period in 2019 was primarily due to the
recognition of a
trade name (see Note 9 "
Consolidated Condensed Financial Statements included in Part I, Item 1, of
this Form 10-Q). This increase was partially offset by a
that was recognized in the six months ended
discontinued cash flow hedge, combined with a foreign currency forward loss
of
a forward contract to mitigate the risk of foreign currency fluctuations on
the acquisition of Jack Wolfskin, in addition to
amortization expense recognized in the six months ended
to the inventory valuation step-up from the Jack Wolfskin acquisition.
Pre-tax income from the Golf Equipment operating segment decreased$37.9 million (30.2%) to$87.8 million for the six months endedJune 30, 2020 from$125.7 million in the comparable period in the prior year. This decrease was primarily due to a$69.8 million decrease in gross profit (a decline of 300 basis points in gross margin), partially offset by a$31.9 million decrease in operating expenses. The decline in gross margin was largely due to (i) lower sales and the negative impact of fixed costs on a lower sales base caused by the temporary shut-down of the Company's distribution centers and manufacturing facilities as a result of COVID-19; (ii) an increase in sales of lower margin products, including packaged sets, entry level golf balls and pre-owned product as a result of an increase in new and returning golfers; and (iii) an increase inU.S. tariffs on imports fromChina . These decreases were partially offset by a higher mix of 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 cost reduction initiatives in response to the decline in sales period over period. Pre-tax income from the Apparel, Gear and Other operating segment decreased$49.5 million (145.6%) to a pre-tax loss of$15.5 million for the six months endedJune 30, 2020 from pre-tax income of$34.0 million for the comparable period in the prior year. This decrease was primarily due to a$63.8 million decrease in gross profit (a decline of 530 basis points in gross margin), partially offset by a$14.3 million decrease in operating expenses. The decline in gross margin was primarily due to lower sales and the negative impact of fixed costs on a lower sales base caused by the temporary shut-down of the Company's distribution centers and retail locations as a result to the COVID-19 pandemic. These declines were partially offset by a higher mix of 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 cost reduction initiatives in response to the decline in sales period over period. Financial Condition The Company's cash and cash equivalents increased$57.8 million to$164.4 million atJune 30, 2020 from$106.7 million atDecember 31, 2019 , primarily due to proceeds of$258.8 million from Convertible Notes issued in May of 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 the first half of 2020. During the first six 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$89.0 million of amounts outstanding under its credit facilities, fund capital expenditures of$25.1 million , primarily in its golf ball manufacturing plant to increase capacity and improve its manufacturing capabilities and repurchase shares of its common stock for$22.0 million . In addition, in connection with the Convertible Notes, the Company paid a premium of$31.8 million 51 -------------------------------------------------------------------------------- for capped call 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 ofJune 30, 2020 , the Company's net accounts receivable increased to$214.0 million from$140.5 million as ofDecember 31, 2019 . This increase reflects the general seasonality of the Company's business. The Company's net accounts receivable as ofJune 30, 2020 decreased$49.6 million compared toJune 30, 2019 primarily due to a decrease in net sales of$149.7 million (33.5%) in the second quarter of 2020 compared to the second quarter of 2019 due to the continued business disruptions and challenges caused by the COVID-19 pandemic in 2020. The Company's inventory balance fluctuates throughout the year as a result of the general seasonality of the Company's business and is also affected by the timing of new product launches. With respect to the Company's Golf Equipment business, the buildup of inventory levels generally begins during the fourth quarter and continues heavily into the first quarter as well as into the beginning of the second quarter in order to meet demand during the height of the golf season. Inventory levels are also impacted by the timing of new product launches as well as the success of new products. Apparel, Gear and Other inventory levels start to build in the second quarter and continues into the third and fourth quarters due to the seasonal nature of the Company's Jack Wolfskin business, as many products are geared toward the fall/winter season. The Company's inventory decreased to$379.2 million as ofJune 30, 2020 compared to$456.6 million as ofDecember 31, 2019 . This decrease reflects the general seasonality of the Company's business. The Company's inventory as ofJune 30, 2020 increased by$18.7 million compared to the Company's inventory as ofJune 30, 2019 primarily due to higher inventory levels resulting from lower sales in the first half of 2020 due to the business disruptions and challenges caused by the COVID-19 pandemic. Liquidity and Capital Resources The Company's principal sources of liquidity consist of its existing cash balances, funds expected to be generated from operations and its credit facilities. In addition, inMay 2020 , the Company issued an aggregate principal amount of$258.8 million of Convertible Notes due in 2026. Based upon the Company's current cash balances, its estimates of funds expected to be generated from operations in 2020, combined with proceeds from the Convertible Notes 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 also received in early May proceeds from its convertible note offering discussed below, which will also significantly increase the Company's liquidity. The Company's ability to generate sufficient positive cash flows from operations is subject to many risks and uncertainties, including future economic trends and conditions, primarily 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 second 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 ofJune 30, 2020 , the Company had$483.1 million in cash and availability under its credit facilities. 52 -------------------------------------------------------------------------------- While the Company believes its cash and credit facilities are adequate to sustain its business through this crisis, the Company continues to consider other available sources of capital as market conditions and programs present themselves. With this increased liquidity, cost reduction actions, the Company's geographic diversity and the strength of its brands, the Company believes is has adequate liquidity to sustain its business through this crisis. Information about the Company's credit facilities and long-term borrowings is presented in Note 6 "Financing Arrangements" to the Notes to Consolidated Condensed Financial Statements included in Part I, Item 1, of this Form 10-Q, which is incorporated herein by this reference. As ofJune 30, 2020 , approximately 66% of the Company's cash was held in regions outside ofthe United States . Due to changes enacted by the Tax Act inDecember 2017 , incrementalU.S. federal income tax is no longer a consideration if the Company were to repatriate cash tothe United States outside of settling intercompany balances. However, if the Company were to repatriate such cash, it may need to pay incremental foreign withholding taxes which, subject to certain limitations, generate foreign tax credits for use against the Company'sU.S. tax liability, if any. Additionally, the Company may need to pay certain state income taxes. The Company continues to maintain its indefinite reinvestment assertion with respect to most jurisdictions in which it operates because of local cash requirements to operate its business. Other Significant Cash and Contractual Obligations The table set forth below summarizes certain significant cash obligations as ofJune 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)$ 444.0 $ 2.4 $ 9.6 $ 9.6 $ 422.4 Interest on Term Loan Facility 114.5 21.3 41.9 41.0 10.3 Convertible Notes(2) 258.8 - - - 258.8 Equipment Notes(3) 26.7 6.2 11.8 6.1 2.6 Interest on Equipment Notes 1.9 0.7 0.8 0.3 0.1 ABL Facility 27.8 27.8 - - - Japan ABL Facility 27.8 27.8 - - - Finance leases, including imputed interest(4) 1.1 0.4 0.5 0.2 - Operating leases, including imputed interest(5) 262.8 20.4 65.4 49.4 127.6 Unconditional purchase obligations(6) 77.1 45.2 29.4 2.5 - Uncertain tax contingencies(7) 7.5 0.5 1.0 1.1 4.9 Other long term liabilities 7.9 0.4 0.9 0.9 5.7 Total$ 1,257.9 $ 153.1 $ 161.3 $ 111.1 $ 832.4
(1) In
the Company entered into a Credit Agreement.
(2) which provides for a Term Loan B facility in an aggregate principal of
million, which was issued less
other transaction fees. As of
outstanding under the Term Loan Facility, which is offset by unamortized debt
issuance costs of
condensed balance sheet as of
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
outstanding under the Convertible Notes, net of unamortized debt issuance
costs of
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.
(4) In connection with the Company's investment initiatives to improve its
manufacturing capabilities at its golf ball manufacturing facility in
Chicopee, Massachusetts , the Company entered into a series of long-term
financing agreements (the "Equipment
53--------------------------------------------------------------------------------
Notes") between 2017 and 2020 that are secured by certain equipment at this
facility. As of
2020, finance lease liabilities of
payable and accrued expenses and
long-term liabilities in the accompanying consolidated condensed balance
sheets. For further discussion, see Note 2 "Leases" to the Notes to
Consolidated Condensed Financial Statements in Part I, Item 1 of this Form
10-Q.
(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
2020, short-term and long-term operating lease liabilities of
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
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 six months endedJune 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). 54 -------------------------------------------------------------------------------- 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 ("ASU") No 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" which became effective as ofJanuary 1, 2020 . For further discussion on the adoption of this new accounting standard please see Note 1 "Basis of Presentation" to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q. Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company uses derivative financial instruments to mitigate its exposure to changes in foreign currency exchange rates and interest rates. Transactions involving these financial instruments are with creditworthy banks, primarily banks that are party to the Company's credit facilities (see Note 6 "Financing Arrangements" to the Notes to Consolidated Condensed Financial Statements in Part 1, Item 1 of this Form 10-Q). The use of these instruments exposes the Company to market and credit risk which may at times be concentrated with certain counterparties, although counterparty nonperformance is not anticipated. Foreign Currency Fluctuations Information about the Company's foreign currency hedging activities is set forth in Note 17 "Derivatives and Hedging," to the Notes to Consolidated Condensed Financial Statements included in Part I, Item 1, of this Form 10-Q, which is incorporated herein by this reference. As part of the Company's risk management procedure, a sensitivity analysis model is used to measure the potential loss in future earnings of market-sensitive instruments resulting from one or more selected hypothetical changes in interest rates or foreign currency values. The sensitivity analysis model quantifies the estimated potential effect of unfavorable movements of 10% in foreign currencies to which the Company was exposed atJune 30, 2020 through its foreign currency forward contracts. AtJune 30, 2020 , the estimated maximum loss from the Company's foreign currency forward contracts, calculated using the sensitivity analysis model described above, was$18.7 million . The Company believes that such a hypothetical loss from its foreign currency forward contracts would be partially offset by increases in the value of the underlying transactions being hedged. The sensitivity analysis model is a risk analysis tool and does not purport to represent actual losses in earnings that will be incurred by the Company, nor does it consider the potential effect of favorable changes in market rates. It also does not represent the maximum possible loss that may occur. Actual future gains and losses will differ from those estimated because of changes or differences in market rates and interrelationships, hedging instruments and hedge percentages, timing and other factors. Interest Rate Fluctuations The Company is exposed to interest rate risk from its credit facilities and long-term borrowing commitments. Outstanding borrowings under these credit facilities and long-term borrowing commitments accrue interest as described in Note 6 "Financing Arrangements" to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1, and in "Liquidity and Capital Resources" in Part I, Item 2 of this Form 10-Q. The Company's long-term borrowing commitments are subject to interest rate fluctuations, which could be material to the Company's cash flows and results of operations. In order to mitigate this risk, the Company enters into interest rate hedges as part of its interest rate risk management strategy. Information about the Company's interest rate hedges is provided in Note 17 "Derivatives and Hedging" to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q. In order to determine the impact of unfavorable changes in interest rates on the Company's cash flows and result of operations, the Company performed a sensitivity analysis as part of its risk management procedures. The 55 -------------------------------------------------------------------------------- sensitivity analysis quantified that the incremental expense incurred by a 10% increase in interest rates would be$1.4 million over the 12-month period ending onJune 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 ofJune 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 ofJune 30, 2020 . Changes in Internal Control over Financial Reporting. During the quarter endedJune 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. 56
--------------------------------------------------------------------------------
© Edgar Online, source
