UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|
| | | | |
| ☒ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 31, 20202021
OR
|
| | | | |
| ☐ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission file number 001-10962
| | | | | | | | |
| | |
| | |
| Callaway Golf Company |
| (Exact name of registrant as specified in its charter) |
| | |
Delaware | | 95-3797580 | | | | | | |
Delaware | | 95-3797580 |
| (State or other jurisdiction of
incorporation or organization)
| | (I.R.S. Employer
Identification No.)
|
2180 Rutherford Road,, Carlsbad,, CA92008
(760) (760) 931-1771
(Address, including zip code, and telephone number, including area code, of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
|
| | | | | | | |
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on which Registered |
| Common Stock, $0.01 par value per share | ELY | The New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
|
| | | | | | | | | | |
| Large accelerated filer | ☒ | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý
As of March 31, 2020,2021, the number of shares outstanding of the Registrant’s common stock was 94,107,978.
Important Notice to Investors Regarding Forward-Looking Statements: This report contains "forward-looking statements" as defined under the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as: "may," "should," "will," "could," "would," "anticipate," "plan," "believe," "project," "estimate," "expect," "strategy," "future," "likely," and similar references to future periods. Forward-looking statements include, among others, statements that relate to future plans, events, liquidity, financial results, performance, prospects or growth and scale opportunities including, but not limited to, statements relating to future industry and market conditions, the impact of the COVID-19 pandemic on the Company’sCompany's business, results of operations and financial condition and the impact of any measures taken to mitigate the effect of the COVID-19 pandemic, the benefits of the merger with Topgolf International, Inc. (“Topgolf”), including the anticipated operations, financial position, liquidity, performance, prospects or growth and scale opportunities of Callaway, Topgolf or the combined company, any statements regarding the strength of the Company’sCompany's brands, product lines and e-commerce business, geographic diversity, market recovery, availability of capital under the Company’sCompany's credit facilities, the capital markets or other sources, the Company’sCompany's conservation and cost reduction efforts, future stock repurchases, cash flows and liquidity, compliance with debt covenants, estimated unrecognized stock compensation expense, projected capital expenditures and depreciation and amortization expense, future contractual obligations, the realization of deferred tax assets, including loss and credit carryforwards, future income tax expense, the future impact of new accounting standards, the integration of the JW Stargazer Holding GmbH ("Jack Wolfskin") acquisition, and the related financial impact of the future business and prospects of the Company, TravisMathew, LLC ("TravisMathew"), OGIO International, Inc. ("OGIO") and, Jack Wolfskin and the impact of the 2017 Tax Cuts and Jobs Act (the "Tax Act"), which includes a broad range of provisions that could have a material impact on the Company's tax provision in future periods.Topgolf. These statements are based upon current information and the Company's current beliefs, expectations and assumptions regarding the future of the Company's business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of the Company's control. As a result of these uncertainties and because the information on which these forward-looking statements is based may ultimately prove to be incorrect, actual results may differ materially from those anticipated. Important factors that could cause actual results to differ include, among others, the following:
•certain risks and uncertainties, including changes in capital marketmarkets or economic conditions, particularly the uncertainty related to the duration and impact of the COVID-19 pandemic, and related decreases in consumer demand and spending;
•the impact of the COVID-19 pandemic and other potential future outbreaks of infectious diseases or other health concerns, and measures taken to limit their impact, which could adversely affect the Company’s business, consumer demand and supply chain, and the global economy;
•disruptions to business operations whether from COVID-19-related travel restrictions, mandated quarantines or voluntary “social distancing” that affects employees, customers and suppliers, production delays, closures of manufacturing facilities, retail locations, warehouses and supply and distribution chains, and staffing shortages as a result of remote working requirements or otherwise;
a material impact on•costs, expenses or difficulties related to the Company's tax provision as a resultmerger with Topgolf, including the integration of the Tax Act;Topgolf business, or the failure to realize the expected benefits and synergies of the Topgolf merger in the expected timeframes or at all;
•the potential impact of the merger on relationships with the Company’s and/or Topgolf’s employees, customers, suppliers and other business partners;
•consumer acceptance of and demand for the Company’s products;
•future retailer purchasing activity, which can be significantly affected by adverse industry conditions and overall retail inventory levels;
•any unfavorable changes in U.S. trade tax or other policies, including restrictions on imports or an increase in import tariffs;
•the level of promotional activity in the marketplace;
•future consumer discretionary purchasing activity, which can be significantly adversely affected by unfavorable economic or market conditions;
•future changes in foreign currency exchange rates and the degree of effectiveness of the Company’s hedging programs;
•the ability of the Company to manage international business risks;
•the Company's ability to recognize operational synergies and scale opportunities across its supply chain and global business platform;
•the costs and disruption associated with activist investors;
•significant developments stemming from the U.K.’s withdrawal from the European Union, which could have a material adverse effect on the Company;
•adverse changes in the credit markets or continued compliance with the terms of the Company’s credit facilities;
•the Company's ability to monetize its investments;
•the Company's ability to successfully integrate, operate and expand the retail stores of the acquired TravisMathew and Jack Wolfskin businesses;
•delays, difficulties or increased costs in the supply of components needed to manufacture the Company’s products or in manufacturing the Company’s products, including the Company's dependence on a limited number of suppliers for some of its products;
•adverse weather conditions and seasonality;
•any rule changes or other actions taken by the USGAUnited States Golf Association or other golf association that could have an adverse impact upon demand or supply of the Company’s products;
•the ability of the Company to protect its intellectual property rights;
•a decrease in participation levels in golf;
•the effect of terrorist activity, armed conflict, natural disasters or pandemic diseases, including without limitation the COVID-19 pandemic, on the economy generally, on the level of demand for the Company’s products or on the Company’s ability to manage its supply and delivery logistics in such an environment; and
•the general risks and uncertainties applicable to the Company and its business.
Investors should not place undue reliance on these forward-looking statements, which are based on current information and speak only as of the date hereof. The Company undertakes no obligation to update any forward-looking statements to reflect new information or events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Additionally, the risks, uncertainties and other factors set forth above or otherwise referred to in the reports that the Company has filed with the Securities and Exchange Commission may be further amplified by the global impact of the COVID-19 pandemic. Investors should also be aware that while the Company from time to time does communicate with securities analysts, it is against the Company’s policy to disclose to them any material non-public information or other confidential commercial information. Furthermore, the Company has a policy against distributing or confirming financial forecasts or projections issued by analysts and any reports issued by such analysts are not the responsibility of the Company. Investors should not assume that the Company agrees with any report issued by any analyst or with any statements, projections, forecasts or opinions contained in any such report. For details concerning these and other risks and uncertainties, see Part I, Item IA, “Risk Factors” contained in the Company's most recent Annual Report on Form 10-K, as well as the Company’s quarterly reports on Form 10-Q and current reports on Form 8-K subsequently filed with the Securities and Exchange Commission from time to time.
Callaway Golf Company Trademarks: The following marks and phrases, among others, are trademarks of the Company:
Alpha Convoy, Apex, Apex DCB, Apex Tour, APW, Aqua Dry, Arm Lock, Backstryke, Big Bertha, Big Bertha B21, Big Bertha REVA, Big T, Bird of Prey, Black Series, Bounty Hunter, C Grind, Callaway, Callaway Capital, Callaway Golf, Callaway Media Productions, Callaway Super Hybrid, Callaway X, Capital, Chev, Chev 18, Chevron Device, Chrome Soft, Chrome Soft X, Cirrus, Comfort Tech, CUATER, Cuater C logo, Cup 360, CXR, 360 Face Cup, D.A.R.T., Dawn Patrol, Demonstrably Superior And Pleasingly Different, Divine, Double Wide, Eagle, Engage, Epic, Epic Flash, Epic Max, Epic Max LS, Epic Speed, ERC, ERC Soft, Everyone’s Game, Exo, Cage, Fast Tech Mantle, Flash Face Technology, Flash Face SS21, FT Optiforce, FT Performance, FT Tour, Fusion, Fusion Zero, GBB, GBB Epic, Gems, Gravity Core, Great Big Bertha, Great Big Bertha Epic, Grom, Groove, In,Groove- In- Groove Technology, Heavenwood, Hersatility, Hex Aerodynamics, Hex Chrome, HX, Hyper Dry, Hyper-Lite, Hyper Speed Face, Innovate or Die, Ion-X,I.D. Ball, Jack Wolfskin, Jailbird, Jailbreak, Jailbreak AI Speed Frame, Jailbreak AI Velocity Blades, JAWS MD5, Jewel Jam, Kings of Distance, Legacy, Life On Tour, Longer From Everywhere, Luxe, Mack Daddy, Magna, Majestic, MarXman, Mavrik, MD3 Milled, MD4 Tactical, MD5, MD 5 Jaws, Metal-X, Microhinge Face Insert, Microhinge Star, Mission:Ambition, Nanuk, NipIt, Number One Putter in Golf, O OGIO, O Works, Odyssey, Odyssey Works, Offset Groove in Groove, Ogio, OGIO ALPHA, OGIO ARORA, OGIO CLUB, OGIO FORGE, OGIO ME, OGIO MY EXPRESSION, OGIO RENEGADE, OGIO SAVAGE, OGIO SHADOW, OGIO XIX, Opti Flex, Opti Grip, Opti Shield, Opti Therm, OptiFit, Opti Vent, ORG 7, ORG 14, ORG 15, Paw Print, PRESTIGE 7, ProType, ∙R∙𐤟R𐤟, Red Ball, R-Moto, Renegade, Rig 9800, Rossie, RSX, S2H2, Sabertooth, Shredder, Silencer, SLED, SoftFast, Solaire, Speed Regime, Speed Step, Steelhead XR, Steelhead, Strata, Stroke Lab, Stronomic, Sub Zero, Superhot, Supersoft, SureOut, TM, Tank, Tank Cruiser, Tech Series, Teron, Texapore, TMCA, Toe Up, Suite Suite, TopChallenge, TopChip , TopContender, TopDrive, TopGolf, TopGolf Crush, TopGolf Media, TopLife, TopPressure, TopScore, TopScramble, TopShot, TopTracer, TopTracer Range, Toulon, Toulon Garage, Tour Authentic, Tour Tested, Trade In! Trade Up!, TRAVISMATHEW, TravisMathew TM logo, Trionomer Cover, Truvis, Truvis Pattern, Tyro, udesign, Uptown, Versa, VFT, W Grind, Warbird, Weather Series, Wedgeducation, White Hot, White Hot OG, White Hot Tour, White Ice, World's Friendliest, X-12, X-14, X-16, X-18, X-20, X-22, X-24, X-ACT,XACT, X Face VFT, X Hot, X Hot Pro, X² Hot, X Series, XR, XR 16, XSPANN, Xtra Traction Technology, Xtra Width Technology, XTT, 2-Ball.
CALLAWAY GOLF COMPANY
INDEX
| | | | | | | | |
|
| | |
| Item 1. | | PART I. FINANCIAL INFORMATION5 |
| | |
Item 1. | | |
| | |
| | |
| | |
| | |
| | |
| | |
| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
|
|
| | |
| Item 1. | | |
| Item 1A. | | |
| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
| Item 5. | | |
| Item 6. | | |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(In thousands, except share data) | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 397,289 | | | $ | 366,119 | |
| Accounts receivable, net | 328,841 | | | 138,482 | |
| Inventories | 336,314 | | | 352,544 | |
| | | |
| Prepaid expenses | 43,785 | | | 20,318 | |
| Other current assets | 96,962 | | | 35,164 | |
| | | |
| Total current assets | 1,203,191 | | | 912,627 | |
| Property, plant and equipment, net | 1,192,278 | | | 146,495 | |
| Operating lease right-of-use assets, net | 1,041,395 | | | 194,776 | |
| Intangible assets, net | 1,557,875 | | | 484,339 | |
| Goodwill | 2,032,057 | | | 56,658 | |
| | | |
| Investment in golf-related venture | 7,250 | | | 111,442 | |
| Other assets | 74,511 | | | 74,263 | |
| Total assets | $ | 7,108,557 | | | $ | 1,980,600 | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 138,665 | | | $ | 92,792 | |
| Accrued expenses | 241,051 | | | 183,417 | |
| Accrued employee compensation and benefits | 87,658 | | | 30,937 | |
| Asset-based credit facilities | 15,279 | | | 22,130 | |
| | | |
| Operating lease liabilities, short-term | 51,510 | | | 29,579 | |
| Construction advances | 54,874 | | | 0 | |
| Deferred revenue | 70,946 | | | 2,546 | |
| | | |
| | | |
| | | |
| Other current liabilities | 36,356 | | | 29,871 | |
| Total current liabilities | 696,339 | | | 391,272 | |
| Long-term liabilities: | | | |
| Long-term debt (Note 7) | 1,174,990 | | | 650,564 | |
| Operating lease liabilities, long-term | 1,155,551 | | | 177,996 | |
| Deemed landlord financing, long-term | 221,618 | | | 0 | |
| Deferred taxes, net | 198,846 | | | 58,628 | |
| | | |
| | | |
| Other long-term liabilities | 48,394 | | | 26,496 | |
| Commitments and contingencies (Note 14) | 0 | | 0 |
| Shareholders’ equity: | | | |
| Preferred stock, $0.01 par value, 3,000,000 shares authorized, NaN issued and outstanding at March 31, 2021 and December 31, 2020 | 0 | | | 0 | |
Common stock, $0.01 par value, 240,000,000 shares authorized, 185,612,666 and 95,648,648 shares issued at March 31, 2021 and December 31, 2020, respectively | 1,856 | | | 956 | |
| Additional paid-in capital | 3,016,902 | | | 346,945 | |
| Retained earnings | 632,650 | | | 360,228 | |
| Accumulated other comprehensive loss | (17,446) | | | (6,546) | |
| Less: Common stock held in treasury, at cost, 940,743 and 1,446,408 shares at March 31, 2021 and December 31, 2020, respectively | (21,143) | | | (25,939) | |
| | | |
| | | |
| Total shareholders’ equity | 3,612,819 | | | 675,644 | |
| Total liabilities and shareholders’ equity | $ | 7,108,557 | | | $ | 1,980,600 | |
|
| | | | | | | |
| | March 31,
2020 | | December 31,
2019 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 166,635 |
| | $ | 106,666 |
|
| Accounts receivable, net | 259,530 |
| | 140,455 |
|
| Inventories | 412,690 |
| | 456,639 |
|
| Income taxes receivable | 21,048 |
| | 9,919 |
|
| Other current assets | 74,219 |
| | 75,671 |
|
| Total current assets | 934,122 |
| | 789,350 |
|
| Property, plant and equipment, net | 150,969 |
| | 132,760 |
|
| Operating lease right-of-use assets, net | 193,829 |
| | 160,098 |
|
| Intangible assets, net | 487,864 |
| | 493,423 |
|
| Goodwill | 200,787 |
| | 203,743 |
|
| Deferred taxes, net | 61,517 |
| | 73,948 |
|
| Investment in golf-related venture | 90,134 |
| | 90,134 |
|
| Other assets | 15,854 |
| | 17,092 |
|
| Total assets | $ | 2,135,076 |
| | $ | 1,960,548 |
|
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable and accrued expenses | $ | 224,282 |
| | $ | 276,300 |
|
| Accrued employee compensation and benefits | 29,438 |
| | 46,891 |
|
| Asset-based credit facilities | 335,593 |
| | 144,580 |
|
| Accrued warranty expense | 9,791 |
| | 9,636 |
|
| Operating lease liabilities, short-term | 28,544 |
| | 26,418 |
|
| Current portion of long-term debt | 8,734 |
| | 7,317 |
|
| Income taxes payable | 12,526 |
| | 12,104 |
|
| Total current liabilities | 648,908 |
| | 523,246 |
|
| Long-term liabilities: | | | |
| Operating lease liabilities, long-term | 175,954 |
| | 137,696 |
|
| Long-term debt (Note 6) | 453,774 |
| | 443,259 |
|
| Income tax liability | 7,156 |
| | 7,264 |
|
| Deferred taxes, net | 72,289 |
| | 73,483 |
|
| Other long-term liabilities | 17,028 |
| | 8,247 |
|
| Commitments and contingencies (Note 14) |
| |
|
| Shareholders’ equity: | | | |
| Preferred stock, $0.01 par value, 3,000,000 shares authorized, none issued and outstanding at March 31, 2020 and December 31, 2019 | — |
| | — |
|
Common stock, $0.01 par value, 240,000,000 shares authorized, 95,648,648 shares issued at both March 31, 2020 and December 31, 2019, respectively | 956 |
| | 956 |
|
| Additional paid-in capital | 307,133 |
| | 323,600 |
|
| Retained earnings | 517,004 |
| | 489,382 |
|
| Accumulated other comprehensive loss | (37,517 | ) | | (22,422 | ) |
| Less: Common stock held in treasury, at cost, 1,540,670 and 1,450,875 shares at March 31, 2020 and December 31, 2019, respectively | (27,609 | ) | | (24,163 | ) |
| Total Callaway Golf Company shareholders’ equity | 759,967 |
| | 767,353 |
|
| Total shareholders’ equity | 759,967 |
| | 767,353 |
|
| Total liabilities and shareholders’ equity | $ | 2,135,076 |
| | $ | 1,960,548 |
|
The accompanying notes are an integral part of these financial statements.
CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
| | | | | | | | | | | | | | | |
| | | | Three Months Ended
March 31, |
| | | | | | 2021 | | 2020 |
| Net revenues: | | | | | | | |
| Products | | | | | $ | 559,958 | | | $ | 442,276 | |
| Services | | | | | 91,663 | | | 0 | |
| Total net revenues | | | | | 651,621 | | | 442,276 | |
| Costs and expenses: | | | | | | | |
| Cost of products | | | | | 310,630 | | | 246,602 | |
| Cost of services, excluding depreciation and amortization | | | | | 10,985 | | | 0 | |
| Other venue expenses | | | | | 65,437 | | | 0 | |
| Selling, general and administrative expenses | | | | | 173,880 | | | 141,754 | |
| Research and development expense | | | | | 12,745 | | | 13,240 | |
| Venue pre-opening costs | | | | | 1,845 | | | 0 | |
| Total costs and expenses | | | | | 575,522 | | | 401,596 | |
| Income from operations | | | | | 76,099 | | | 40,680 | |
| Interest income | | | | | 54 | | | 99 | |
| Interest expense | | | | | (17,511) | | | (9,214) | |
| | | | | | | |
| Gain on Topgolf investment | | | | | 252,531 | | | 0 | |
| Other income, net | | | | | 9,031 | | | 6,480 | |
| Income before income taxes | | | | | 320,204 | | | 38,045 | |
| Income tax provision | | | | | 47,743 | | | 9,151 | |
| Net income | | | | | $ | 272,461 | | | $ | 28,894 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Earnings per common share: | | | | | | | |
| Basic | | | | | $ | 2.32 | | | $ | 0.31 | |
| Diluted | | | | | $ | 2.19 | | | $ | 0.30 | |
| Weighted-average common shares outstanding: | | | | | | | |
| Basic | | | | | 117,482 | | | 94,309 | |
| Diluted | | | | | 124,570 | | | 95,676 | |
| | | | | | | |
| | | | | | | |
|
| | | | | | | |
| | Three Months Ended
March 31, |
| | 2020 | | 2019 |
| Net sales | $ | 442,276 |
| | $ | 516,197 |
|
| Cost of sales | 246,602 |
| | 277,764 |
|
| Gross profit | 195,674 |
| | 238,433 |
|
| Operating expenses: | | | |
| Selling expense | 111,061 |
| | 119,321 |
|
| General and administrative expense | 30,693 |
| | 36,938 |
|
| Research and development expense | 13,240 |
| | 12,538 |
|
| Total operating expenses | 154,994 |
| | 168,797 |
|
| Income from operations | 40,680 |
| | 69,636 |
|
| Interest income | 99 |
| | 189 |
|
| Interest expense | (9,214 | ) | | (9,828 | ) |
| Other income (expense), net | 6,480 |
| | (1,940 | ) |
| Income before income taxes | 38,045 |
| | 58,057 |
|
| Income tax provision | 9,151 |
| | 9,556 |
|
| Net income | 28,894 |
| | 48,501 |
|
| Less: Net loss attributable to non-controlling interest | — |
| | (146 | ) |
| Net income attributable to Callaway Golf Company | $ | 28,894 |
| | $ | 48,647 |
|
| | | | |
| Earnings per common share: | | | |
| Basic | $ | 0.31 |
| | $ | 0.51 |
|
| Diluted | $ | 0.30 |
| | $ | 0.50 |
|
| Weighted-average common shares outstanding: | | | |
| Basic | 94,309 |
| | 94,684 |
|
| Diluted | 95,676 |
| | 96,419 |
|
The accompanying notes are an integral part of these financial statements.
CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
| | | | | | | | | | | | | | | |
| | | | Three Months Ended
March 31, |
| | | | | | 2021 | | 2020 |
| Net income | | | | | $ | 272,461 | | | $ | 28,894 | |
| Other comprehensive income: | | | | | | | |
| Change in derivative instruments | | | | | 6,314 | | | (589) | |
| Foreign currency translation adjustments | | | | | (16,243) | | | (14,936) | |
| Comprehensive income, before income tax on other comprehensive income items | | | | | 262,532 | | | 13,369 | |
| Income tax provision (benefit) on derivative instruments | | | | | 971 | | | (430) | |
| Comprehensive income | | | | | $ | 261,561 | | | $ | 13,799 | |
| | | | | | | |
| | | | | | | |
|
| | | | | | | |
| | Three Months Ended
March 31, |
| | 2020 | | 2019 |
| Net income | $ | 28,894 |
| | $ | 48,501 |
|
| Other comprehensive income: | | | |
| Change in derivative instruments | (589 | ) | | (3,174 | ) |
| Foreign currency translation adjustments | (14,936 | ) | | (2,978 | ) |
| Comprehensive income, before income tax on other comprehensive income items | 13,369 |
| | 42,349 |
|
| Income tax benefit (provision) on derivative instruments | 430 |
| | (428 | ) |
| Comprehensive income | 13,799 |
| | 41,921 |
|
| Less: Comprehensive loss attributable to non-controlling interests | — |
| | (108 | ) |
| Comprehensive income attributable to Callaway Golf Company | $ | 13,799 |
| | $ | 42,029 |
|
The accompanying notes are an integral part of these financial statements.
CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands) | | | | | | | | | | | |
| | Three Months Ended
March 31, |
| | 2021 | | 2020 |
| Cash flows from operating activities: | | | |
| Net income | $ | 272,461 | | | $ | 28,894 | |
| Adjustments to reconcile net income to net cash used in operating activities: | | | |
| Depreciation and amortization | 20,272 | | | 8,997 | |
| Lease amortization expense | 10,784 | | | 8,517 | |
| Amortization of debt issuance costs | 1,199 | | | 835 | |
| Debt discount amortization | 2,866 | | | 0 | |
| | | |
| | | |
| Deferred taxes, net | 46,401 | | | 12,409 | |
| Non-cash share-based compensation | 4,609 | | | 1,861 | |
| Loss on disposal of long-lived assets | 0 | | | 51 | |
| Gain on Topgolf investment | (252,531) | | | 0 | |
| Unrealized net (gains) losses on hedging instruments and foreign currency | (6,146) | | | 767 | |
| | | |
| | | |
| Acquisition costs | (15,755) | | | 0 | |
| | | |
| Change in assets and liabilities, net of effect from acquisitions: | | | |
| Accounts receivable, net | (183,835) | | | (120,075) | |
| Inventories | 25,415 | | | 36,982 | |
| Leasing Receivables | (2,903) | | | 0 | |
| Other assets | (18,988) | | | 19,349 | |
| Accounts payable and accrued expenses | 6,091 | | | (58,288) | |
| Deferred Revenue | 3,921 | | | 151 | |
| Accrued employee compensation and benefits | 17,573 | | | (16,680) | |
| | | |
| Change in operating leases, net | (9,245) | | | (7,041) | |
| Income taxes receivable/payable, net | (2,649) | | | (11,356) | |
| Other liabilities | 1,844 | | | 945 | |
| | | |
| | | |
| Net cash used in operating activities | (78,616) | | | (93,682) | |
| Cash flows from investing activities: | | | |
| Capital expenditures | (28,821) | | | (16,953) | |
| | | |
| | | |
| Cash acquired in merger | 171,294 | | | 0 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Net cash provided by (used in) investing activities | 142,473 | | | (16,953) | |
| Cash flows from financing activities: | | | |
| | | |
| Proceeds from issuance of long-term debt | 0 | | | 9,766 | |
| | | |
| Debt issuance cost | (5,441) | | | 0 | |
| (Repayments of) proceeds from credit facilities, net | (6,851) | | | 191,013 | |
| Repayments of long-term debt | (5,267) | | | (3,143) | |
| Payment on contingent earn-out obligation | (3,577) | | | 0 | |
| Repayments of financing leases | (95) | | | (109) | |
| Proceeds from lease financing | 3,127 | | | 0 | |
| Exercise of stock options | 257 | | | 130 | |
| Dividends paid | (3) | | | (949) | |
| Acquisition of treasury stock | (12,501) | | | (21,938) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Net cash (used in) provided by financing activities | (30,351) | | | 174,770 | |
| Effect of exchange rate changes on cash and cash equivalents | (2,336) | | | (4,166) | |
| Net increase in cash and cash equivalents | 31,170 | | | 59,969 | |
| Cash and cash equivalents at beginning of period | 366,119 | | | 106,666 | |
| Cash and cash equivalents at end of period | $ | 397,289 | | | $ | 166,635 | |
| Supplemental disclosures: | | | |
| Cash paid for income taxes, net | $ | 3,145 | | | $ | 3,983 | |
| Cash paid for interest and fees | $ | 15,449 | | | $ | 7,165 | |
| Non-cash investing and financing activities: | | | |
| | | |
| | | |
| | | |
| Issuance of treasury stock and common stock for compensatory stock awards released from restriction | $ | 16,565 | | | $ | 18,129 | |
| | | |
| Accrued capital expenditures at period-end | $ | 14,402 | | | $ | 4,055 | |
| Financed additions of capital expenditures | $ | 9,827 | | | $ | 0 | |
| Issuance of common stock in Topgolf merger | $ | 2,650,201 | | | $ | 0 | |
|
| | | | | | | |
| | Three Months Ended
March 31, |
| | 2020 | | 2019 |
| Cash flows from operating activities: | | | |
| Net income | $ | 28,894 |
| | $ | 48,501 |
|
| Adjustments to reconcile net income to net cash used in operating activities: | | | |
| Depreciation and amortization | 8,997 |
| | 7,977 |
|
| Lease amortization expense | 8,517 |
| | 9,154 |
|
| Amortization of debt issuance costs | 835 |
| | 647 |
|
| Inventory step-up from acquisition | — |
| | 5,367 |
|
| Deferred taxes, net | 12,409 |
| | 4,005 |
|
| Non-cash share-based compensation | 1,861 |
| | 3,435 |
|
| Loss on disposal of long-lived assets | 51 |
| | 75 |
|
| Unrealized net (gains) losses on hedging instruments | 767 |
| | (478 | ) |
| Change in assets and liabilities, net of effect from acquisitions: | | | |
| Accounts receivable, net | (120,075 | ) | | (187,577 | ) |
| Inventories | 36,982 |
| | 42,173 |
|
| Other assets | 19,349 |
| | (2,962 | ) |
| Accounts payable and accrued expenses | (58,137 | ) | | (22,730 | ) |
| Accrued employee compensation and benefits | (16,680 | ) | | (14,983 | ) |
| Accrued warranty expense | 155 |
| | 966 |
|
| Change in operating leases, net | (7,041 | ) | | (8,714 | ) |
| Income taxes receivable/payable, net | (11,356 | ) | | (4,468 | ) |
| Other liabilities | 790 |
| | (992 | ) |
| Net cash used in operating activities | (93,682 | ) | | (120,604 | ) |
| Cash flows from investing activities: | | | |
| Capital expenditures | (16,953 | ) | | (11,304 | ) |
| Acquisition, net of cash acquired | — |
| | (463,105 | ) |
| Proceeds from sales of property and equipment | — |
| | 15 |
|
| Net cash used in investing activities | (16,953 | ) | | (474,394 | ) |
| Cash flows from financing activities: | | | |
| Proceeds from credit facilities, net | 191,013 |
| | 174,182 |
|
| Proceeds from issuance of long-term debt | 9,766 |
| | 480,000 |
|
| Repayments of long-term debt | (3,143 | ) | | (1,760 | ) |
| Debt issuance cost | — |
| | (18,129 | ) |
| Principal payments on finance leases | (109 | ) | | (114 | ) |
| Acquisition of treasury stock | (21,938 | ) | | (27,377 | ) |
| Dividends paid, net | (949 | ) | | (953 | ) |
| Exercise of stock options | 130 |
| | — |
|
| Net cash provided by financing activities | 174,770 |
| | 605,849 |
|
| Effect of exchange rate changes on cash and cash equivalents | (4,166 | ) | | 4,107 |
|
| Net increase in cash and cash equivalents | 59,969 |
| | 14,958 |
|
| Cash and cash equivalents at beginning of period | 106,666 |
| | 63,981 |
|
| Cash and cash equivalents at end of period | $ | 166,635 |
| | $ | 78,939 |
|
| Supplemental disclosures: | | | |
| Cash paid for income taxes, net | $ | 3,983 |
| | $ | 3,259 |
|
| Cash paid for interest and fees | $ | 7,165 |
| | $ | 5,042 |
|
| Non-cash investing and financing activities: | | | |
| Issuance of treasury stock and common stock for compensatory stock awards released from restriction | $ | 18,129 |
| | $ | 18,467 |
|
| Accrued capital expenditures at period-end | $ | 4,055 |
| | $ | 1,178 |
|
The accompanying notes are an integral part of these financial statements.
CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Shareholders' Equity Callaway Golf Company | | | | |
| | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Total Callaway Golf Company Shareholders' Equity | | Non- Controlling Interest | | |
|
| | Shares | | Amount | | | | | Shares | | Amount | | | | Total |
| Balance, December 31, 2018 | 95,649 |
| | $ | 956 |
| | $ | 341,241 |
| | $ | 413,799 |
| | | $ | (13,700 | ) | | | (1,138 | ) | | $ | (17,722 | ) | | | $ | 724,574 |
| | | $ | 9,734 |
| | $ | 734,308 |
|
| Acquisition of treasury stock | — |
| | — |
| | — |
| | — |
| | | — |
| | | (1,654 | ) | | (27,377 | ) | | | (27,377 | ) | | | — |
| | (27,377 | ) |
| Compensatory awards released from restriction | — |
| | — |
| | (18,467 | ) | | — |
| | | — |
| | | 803 |
| | 18,467 |
| | | — |
| | | — |
| | — |
|
| Share-based compensation | — |
| | — |
| | 3,435 |
| | — |
| | | — |
| | | — |
| | — |
| | | 3,435 |
| | | — |
| | 3,435 |
|
| Stock dividends | | | — |
| | — |
| | (37 | ) | | | — |
| | | 385 |
| | 37 |
| | | — |
| | | — |
| | — |
|
| Cash dividends ($0.01 per share) | — |
| | — |
| | — |
| | (953 | ) | | | — |
| | | — |
| | — |
| | | (953 | ) | | | — |
| | (953 | ) |
| Equity adjustment from foreign currency translation | — |
| | — |
| | — |
| | — |
| | | (2,870 | ) | | |
|
| | — |
| | | (2,870 | ) | | | (108 | ) | | (2,978 | ) |
| Change in fair value of derivative instruments | — |
| | — |
| | — |
| | — |
| | | (3,602 | ) | | | — |
| | — |
| | | (3,602 | ) | | | — |
| | (3,602 | ) |
| Net Income | — |
| | — |
| | — |
| | 48,647 |
| | | — |
| | |
|
| | — |
| | | 48,647 |
| | | (146 | ) | | 48,501 |
|
| Balance, March 31, 2019 | 95,649 |
| | $ | 956 |
| | $ | 326,209 |
| | $ | 461,456 |
| | | $ | (20,172 | ) | | | (1,604 | ) | | $ | (26,595 | ) | | | $ | 741,854 |
| | | $ | 9,480 |
| | $ | 751,334 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Shareholders' Equity Callaway Golf Company |
| | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Total Callaway Golf Company Shareholders' Equity |
| | Shares | | Amount | | | | | Shares | | Amount | |
| Balance at December 31, 2019 | 95,649 |
| | $ | 956 |
| | $ | 323,600 |
| | $ | 489,382 |
| | | $ | (22,422 | ) | | | (1,451 | ) | | $ | (24,163 | ) | | | $ | 767,353 |
| |
| Adoption of accounting standard | — |
| | — |
| | — |
| | (289 | ) | | | — |
| | | — |
| | — |
| | | (289 | ) | |
| Acquisition of treasury stock | — |
| | — |
| | — |
| | — |
| | | — |
| | | (1,167 | ) | | (21,938 | ) | | | (21,938 | ) | |
| Exercise of stock options | — |
| | — |
| | (203 | ) | | — |
| | | — |
| | | 20 |
| | 333 |
| | | 130 |
| |
| Compensatory awards released from restriction | — |
| | — |
| | (18,129 | ) | | — |
| | | — |
| | | 1,055 |
| | 18,129 |
| | | — |
| |
| Share-based compensation | — |
| | — |
| | 1,861 |
| | — |
| | | — |
| | | — |
| | — |
| | | 1,861 |
| |
| Stock dividends | — |
| | — |
| | 4 |
| | (34 | ) | | | — |
| | | 2 |
| | 30 |
| | | — |
| |
| Cash dividends ($0.01 per share) | — |
| | — |
| | — |
| | (949 | ) | | | — |
| | | — |
| | — |
| | | (949 | ) | |
| Equity adjustment from foreign currency translation | — |
| | — |
| | — |
| | — |
| | | (14,936 | ) | | | — |
| | — |
| | | (14,936 | ) | |
| Change in fair value of derivative instruments, net of tax | — |
| | — |
| | — |
| | — |
| | | (159 | ) | | | — |
| | — |
| | | (159 | ) | |
| Net income | — |
| | — |
| | — |
| | 28,894 |
| | | — |
| | | — |
| | — |
| | | 28,894 |
| |
| Balance at March 31, 2020 | 95,649 |
| | $ | 956 |
| | $ | 307,133 |
| | $ | 517,004 |
| | | $ | (37,517 | ) | | | (1,541 | ) | | $ | (27,609 | ) | | | $ | 759,967 |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | |
| | Common Stock | | Additional
Paid-in
Capital | | Retained
Earnings | | Accumulated
Other
Comprehensive
Loss | | Treasury Stock | | Total Shareholders' Equity | | | | |
| | Shares | | Amount | | | | | Shares | | Amount | | | | |
| Balance at December 31, 2020 | 95,649 | | | $ | 956 | | | $ | 346,945 | | | $ | 360,228 | | | | $ | (6,546) | | | | (1,446) | | | $ | (25,939) | | | | $ | 675,644 | | | | | | |
| Common stock issued in Topgolf merger | 89,776 | | | 898 | | | 2,649,303 | | | — | | | | — | | | | — | | | — | | | | 2,650,201 | | | | | | |
| Fair value of replacement awards converted in Topgolf merger | — | | | — | | | 33,051 | | | — | | | | — | | | | — | | | — | | | | 33,051 | | | | | | |
| Common stock issued for replacement restricted stock awards | 188 | | | 2 | | | (2) | | | — | | | | — | | | | — | | | — | | | | 0 | | | | | | |
| Acquisition of treasury stock | — | | | — | | | — | | | — | | | | — | | | | (400) | | | (12,501) | | | | (12,501) | | | | | | |
| Exercise of stock options | — | | | — | | | (452) | | | — | | | | — | | | | 40 | | | 709 | | | | 257 | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Compensatory awards released from restriction | — | | | — | | | (16,565) | | | — | | | | — | | | | 864 | | | 16,565 | | | | 0 | | | | | | |
| Share-based compensation | — | | | — | | | 4,609 | | | — | | | | — | | | | — | | | — | | | | 4,609 | | | | | | |
| Stock dividends | — | | | — | | | 13 | | | (36) | | | | — | | | | 1 | | | 23 | | | | 0 | | | | | | |
| Cash dividends ($0.01 per share) | — | | | — | | | — | | | (3) | | | | — | | | | — | | | — | | | | (3) | | | | | | |
| Equity adjustment from foreign currency translation | — | | | — | | | — | | | — | | | | (16,243) | | | | — | | | — | | | | (16,243) | | | | | | |
| Change in fair value of derivative instruments, net of tax | — | | | — | | | — | | | — | | | | 5,343 | | | | — | | | — | | | | 5,343 | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Net Income | — | | | — | | | — | | | 272,461 | | | | — | | | | — | | | — | | | | 272,461 | | | | | | |
| Balance at March 31, 2021 | 185,613 | | | $ | 1,856 | | | $ | 3,016,902 | | | $ | 632,650 | | | | $ | (17,446) | | | | (941) | | | $ | (21,143) | | | | $ | 3,612,819 | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | Common Stock | | Additional
Paid-in
Capital | | Retained
Earnings | | Accumulated
Other
Comprehensive
Loss | | Treasury Stock | | Total Shareholders' Equity | | | | |
| | Shares | | Amount | | | | | Shares | | Amount | | | | |
| Balance, December 31, 2019 | 95,649 | | | $ | 956 | | | $ | 323,600 | | | $ | 489,382 | | | | $ | (22,422) | | | | (1,451) | | | $ | (24,163) | | | | $ | 767,353 | | | | | | |
| Adoption of accounting standard ASU Topic 326 (Note 5) | — | | | — | | | — | | | (289) | | | | — | | | | — | | | — | | | | (289) | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Acquisition of treasury stock | — | | | — | | | — | | | — | | | | — | | | | (1,167) | | | (21,938) | | | | (21,938) | | | | | | |
| Exercise of stock options | — | | | — | | | (203) | | | — | | | | — | | | | 20 | | | 333 | | | | 130 | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Compensatory awards released from restriction | — | | | — | | | (18,129) | | | — | | | | — | | | | 1,055 | | | 18,129 | | | | 0 | | | | | | |
| Share-based compensation | — | | | — | | | 1,861 | | | — | | | | — | | | | — | | | — | | | | 1,861 | | | | | | |
| Stock dividends | 0 | | — | | | 4 | | | (34) | | | | — | | | | 2 | | | 30 | | | | 0 | | | | | | |
| Cash dividends ($0.01 per share) | — | | | — | | | — | | | (949) | | | | — | | | | — | | | — | | | | (949) | | | | | | |
| Equity adjustment from foreign currency translation | — | | | — | | | — | | | — | | | | (14,936) | | | | — | | | — | | | | (14,936) | | | | | | |
| Change in fair value of derivative instruments, net of tax | — | | | — | | | — | | | — | | | | (159) | | | | — | | | — | | | | (159) | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Net Income | — | | | — | | | — | | | 28,894 | | | | — | | | | — | | | — | | | | 28,894 | | | | | | |
| Balance, March 31, 2020 | 95,649 | | | $ | 956 | | | $ | 307,133 | | | $ | 517,004 | | | | $ | (37,517) | | | | (1,541) | | | $ | (27,609) | | | | $ | 759,967 | | | | | | |
The accompanying notes are an integral part of these financial statements.
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited consolidated condensed financial statements have been prepared by Callaway Golf Company (the “Company” or “Callaway Golf”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “Commission”). Accordingly, certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20192020 filed with the Commission. These consolidated condensed financial statements, in the opinion of management, include all the normal and recurring adjustments necessary for the fair presentation of the financial position, results of operations and cash flows for the periods and dates presented. Interim operating results are not necessarily indicative of operating results for the full year.
On March 8, 2021, the Company completed the merger with Topgolf International, Inc. ("Topgolf") and has included the results of operations of Topgolf in it's consolidated condensed statement of operations from that date forward. The Company’s Topgolf subsidiary operates on a 52- or 53-week fiscal year ending on the Sunday closest to December 31. As such, the Topgolf financial information included in the Company’s condensed consolidated financial statements for the quarter ended March 31, 2021, is for the period beginning March 8, 2021 (merger date) through April 4, 2021. Additionally, based on the Company's assessment of the combined business, the Company modified the presentation of its consolidated condensed statement of operations for the three months ended March 31, 2021 and 2020. For further information about the merger with Topgolf, see Note 6. In connection with the merger, the Company reassessed its operating segments by evaluating its global business platform, including its management structure after the addition of Topgolf, and determined that as of March 31, 2021, the Company has 3 operating segments, namely, Golf Equipment, Apparel, Gear and Other, and Topgolf. For further information about the Company's operating segments, see Note 19.
Note 2. Summary of Significant Accounting Policies
The following reflects updates to the Company’s significant accounting policies disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Commission.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Examples of such estimates include determining the nature and timing of satisfaction of performance obligations as it relates to revenue recognition, the valuation of share-based awards, recoverability of long-lived assets, assessing intangible assets and goodwill for impairment, determining the incremental borrowing rate for operating leases, in addition to provisions for warranty, uncollectible accounts receivable, inventory obsolescence, sales returns, future price concessions and tax contingencies and estimates related to the Tax Act enacted in December 2017, and estimates on the valuation of share-based awards and recoverability of long-lived assets and investments.allowances. Actual results may materially differ from these estimates. On an ongoing basis, the Company reviews its estimates to ensure that these estimates appropriately reflect changes in its business or as new information becomes available.
Recent Accounting Standards
In December 2019,August 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2020-06, "Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity." This ASU simplifies the accounting for convertible instruments by removing the separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature. As a result, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost. These
changes will reduce reported interest expense and increase reported net income for entities that have issued a convertible instrument that was bifurcated according to previously existing rules. Also, this ASU requires the application of the if-converted method for calculating diluted earnings per share and the treasury stock method will be no longer available. The new guidance is effective for fiscal years beginning after December 15, 2021, with early adoption permitted no earlier than fiscal years beginning after December 15, 2020. Entities may adopt the guidance through either a modified retrospective method of transition or a fully retrospective method of transition. In applying the modified retrospective method, entities should apply the guidance to transactions outstanding as of the beginning of the fiscal year in which the amendments are adopted. The Company completed a preliminary assessment of this ASU, and it anticipates adopting the modified retrospective approach, which will result in a significant increase in its dilutive share-count as the result of calculating the impact of dilution from its convertible notes using the if-converted method. The Company also anticipates a decrease in interest expense resulting from the elimination of the original issuance discount. Under the modified retrospective approach, the Company anticipates recognizing the difference between the removal of the equity component of the convertible notes and the unamortized original issuance discount as an adjustment to beginning retained earnings when it adopts this new standard on January 1, 2022.
Adoption of New Accounting Standards
The Company adopted ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." This ASU provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Inter-bank Offered Rate ("LIBOR") or another reference rate expected to be discontinued. The Company has elected to apply the hedge accounting expedients related to the probability and the assessments of effectiveness of LIBOR-indexed cash flow hedges upon a change in the critical terms of the derivative or the hedged transactions, and upon the end of relief under Topic 848. The Company has elected to continue the method of assessing effectiveness as documented in the original hedge documentation and elects to apply the expedient in ASC 848-50-35-17 (through 35-18) which allows the reference rate on the hypothetical derivative to match the reference rate on the hedging instrument. The adoption of this ASU did not have a material impact on the Company's consolidated financial statements and disclosures.
The Company adopted ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." This ASU removes specific exceptions to the general principles in Accounting Standards Codification ("ASC") Topic 740, "Accounting for Income Taxes" ("Topic 740") and simplifies certain U.S. GAAP requirements. ASU 2019-12 is effective for public filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. The Company is currently evaluating the impact this ASU will have on its consolidated condensed financial statements and disclosures.
Adoption of New Accounting Standards
On January 1, 2020, the Company adopted ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" ("Topic 326") utilizing the modified retrospective approach. This new standard is intended to improve financial reporting by requiring timelier recording of credit losses on the Company's trade account receivable and requires the measurement of all expected credit losses based on historical experience, current conditions, and reasonable and supportable forecasts. Upon the completion of the Company's assessment of Topic 326, the Company concluded that its prior methodology of estimating credit losses on its trade accounts receivable closely aligns with the requirements of the new standard, and therefore, the adoption of this ASU did not have a material impact on the Company consolidated condensed financial statements. For further information, see Note 4 . Upon adoption of Topic 326, the Company recorded a cumulative adjustment to beginning retained earnings of $289,000, which reflected an increase to the allowance for doubtful accounts. As the impact to the Company's consolidated condensed financial statements in the first quarter of 2020 was not material, prior period information that is presented for comparative purposes has not been restated and continues to be reported under the accounting standards that were in effect during those periods.
On January 1, 2020, the Company adopted ASU No. 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement." The amendments in this ASU removed, modified or added to the disclosure requirements for fair value measurements in ASC Topic 820, "Fair Value Measurement" ("Topic 820"). The adoption of this ASU did not have a material impact on the Company's consolidated condensed financial statements andor disclosures.
Note 2. Leases
The Company leases office space, manufacturing plants, warehouses, distribution centers, andCompany-operated Topgolf venues, vehicles, and equipment, as well as retail and/or outlet locations related to the TravisMathew and Jack Wolfskin businesses and the apparel business in Japan. Certain real estate leases include one or more options to extend the lease term, or options to purchase the leased property at the Company's sole discretion.discretion or escalation clauses that increase the rent payments over the lease term. When deemed reasonably certain of exercise, the renewal and purchase options are included in the determination of the lease term and lease payment obligation, respectively. The depreciable life of assets and leasehold improvements are limited by the expected lease term unless there is a transfer of title or purchase option reasonably certain of exercise. Certain leases may require an additional contingent rent payment based on a percentage of sales greater than certain specified threshold amounts. The Company recognizes contingent rent expense when it is probable that sales thresholds will be reached during the fiscal year. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Right-of-use ("ROU") assets represent the right to use an underlying asset during the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. When readily determinable, the Company uses the rate implicit in the lease agreement in determining the present value of minimum lease payments. If the implicit rate is not provided, the Company uses its incremental borrowing rate based on information available at the lease commencement date, including the lease term. At the commencement of a lease, the ROU asset for operating leases is measured by taking the sum of the present value of the lease liability, initial direct costs (if any) and prepaid lease payments (if any), and deducting lease incentives (if any). After the lease commencement date
and over the lease term, lease expense is recognized as a single lease cost on a straight-line basis. Lease agreements related to properties are generally comprised of lease components and non-lease components. Non-lease components, such as common area maintenance charges, property taxes and insurance, are expensed as incurred and recognized separately from the straight-line lease expense. Variable lease payments that do not depend on an index or rate, such as rental payments based on a percentage of retail sales over contractual levels, are expensed separately as incurred, and are not included in the measurement of the ROU asset and lease liability. Variable lease payments that depend on an index or rate, such as payments that are adjusted periodically for inflation, are included in the measurement of the ROU asset and lease liability and are recognized on a straight-line basis over the lease term.
In certain venue leasing arrangements, due to the Company’s involvement in the construction of leased assets, the Company is considered the owner of the leased assets for accounting purposes. In such cases, in addition to capitalizing the Company’s construction costs, the Company capitalizes the construction costs funded by the landlord related to its leased premises and recognizes a corresponding liability for those costs as construction advances during the construction period. At the end of the construction period, the Company applies sale and leaseback guidance to determine whether the underlying asset should be derecognized. When the application of the sale and leaseback guidance results in a sale, the asset and liability on the Company’s balance sheet are derecognized. When the application of the sale and leaseback guidance results in a failed sale, the asset remains on the Company’s balance sheet and is depreciated over its respective useful life or the lease term, whichever is shorter, and the liability is accounted for as a deemed landlord financing obligation. These deemed landlord financing obligations are generally non-cancelable leases with initial terms of 20 years containing various renewal options following the initial term and escalation clauses that increase the payments over the lease term.
With respect to the Company’s Toptracer operations, the Company enters into non-cancelable license agreements that provide software and hardware to driving ranges and hospitality and entertainment venues. These license agreements provide the customer the right to use Company-owned software and hardware products for a specified period generally ranging from three to five years. The software and hardware are a distinct bundle of goods that are highly interrelated. At the inception of the arrangement, lease classification is assessed which generally results in the license agreements being classified as sales-type leases. Upon lease commencement for sales-type leases, revenue is recognized consisting of initial payments received and the present value of payments over the non-cancellable term.
Revenue Recognition
The Company accounts for revenue recognition of products and services in accordance with Accounting Standards Codification (“ASC”) Topic 606, "Revenue from Contracts with Customers." See Note 4.
Product Revenue
The Company recognizes revenue from the sale of its golf clubs, golf balls, lifestyle and outdoor apparel, gear and accessories and golf apparel and accessories when it satisfies the terms of a sales order from a customer, and transfers control of the products ordered to the customer. Control transfers when products are shipped, and in certain cases, when products are received by customers under certain contract terms. In addition, the Company recognizes revenue at the point of sale on transactions with consumers at its retail locations and retail shops at Topgolf locations. Sales taxes, value added taxes and other taxes that are collected in connection with revenue transactions are withheld and remitted to the respective taxing authorities. As such, these taxes are excluded from revenue. The Company elected to account for shipping and handling as activities to fulfill the promise to transfer the good. Therefore, shipping and handling fees that are billed to customers are recognized in revenue and the associated shipping and handling costs are recognized in cost of products as soon as control of the goods transfers to the customer.
The Company, in exchange for a royalty fee, licenses its trademarks and service marks to third parties for use on products such as golf apparel and footwear, practice aids and other golf accessories. Royalty income is recognized over time as underlying product sales occur, subject to certain minimum royalties, in accordance with the related licensing arrangements. Royalty income is included in the Company's Apparel, Gear and Other operating segment.
Revenues from gift cards are deferred and recognized when the cards are redeemed. The Company’s gift cards have no expiration date. The Company recognizes revenue from unredeemed gift cards, otherwise known as breakage, when the likelihood of redemption becomes remote and under circumstances that comply with any applicable state escheatment laws. To determine when redemption is remote, the Company analyzes an aging of unredeemed cards (based on the date the card was last used or the activation date if the card has never been used) and compares that information with historical
redemption trends. The Company uses this historical redemption rate to recognize breakage on unredeemed gift cards over the redemption period. The Company does not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions used to determine the timing of recognition of gift card revenues.
Variable Consideration
The amount of revenue the Company recognizes is based on the amount of consideration it expects to receive from customers. The amount of consideration is the sales price adjusted for estimates of variable consideration, including sales returns, discounts, and allowances as well as sales programs, sales promotions and price concessions that are offered by the Company as described below. These estimates are based on the amounts earned or to be claimed by customers on the related sales and are therefore recorded as reductions to sales and trade accounts receivable.
The Company’s primary sales program, the “Preferred Retailer Program,” offers potential rebates and discounts for participating retailers in exchange for providing certain benefits to the Company, including the maintenance of agreed upon inventory levels, prime product placement and retailer staff training. Under this program, qualifying retailers can earn either discounts or rebates based upon the amount of product purchased. Discounts are applied and recorded at the time of sale. For rebates, the Company estimates the amount of variable consideration related to the rebate at the time of sale based on the customer’s estimated qualifying current year product purchases. The estimate is based on the historical level of purchases, adjusted for any factors expected to affect the current year purchase levels. The estimated year-end rebate is adjusted quarterly based on actual purchase levels, as necessary. The Preferred Retailer Program is generally short-term in nature and the actual amount of rebate to be paid under this program is known as of the end of the year and paid to customers shortly after year-end. Historically, the Company's actual amount of variable consideration related to its Preferred Retailer Program has not been materially different from its estimates.
The Company also offers short-term sales program incentives, which include sell-through promotions and price concessions or price reductions. Sell-through promotions are generally offered throughout the product's life cycle of approximately two years, and price concessions or price reductions are generally offered at the end of the product's life cycle. The estimated variable consideration related to these programs is based on a rate that includes historical and forecasted data. The Company records a reduction to net revenues using this rate at the time of the sale. The Company monitors this rate against actual results and forecasted estimates and adjusts the rate as deemed necessary to reflect the amount of consideration it expects to receive from its customers. There were no material changes to the rate during the three months ended March 31, 2021 and 2020. Historically, the Company's actual amount of variable consideration related to these sales programs has not been materially different from its estimates.
The Company records an estimate for anticipated returns as a reduction of sales and cost of sales, and accounts receivable, in the period that the related sales are recorded. Sales returns are estimated based upon historical returns, current economic trends, changes in customer demands and sell-through of products. The Company also offers certain customers sales programs that allow for specific returns. The Company records a return liability as an offset to accounts receivable for anticipated returns related to these sales programs at the time of the sale based on the terms of the sales program. The cost recovery of inventory associated with this reserve is accounted for in other current assets. Historically, the Company’s actual sales returns have not been materially different from management’s original estimates.
Services Revenue
The Company recognizes revenue from the operation of its Topgolf venues consisting primarily of food and beverage sales, event deposits, fees charged for gameplay, purchases of game credits and membership fees. In addition, services sales are recognized through the redemption of gift cards, sponsorship contracts, franchise fees, leasing revenue, the Company’s World Golf Tour ("WGT") digital golf game and non-refundable deposits for venue reservations.
The Company's food and beverage revenue is recognized at the time of sale. Event deposits received from guests attributable to food and beverage purchases are deferred and recognized as revenue when the event is held. Food and beverage revenues are presented net of discounts. All sales taxes collected from guests are excluded from revenue in the consolidated condensed statements of operations and the obligation is included in accrued expenses on the Company’s consolidated condensed balance sheets until the taxes are remitted to the appropriate taxing authorities.
Fees charged for gameplay are recognized at the time of purchase. Event deposits received from guests attributable to gameplay purchases are deferred and recognized as revenue when the event is held. Purchases of game credits are deferred and recognized as revenue when: (i) the game credits are redeemed by the guest; or (ii) the likelihood of the game credits
being redeemed by the guest is remote (“game credit breakage”). The Company uses historic game credit redemption patterns to determine the likelihood of game credit redemption. Game credit breakage is recorded consistent with the historic redemption pattern.
Membership fees received from guests are deferred and recognized as revenue over the estimated life of the associated membership.
Revenues from gift cards to purchase for food and beverage or gameplay at Topgolf locations are deferred and recognized when the cards are redeemed, consistent with the gift card policy on product revenues.
The Company enters into sponsorship contracts that provide advertising opportunities to market to Topgolf guests in the form of custom displays, lobby displays, digital and print posters and other advertising at Topgolf venues and on Topgolf websites. Sponsorship contracts are typically for a fixed price over a specified length of time and revenue is generally recognized ratably over the contract period unless there is a different predominate pattern of performance.
The Company enters into international development agreements that grant franchise partners the right to develop, open and operate a certain number of venues within a particular geographic area. The franchise partner may be required to pay a territory fee upon entering into a development agreement and a franchise fee for each developed venue. The franchisee will also pay ongoing royalty fees based upon a percentage of sales. The initial franchise term provided for each venue generally ranges from 15 to 20 years and provides the option for renewal. The franchise of each individual venue within an arrangement represents a single performance obligation. Therefore, territory fees and franchise fees for each arrangement are allocated to each individual venue and recognized over the term of the respective franchise agreement, including renewal options. Revenue from sales-based royalties is recognized as the related sales occur. The franchisee may also purchase Topgolf-specific equipment and supplies from the Company to be used at the licensed venue. The Company has determined that it is the principal in these transactions and record the related revenue and cost of services on a gross basis.
Leasing revenue results from non-cancelable sales-type lease agreements that provide Toptracer software and hardware to driving ranges and hospitality and entertainment venues. See discussion above on sales-type leases.
The Company’s WGT digital golf game is a live service that allows players to play for free via web and mobile gaming platforms. Within the WGT digital golf game, players can purchase virtual currency to obtain virtual goods to enhance their game-playing experience. Revenues from purchases of virtual currency are deferred at the point of purchase and recognized as revenue over the average life of a player, determined using historic gameplay activity patterns.
Non-refundable deposits received for venue reservations are recognized at the time of purchase.
Cost of Products
The Company’s cost of products is comprised primarily of variable costs that fluctuate with sales volumes, including raw materials and component costs, merchandise from third parties, conversion costs including direct labor and manufacturing overhead, and inbound freight, duties, and shipping charges. In addition, cost of products include hardware costs with respect to Topgolf's Toptracer license agreements classified as sales-type leases, and retail merchandise costs for products sold in retail shops within Topgolf venue facilities. Fixed overhead expenses include warehousing costs, indirect labor, and supplies, as well as depreciation expense associated with assets used to manufacture and distribute products. In addition, cost of products includes adjustments to reflect inventory at its net realizable value, as well as adjustments for obsolescence and product warranties.
Cost of Services
The Company’s cost of services primarily consists of food and beverage costs and transaction fees with respect to in-app purchases within the Company’s WGT digital golf game. Food and beverage costs are variable by nature, change with sales volume, and are impacted by product mix and commodity pricing. Cost of services excludes employee costs as well as depreciation and amortization.
Other Venue Expenses
Other venue expenses consists of salaries and wages, bonuses, commissions, payroll taxes, and other employee costs that directly support venue operations, in addition to rent and occupancy costs, property taxes, depreciation associated with
venues, supplies, credit card fees and marketing expenses. Other venue expenses include both fixed and variable components and are therefore not directly correlated with revenue.
Venue Pre-Opening Costs
Pre-opening costs primarily include costs associated with activities prior to the opening of a new company-operated venue, as well as other costs that are not considered in the evaluation of ongoing performance. Pre-opening costs fluctuate based on the timing, size and location of new company-operated venues.
Selling, General and Administrative Expenses (SG&A)
SG&A expenses are comprised primarily of employee costs, advertising and promotional costs, tour expenses, legal and professional fees, travel expenses, building and rent expenses, depreciation charges (excluding those related to manufacturing and distribution operations), amortization of intangible assets, and other miscellaneous expenses.
Research and Development
Research and development expenses are comprised of costs to develop or significantly improve the Company's products and technology, which primarily include the salaries and wages of personnel engaged in research and development activities, research costs and depreciation expense. Other than software development costs qualifying for capitalization, research and development costs are expensed as incurred.
Inventories
Unless otherwise stated below, the Company's inventory is recorded at the lower of cost or net realizable value, which includes a reserve for excess, obsolete and/or unmarketable inventory. This reserve is regularly assessed based on current inventory levels, sales trends, and historical experience, as well as management’s estimates of market conditions and forecasts of future product demand, all of which are subject to change. The Company utilizes the standard costing method, determined on the first-in, first-out basis, for its golf equipment inventory and soft goods inventory sold under the TravisMathew, OGIO and Callaway brands, and the weighted average costing method for soft goods inventory sold under the Jack Wolfskin brand. Golf equipment inventory, which is directly manufactured by the Company, includes finished goods, raw materials, labor and manufacturing overhead costs and work in process. The Company's soft goods product lines, which are manufactured by third-party contractors, primarily include finished good products. Toptracer hardware and software, food and beverage products and Topgolf-specific retail merchandise inventories are stated at weighted average cost.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over estimated useful lives generally as follows:
| | | | | |
| Buildings and improvements | 10-40 years |
| Machinery and equipment | 5-10 years |
| Furniture, computers and equipment | 3-5 years |
| Internal-use software | 3-5 years |
| Production molds | 2-5 years |
Buildings capitalized in conjunction with deemed landlord financing where the Company is deemed to be the accounting owner are depreciated, less residual value, over the shorter of 20 years or the lease term.
Normal repairs and maintenance costs are expensed as incurred. Expenditures that materially increase values, change capacities, or extend useful lives are capitalized. The related costs and accumulated depreciation of disposed assets are eliminated and any resulting gain or loss on disposition is recognized in earnings. Construction in-process consists primarily of costs associated with building improvements, machinery and equipment and venues under construction that have not yet been placed into service, unfinished molds as well as in-process internal-use software.
In accordance with ASC Topic 350-40, “Internal-Use Software,” the Company capitalizes certain costs incurred in connection with developing or obtaining internal use software. Costs incurred in the preliminary project stage are expensed. All direct external costs incurred to develop internal-use software during the development stage are capitalized and depreciated using the straight-line method over the remaining estimated useful lives. Costs such as maintenance and training are expensed as incurred.
Goodwill and Intangible Assets
The Company's intangible assets, which are comprised of goodwill, trade names, trademarks, service marks, trade dress, customer and distributor relationships, developed technology, non-competes and patents were acquired in connection with the acquisitions of Odyssey Sports, Inc., FrogTrader, Inc., OGIO, TravisMathew, Jack Wolfskin, certain foreign distributors and the recently completed merger with Topgolf on March 8, 2021.
In accordance with ASC Topic 350, “Intangibles—Goodwill and Other,” goodwill and intangible assets with indefinite lives are not amortized but instead are measured for impairment at least annually or more frequently when events indicate that an impairment exists. The Company calculates impairment as the excess of the carrying value of goodwill and other indefinite-lived intangible assets over their estimated fair value. If the carrying value exceeds the estimate of fair value a write-down is recorded. To determine fair value, the Company uses discounted cash flow estimates, quoted market prices, royalty rates when available and independent appraisals when appropriate.
During the second quarter of 2020, due to the significant disruptions caused by the COVID-19 pandemic on the Company's operations, the Company performed a qualitative assessment considering the macroeconomic conditions caused by the COVID-19 pandemic, and the potential impact on the Company's revenue 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 to test the recoverability of goodwill for all its reporting units, in addition to the recoverability of indefinite-lived intangible assets, consisting primarily of the trade names and trademarks associated with the Company's brands. Based on this assessment, the Company determined that the fair values of the Jack Wolfskin reporting unit and the Jack Wolfskin trade name were less than their carrying values. As a result, during the second quarter of 2020, the Company recognized impairment losses to write-off the goodwill associated with the Jack Wolfskin reporting unit and write-down the trade name associated with the Jack Wolfskin brand name to its new estimated fair value. There were no further impairments recognized over the remainder of 2020. For further discussion, see Note 9.
Intangible assets that are determined to have definite lives are amortized over their estimated useful lives and are measured for impairment in accordance with ASC Topic 360-10-35, “Impairment or Disposal of Long-Lived Assets” as discussed above, only when events or circumstances indicate the carrying value may be impaired. See Note 9 for further discussion of the Company’s intangible assets.
Costs related to the development, maintenance, or renewal of internally developed intangible assets that are inherent in the Company's continuing business and relate to the Company as a whole, that were not acquired as a part of a business combination or asset acquisition, are expensed as incurred.
Note 3. Leases
The Company leases office space, manufacturing plants, warehouses, distribution centers, Company-operated Topgolf venues, vehicles, and equipment, as well as retail and/or outlet locations related to the TravisMathew and Jack Wolfskin businesses and the apparel business in Japan. The Company also enters into non-cancellable agreements with driving ranges and hospitality and entertainment venues to license Toptracer software and hardware, which are classified as sales-type leases.
Deemed Landlord Financing Leases
As of March 31, 2021, the Company accounted for 2 deemed landlord financing leases that did not meet the sale-leaseback criteria upon the completion of construction in accordance with ASC 842. As of March 31, 2021, the Company was the accounting owner of 10 landlord buildings under deemed landlord financing contracts. As of March 31, 2021, the net book value included in property, plant and equipment related to these buildings on the consolidated condensed balance sheet totaled $280,864,000. The Company depreciates these properties over the initial lease term of 20 years or over their estimated useful life, whichever is shorter.
Sales-Type Leases
Leasing revenue attributed to sales-type leases was $3,893,000 for the three months ended March 31, 2021, which was included in services revenues within the consolidated condensed statement of operations. Leasing receivables related to the Company’s net investment in sales-type leases are as follows (in thousands):
| | | | | | | | | | | |
| Balance Sheet Location | | March 31,
2021 |
| Leasing receivables, net - current | Other current assets | | $ | 8,957 | |
| Leasing receivables - long-term | Other assets | | 29,903 | |
| | | $ | 38,860 | |
Operating Leases
In response to the COVID-19 pandemic, the Company received certain rent concessions in the form of deferments and abatement on a few of its operating leases. The Company opted to not modify these leases in accordance with the FASB Staff Q&A-Topic 842 and Topic 840: "Accounting For Lease Concessions Related to the Effects of the COVID-19 Pandemic" issued in April 2020, and account for these concessions as if they were made under the enforceable rights included in the original agreement. Rent deferments were recorded as a payable and paid at a later negotiated date. Rent abatements were recognized as reductions in rent expense over the periods covered by the abatement period. As of March 31, 2021 and December 31, 2020 the Company recorded rent deferments of $3,425,000 and $687,000, respectively, which were recorded in accrued expenses, and $9,345,000 other long-term liabilities in the consolidated condensed balance sheets as of March 31, 2021. Of the rent deferments recorded as of March 31, 2021, $12,770,000 was recorded in connection with the Topgolf merger in March 2021. There were 0 rent abatements recorded for the three months ended March 31, 2021 or 2020.
Supplemental balance sheet information related to leases is as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Balance Sheet Location | | March 31,
2021 | | December 31, 2020 |
| Operating Leases | | | | | |
| ROU assets, net | Operating lease ROU assets, net | | $ | 1,041,395 | | | $ | 194,776 | |
| Lease liabilities, short-term | Operating lease liabilities, short-term | | $ | 51,510 | | | $ | 29,579 | |
| Lease liabilities, long-term | Operating lease liabilities, long-term | | $ | 1,155,551 | | | $ | 177,996 | |
| | | | | |
| Deemed Landlord Financing | | | | | |
| Lease liabilities, short-term | Accrued expenses | | $ | 1,567 | | | $ | 0 | |
| Lease liabilities, long-term | Deemed landlord financing, long-term | | $ | 221,618 | | | $ | 0 | |
| | | | | |
| Finance Leases | | | | | |
| ROU assets, net, | Other assets | | $ | 2,761 | | | $ | 1,003 | |
| Lease liabilities, short-term | Accrued expenses | | $ | 1,090 | | | $ | 252 | |
| Lease liabilities, long-term | Long-term other | | $ | 1,903 | | | $ | 447 | |
|
| | | | | | | | | |
| | Balance Sheet Location | | March 31, 2020 | | December 31, 2019 |
| Operating leases | | |
| | |
| ROU assets, net | Operating lease ROU assets, net | | $ | 193,829 |
| | $ | 160,098 |
|
| Lease liabilities, short-term | Operating lease liabilities, short-term | | $ | 28,544 |
| | $ | 26,418 |
|
| Lease liabilities, long-term | Operating lease liabilities, long-term | | $ | 175,954 |
| | $ | 137,696 |
|
| | | | | | |
| Finance Leases | | |
| | |
| ROU assets, net, | Other assets | | $ | 1,108 |
| | $ | 1,263 |
|
| Lease liabilities, short-term | Accounts payable and accrued expenses | | $ | 542 |
| | $ | 589 |
|
| Lease liabilities, long-term | Long-term other | | $ | 509 |
| | $ | 558 |
|
The components of lease expense are as follows (in thousands): | | | | | | | | | | | | | | | |
| | | Three Months Ended
March 31, |
| | | | | 2021 | | 2020 |
| Operating lease costs | | | | | $ | 20,497 | | | $ | 11,022 | |
| Financing lease costs: | | | | | | | |
| Amortization of right-of-use assets | | | | | 322 | | | 167 | |
| Interest on lease liabilities | | | | | 20 | | | 11 | |
| Total financing lease costs | | | | | 342 | | | 178 | |
| Variable lease costs | | | | | 579 | | | 1,296 | |
| Total lease costs | | | | | $ | 21,418 | | | $ | 12,496 | |
|
| | | | | | | |
| | Three Months Ended
March 31, |
| | 2020 | | 2019 |
| Operating lease costs | $ | 11,022 |
| | $ | 8,897 |
|
| Financing lease costs: | | | |
| Amortization of right-of-use assets | 167 |
| | 257 |
|
| Interest on lease liabilities | 11 |
| | 25 |
|
| Total financing lease costs | 178 |
| | 282 |
|
| Variable lease costs | 1,296 |
| | 1,340 |
|
| Total lease costs | $ | 12,496 |
| | $ | 10,519 |
|
Other information related to leases was as follows (in thousands): |
| | | | | | | | |
| | | Three Months Ended
March 31, |
| Supplemental Cash Flows Information | | 2020 | | 2019 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | |
| Operating cash flows - operating leases | | $ | 9,331 |
| | $ | 8,714 |
|
| Operating cash flows from finance leases | | $ | 11 |
| | $ | 25 |
|
| Financing cash flows from finance leases | | $ | 109 |
| | $ | 114 |
|
| | | | | |
| Lease liabilities arising from new ROU assets: | | | | |
| Operating leases | | $ | 51,851 |
| | $ | 3,059 |
|
| Finance leases | | $ | 22 |
| | $ | — |
|
| | | | | | | | | | | | | | |
| | Three Months Ended
March 31, |
| Supplemental Cash Flows Information | | 2021 | | 2020 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | |
| Operating cash flows from operating leases | | $ | 18,852 | | | $ | 9,331 | |
| Operating cash flows from finance leases | | $ | 9 | | | $ | 11 | |
| Financing cash flows from finance leases | | $ | 95 | | | $ | 109 | |
| | | | |
| Lease liabilities arising from new ROU assets: | | | | |
| Operating leases | | $ | 28,419 | | | $ | 51,851 | |
| Finance leases | | $ | 29 | | | $ | 22 | |
|
| | | | | | |
| | | March 31,
2020 | | December 31,
2019 |
| Weighted average remaining lease term (years): | | | | |
| Operating leases | | 10.1 |
| | 6.6 |
|
| Finance leases | | 2.7 |
| | 2.7 |
|
| | | | | |
| Weighted average discount rate: | | | | |
| Operating leases | | 5.4 | % | | 5.5 | % |
| Finance leases | | 4.1 | % | | 4.5 | % |
| | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| Weighted average remaining lease term (years): | | | |
| Operating leases | 14.6 | | 9.8 |
| Finance leases | 2.8 | | 3.0 |
| | | |
| Weighted average discount rate: | | | |
| Operating leases | 8.2 | % | | 5.3 | % |
| Finance leases | 5.3 | % | | 3.9 | % |
Future minimum lease obligations as of March 31, 20202021 were as follows (in thousands):
|
| | | | | | | |
| | Operating Leases | | Finance Leases |
| Remainder of 2020 | $ | 29,289 |
| | $ | 510 |
|
| 2021 | 34,284 |
| | 245 |
|
| 2022 | 29,864 |
| | 204 |
|
| 2023 | 26,016 |
| | 94 |
|
| 2024 | 22,586 |
| | 23 |
|
| Thereafter | 126,550 |
| | 23 |
|
| Total future lease payments | 268,589 |
| | 1,099 |
|
| Less: imputed interest | 64,091 |
| | 48 |
|
| Total | $ | 204,498 |
| | $ | 1,051 |
|
| | | | | | | | | | | | | | | | | |
| Operating Leases | | DLF Leases | | Finance Leases |
| Remainder of 2021 | $ | 111,570 | | | $ | 13,253 | | | $ | 902 | |
| 2022 | 146,151 | | | 20,026 | | | 1,171 | |
| 2023 | 143,834 | | | 19,862 | | | 736 | |
| 2024 | 141,171 | | | 20,054 | | | 352 | |
| 2025 | 139,169 | | | 20,380 | | | 26 | |
| Thereafter | 1,464,450 | | | 355,973 | | | 9 | |
| Total future lease payments | 2,146,345 | | | 449,548 | | | 3,196 | |
| Less: imputed interest | 939,284 | | | 226,363 | | | 203 | |
| Total | $ | 1,207,061 | | | $ | 223,185 | | | $ | 2,993 | |
Lease payments exclude $828,530,000 related to 14 non-cancellable leases that have been signed as of March 31, 2021 but have not yet commenced. Of the 14 leases, 5 are scheduled to commence in 2021. The Company's minimum capital commitment related to these leases was approximately $75,000,000 as of March 31, 2021. As the Company is actively involved in the construction of these properties, the Company recorded $58,103,000 in construction costs within property, plant and equipment as of March 31, 2021. In addition, the Company recorded $54,874,000 in advances from the landlord in connection with properties under construction as of March 31, 2021. The Company will determine the lease classification for properties currently under construction at the end of the construction period. The initial base term upon the commencement of these leases is generally 20 years. Note 3.4. Revenue Recognition
The Company primarily recognizes revenue from the sale of its products whichand operation of its venues. Revenue from product sales include golf clubs, golf balls, lifestyle and outdoor apparel, gear and accessories in addition toand golf apparel and accessories. The Company sells its products to customers, which include on- and off-course golf shops and national retail stores, as well as to consumers through its e-commerce business and at its apparel retail and venue locations. In addition, the Company recognizesThe Company's product revenues also includes royalty income from third parties from the licensing of certain soft goods products,products. Revenue from services primarily includes venue sales of food and beverage and fees charged for gameplay, and the sale of game credits to guests. Service Revenues also include franchise fees from franchised international venues, as
well as revenue from gift cards.cards, sponsorship contracts, franchise fees, leasing revenue and non-refundable deposits received for venue reservations. In addition, the Company recognizes service revenues through its online multiplayer WGT digital golf game.
The Company's contracts with customers for its products are generally in the form of a purchase order. In certain cases, the Company enters into sales agreements containing specific terms, discounts and allowances. In addition, theThe Company enters into licensing agreements with certain distributors.
The Company has two3 operating and reportable segments, namely the Golf Equipment operating segment, and the Apparel, Gear and Other operating segment, and the Topgolf operating segment. Revenue attributable to the Topgolf operating segment is for the period beginning March 8, 2021 (merger date) through April 4, 2021. The following table presents the Company's revenue disaggregated by major product category and operating and reportable segment (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating and Reportable Segments |
| Three Months Ended March 31, 2021 | | Three Months Ended March 31, 2020 |
| Golf Equipment | | Apparel, Gear
& Other | | Topgolf | | Total | | Golf Equipment | | Apparel, Gear
& Other | | | | Total |
| Major revenue categories: | | | | | | | | | |
| Golf clubs | $ | 316,353 | | | $ | — | | | $ | — | | | $ | 316,353 | | | $ | 251,224 | | | $ | — | | | | | $ | 251,224 | |
| Golf balls | 60,529 | | | — | | | — | | | 60,529 | | | 40,437 | | | — | | | | | 40,437 | |
| Apparel | — | | | 95,289 | | | — | | | 95,289 | | | — | | | 77,290 | | | | | 77,290 | |
| Gear, accessories & other | — | | | 86,813 | | | — | | | 86,813 | | | — | | | 73,325 | | | | | 73,325 | |
| Venues | — | | | — | | | 85,170 | | | 85,170 | | | — | | | — | | | | | — | |
| Other business lines | — | | | — | | | 7,467 | | | 7,467 | | | — | | | — | | | | | — | |
| $ | 376,882 | | | $ | 182,102 | | | $ | 92,637 | | | $ | 651,621 | | | $ | 291,661 | | | $ | 150,615 | | | | | $ | 442,276 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
The Topgolf segment includes an immaterial amount of golf clubs, golf balls, and apparel sales, which are reflected within product sales within the consolidated condensed statement of operations for the three months ended March 31, 2021. |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Operating and Reportable Segments |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 |
| | Golf Equipment | | Apparel, Gear & Other | | Total | | Golf Equipment | | Apparel, Gear & Other | | Total |
| Major product category: | | | | | | | |
| Golf Clubs | $ | 251,224 |
| | $ | — |
| | $ | 251,224 |
| | $ | 261,785 |
| | $ | — |
| | $ | 261,785 |
|
| Golf Balls | 40,437 |
| | — |
| | 40,437 |
| | 61,834 |
| | — |
| | 61,834 |
|
| Apparel | — |
| | 77,290 |
| | 77,290 |
| | — |
| | 96,246 |
| | 96,246 |
|
| Gear, Accessories & Other | — |
| | 73,325 |
| | 73,325 |
| | — |
| | 96,332 |
| | 96,332 |
|
| | $ | 291,661 |
| | $ | 150,615 |
| | $ | 442,276 |
| | $ | 323,619 |
| | $ | 192,578 |
| | $ | 516,197 |
|
As of March 31, 2021 and December 31, 2020, the Company's deferred revenue liability was $70,946,000 and $2,546,000, respectively. The balance as of March 31, 2021 included a deferred revenue liability of $68,093,000 in the Topgolf segment related to gift cards, event deposits, lifetime memberships, prepaid sponsorship, premium membership, the WGT digital golf game, and game credits. Revenue from redeemed gift cards and gift card breakage was $3,306,000 and $525,000 for the three months ended March 31, 2021 and 2020, respectively. Deferred revenue from redeemed event deposits, lifetime memberships, prepaid sponsorship, premium membership, WGT digital golf game, game credits, and the corresponding breakage was $24,740,000 for the three months ended March 31, 2021.
The following table summarizes revenue by geographical areas in which the Company operates (in thousands):
| | | | | | | | | | | | | | | |
| | | Three Months Ended
March 31, |
| | | | | 2021 | | 2020 |
| Revenue by Major Geographic Region: | | | | | | | |
| United States | | | | | $ | 388,222 | | | $ | 217,503 | |
| Europe | | | | | 108,345 | | | 96,719 | |
| Japan | | | | | 71,886 | | | 77,347 | |
| Rest of World | | | | | 83,168 | | | 50,707 | |
| | | | | $ | 651,621 | | | $ | 442,276 | |
The Company sells its golf equipment products and apparel, gear and accessories in the United States and internationally, with its principal international regions being Japan and Europe. As the majority of the Company's sales are concentrated in golf equipment products,On a regional basis, sales of golf equipment
are generally higher on a regional basis, with the exceptionthan sales of apparel gear and other in most regions other than Europe, which has a higher concentration of sales of apparel, gear and other sales as a result of the Jack Wolfskin, acquisition completedwhich is headquartered in January 2019.
The following table presents information about the geographical areas in which the Company operates. Revenues are attributed to the location to which the product was shipped (in thousands):
|
| | | | | | | |
| | Three Months Ended
March 31, |
| | 2020 | | 2019 |
| Major Geographic Region: | | | |
| United States | $ | 217,503 |
| | $ | 249,001 |
|
| Europe | 96,719 |
| | 126,613 |
|
| Japan | 77,347 |
| | 73,228 |
|
| Rest of World | 50,707 |
| | 67,355 |
|
| | $ | 442,276 |
| | $ | 516,197 |
|
Product Sales
The Company recognizesGermany. Venues revenue from the sale of its products when it satisfies the terms of a sales order from a customer, and transfers control of the products ordered to the customer. Control transfers when products are shipped, and in certain cases, when products are received by customers. In addition, the Company recognizes revenue at the point of sale on transactions with consumers at its retail locations. Sales taxes, value added taxes and other taxes that are collected in connection with revenue transactions are withheld and remitted to the respective taxing authorities. As such, these taxes are excluded from revenue. The Company elected to account for shipping and handling as activities to fulfill the promise to transfer the good. Therefore, shipping and handling fees that are billed to customers are recognized in revenue and the associated shipping and handling costs are recognized in cost of goods sold as soon as control of the goods transfers to the customer.
Royalty Income
Royalty income is recognized over time in net sales as underlying product sales occur, subject to certain minimum royalties, in accordance with the related licensing arrangements. Royalty income is includedhigher in the Company's Apparel, Gear and Other operating segment. Total royalty income for the three months ended March 31, 2020 and 2019 was $5,545,000 and $4,678,000, respectively.
Gift Cards
Revenues from gift cards are deferred and recognized when the cards are redeemed. The Company’s gift cards have no expiration date. The Company recognizes revenue from unredeemed gift cards, otherwise knownUnited States, as breakage, when the likelihood of redemption becomes remote and under circumstances that comply with any applicable state escheatment laws. To determine when redemption is remote, the Company analyzes an aging of unredeemed cards (based on the date the card was last used or the activation date if the cardTopgolf has never been used) and compares that information with historical redemption trends. The Company uses this historical redemption rate to recognize breakage on unredeemed gift cards over the redemption period. The Company does not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions used to determine the timing of recognition of gift card revenues. As of March 31, 2020 and December 31, 2019, the Company's deferred revenue liability for gift cards was $1,990,000 and $2,190,000, respectively. During the three months ended March 31, 2020 and 2019, the Company recognized $525,000 and $389,000 of deferred gift card revenue, respectively.
Variable Consideration
The amount of revenue the Company recognizes is based on the amount of consideration it expects to receive from customers. The amount of consideration is the sales price adjusted for estimates of variable consideration, including sales returns, discounts and allowances as well as sales programs, sales promotions and price concessions that are offered by the Company as described below. These estimates are based on the amounts earned or to be claimed by customers on the related sales, and are therefore recorded as reductions to sales and trade accounts receivable.
The Company’s primary sales program, the “Preferred Retailer Program,” offers potential rebates and discounts for participating retailers in exchange for providing certain benefits to the Company, including the maintenance of agreed upon inventory levels, prime product placement and retailer staff training. Under this program, qualifying retailers can earn either discounts or rebates based upon the amount of product purchased. Discounts are applied and recorded at the time of sale. For rebates, the Company estimates the amount of variable consideration related to the rebate at the time of sale based on the customer’s estimated qualifying current year product purchases. The estimate is based on the historical level of purchases, adjusted for any factors expected to affect the current year purchase levels. The estimated year-end rebate is adjusted quarterly based on actual purchase levels, as necessary. The Preferred Retailer Program is generally short-term in nature and the actual amount of rebate to be paid under this program is known as of the end of the year and paid to customers shortly after year-end. Historically, the Company's actual amount of variable consideration related to its Preferred Retailer Program has not been materially different from its estimates.
The Company also offers short-term sales program incentives, which include sell-through promotions and price concessions or price reductions. Sell-through promotions are generally offered throughout the product's life cycle of approximately two years, and price concessions or price reductions are generally offered at the end of the product's life cycle. The estimated variable consideration related to these programs is based on a rate that includes historical and forecasted data. The Company records a reduction to net sales using this rate at the time of the sale. The Company monitors this rate against actual results and forecasted estimates, and adjusts the rate as deemed necessary in order to reflect the amount of consideration it expects to receive from its customers. There were no material changes to the rate during the three months ended March 31, 2020 and 2019. Historically, the Company's actual amount of variable consideration related to these sales programs has not been materially different from its estimates.more domestic venues than international.
The Company records an estimate for anticipated returns as a reduction of salesproduct revenues and cost of sales,products, and accounts receivable, in the period that the related sales are recorded. Sales returns are estimated based upon historical returns, current economic trends, changes in customer demands and sell-through of products. The Company also offers certain customers sales programs that allow for specific returns. The Company records a return liability as an offset to accounts receivable for anticipated returns related to these sales programs at the time of the sale based on the terms of the sales program. The cost recovery of inventory associated with this reserve is accounted for in other current assets. The Company's provision for sales returns will fluctuate with the seasonality of the business, while actual sales returns are generally more heavily weighted toward the back half of the year as the golf season comes to an end. Historically, the Company’s actual sales returns have not been materially different from management’s original estimates.
The following table provides a reconciliation of the activity related to the Company’s sales return reserve (in thousands): | | | | | | | | | | | | | | | |
| | | Three Months Ended
March 31, |
| | | | | 2021 | | 2020 |
| Beginning balance | | | | | $ | 43,986 | | | $ | 34,314 | |
| Provision | | | | | 35,890 | | | 35,636 | |
| Sales returns | | | | | (19,092) | | | (18,958) | |
| Ending balance | | | | | $ | 60,784 | | | $ | 50,992 | |
Note 4.5. Estimated Credit Losses
The Company's trade accounts receivable are recorded at net realizable value, which includes an appropriate allowance for estimated credit losses, as well as reserves related to product returns and sales programs as described in Note 3.4. Under ASC Topic 326, the “expected credit loss” model will replacereplaces the “incurred loss” model and will requirerequires consideration of a
broader range of information to estimate expected credit losses over the life of the asset. The Company's prior methodology for estimating credit losses on trade accounts receivable did not differ significantly from the new requirements of ASC 326. Specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. An estimate of credit losses for the remaining customers in the aggregate is based upon historical bad debts, current customer receivable balances, age of customer receivable balances, the customers' financial condition, all of which are subject to change. Additionally, the Company’s monitoring activities now consider future reasonable and supportable forecasts of economic conditions to adjust all general reserve percentages as necessary. Balances are written off when determined to be uncollectible. The Company considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic and determined, based on current information, that the estimate of credit losses as of March 31, 20202021 was not significantly impacted.
Actual uncollected amounts have historically been consistent with the Company’s expectations. The Company's payment terms on its receivables from customers are generally 60 days or less.
The following table provides a reconciliation of the activity related to the Company’s allowance for estimated credit losses (in thousands):
| | | | | | | | | | | | | | | |
| | | Three Months Ended
March 31, |
| | | | | 2021 | | 2020 |
| Beginning balance | | | | | $ | 8,841 | | | $ | 5,992 | |
| Adjustment due to the adoption of Topic 326 | | | | | 0 | | | 289 | |
| (Recovery)/provision for credit losses | | | | | (378) | | | 13 | |
| Write-off of uncollectible amounts, net of recoveries | | | | | (1,662) | | | (154) | |
| | | | | | | |
| Ending balance | | | | | $ | 6,801 | | | $ | 6,140 | |
|
| | | | | | | |
| | Three Months Ended
March 31, |
| | 2020 | | 2019 |
| | (in thousands) |
| Beginning balance as of January 1 | $ | 5,992 |
| | $ | 5,610 |
|
| Adjustment due to the adoption of Topic 326 | 289 |
| | — |
|
| Provision for credit losses | 13 |
| | (123 | ) |
| Write-off of uncollectible amounts, net of recoveries | (154 | ) | | (13 | ) |
| Ending balance as of March 31 | $ | 6,140 |
| | $ | 5,474 |
|
Note 5.6. Business Combinations
Acquisition of JW Stargazer Holding GmbHMerger with Topgolf International, Inc.
In January 2019,On March 8, 2021, the Company completed its previously announced merger with Topgolf, pursuant to the acquisitionterms of JW Stargazer Holding GmbH,an Agreement and Plan of Merger, dated as of October 27, 2020 (the “Merger Agreement”). Topgolf is a leading tech-enabled golf entertainment business, with an innovative platform that comprises its state-of-the-art open-air golf and entertainment venues, revolutionary Toptracer ball-tracking technology and innovative media platform with a differentiated position in eSports. The combined company will benefit from a compelling family of brands with reach across multiple channels including retail, venues, e-commerce and digital communities.
Pursuant to the ownerterms of the international, premium outdoor apparel, gearMerger Agreement, at the closing of the merger, the Company issued approximately 89,776,450 unrestricted and accessories brand, Jack Wolfskin, for €457,394,000 (including cash acquiredfully vested shares of €50,984,000) orits common stock to the stockholders of Topgolf (excluding approximately $521,201,000 (including cash acquired12,329,721 shares of $58,096,000) (using the exchange rateCompany’s common stock that would have been allocated to the Company in effectthe merger based on the acquisition date), subjectshares of Topgolf held by the Company) for 100% of the outstanding equity of Topgolf, at an exchange ratio based on an equity value of Topgolf of $1,987,000,000 (or $1,748,000,000 excluding Topgolf shares that were held by the Company) and a price per share of the Company's common stock fixed at $19.40 per share (the “Callaway Share Price”). The actual purchase consideration upon the closing of the merger of $3,014,174,000 (or $2,650,201,000 excluding Topgolf shares that were held by the Company) was based on the number of shares of the Company’s common stock issued, multiplied by the closing price of $29.52 of the Company's common stock on March 8, 2021. Additionally, the Company converted certain stock options previously held by former equity holders of Topgolf into options to working capital adjustments.purchase a number of shares of Callaway common stock, and certain outstanding restricted stock awards of Topgolf, into 187,568 shares of Callaway common stock (together, the "replacement awards"). The Company financed the acquisition with a Term Loan B facilityincluded $33,051,000 in the aggregate principal amount of $480,000,000 (see Note 6). Jack Wolfskin designs premium outdoor apparel, gear and accessories targeted at the active outdoor and urban outdoor customer categories. This acquisition further enhanced the Company's lifestyle category and provides a platform for future growthconsideration transferred in the active outdoor and urban outdoor categories,merger for these replacement awards, which represents the Company believes are complementaryfair value of the vested portion the replacement awards. The unvested portion of these replacement awards related to its portfolio of brands and product capabilities.future services that will be rendered in the post-combination period will be recognized as compensation expense over the remaining vesting period. In addition, the Company anticipates it will realize synergiesconverted issued and outstanding warrants to purchase certain preferred shares of Topgolf into a warrant to purchase a number of shares of Callaway common stock. The fair value of the consideration transferred in the merger related to these warrants totaled $1,625,000. The purchase consideration, together with respectthe fair value of the consideration transferred for outstanding stock awards and warrants totaled $3,048,850,000.
The Company previously held approximately 14.3% of Topgolf's outstanding shares. Immediately following the closing of the merger, the Company's stockholders, as of immediately prior to supply chain operations as well as warehousingthe merger, owned approximately 51.3% of the outstanding shares of the combined company, and distribution activities.former Topgolf stockholders, other than Callaway, owned approximately 48.7% of the outstanding shares of the combined company.
The Company allocated the purchase price to the net identifiable tangible and intangible assets acquired and liabilities assumed based on their preliminary estimated fair values as of the date of acquisition. Identifiable intangible assets include the Topgolf trade name, developed technology, Topgolf's investment in Swing Suite golf and multi-sport simulator, customer relationships and liquor licenses. The excess of the purchase price over the estimated fair value of the net assets and liabilities was allocated to goodwill. The Company determined the preliminary estimated fair values after review and consideration of relevant information as of the acquisition date, including discounted cash flows, quoted market prices and estimates made by management. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are preliminary based on management's estimates and assumptions and may be subject to change as additional information is received and certain tax returns are finalized. We expect to finalize the valuation as soon as practicable, but not later than one year from the acquisition date.
The allocation of the purchase price presented below was based on management's preliminary estimate of the fair values of the acquired assets and assumed liabilities using valuation techniques including income, cost and market approaches. These valuation techniques incorporate the use of expected future revenues, cash flows and growth rates as well as estimated discount rates. Current and noncurrent assets and liabilities are valued at historical carrying values, which approximates fair value. Inventory was valued using the net realizable value approach, which was based on the estimated selling price in the ordinary course of business less reasonable disposal costs and a profit on the disposal efforts. The customer and distributor relationships were valued under the income approach based on the present value of future earnings. The Company amortizes the fair value of these relationships over a 10-year period. The trade name was valued under the royalty savings income approach method, which is equal to the present value of the after-tax royalty savings attributable to owning the trade name as opposed to paying
a third party for its use. For this valuation the Company used a royalty rate of 5.0%2.5%, which is reflective of royalty rates paid in market transactions, and a discount rate of 10.0%8.5% on the future cash flows generated by the net after-tax savings. The goodwill of $150,180,000 arising from the acquisition consists largelyfair value of the synergies expected from combiningTopgolf hitting bays, Toptracer ball-tracking technology and the operationsWGT digital game was based on a combination of
valuation methodologies, including the residual net income approach, royalty savings income approach and the cost approach. Customer relationships and liquor licenses were valued using the replacement cost method. The Company amortizes the fair value of the Companyfinite-lived intangibles, which include technology and Jack Wolfskin.
As of December 31, 2019,customer relationships, over a period ranging between one and ten years. Additionally, the Company completed its evaluation of information that existed as of the acquisition date and finalized the purchase price allocation of the underlying acquired assets and liabilities. The resulting adjustments were offset against goodwill. The final assessment included the completion of thea market analysis of the assumed operating and deemed landlord financed leases to determine if the terms of these leases are favorable or unfavorable relative to market terms. The analysis resulted in a net unfavorable adjustment in the underlying value of the right-of-use asset of each lease. The Company also completed a replacement cost analysis of property, plant and equipment, which resulted in an overall step-up in value. The Company based the estimated fair value of the debt assumed on an a market credit rating, current interest rates and repayment terms, which resulted in an overall decrease in value. As of March 31, 2021, the completionCompany did not complete its assessment of the fair value assessment of the investment in Swing Suite, the right-of-use assets of operating and deemed landlord financed leases, deferred taxes acquired.revenue and deferred taxes. Additionally the Company is still in the process of reviewing and evaluating fair value estimates as included herein. Upon the completion of these assessments, the Company will adjust the preliminary purchase price allocation accordingly. After assessing the preliminary fair value of the net assets acquired and liabilities assumed, the Company recorded goodwill of $1,975,581,000, of which the Company attributed $1,412,361,000 to the future revenues and growth potential of the Topgolf business, and $563,220,000 to the synergies the Company anticipates from leveraging the Topgolf business to expand its golf equipment and apparel businesses. For the operating segment allocation of goodwill, see Note 9. As a non-taxable stock acquisition, the Company does not expect the value attributable to the acquired intangible assetsintangibles and goodwill are notto be tax deductible, accordingly, the Company recognized a net deferred tax liability of $77,079,000, including a valuation reserve of $8,281,000 on certain deferred tax assets. In addition, the Company recognized certain adjustments on income taxes receivable and long-term income taxes payable. The Company's final assessment also included adjustments related to certain sales returns reserves and inventory obsolescence reserves, and adjustments to the useful lives of certain property, plant and equipment. All of the goodwill was assigned to the Apparel, Gear and Other operating segment.deductible.
In connection with the acquisition,merger, during the yearquarter ended DecemberMarch 31, 2019,2021, the Company recognized transaction costs of approximately $9,987,000,$15,755,000, consisting primarily of which $4,723,000 was recognizedadvisor, legal, valuation and accounting fees. These transaction costs were recorded in selling, general and& administrative expenses during the three months ended March 31, 2019.expenses. There were 0 transaction costs incurred during the three months ended March 31, 2020. In addition, the Company recorded a loss of $3,215,000 in other income (expense) in the first quarter of 2019 upon the settlement of a foreign currency forward contract to mitigate the risk of foreign currency fluctuations on the purchase price, which was denominated in Euros.
The following table summarizes the fair values of the assets acquired and liabilities assumed as of the acquisition date based on the preliminary purchase price allocation (in thousands):
| | | | | | | | |
| At March 8, 2021 |
| Assets Acquired | | |
| Cash | | $ | 171,294 | |
| Accounts receivable | | 11,277 | |
| Inventories | | 14,661 | |
| Other current assets | | 52,233 | |
| Property and equipment | | 1,018,647 | |
| Operating lease right-of-use assets | | 833,812 | |
| Investments | | 7,673 | |
| Other assets | | 33,664 | |
| Intangibles - trade name | | 994,200 | |
| Intangibles - technology & customer relationships | | 91,928 | |
| Goodwill | | 1,412,361 | |
| Total assets acquired | | 4,641,750 | |
| Liabilities Assumed | | |
| Accounts Payable and accrued liabilities | | 89,428 | |
| Accrued employee costs | | 36,992 | |
| Construction advances | | 60,333 | |
| Deferred revenue | | 66,232 | |
| Other current liabilities | | 7,821 | |
| Long-term debt | | 535,096 | |
| Deemed landlord financing | | 179,840 | |
| Operating lease liabilities | | 1,023,338 | |
| Other long-term liabilities | | 23,538 | |
| Deferred tax liabilities | | 133,502 | |
| Net assets acquired | | $ | 2,485,630 | |
| Goodwill allocated to other business units | | 563,220 | |
| Total purchase price and consideration transferred in the merger | | $ | 3,048,850 | |
|
| | | | |
| | At January 4, 2019 |
| Assets Acquired | | |
| Cash | | $ | 58,096 |
|
| Accounts receivable | | 26,637 |
|
| Inventories | | 94,504 |
|
| Income tax receivable | | 6,588 |
|
| Other current assets | | 11,483 |
|
| Property and equipment | | 20,930 |
|
| Operating lease right-of-use assets | | 120,865 |
|
| Deferred tax assets | | 2,930 |
|
| Other assets | | 23 |
|
| Intangibles - trade name | | 239,295 |
|
| Intangibles - retail partners & distributor relationships | | 38,743 |
|
| Goodwill | | 150,180 |
|
| Total assets acquired | | 770,274 |
|
| Liabilities Assumed | | |
| Accounts Payable and accrued liabilities | | 46,124 |
|
| Income taxes payable, long-term | | 2,416 |
|
| Operating lease liabilities | | 120,524 |
|
| Deferred tax liabilities | | 80,009 |
|
| Net assets acquired | | $ | 521,201 |
|
Supplemental Pro-Forma Information (Unaudited) The following table presents supplemental pro-forma information for the three months ended March 31, 2021 and 2020 as if the merger with Topgolf had occurred on January 1, 2020. These amounts have been calculated after applying the Company's accounting policies and are based upon currently available information. For this analysis, the Company assumed that gains and costs associated with the merger, including a gain of $252,531,000 recognized on the Company's pre-acquisition investment in Topgolf, acquisition costs of $15,755,000 and a valuation allowance of $38,927,000 against certain net operating losses and tax credit carryforwards, in addition to the amortization of estimated intangible assets and other fair value adjustments, as well as the tax effect on those costs, were recognized as of January 1, 2020. Pre-acquisition net sales and net income amounts for Topgolf were derived from the books and records of Topgolf prepared prior to the acquisition and are presented for informational purposes only and do not purport to be indicative of the results of future operations or of the results that would have occurred had the acquisition taken place as of the dates noted below.
| | | | | | | | | | | |
| Three Months Ended
March 31, |
| 2021 | | 2020 |
| (in thousands) |
| Net revenues | $ | 794,565 | | | $ | 666,134 | |
| Net income | $ | 44,216 | | | $ | 165,749 | |
Supplemental Information of Operating Results
For the three months ended March 31, 2021, the Company's consolidated condensed results of operations included net revenues of $92,637,000 and a net loss of $3,057,000 attributable to Topgolf for the period beginning March 8, 2021 (merger date) through April 4, 2021. The Topgolf results of operations include depreciation and amortization of $10,831,000, interest expense of $293,000 related to the accretion of the fair value adjustment on long-term debt, and transition-related costs of $400,000.
Note 6.7. Financing Arrangements
The Company's long-term debt obligations are summarized as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| Interest Rate | | Unamortized Original Issuance Discount and Debt Issuance Costs | | Carrying Value, net | | Carrying Value, net |
| Short-Term Credit Facilities | | | | | | | |
| U.S. Asset-Based Revolving Credit Facility | 3.25 | % | | $ | 1,652 | | | $ | 15,279 | | | $ | 22,130 | |
| Japan ABL Facility | 1.28 | % | | 0 | | | 0 | | | 0 | |
| | | | | | | |
| Long-Term Debt and Credit Facility | | | | | | | |
| Japan Term Loan Facility payable through August 2025 | 0.86 | % | | $ | 0 | | | $ | 16,257 | | | $ | 18,390 | |
| Term Loan Facility payable through January 2026 | 4.61 | % | | 18,125 | | | 422,275 | | | 428,175 | |
| Topgolf Term Loan payable through February 2026 | 7.00 | % | | 7,415 | | | 335,585 | | | 0 | |
| Topgolf Revolving Credit Facility | 4.25 | % | | 7,810 | | | 152,190 | | | 0 | |
| 2.75% Convertible Notes due May 2026 | 2.75 | % | | 72,889 | | | 185,861 | | | 183,126 | |
| Equipment Notes payable through March 2027 | 2.36% - 3.79% | | 0 | | | 29,747 | | | 31,822 | |
| Mortgage loans payable through July 2036 | 9.75% - 11.31% | | 0 | | | 46,743 | | | 0 | |
| Financed Tenant Improvements | 8.00 | % | | 0 | | | 3,764 | | | 3,650 | |
| | | $ | 106,239 | | | $ | 1,192,422 | | | $ | 665,163 | |
| Balance Sheet Location | | | | | | | |
| Accrued expenses | | | $ | 3,816 | | | $ | 17,432 | | | $ | 14,599 | |
| Long-term debt | | | 102,423 | | | 1,174,990 | | | 650,564 | |
| | | $ | 106,239 | | | $ | 1,192,422 | | | $ | 665,163 | |
Revolving Credit Facilities and Available Liquidity
In addition to cash on hand, as well as cash generated from operations, the Company relies on its primaryU.S. and Japan asset-based revolving credit facilities, as well as on the Topgolf revolving credit facility, to manage seasonal fluctuations in liquidity and to provide additional liquidity when the Company’s operating cash flows are not sufficient to fund the Company’s requirements. As of March 31, 2021, the Company had 175,279,000 outstanding under these facilities and $397,289,000 in cash and cash equivalents. As of March 31, 2021, the Company's available liquidity, which is comprised of cash on hand, including cash received from the issuance of Convertible Senior Notes in May 2020, and amounts available under the Company's its revolving credit facilities, after letters of credit and outstanding borrowings, was $713,067,000. As of March 31, 2020, the Company
had $335,593,000 outstanding under theseits U.S. and Japan facilities, $1,375,000 in outstanding letters of credit, and $166,635,000 in cash and cash equivalents. As of March 31, 2020, the Company's available liquidity, which is comprised of cash on hand and amounts available under bothits U.S. and Japan facilities, after letters of credit and outstanding borrowings, was $259,428,000. As of March 31, 2019, the Company had $214,482,000 outstanding under these facilities, $1,228,000 in outstanding letters of credit, and $78,939,000 in cash and cash equivalents. As of March 31, 2019, the Company's available liquidity, which is comprised of cash on hand and amounts available under both facilities, after letters of credit and outstanding borrowings, was $223,402,000.
PrimaryU.S. Asset-Based Revolving Credit Facility
In May 2019, the Company amended and restated its primary credit facility (theentered into a Fourth Amended and Restated Loan and Security Agreement as amended in August 2019, March 2020 and April 2020) with Bank of America N.A. and other lenders, (the “ABL Facility”), which provides a senior secured asset-based revolving credit facility of up to $400,000,000 (the "ABL Facility"), comprised of a $260,000,000 U.S. facility, a $70,000,000 German facility, a $25,000,000 Canadian facility and a $45,000,000 United Kingdom facility, in each case subject to borrowing base availability under the applicable facility. In March 2020, the Company amended the ABL Facility to add a stretch loan sub-facility of up to $30,000,000 (the “Stretch Term Loan Facility”) and the loans thereunder (the “Stretch Term Loans”), which may be borrowed pursuant to one borrowing at any time prior to September 30, 2020. The amounts outstanding under the ABL Facility are secured by certain assets, including cash (to the extent pledged by the Company), certain intellectual property, certain eligible real estate, inventory and accounts receivable of the Company’s subsidiaries in the United States, Germany, Canada and the United Kingdom. The real estate and intellectual property components of the borrowing base under the ABL Facility are both amortizing. The amount available for the real estate portion is reduced quarterly over a 15-year period, and the amount available for the intellectual property portion is reduced quarterly over a 3-year period.
As of March 31, 2020, the Company had $300,257,000 in borrowings outstanding under the ABL Facility and $1,375,000 in outstanding letters of credit. As of March 31, 2020, the Company had not yet utilized the Stretch Term Loan Facility. Amounts available under the ABL Facility fluctuate with the general seasonality of the business and increase and decrease with changes in the Company’s inventory and accounts receivable balances. With respect to the Company's Golf Equipment business, inventory balances are generally higher in the fourth and first quarters, primarily to meet demand during the height of the golf season, and accounts receivable are generally higher during the first half of the year when sales are higher. Average outstanding borrowings during the three months ended March 31, 20202021 were $204,236,000,$17,090,000, and average amounts available under the ABL Facility during the three months ended March 31, 2020,2021, after outstanding borrowings and letters of credit, was approximately $114,012,000.$246,984,000. Amounts borrowed under the ABL Facility may be repaid and borrowed as needed. The entire outstanding principal amount (if any) is due and payable in May 2024.
The ABL Facility includes certain restrictions including, among other things, restrictions on the incurrence of additional debt, liens, stock repurchases and other restricted payments, asset sales, investments, mergers, acquisitions and affiliate transactions. OnIn April 28, 2020, the Company amended the ABL Facility to permit a customary capped call transaction (see Convertible"Convertible Senior NotesNotes" below) in connection with the issuance of convertible debt securities by the Company and to permit the Company to incur loans or financial assistance of up to $50,000,000$50,000,000 pursuant to governmental programs enacted due to the COVID-19 outbreak.pandemic. As of March 31, 2021, the Company had not drawn on these funds. In addition, the ABL Facility imposes restrictions on the amount the Company could pay in annual cash dividends, including certain restrictions on the amount of additional indebtedness and requirements to maintain a certain fixed charge coverage ratio under certain circumstances. These restrictions do not materially limitIn addition, in connection with the Company's ability to pay future dividends at the current dividend rate. As of March 31, 2020,merger with Topgolf (see Note 6), the Company wasamended the ABL Facility to, among other things, permit the consummation of the merger, designate Topgolf and its subsidiaries as excluded subsidiaries under the ABL Facility and amend certain covenants and other provisions to allow the Company to make certain investments in, complianceand enter into certain transactions with all financial covenantsTopgolf. Fees in connection with this amendment will be combined with existing debt origination and amendment fees and amortized over the remaining term of the ABL Facility.
The ABL Facility includes certain restrictions including, among other things, restrictions on the incurrence of additional debt, liens, stock repurchases and other restricted payments, asset sales, investments, mergers, acquisitions and affiliate transactions. Additionally, the Company is subject to compliance with a fixed charge coverage ratio covenant of at least 1.0 to 1.0 during, and continuing 30 days after, any period in which the Company’s borrowing base availability, as amended, falls below 10% of the maximum facility amount or $40,000,000. Additionally, at any time the Stretch Term Loans are outstanding as of the end of any fiscal quarter, the Company is subject to compliance with a fixed charge coverage ratio of at least 1.1 to 1.0. The Company’s borrowing base availability was above $40,000,000 during the three months ended March 31, 2020,2021, and the Company was in compliance with the fixed charge coverage ratio as of March 31, 2020.2021. Had the Company not been in compliance with the fixed charge coverage ratio as of March 31, 2020,2021, the maximum amount of additional indebtedness that could have been outstanding on March 31, 20202021 would have been reduced by $40,000,000. As of March 31, 2021, in addition to the fixed charge coverage ratio covenant, the Company was in compliance with all other financial covenants of the ABL Facility.
The interest rate applicable to outstanding loans under the ABL Facility fluctuates depending on the Company’s “availability ratio," which is expressed as a percentage of (i) the average daily availability under the ABL Facility to (ii) the sum of the Canadian, the German, the U.K. and the U.S. borrowing bases, as adjusted. At March 31, 20202021 the Company’s trailing 12 month12-month average interest rate applicable to its outstanding loans under the ABL Facility was 4.36%3.43%. Additionally,
the ABL Facility provides for monthly fees of 0.25% of the unused portion of the ABL Facility and 0.50% of the Stretch Term Loan Facility until the earlier of the borrowing of the Stretch Term Loans and September 30, 2020.Facility.
The fees incurredFees in connection with the origination and amendment of the ABL Facility totaled $3,315,000, whichand prior amendments are amortized intoin interest expense over the term of the ABL Facility agreement.facility. Unamortized origination fees at March 31, 20202021 and December 31, 20192020 were $1,945,000$1,652,000 and $2,115,000,$1,891,000, respectively, of which $753,000$1,043,000 and $746,000,$1,031,000, respectively, were included in other current assets and $1,192,000$609,000 and $1,369,000,$859,000, respectively, were included in other long-term assets in the accompanying consolidated condensed balance sheets.
Japan ABL FacilitiesFacility
In January 2018,2021, the Company refinanced the asset-based loan agreement between its subsidiary in Japan and The Bank of Tokyo-Mitsubishi UFJ, Ltd (the "2018 Japan ABL Facility"), which provides a credit facility of up to
4,000,000,000 Yen (or U.S. $37,196,000,$36,128,000, using the exchange rate in effect as of March 31, 2020)2021) over a three-year term, subject to borrowing base availability under the 2018 Japan ABL Facility. The amounts outstanding are secured by certain assets, including eligible inventory and eligible accounts receivable. The Company had 3,800,000,000 Yen (or U.S. $35,336,000, using the exchange rate in effect as of March 31, 2020) in0 borrowings outstanding under the 2018 Japan ABL Facility as of March 31, 2020.2021. The 2018 Japan ABL Facility also includes certain restrictions including covenants related to certain pledged assets and financial performance metrics. As of March 31, 2020,2021, the Company was in compliance with these covenants.
The 2018 Japan ABL Facility expires in January 2022. The 2018 Japan ABL Facility is subject to an effective interest rate equal to the Tokyo Interbank Offered Rate (TIBOR)("TIBOR") plus 0.80%. The average interest rate under the 2018 Japan ABL Facility during 2020 was 0.87%. The 2018 Japan ABL Facility expires in January 2021.
On July 31, 2019, the Company entered into a new one-year asset-based loan facility ("2019 Japan ABL Facility" and collectively with the 2018 Japan ABL Facility, the "Japan ABL Facility") between its subsidiary in Japan and MUFG Bank, Ltd. for 2,000,000,000 Yen, (or approximately U.S. $18,598,000 using the exchange rate in effect as of March 31, 2020) and had 0 borrowings outstanding under the 2019 Japan ABL Facility as of March 31, 2020. The amounts outstanding are secured by certain assets, including eligible inventory and eligible accounts receivable. The 2019 Japan ABL Facility is subject to an effective interest rate equal to the TIBOR plus 1.0%, and is subject to certain restrictions including covenants related to certain pledged assets and financial performance metrics. The average interest rate under the 2019 Japan ABL Facility during 2020 was 1.07%1.20%.
Long-Term Debt
Equipment Notes
InBetween December 2017 and August 2020, the Company entered into a4 long-term financing agreementagreements (the "2017 Equipment Note""Equipment Notes") secured by certain equipment at the Company'swith Bank of America N.A. and other lenders to invest in its golf ball manufacturing facility. facility in Chicopee, Massachusetts, its North American Distribution Center in Roanoke, Texas, and in corporate IT equipment. The loans are secured by the underlying equipment at each facility and the IT equipment.
As of March 31, 20202021 and December 31, 2019,2020, the Company had $6,775,000a combined $29,747,000 and $7,357,000, respectively,$31,822,000 outstanding under the 2017these Equipment Note,Notes, respectively, of which $2,467,000$8,797,000 and $2,455,000 were reported$8,761,000 was included in current liabilities, respectively, and $4,308,000$20,950,000 and $4,902,000 were reported$23,061,000 was included in long-term liabilities,debt, respectively, in the accompanying consolidated condensed balance sheets.Consolidated Condensed Balance Sheets. The Company'sEquipment Notes accrue interest rate applicable to outstanding borrowings wasin the range of 2.36% and 3.79%. Total interest expense related to the 2017 Equipment Note recognized during, and have maturity dates between December 2022 and March 2027. During the three months ended March 31, 2020 was $68,000. The 2017 Equipment Note amortizes over a 5-year term.
In August 2019, the Company entered into a second long-term financing agreement (the "2019 Equipment Note") secured by certain equipment at the Company's golf ball manufacturing facility. As of March 31, 20202021 and December 31, 2019, the Company had $11,742,000 and $12,358,000, respectively, outstanding under the 2019 Equipment Note, of which $2,662,000 and $2,652,000 was reported in current liabilities, respectively, and $9,080,000 and $9,706,000 was reported in long-term liabilities, respectively, in the accompanying consolidated condensed balance sheets. The Company's interest rate applicable to outstanding borrowings was 3.21%. Total interest expense related to the 2019 Equipment Note recognized during the three months ended March 31, 2020 was $97,000. The 2019 Equipment Note amortizes over a 5-year term.
In March 2020, the Company entered into a third long-term financing agreement (the "2020 Equipment Note") secured by certain equipment at the Company's golf ball manufacturing facility. As of March 31, 2020 the Company had $9,766,000 outstanding under the 2020 Equipment Note, of which $1,395,000 was reported in current liabilities and $8,371,000 was reported in long-term liabilities in the accompanying consolidated condensed balance sheet. The Company's interest rate applicable to outstanding borrowings was 2.36%. There was 0recognized interest expense of $239,000 and $165,000, respectively, related to the 2020these Equipment Note recognized during the three months ended March 31, 2020. The 2020 Equipment Note amortizes over a 7-year term.
The 2017 Equipment Note, 2019 Equipment Note and the 2020 Equipment NoteNotes are subject to compliance with the financial covenants in the Company's ABL Facility. As of March 31, 2020,2021, the Company was in compliance with these covenants.
Mortgage Loans
In connection with the merger with Topgolf on March 8, 2021, the Company assumed 3 mortgage loans related to the construction of 3 venues. The loans bear annual interest rates ranging from 9.75% to 11.31% and require either monthly (i) principal and interest payments or (ii) interest only payments until their maturity dates, which range from July 2033 to July 2036. For loans requiring monthly interest only payments, the entire unpaid principal balance and any unpaid accrued interest is due on the maturity date. The mortgage loans are secured by the assets of each respective venue.
Term Loan B Facility
In January 2019, to fund the purchase price of the Jack Wolfskin acquisition, the Company entered into a Credit Agreement (the “Credit Agreement”) with Bank of America, N.A and other lenders party to the Credit Agreement (the "Term Lenders"). The Credit Agreement provides for a Term Loan B facility (the “Term Loan Facility”) in an aggregate principal of $480,000,000, which was issued less $9,600,000 in original issue discount and other transaction fees. Such principal amount may be increased pursuant to incremental facilities in the form of additional tranches of term loans or new commitments, up to a maximum incremental amount of $225,000,000, or an unlimited amount subject to compliance with a first lien net leverage ratio of 2.25 to 1.00. The Term Loan Facility is due in January 2026.
As of March 31, 20202021 and December 31, 2019,2020, the Company had $445,200,000$440,400,000 and $446,400,000,$441,600,000, respectively, outstanding under the Term Loan Facility, of which $4,800,000 is reflected in current liabilities. The amount outstanding as of March 31, 20202021 was offset by unamortized debt issuance costs of $14,891,000,$18,125,000, of which $2,590,000$3,816,000 was reflected in the short-term portion of the facility, and $12,301,000$14,309,000 was reflected in the long-term portion of the facility in the accompanying consolidated condensed balance sheet.sheets. Total interest and amortization expense recognized during the three months ended March 31, 2021 and 2020 was $5,847,000 and 2019 was $7,413,000, and $8,780,000, respectively.
Loans under the Term Loan Facility are subject to interest at a rate per annum equal to either, at the Company's option, the LIBOR rate or the base rate, plus 4.50% or 3.50%, respectively. The Company utilizes an interest rate hedge in order to mitigate the risk of interest rate fluctuations on this facility. See Note 16 for further information on this hedging contract. Principal payments of $1,200,000 are due quarterly, however the Company has the option to prepay any
outstanding loan balance in whole or in part without premium or penalty. In addition, as of December 31, 2019, the Term Loan Facility requires excess cash flow payments beginning after December 31, 2019.
In order to mitigate the risk of interest rate fluctuations under the Term Loan Facility, the Company converted $200,357,000 of principal into €176,200,000, and entered into a cross-currency swap combined with an interest rate hedge with the lenders party to the Credit Agreement to swap the floating rate of LIBOR plus 4.50% to a fixed rate of 4.60%. As of March 31, 2020, the Company unwound the cross-currency swap and maintained the interest rate hedge. During the three months ended March 31, 2020 and 2019, the Company recognized interest income of $1,313,000 and $1,018,000, respectively, under the cross-currency swap to offset the interest expense recognized under the Term Loan Facility.payments.
Loans outstanding under this facility are guaranteed by the Company's domestic subsidiaries. The loans and guaranties are secured by substantially all the assets of the Company and guarantors.
The Credit Agreement contains a cross-default provision with respect to any indebtedness of the Company as defined in the Credit Agreement, as well as customary representations and warranties and customary affirmative and negative covenants, including, among other things, restrictions on incurrence of additional debt, liens, dividends and other restricted payments, asset sales, investments, mergers, acquisitions and affiliate transactions. Events of default permitting acceleration under the Credit Agreement include, among others, nonpayment of principal or interest, covenant defaults, material breaches of representations and warranties, bankruptcy and insolvency events, certain cross defaults or a change of control. As of March 31, 2020,2021, the Company was in compliance with these covenants.
The following table presentsIn connection with the Company's combined aggregate amount of maturities for its 2017 Equipmentmerger with Topgolf (see Note 2019 Equipment Note, 2020 Equipment Note and6), the Company amended the Term Loan Facility overwith Bank of America, N.A. and the next five yearsTerm Lenders to, among other things, permit the consummation of the Merger and thereaftercertain other transactions contemplated in the Merger Agreement, designate Topgolf and its subsidiaries as of March 31, 2020. Amounts payableunrestricted subsidiaries under the Term Loan Facility, included below representwhich excludes them from certain requirements, covenants and representations, and amend certain covenants and other provisions to allow the minimumCompany to make certain investments in, and enter into certain transactions with Topgolf.
Topgolf Credit Facilities
In connection with the merger with Topgolf on March 8, 2021, the Company assumed a $350,000,000 term loan facility (the “Topgolf Term Loan”), and a $175,000,000 revolving credit facility with JPMorgan Chase Bank, N.A (the “Topgolf Revolving Credit Facility”), with JPMorgan Chase Bank, N.A., as Administrative Agent, Swingline Lender and Issuing Bank, RBC Capital Markets, as Syndication Agent, and the other agents, arrangers and lenders party thereto (together, the "Topgolf Credit Facilities"). At March 31, 2021, the outstanding balances under the Topgolf Term Loan and Topgolf Revolving Credit Facility were $343,000,000 and $160,000,000, respectively.
Borrowings under the Topgolf Term Loan accrue interest at a rate per annum equal to, at the Company's option, either (i) an alternate base rate determined by reference to the highest of (a) the prime rate of JPMorgan Chase Bank, N.A. (the administrative agent), (b) the federal funds effective rate plus 0.50%, (c) the adjusted one-month LIBOR rate plus 1.00%, and (d) 1.75%, or (ii) an adjusted LIBOR rate (for a period equal to the relevant interest period) (which shall not be less than 0.75%), in each case plus an applicable margin. The applicable margin for loans under the Topgolf Term Loan is 5.25% with respect to alternate base rate borrowings and 6.25% with respect to LIBOR borrowings. As of March 31, 2021, the interest rate on the outstanding borrowings pursuant to the Topgolf Term Loan was 7.00%.
Borrowings under the Topgolf Revolving Credit Facility accrue interest at a rate per annum equal to, at the Company's option, either (i) an alternate base rate determined by reference to the highest of (a) the prime rate of JPMorgan Chase Bank, N.A. (the administrative agent), (b) the federal funds effective rate plus 0.50%, (c) the adjusted one-month LIBOR rate plus 1.00%, and (d) 1.75%, or (ii) an adjusted LIBOR rate (for a period equal to the relevant interest period) (which shall not be less than 0.75%), in each case plus an applicable margin. The applicable rate for the Topgolf Revolving Credit Facility loans is 3.00% with respect to alternate base rate borrowings and 4.00% with respect to LIBOR borrowings subject to 2 stepdowns of 0.25% per annum upon achievement of specified first lien leverage ratio levels. As of March 31, 2021 the weighted-average interest rate on the outstanding borrowings pursuant to the Topgolf Revolving Credit Facility was 4.25%. In addition, the Company is required to pay a commitment fee under the Topgolf Revolving Credit Facility based upon the first lien leverage ratio (as defined in the Amended Credit Agreement) at a rate of up to 0.50% per annum, subject to 2 stepdowns of 0.13% per annum upon achievement of specified first lien leverage ratio levels. The Company must also pay customary letter of credit fees and agency fees.
The Topgolf Term Loan is payable in quarterly installments of 0.25% of the principal repaymentamount per quarter. The remaining unpaid balance on the Topgolf Term Loan, together with all accrued and unpaid interest thereon, is due and payable on February 8, 2026. Outstanding borrowings under the Topgolf Revolving Credit Facility do not amortize and are due and payable on February 8, 2024.
The terms of the Topgolf Credit Facilities requires the Company to maintain on a quarterly basis a total leverage ratio (measured on a trailing four-quarter basis) less than or equal to 5.50:1.00. On September 17, 2020, prior to the completion of the merger, Topgolf entered into an amendment to the Credit Agreement (the “Amended Credit Agreement”) to modify
the financial covenants and make certain other changes. The Amended Credit Agreement (i) suspends the total leverage ratio financial covenant through and including the fiscal quarter ending on or about March 31, 2022 and (ii) provides for an increased level of 7.75:1.00 for the fiscal quarter ending on or about June 30, 2022, in each caseunless the Company elects to restore the 5.50:1.00 total leverage ratio test (and eliminate the restrictions in the Amended Credit Agreement that apply during the period of relief) at an earlier date. Until the Company demonstrates compliance with the 5.50:1.00 total leverage ratio test for the period ending on or about September 30, 2022 (or terminate the period of relief at an earlier date after demonstrating compliance with the 5.50:1.00 total leverage ratio test), the Company is required to maintain unrestricted cash on hand and/or availability under the Topgolf Credit Facilities of not less than $30,000,000.
The Topgolf Credit Facilities also contains certain customary representations and warranties and affirmative covenants, and certain reporting obligations. The Topgolf Term Loan also contains certain customary representations and warranties and affirmative covenants, and certain reporting obligations.
Japan Term Loan Facility
In August 2020, the Company entered into a new five-year Term Loan facility (the "2020 Japan Term Loan Facility") between its subsidiary in Japan and Sumitomo Mitsui Banking Corporation (“SMBC”) for 2,000,000,000 Yen (or approximately U.S. $18,064,000 using the exchange rate in effect as of March 31, 2021). The 2020 Japan Term Loan Facility is due in August 2025.
As of March 31, 2021, the Company had 1,800,000,000 Yen (or approximately U.S. $16,257,000 using the exchange rate in effect as of March 31, 2021) outstanding, of which 400,000,000 Yen (or approximately U.S. $3,612,800 using the exchange rate in effect as of March 31, 2021) is reflected in current liabilities in the accompanying consolidated condensed balance sheets. Total interest expense recognized during the three months ended March 31, 2021 was 3,891,000 Yen (or approximately U.S. $37,000 using the exchange rate in effect as of March 31, 2021).
Loans under the 2020 Japan Term Loan Facility are subject to a rate per annum of either, at the Company’s option, SMBC TIBOR or TIBOR plus 80 basis points. Principal payments of 100,000,000 Yen (or approximately U.S. $903,000 using the exchange rate in effect as of March 31, 2021) are due quarterly and the facility imposes certain restrictions including covenants to certain financial performance obligations. As of March 31, 2020,2021, the Company does not anticipate excess cash flow repayments as defined by the Term Loan Facility.
|
| | | | |
| | | (in thousands) |
| Remainder of 2020 | | $ | 8,332 |
|
| 2021 | | 11,297 |
|
| 2022 | | 11,519 |
|
| 2023 | | 9,107 |
|
| 2024 | | 8,290 |
|
| Thereafter | | 428,835 |
|
| | | $ | 477,380 |
|
Convertible Senior Notes
On May 4, 2020, the Company issued $258,750,000 of 2.75% Convertible Senior Notes (the “2026“Convertible Notes”). The 2026Convertible Notes bear interest at a rate of 2.75% per annum on the principal amount, thereof, payable semi-annually in arrears on May 1 and November 1 of each year, beginning on November 1, 2020. The 2026Convertible Notes will mature on May 1, 2026, unless earlier redeemed or repurchased by the Company or converted. The 2026Convertible Notes will beare structurally subordinated to all existing and future indebtedness and other liabilities, including trade payables, and (to the extent the Company is not a holder thereof) preferred equity, if any, of the Company’s subsidiaries.
The Company may settle the Convertible Notes through cash settlement, physical settlement, or combination settlement at its election. Therefore, the Convertible Notes were separated into a liability component and an equity component in a manner that reflects the interest cost of a similar nonconvertible debt instrument. The carrying amount of the liability component totaling $185,861,000, as of March 31, 2021, was determined by measuring the fair value of a similar liability that does not have an associated equity component. The carrying amount of the equity component (the conversion feature) and discount on the Convertible Notes, totaling of $67,584,000, is amortized over the remaining term of approximately 5.1 years. The conversion feature of $76,508,000 was determined by deducting the fair value of the liability component from the initial proceeds ascribed to the Convertible Notes.
The Company incurred $8,527,000 of cost associated with the issuance of the Convertible Notes. These debt issuance costs were allocated between the debt and equity components in proportion to the allocation of the proceeds to those components. As such, $6,005,000 was allocated to the liability component of the Convertible Notes, and $2,522,000 was allocated to the equity conversion feature. Unamortized debt issuance costs at March 31, 2021 and December 31, 2020 were $5,305,000 and $5,504,000, respectively.
The discount on the Convertible Notes as wells as the debt issuance costs allocated to the liability component are amortized over the term of the Convertible Notes using the effective interest rate method.
All or any portion of the Convertible Notes may be converted at the conversion rate and at the holders' option on or after February 1, 2026 until the close of business on the second trading day immediately prior to the maturity date. Additionally, all or any portion of the Convertible Note may be converted at the conversion rate at the holders' option upon the occurrence of certain contingent conversion events, including (i) if the price of the Company’s common stock is more than 130% of the conversion price of the Convertible Notes for any 20 of 30 consecutive trading days ending on the last trading day of the calendar quarter, subsequent to the quarter ending September 30, 2020; (ii) if the trading price of the Convertible Notes, after a consecutive ten trading day period, is less than 98% of the closing price per share of the Company’s common stock multiplied by the conversion rate in effect (iii) upon the occurrence of certain corporate events or distributions on the Company’s common stock, as described in the Indenture; or (iv) if the Company calls the Convertible Notes for redemption.
Upon conversion, the Company has the option to settle the conversion obligation in any combination of cash and shares. The initial conversion rate is 56.7698 shares of the Company's common stock per $1,000 principal amount of Convertible Notes, which is equal to an initial conversion price of $17.62 per share. At March 31, 2021, the price of the Company's common stock was higher than the initial conversion price. Therefore, the if-converted value of the Convertible Notes exceeded the principal amount.
The Company may redeem all or part of the Convertible Notes (i) on or after May 6, 2023, but before the 40th trading day prior to the maturity date if the last reported sale price of the Company’s common stock exceeds 130% of the conversion price for any 20 of 30 consecutive trading days; (ii) upon a Fundamental Change (where holders can require settlement entirely in cash); or (iii) upon an Event of Default. The Company will also be required to pay additional interest upon (i) failure to timely file with the SEC, (ii) failure to allow the Notes to be freely tradable, or (iii) upon an Event of Default solely related to failure to timely file with the Trustee.
In connection with the pricing of the 2026Convertible Notes on April 29, 2020, the Company enteredpaid $31,775,000 to enter into privately negotiated capped call transactions ("Capped Calls") with Goldman Sachs & Co. LLC, Bank of America, N.A. and Morgan Stanley & Co. LLC as well as with each of the Option Counterparties.option counterparties. The capped call transactionsCapped Calls cover the aggregate number of shares of the Company’s common stock that initially underlie the 2026Convertible Notes, and are expected generally to reduce the potential dilution to the Company’s common stock upon any conversion of the notes.Convertible Notes, and/or offset any cash payments the Company is required to make in excess of the principal amount of converted Convertible Notes, with such reduction and/or offset subject to a cap based on the cap price. The cap price of the capped call transactionsCapped Calls is initially $27.10. The costCapped Calls are recorded as a reduction to additional paid-in capital and are not accounted for as derivatives.
The Convertible Notes will have an impact on the Company’s diluted earnings per share when the average market price of its common stock exceeds the conversion price of $17.62 per share, as the Company intends to settle the principal amount of the capped call transactionsConvertible Notes in cash upon conversion. As of March 31, 2021, the average market price of the Company's common stock was approximately $31,800,000.$27.74, which exceeded the conversion price. As such, the Company used the treasury stock method to compute the dilutive shares of common stock related to the Convertible Notes for periods the Company reported net income. Upon conversion, there will be no economic dilution from the Convertible Notes until the average market price of the Company’s common stock exceeds the cap price of $27.10 per share, as exercise of the Capped Calls offsets any dilution from the Convertible Notes from the conversion price up to the cap price. Capped Calls are excluded from the calculation of diluted earnings per share, as they would be anti-dilutive under the treasury stock method.
The following table presents the Company's combined aggregate amount of maturities for the Company's long-term debt over the next five years and thereafter as of March 31, 2021. Amounts payable under the Term Loan Facility included below represent the minimum principal repayment obligations. As of March 31, 2021, the Company does not anticipate excess cash flow repayments as defined by the Term Loan Facility. | | | | | | | | |
| | (in thousands) |
| Remainder of 2021 | | $ | 20,657 | |
| 2022 | | 20,680 | |
| 2023 | | 18,426 | |
| 2024 | | 176,702 | |
| 2025 | | 11,745 | |
| | |
| Thereafter | | 1,050,451 | |
| | $ | 1,298,661 | |
Note 7.8. Earnings per Common Share
Basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding for the period.
Diluted earnings per common share takes into account the potential dilution that could occur if outstanding securities were exercised. Dilutive securities are included in the calculation of diluted earnings per common share using the treasury stock method in accordance with ASC Topic 260, “Earnings per Share.” Dilutive securities include outstanding stock options, restricted stock units and performance share units granted to employees and non-employee directors (see Note 15), as well as common shares underlying convertible notes (see Note 7).
Weighted-average common shares outstanding—diluted is the same as weighted-average common shares outstanding—basic in periods when a net loss is reported or in periods when anti-dilution occurs.
The following table summarizes the computation of basic and diluted earnings per share (in thousands, except per share data):
| | | | | | | | | | | | | | | |
| | | | Three Months Ended
March 31, |
| | | | | | 2021 | | 2020 |
| Earnings per common share—basic | | | | | | | |
| | | | | | | |
| | | | | | | |
| Net income | | | | | $ | 272,461 | | | $ | 28,894 | |
Weighted-average common shares outstanding—basic(1) | | | | | 117,482 | | | 94,309 | |
| Basic earnings per common share | | | | | $ | 2.32 | | | $ | 0.31 | |
| Earnings per common share—diluted | | | | | | | |
| Net income | | | | | $ | 272,461 | | | $ | 28,894 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Weighted-average common shares outstanding—basic(1) | | | | | 117,482 | | | 94,309 | |
| Convertible notes weighted-average shares outstanding | | | | | 5,361 | | | 0 | |
| | | | | | | |
| Outstanding options, restricted stock units and performance share units | | | | | 1,727 | | | 1,367 | |
| Weighted-average common shares outstanding—diluted | | | | | 124,570 | | | 95,676 | |
| Diluted earnings per common share | | | | | $ | 2.19 | | | $ | 0.30 | |
|
| | | | | | | |
| | Three Months Ended
March 31, |
| | 2020 | | 2019 |
| Earnings per common share—basic | | | |
| Net income attributable to Callaway Golf Company | $ | 28,894 |
| | $ | 48,647 |
|
| Weighted-average common shares outstanding—basic | 94,309 |
| | 94,684 |
|
| Basic earnings per common share | $ | 0.31 |
| | $ | 0.51 |
|
| Earnings per common share—diluted | | | |
| Net income attributable to Callaway Golf Company | $ | 28,894 |
| | $ | 48,647 |
|
| Weighted-average common shares outstanding—basic | 94,309 |
| | 94,684 |
|
| Outstanding options, restricted stock units and performance share units | 1,367 |
| | 1,735 |
|
| Weighted-average common shares outstanding—diluted | 95,676 |
| | 96,419 |
|
| Diluted earnings per common share | $ | 0.30 |
| | $ | 0.50 |
|
In May 2020, the Company issued $258,750,000 of 2.75% Convertible Notes. The Convertible Notes will have an impact on the Company’s diluted earnings per share when the average market price of its common stock exceeds the conversion price of $17.62 per share, as the Company intends to settle the principal amount of the Convertible Notes in cash upon conversion. The Company is required under the treasury stock method to compute the potentially dilutive shares of common stock related to the Convertible Notes for periods the Company reports net income. As of March 31, 2021, the average market price of its common stock exceeded this conversion price per share and as such, the common shares underlying convertible notes were included in the diluted calculation for the three months ended March 31, 2021 (See Note 7).
For the three months ended March 31, 2021, securities outstanding totaling approximately 480,000 shares, comprised of stock options and restricted stock units were excluded from the calculation of earnings per common share—diluted as they would be anti-dilutive. For the three months ended March 31, 2020, there were 0 anti-dilutive securities and as such, there were no securities excluded from the calculation of diluteddilutive earnings per common share. As of March 31, 2019, the Company had a nominal number of securities that had an anti-dilutive effect on the calculation of diluted earnings per common share. Such securities were excluded from the calculation.
Note 8. Inventories
Inventories are summarized below (in thousands):
|
| | | | | | | |
| | March 31,
2020 | | December 31, 2019 |
| Inventories: | | | |
| Raw materials | $ | 75,823 |
| | $ | 76,140 |
|
| Work-in-process | 1,079 |
| | 860 |
|
| Finished goods | 335,788 |
| | 379,639 |
|
| | $ | 412,690 |
| | $ | 456,639 |
|
Note 9. Goodwill and Intangible Assets
Changes in the carrying amount of goodwill by operating and reportable segment are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Golf Equipment | | Apparel, Gear and Other | | | | Topgolf | | Total |
| Balance at December 31, 2020 | | $ | 27,025 | | | $ | 29,633 | | | | | | | $ | 0 | | | $ | 56,658 | |
| Acquisitions | | 504,568 | | | 58,652 | | | | | | | 1,412,361 | | | 1,975,581 | |
| Impairments | | 0 | | | 0 | | | | | | | 0 | | | 0 | |
| Foreign currency translation | | (182) | | | 0 | | | | | | | 0 | | | (182) | |
| Balance at March 31, 2021 | | $ | 531,411 | | | $ | 88,285 | | | | | | | $ | 1,412,361 | | | $ | 2,032,057 | |
Goodwill at March 31, 2020 decreased2021 increased to $200,787,000$2,032,057,000 from $203,743,000$56,658,000 at December 31, 2019.2020. This $2,956,000 decrease$1,975,399,000 increase was primarily due to the addition of $1,975,581,000 in goodwill in connection with the Topgolf merger in March 2021, of which the Company attributed $1,412,361,000 to the Topgolf business, and $504,568,000 and $58,652,000 to the golf equipment and apparel businesses, respectively (see Note 6). This increase was partially offset by changes in foreign currency rates period over period. The Company's goodwill is reported in both the Golf Equipment and Apparel, Gear and Other operating segments (see Note 19).
In accordance with ASC Topic 350, “Intangibles—Goodwill and Other,” the Company’s goodwill and non-amortizing intangible assets are subject to an annual impairment test or more frequently when impairment indicators are present. The Company considered the recent economic impacts caused by the COVID-19 pandemic, combined with the fact that the historical fair value of its reporting units has exceeded their carrying values, and concluded there was no impairment asAs of March 31, 2020. As such, there2021 and December 31, 2020 the Company recognized accumulated impairment losses on goodwill of $148,375,000. There were 0 impairment chargeslosses recognized during the three months ended March 31, 2020 as well as in the comparable period in 2019. Due to the economic uncertainty created by the COVID-19 pandemic, the Company will continue to monitor the impacts of COVID-19 on its business as new developments occur.2021 and 2020.
The following sets forth the intangible assets by major asset class (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Useful Life (Years) | | March 31, 2020 | | December 31, 2019 |
| | Gross(1) | | Accumulated Amortization | | Net Book Value | | Gross | | Accumulated Amortization | | Net Book Value |
| Indefinite-lived: | | | | | | | | | | | | | | | | | |
| Trade name, trademark, trade dress and other | NA | | $ | 450,015 |
| | | $ | — |
| | | $ | 450,015 |
| | $ | 453,837 |
| | | $ | — |
| | | $ | 453,837 |
|
| Amortizing: | | | | | | | | | | | | | | | | | |
| Patents | 2-16 | | 31,581 |
| | | 31,581 |
| | | — |
| | 31,581 |
| | | 31,581 |
| | | — |
|
| Customer and distributor relationships and other | 1-10 | | 53,683 |
| | | 15,834 |
| | | 37,849 |
| | 53,904 |
| | | 14,318 |
| | | 39,586 |
|
| Total intangible assets | | | $ | 535,279 |
| | | $ | 47,415 |
| | | $ | 487,864 |
| | $ | 539,322 |
| | | $ | 45,899 |
| | | $ | 493,423 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Useful
Life
(Years) | | March 31, 2021 | | |
| | Gross(1) | | Accumulated Amortization | | Translation Adjustment | | Net Book
Value | | | | | | | | |
| Indefinite-lived: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Trade name, trademark, trade dress and other | NA | | $ | 1,441,003 | | | | $ | — | | | | | $ | 9,088 | | | | $ | 1,431,915 | | | | | | | | | | | | | |
| Liquor licenses | NA | | 7,400 | | | | — | | | | | 0 | | | | 7,400 | | | | | | | | | | | | | |
| Amortizing: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Patents | 2-16 | | 32,041 | | | | 31,590 | | | | | 0 | | | | 451 | | | | | | | | | | | | | |
| Customer and distributor relationships and other | 1-10 | | 61,377 | | | | 21,233 | | | | | 1,345 | | | | 38,799 | | | | | | | | | | | | | |
| Developed technology | 1-10 | | 80,000 | | | | 832 | | | | | (142) | | | | 79,310 | | | | | | | | | | | | | |
| Total intangible assets | | | $ | 1,621,821 | | | | $ | 53,655 | | | | | $ | 10,291 | | | | $ | 1,557,875 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Useful
Life
(Years) | | December 31, 2020 |
| | Gross | | Accumulated Amortization | | | | Net Book
Value |
| Indefinite-lived: | | | | | | | | | | | | | |
| Trade name, trademark, trade dress and other | NA | | $ | 446,803 | | | | $ | — | | | | | | | | $ | 446,803 | |
| | | | | | | | | | | | | |
| Amortizing: | | | | | | | | | | | | | |
| Patents | 2-16 | | 31,581 | | | | 31,581 | | | | | | | | 0 | |
| Customer and distributor relationships and other | 1-10 | | 57,309 | | | | 19,773 | | | | | | | | 37,536 | |
| | | | | | | | | | | | | |
| Total intangible assets | | | $ | 535,693 | | | | $ | 51,354 | | | | | | | | $ | 484,339 | |
(1) The gross balance of intangible assets as of March 31, 20202021 includes a reduction dueadditions of $1,001,600,000 and $84,528,000 in indefinite-lived and amortizing intangible assets, respectively, related to the impact of foreign exchange rates of $3,822,000 on the Jack Wolfskin non-amortizing intangible asset, as well as $557,000 on the amortizing customer and distributor relationships.Topgolf merger in March 2021.
AggregateThe Company recognized amortization expense onrelated to intangible assets was approximatelyof $2,301,000 and $1,180,000 and $1,220,000 for the three months ended March 31, 2021 and 2020, respectively, in selling, general and 2019, respectively.administrative expenses in the accompanying consolidated condensed statements of operations.
Amortization expense related to intangible assets at March 31, 20202021 in each of the next five fiscal years and beyond is expected to be incurred as follows (in thousands):
|
| | | |
| Remainder of 2020 | $ | 3,584 |
|
| 2021 | 4,724 |
|
| 2022 | 4,548 |
|
| 2023 | 4,409 |
|
| 2024 | 4,409 |
|
| Thereafter | 16,175 |
|
| | $ | 37,849 |
|
| | | | | |
| Remainder of 2021 | $ | 13,704 | |
| 2022 | 14,332 | |
| 2023 | 12,517 | |
| 2024 | 12,517 | |
| 2025 | 12,427 | |
| Thereafter | 53,063 | |
| $ | 118,560 | |
Note 10. Joint Venture
The Company had a joint venture in Japan, Callaway Apparel K.K., with its long-time apparel licensee, TSI Groove & Sports Co, Ltd., ("TSI") for the design, manufacture and distribution of Callaway-branded apparel, footwear and headwear in Japan. In July 2016, the Company contributed $10,556,000, primarily in cash, for a 52% ownership of the joint venture, and TSI contributed $9,744,000, primarily in inventory, for the remaining 48%. In May 2019, the Company entered into a stock purchase agreement with TSI to acquire the remaining shares comprising the 48% ownership in Callaway Apparel K.K. for 2 billion Yen, or approximately $18,538,000 (using the exchange rate in effect on the acquisition date). The purchase was completed as of May 31, 2019 and, pursuant to the stock purchase agreement, the purchase price was paid in August 2019. As of March 31, 2020, the Company owned 100% of this entity and controlled all matters pertaining to its business operations and significant management decisions. Callaway Apparel K.K. is consolidated one month in arrears.
During the three months ended March 31, 2019, the Company recorded a net loss attributable to the non-controlling interest of $146,000 in its consolidated condensed statements of operations. As a result of the acquisition, the Company did not recognize net income attributable to non-controlling interests during the three months ended March 31, 2020.
Note 11. Investments
Investment in Topgolf International, Inc.
ThePrior to the completion of the merger with Topgolf, the Company ownsowned a minority interest of approximately 14.0%14.3% in Topgolf, International, Inc. doing business as the Topgolf Entertainment Group ("Topgolf"), the owner and operator of Topgolf entertainment centers,centers. On March 8, 2021, the Company completed its previously announced merger with Topgolf, in which ownership consiststhe Company issued shares of its common stock in exchange for 100% of the outstanding equity of Topgolf (see Note 6). As a result of the merger, the Company's shares of Topgolf comprised of common stock and various classes of preferred stock. In connection with this investment,stock were stepped up to their fair value and applied toward the Company hastotal purchase consideration in the merger. The fair value adjustment resulted in a preferred partner agreement with Topgolf ingain of $252,531,000, which the Company has preferred signage rights, rights asrecognized in other income in the preferred supplierfirst quarter of golf products used or offered for use2021.
Immediately prior to the merger and at Topgolf facilities at prices no less than those paid by the Company’s customers, preferred retail positioning in Topgolf retail stores, and other rights incidental to those listed above.
Topgolf is a privately held company, and as such, the common and preferred shares comprising the Company’s investment are illiquid and their fair value is not readily determinable. The Company accounts for changes in fair value in accordance with ASU No. 2016-01, which requires equity securities without a readily determinable fair value to be measured at cost, less impairments if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer.
There were 0 additional investments by the Company in Topgolf in each of the three months ended MarchDecember 31, 2020, or 2019. Thethe Company's total investment in Topgolf as of both March 31, 2020 and December 31, 2019 was $90,134,000. Since the adoption of ASU 2016-01, there were no observable transactions which would provide an estimate of fair value. As such, at March 31, 2020 and December 31, 2019, the Company's$111,442,000. The Company accounted for this investment in Topgolf is reflected at cost less impairments in accordance with ASU No.ASC 2016-01.
As of March 31, 2020, Prior to the merger, the Company hasdid not recordedrecord any impairments with respect to this investment. If
Investment in Full Swing Golf Holdings, Inc.
In connection with the future there is an observable price change as a result of an orderly transaction for the identical or similar investment inmerger with Topgolf, the Company would be required to assessacquired a strategic investment in Full Swing Golf Holdings, Inc. (“Full Swing”), which own indoor golf simulation technology, with patented dual-tracking technology, which delivers golf ball tracking data and measures ball flight indoors. The Company accounts for this investment at cost less impairments in accordance with ASC 2016-01. As of March 31, 2021, Topgolf held a 17.7% interest in Full Swing and the investment had a preliminary fair value of $7,250,000. The Company is the processes of assessing the fair value impact, if any, on each identified or similar class of Topgolf stock held bythis investment in connection with the Company, and write such stock up or down to its estimated fair value, which could have a material effect on the Company's financial position and results of operations.merger with Topgolf.
Note 12.11. Product Warranty
The Company has a stated two-year warranty policy for its golf clubs and certain Jack Wolfskin gear, as well as a limited lifetime warranty for its OGIO line of products. The Company’s policy is to accrue the estimated cost of satisfying future warranty claims at the time the sale is recorded. In estimating its future warranty obligations, the Company considers various relevant factors, including the Company’s stated warranty policies and practices, the historical frequency of claims, and the cost to replace or repair its products under warranty.
The Company’s estimates for calculating the warranty reserve are principally based on assumptions regarding the warranty costs of each product line over the expected warranty period. Where little or no claims experience may exist, the Company’s warranty obligation calculation is based upon long-term historical warranty rates of similar products until sufficient data is available. As actual model-specific rates become available, the Company’s estimates are modified to reflect the range of likely outcomes.
The warranty provision for the three months ended March 31, 2020 and March 31, 2019 includes the warranty reserves assumed in connection with the Jack Wolfskin acquisition (see Note 5).
The following table provides a reconciliation of the activity related to the Company’s reserve for warranty expense. The warranty reserve is included in other current liabilities in the accompanying consolidated condensed balance sheets as of March 31, 2021 and December 31, 2021. Amount in the table below are in thousands.
| | | | | | | | | | | | | | | |
| | | | Three Months Ended
March 31, |
| | | | | | 2021 | | 2020 |
| Beginning balance | | | | | $ | 9,364 | | | $ | 9,636 | |
| Provision | | | | | 2,456 | | | 1,808 | |
| | | | | | | |
| Claims paid/costs incurred | | | | | (1,120) | | | (1,653) | |
| Ending balance | | | | | $ | 10,700 | | | $ | 9,791 | |
Note 12. Selected Financial Statement Information
| | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| (In thousands) |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Inventories: | | | |
| Raw materials | $ | 72,330 | | | $ | 69,932 | |
| Work-in-process | 1,439 | | | 1,010 | |
| Finished goods | 258,806 | | | 281,602 | |
| Food and beverage | 3,739 | | | 0 | |
| $ | 336,314 | | | $ | 352,544 | |
| Property, plant and equipment, net: | | | |
| Land | $ | 52,151 | | | $ | 7,308 | |
| Buildings and leasehold improvements | 703,058 | | | 100,653 | |
| Machinery and equipment | 196,330 | | | 137,026 | |
| Furniture, computer hardware and equipment | 157,113 | | | 100,558 | |
| Internal-use software | 70,510 | | | 42,082 | |
| Production molds | 6,809 | | | 6,809 | |
| Construction-in-process | 236,897 | | | 13,299 | |
| 1,422,868 | | | 407,735 | |
| Accumulated depreciation | (230,590) | | | (261,240) | |
| $ | 1,192,278 | | | $ | 146,495 | |
| Accrued AP and expenses: | | | |
| Accrued expenses | $ | 201,538 | | | $ | 136,277 | |
| Accrued goods in-transit | 39,513 | | | 47,140 | |
| $ | 241,051 | | | $ | 183,417 | |
| Accrued employee compensation and benefits: | | | |
| Accrued payroll and taxes | $ | 62,488 | | | $ | 17,009 | |
| Accrued vacation and sick pay | 20,517 | | | 12,887 | |
| Accrued commissions | 4,653 | | | 1,041 | |
| $ | 87,658 | | | $ | 30,937 | |
During the three months ended March 31, 2021 and 2020, the Company recorded depreciation expense (in thousands):of $17,971,000 and $7,817,000, respectively, on the accompanying consolidated condensed statements of operations.
|
| | | | | | | |
| | Three Months Ended
March 31, |
| | 2020 | | 2019 |
| Beginning balance | $ | 9,636 |
| | $ | 7,610 |
|
| Provision | 1,808 |
| | 2,479 |
|
| Provision liability assumed from acquisition | — |
| | 2,327 |
|
| Claims paid/costs incurred | (1,653 | ) | | (1,633 | ) |
| Ending balance | $ | 9,791 |
| | $ | 10,783 |
|
Note 13. Income Taxes
The Company calculates its interim income tax provision in accordance with ASC Topic 270, “Interim Reporting,” and ASC Topic 740, “Accounting for Income Taxes.” At the end of each interim period, the Company estimates its annual effective tax rate and applies that rate to its ordinary quarterly earnings to calculate the tax related to ordinary income. The tax effects for other items that are excluded from ordinary income are discretely calculated and recognized in the period in which they occur.
In January 2019,March 2021, the Company acquired Jack Wolfskin forTopgolf through a non-taxable stock acquisition in a share exchange. The fair market value of Topgolf at acquisition was approximately $521,201,000 (including cash acquired of $58,096,000).$3,014,174,000. The Company recorded a deferred tax liability of $88,392,000approximately $288,000,000 related to the acquired intangibles, upon acquisition in addition to $11,384,000offset by approximately $154,000,000 of other acquired deferred tax assets, after consideration of acquired (seevaluation allowances. See Note 5).6 for further details.
The realization of deferred tax assets, including loss and credit carryforwards, is subject to the Company generating sufficient taxable income during the periods in which the deferred tax assets become realizable. DueAs a result of the Topgolf merger and the fact that Topgolf’s losses exceed Callaway’s income in recent years, the Company recorded a valuation allowance in its income tax provision of approximately $38,927,000 against certain of its net operating losses and tax credit carryforwards during the quarter. In connection with the purchase accounting related to the Company’s historical profitability, combinedmerger with future projections of profitability,Topgolf, the Company has determined that the majorityalso recorded a valuation allowance in goodwill of its U.S.approximately $80,566,000 against certain Topgolf deferred tax assets are more likely than notacquired in the merger. The Company will continue to be realized. The valuation allowance onassess this amount through the Company’s U.S. deferred tax assets as of March 31, 2020 primarily relates to state net operating loss carryforwards and credits that the Company estimates it may not be able to utilize in future periods.measurement period. With respect to Jack Wolfskin and previously existing non-U.S. entities, there continues to be sufficient positive evidence to conclude that realization of its deferred tax assets is more likely than not under applicable accounting rules, and therefore no significant valuation allowances have been established. The Company has considered
For the business disruption impacts from the COVID-19 pandemic and determined that this hasn’t impacted the realization of its deferred tax assets. As this is a dynamically evolving business disruption,quarter ended March 31, 2021, the Company will continuerecorded an income tax provision of $47,743,000 with an effective rate of 14.9%. The primary difference between the statutory rate and the effective rate relates to evaluateexcluding the COVID-19-related impactsbook gain on pre-merger Topgolf shares for tax purposes, offset by the valuation allowances on the realization of itsCompany's deferred tax assets as new information becomes available.
The Company's income tax provision was $9,151,000 and $9,556,000 fordiscussed above. For the three monthsquarter ended March 31, 2020, the Company recorded an income tax provision of $9,151,000 with an effective rate of 24.1%. The primary difference between the statutory rate and 2019, respectively. The decrease in the provision was primarily dueeffective rate relates to a decrease in pre-tax income compared to 2019. As a percentagethe effect of pre-tax income, the Company's effective tax rate increased to 24.1% in the first quarter of 2020 compared to 16.5% in the first quarter of 2019, primarily due to a shift in the mix of foreign earnings relative to the prior year combined with a decrease in earnings resulting from the business disruptions caused by the COVID-19 pandemic.and U.S. earnings.
At March 31, 2020,2021, the gross liability for income taxes associated with uncertain tax positions was $26,380,000.$28,420,000. Of this amount, $11,129,000$6,752,000 would benefit the Company’s consolidated condensed financial statements and effective income tax rate if favorably settled. The unrecognized tax liabilities are expected to decrease by approximately $449,000$452,000 during the next 12 months. The gross liability for uncertain tax positions increased by $387,000$118,000 for the three months ended March 31, 2020. The increase was2021, primarily due to increases in tax positions taken during the current quarter.quarter, as well as currency translation adjustments.
The Company recognizes interest and penalties related to income tax matters in income tax expense. For the three months ended March 31, 20202021 and 2019,2020, the Company's provision for income taxes includes a benefit of $331,000 and an expense of $29,000, and $32,000, respectively, related to the recognition of interest and/or penalties. As of March 31, 20202021 and December 31, 2019,2020, the gross amount of accrued interest and penalties included in income taxes payable in the accompanying consolidated condensed balance sheets was $1,698,000$901,000 and $1,669,000,$1,232,000, respectively.
The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is generally no longer subject to income tax examinations by tax authorities in the following major jurisdictions:
|
| | | | | | | |
| Tax Jurisdiction | | Years No Longer Subject to Audit |
| U.S. federal | | 2010 and prior |
| California (U.S.) | | 2008 and prior |
| Germany | | 2013 and prior |
| Japan | | 2014 and prior |
Japan | | 2013 and prior |
| South Korea | | 2014 and prior |
United Kingdom | | 2015 and prior |
| United Kingdom | | 2016 and prior |
Pursuant to Section 382 of the Internal Revenue Code, use of the Company's net operating losses and credit carry-forwards may be limited significantly if the Company were to experience a cumulative change in ownership of the Company's stock by “5-percent shareholders” that exceeds 50% over a rolling three-year period. The Company does not believe there has beenbelieves a cumulative change in ownership in excessoccurred as a result of 50% during any rolling three-year period, andthe merger with Topgolf, for the Company continuesand Topgolf. The resulting limitations are not expected to monitor changes in its ownership. If such a cumulative change did occur in any three-year period andhave an adverse impact on future combined earnings of the Company were limited in the amount ofCompany. The limitation on losses and credits it could use to offset its tax liabilities, the Company's results of operations andimpact future cash flows couldbut those impacts are not expected to be adversely impacted.significant.
Note 14. Commitments & Contingencies
Legal Matters
The Company is subject to routine legal claims, proceedings, and investigations incident to its business activities, including claims, proceedings, and investigations relating to commercial disputes and employment matters. The Company also receives from time to time information claiming that products sold by the Company infringe or may infringe patent, trademark, or other intellectual property rights of third parties. One or more such claims of potential infringement could lead to litigation, the need to obtain licenses, the need to alter a product to avoid infringement, a settlement or judgment, or some other action or material loss by the Company, which also could adversely affect the Company’s overall ability to protect its product designs and ultimately limit its future success in the marketplace. In addition, the Company is occasionally subject to non-routine claims, proceedings, or investigations.
The Company regularly assesses such matters to determine the degree of probability that the Company will incur a material loss as a result of such matters, as well as the range of possible loss. An estimated loss contingency is accrued in the Company’s financial statements if it is probable the Company will incur a loss and the amount of the loss can be reasonably estimated. The Company reviews all claims, proceedings, and investigations at least quarterly and establishes or adjusts any accruals for such matters to reflect the impact of negotiations, settlements, advice of legal counsel, and other information and events pertaining to a particular matter. All legal costs associated with such matters are expensed as incurred.
Historically, the claims, proceedings, and investigations brought against the Company, individually and in the aggregate, have not had a material adverse effect on the consolidated results of operations, cash flows or financial position of the Company. The Company believes that it has valid legal defenses to the matters currently pending against the Company. These matters are inherently unpredictable and the resolutions of these matters are subject to many uncertainties and the outcomes are not predictable with assurance. Consequently, management is unable to estimate the ultimate aggregate amount of monetary loss, amounts covered by insurance, or the financial impact that will result from such matters. In addition, the Company cannot assure that it will be able to successfully defend itself in those matters, or that any amounts accrued are sufficient. The Company does not believe that the matters currently pending against the Company will have a material adverse effect on the Company's consolidated business, financial condition, cash flows, or results of operations on an annual basis.
Unconditional Purchase Obligations
During the normal course of its business, the Company enters into agreements to purchase goods and services, including purchase commitments for production materials, as well as endorsement agreements with professional athletes 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. The Company has entered into many of these contractual agreements with terms ranging from one to four years.
The minimum obligation that the Company is required to pay as of March 31, 20202021 under these agreements is $115,205,000$109,882,000 over the next four years as follows (in thousands):
|
| | | |
| Remainder of 2020 | $ | 52,402 |
|
| 2021 | 29,681 |
|
| 2022 | 19,988 |
|
| 2023 | 10,335 |
|
| 2024 | 2,799 |
|
| | $ | 115,205 |
|
| | | | | |
| Remainder of 2021 | $ | 44,503 | |
| 2022 | 40,230 | |
| 2023 | 24,899 | |
| 2024 | 250 | |
| |
| |
| $ | 109,882 | |
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 total.
Other Contingent Contractual Obligations
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 product 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 and 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 consulting agreements that provide for payment of nominal fees upon the issuance of patents and/or the commercialization of research results. The Company has also issued guarantees in the form of standby letters of credit of $1,375,000 as of March 31, 2020.credit.
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 consolidated financial statements. The fair value of indemnities, commitments and guarantees that the Company issued during and as of March 31, 20202021 was not material to the Company’s financial position, results of operations or cash flows.
Employment Contracts
In addition, the Company has made contractual commitments to each of its officers and certain other employees providing for severance payments, including salary continuation, upon the termination of employment by the Company without substantial cause or by the officer for good reason or non-renewal. In addition, in order to assure that the officers would continue to provide independent leadership consistent with the Company’s best interest, the contracts also generally provide for certain protections in the event of a change in control of the Company. These protections include the payment of certain severance benefits, such as salary continuation, upon the termination of employment following a change in control.
Note 15. Share-Based Employee Compensation
As of March 31, 2020,2021, the Company had 23 shareholder approved stock plans under which shares were available for equity-based awards: the Callaway Golf Company Amended and Restated 2004 Incentive Plan, (the "2004 Incentive Plan")
and the 2013 Non-Employee Directors Stock Incentive Plan (the "2013 Directors Plan"). From time to time,and the 2021 Employment Inducement Plan. The Company grants stock options, restricted stock units, performance share units, phantom stock units, stock appreciation rights and other awards under these plans.
The Company accounts for its share-based compensation arrangements in accordance with ASC Topic 718, which requires the measurement and recognition of compensation expense for all share-based payment awards to employees and directors based on estimated fair values, and ASU No. 2014-12 for stock awards that are subject to performance measures. ASC Topic 718 further requires a reduction in share-based compensation expense by an estimated forfeiture rate. The forfeiture rate used by the Company is based on historical forfeiture trends. If actual forfeiture rates are not consistent with the Company’s estimates, the Company may be required to increase or decrease compensation expenses in future periods.
In connection with the merger with Topgolf, on March 8, 2021, the Company granted restricted stock units and performance share units to certain employees of the Company and Topgolf under the 2021 Employment Inducement Plan that was adopted by the Company as of the merger date. This inducement plan has substantially the same terms as the Company’s other stock plans.
Replacement Awards
In connection with the merger with Topgolf, the Company converted certain stock options previously held by former equity holders of Topgolf into options to purchase a number of shares of Callaway common stock, and certain outstanding
restricted stock awards of Topgolf, to the extent unvested, into shares of Callaway common stock (together, the "replacement awards"). On March 8, 2021, the Company converted approximately 3,168,000 shares underlying stock options with a fair value of $5,343,000, and approximately 188,000 restricted stock awards with a fair value of $4,794,000. The Company's stock price on the conversion date was $29.52. The Company used the Black-Scholes option-pricing model to determine the fair value of the stock options. The average fair value assumptions used in the Black-Scholes model on March 8, 2021 were a risk-free interest rate of 0.6%, an expected term of 3.7 years and an expected stock price volatility of 55.1%.
Compensation expense will be recognized over the remaining vesting terms of each award ranging between 1 to 3 years. During the three months ended March 31, 2021, the Company recognized $406,000 in compensation expense related to these awards, net of estimated forfeitures. At March 31, 2021, unamortized compensation expense related to stock options and restricted stock awards was $5,122,000 and $4,608,000, respectively, each of which will recognized over a weighted average period of 1.9 years.
Restricted Stock Units
Restricted stock units awarded under the 2004 Incentive Plan and the 2013 Directors Plan are valued at the Company’s closing stock price on the date of grant. Restricted stock unitsgrant, and generally vest over a one-one- to five-year period. Compensation expense for restricted stock units is recognized on a straight-line basis over the vesting period and is reduced by an estimate for forfeitures.
During the three months ended March 31, 20202021 and 2019,2020, the Company granted 268,000987,000 shares underlying restricted stock units, including inducement awards of 774,000, and 400,000268,000 shares underlying restricted stock units, respectively, at a weighted average grant-date fair value of $19.67$29.61 and $15.17$19.67 per share, respectively.
TotalThe Company recognized $2,175,000 and $1,615,000, in compensation expense, net of estimated forfeitures, recognized forrelated to restricted stock units was $1,615,000 and $1,799,000, for the three months ended March 31, 20202021 and 2019,2020, respectively. At March 31, 2020,2021, the Company had $12,132,000$46,360,000 of total unamortized compensation expense related to non-vested restricted stock units. That cost is expected to be recognized over a weighted-average period of 2.22.4 years.
Performance Based Awards
Performance based awards are stock-based awards in which the number of shares ultimately received depends on the Company's performance against specified metrics, over a one- to five-yearincluding earnings before interest, taxes, depreciation, amortization and stock compensation, earnings per share, adjusted pre-tax income and total shareholder return. The performance period ranges over one- to five years from the date of grant. These performance metrics are established by the Company at the beginning of the performance period. At the end of the performance period, the number of shares of stock that could be issued is fixed based upon the degree of achievement of the performance goals. The number of shares that could be issued can range from 0% to 200% of the participant's target award. The Company grants two types of performance based awards: performance share units and awards subject to total shareholder return metrics under the 2004 Incentive Plan.
Performance share units are initially valued at the Company's closing stock price on the date of grant. Stock compensation expense, net of estimated forfeitures, is recognized on a straight-line basis over the vesting period. The expense recognized over the vesting period is adjusted up or down based on the anticipated performance level during the performance period. If the performance metrics are not probable of achievement during the performance period, compensation expense would be reversed. The awards are forfeited if the threshold performance metrics are not achieved as of the end of the performance period. The performance share units cliff-vest in full over a period of three to five years from the date of grant.
Performance share units with total shareholder return requirements are awards that compare the performance of the Company's common stock over a three-year period to that of the Company's peer group. The fair value of these awards is derived using the Monte Carlo simulation which utilizes the stock volatility, dividend yield and market correlation of the Company and the Company's peer group. The Monte Carlo fair value is expensed on a straight-line basis over the vesting period, net of estimated forfeitures. The awards are forfeited if the threshold performance metrics are not achieved as of the end of the performance period. The performance share units cliff-vest in full over a three-year vesting period.
The Company granted 125,000 and 226,000 shares underlying performance share units duringDuring the three months ended March 31, 2020 and 2019, respectively,2021, the Company granted 1,346,000 shares underlying performance share units, including inducement awards of 1,149,000, at a weighted average grant-date fair value of $19.66 and $15.17 per share, respectively. The awards granted during 2020 and 2019 are subject to a three- to five-year performance period provided that (i) if certain first year performance goals are achieved, the participant could earn up to 50% of the three-year target award shares, subject to continued service through the vesting date, and (ii) if certain cumulative first- and second-year performance goals are achieved, the participant could earn up to an aggregate of 80% of the three-year target award shares (which includes any shares earned during the first year), subject to continued service through the vesting date. Based on the Company’s performance, participants earned a minimum of 50% of the target award shares granted in 2019, and 80% of the target award shares granted in 2018, in each case subject to continued service through the vesting date.
During the three months ended March 31, 2020 and 2019, the Company granted 125,000 and 149,000 shares underlying performance share units subject to total shareholder return requirements, respectively, at a weighted average grant-date fair value of $23.22 and $16.96, respectively.
$29.58. During the three months ended March 31, 2020, the Company performedgranted 125,000 shares underlying performance share units at a remeasurmentweighted average grant-date fair value of these awards based on the Company’s most recent financial targets resulting in a reduction to expense. $19.66.
During the three months ended March 31, 20202021 and 2019,2020, the Company recognized total compensation expense, for performance-based awards of $2,028,000 and $245,000, respectively, net of estimated forfeitures, for performance based awards of $245,000 and $1,636,000, respectively. The decrease in expense reflects a decrease in the anticipated degree of achievement against the performance metrics established on performance-based awards as a result of the uncertain future economic impact on the Company's business due to the COVID-19 pandemic.forfeitures. At March 31, 2020,2021, unamortized compensation expense related to these awards was $7,732,000,$65,237,000, which is expected to be recognized over a weighted-average period of 2.02.7 years.
Share-Based Compensation Expense
The table below summarizes the amounts recognized in the financial statements for the three months ended March 31, 20202021 and 20192020 for share-based compensation, including expense for restricted stock units, and performance share units, restricted stock awards and stock options (in thousands).
|
| | | | | | | |
| | Three Months Ended
March 31, |
| | 2020 | | 2019 |
| | |
| Cost of sales | $ | 156 |
| | $ | 249 |
|
| Operating expenses | 1,705 |
| | 3,186 |
|
| Total cost of share-based compensation included in income, before income tax | $ | 1,861 |
| | $ | 3,435 |
|
| | | | | | | | | | | | | | | |
| | | | Three Months Ended
March 31, |
| | | | | 2021 | | 2020 |
| | | |
| Cost of products | | | | | $ | 226 | | | $ | 156 | |
| Selling, general and administrative expenses | | | | | 4,210 | | | 1,587 | |
| Research and development expenses | | | | | 176 | | | 118 | |
| Total cost of share-based compensation included in income, before income tax | | | | | 4,612 | | | 1,861 | |
| Income tax benefit | | | | | 1,106 | | | 428 | |
| Total cost of employee share-based compensation, after tax | | | | | $ | 3,506 | | | $ | 1,433 | |
Note 16. Fair Value of Financial Instruments
Certain of the Company’s financial assets and liabilities are measured at fair value on a recurring and nonrecurring basis. Fair value is defined as the price that would be received to sell an asset or the price paid to transfer a liability (the exit price) in the principal and most advantageous market for the asset or liability in an orderly transaction between market participants. Assets and liabilities carried at fair value are classified using the following three-tier hierarchy:
Level 1: Quoted market prices in active markets for identical assets or liabilities;
Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and
Level 3: Fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
The following table summarizes the valuation of the Company’s foreign currency forward contracts (see Note 17) that are measured at fair value on a recurring basis by the above pricing levels at March 31, 20202021 and December 31, 20192020 (in thousands):
|
| | | | | | | | | | | | | | | |
| | Fair Value | | Level 1 | | Level 2 | | Level 3 |
| March 31, 2020 | | | | | | | |
| Foreign currency forward contracts—asset position | $ | 7,109 |
| | $ | — |
| | $ | 7,109 |
| | $ | — |
|
| Foreign currency forward contracts—liability position | (1,888 | ) | | — |
| | (1,888 | ) | | — |
|
| | | | | | | | |
| Interest rate hedge agreements—liability position | (19,690 | ) | | — |
| | (19,690 | ) | | — |
|
| | $ | (14,469 | ) | | $ | — |
| | $ | (14,469 | ) | | $ | — |
|
| December 31, 2019 | | | | | | | |
| Foreign currency forward contracts—asset position | $ | 61 |
| | $ | — |
| | $ | 61 |
| | $ | — |
|
| Foreign currency forward contracts—liability position | (766 | ) | | — |
| | (766 | ) | | — |
|
| | | | | | | | |
| Cross-currency debt swap agreements—asset position | 6,163 |
| | — |
| | 6,163 |
| | — |
|
| Cross-currency debt swap agreements—liability position | (25 | ) | | — |
| | (25 | ) | | — |
|
| | | | | | | | |
| Interest rate hedge agreements—asset position | (8,894 | ) | | — |
| | (8,894 | ) | | — |
|
| | $ | (3,461 | ) | | $ | — |
| | $ | (3,461 | ) | | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair
Value | | Level 1 | | Level 2 | | Level 3 |
| March 31, 2021 | | | | | | | |
Foreign currency forward contracts—asset position(1) | $ | 10,389 | | | $ | 0 | | | $ | 10,389 | | | $ | 0 | |
Foreign currency forward contracts—liability position(1) | (719) | | | 0 | | | (719) | | | 0 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Interest rate hedge agreements—liability position(2) | (14,047) | | | 0 | | | (14,047) | | | 0 | |
| | | | | | | |
| | | | | | | |
| $ | (4,377) | | | $ | 0 | | | $ | (4,377) | | | $ | 0 | |
| December 31, 2020 | | | | | | | |
Foreign currency forward contracts—asset position(1) | $ | 90 | | | $ | 0 | | | $ | 90 | | | $ | 0 | |
Foreign currency forward contracts—liability position(1) | (1,553) | | | 0 | | | (1,553) | | | 0 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Interest rate hedge agreements—liability position(2) | (17,922) | | | 0 | | | (17,922) | | | 0 | |
| $ | (19,385) | | | $ | 0 | | | $ | (19,385) | | | $ | 0 | |
(1)The fair value of the Company’s foreign currency forward contracts and cross-currency debt swap contracts are based on observable inputs that are corroborated by market data. Observable inputs include broker quotes, daily market foreign currency rates and forward pricing curves. Remeasurement gains and losses on foreign currency forward contracts and cross-currency debt swap contracts designated as cash flow hedges are recorded in accumulated other comprehensive income (loss) until recognized in earnings during the period that the hedged transactions take place. place (see Note 17).
(2)The fair value of interest rate hedge contracts are based on observable inputs that are corroborated by market data.
Observable inputs include daily market foreign currency rates and interest rate curves. Remeasurement gains and losses are recorded in accumulated other comprehensive income (loss) until recognized in earnings as interest payments are made or received on the Company’s variable-rate debt. Remeasurement gains and losses on foreign currency forward contracts that are not-designated as cash flow hedges are recorded in other income (expense) (see Note 17).
Disclosures about the Fair Value of Financial Instruments
The carrying values of cash and cash equivalents at March 31, 20202021 and December 31, 20192020 are categorized within Level 1 of the fair value hierarchy. The table below summarizesillustrates information about fair value relating to the Company’s financial assets and liabilities that are recognized in the accompanying consolidated condensed balance sheets as of March 31, 20202021 and December 31, 2020 (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2021 | | December 31, 2020 |
| | Carrying
Value | | Fair
Value | | Carrying
Value | | Fair
Value |
Term Loan Facility(1) | $ | 440,400 | | | $ | 442,140 | | | $ | 441,600 | | | $ | 443,243 | |
2020 Japan Term Loan Facility(2) | $ | 16,258 | | | $ | 14,675 | | | $ | 18,390 | | | $ | 16,083 | |
Convertible Notes(3) | $ | 258,750 | | | $ | 439,254 | | | $ | 258,750 | | | $ | 414,191 | |
U.S. Asset-Based Revolving Credit Facility(4) | $ | 16,931 | | | $ | 16,931 | | | $ | 22,130 | | | $ | 22,130 | |
| | | | | | | |
Equipment Notes(5) | $ | 29,747 | | | $ | 28,229 | | | $ | 31,822 | | | $ | 29,385 | |
Topgolf Revolving Credit Facility(6) | $ | 152,190 | | | $ | 152,190 | | | $ | 0 | | | $ | 0 | |
Mortgage Loans(6) | $ | 46,743 | | | $ | 46,743 | | | $ | 0 | | | $ | 0 | |
Topgolf Term Loan(6) | $ | 335,585 | | | $ | 335,585 | | | $ | 0 | | | $ | 0 | |
| | | | | | | |
| | | | | | | |
(1)In January 2019, as well asthe Company entered into a Term Loan Facility. The fair value of this debt is based on quoted prices for similar instruments in active markets combined with quantitative pricing models, and is therefore categorized within Level 2 of the fair value hierarchy. See Note 7 for further information.
(2)In August 2020, the Company entered into the 2020 Japan Term Loan Facility. The fair value is categorized within Level 2 of contingent contractsthe fair value hierarchy. The Company used discounted cash flows and market-based expectations for interest rates, credit risk, and the contractual terms of the debt to derive the fair value. See Note 7 for further information.
(3)In May 2020, the Company issued $258,750,000 of 2.75% Convertible Notes due in 2026. The fair value of this debt is based on quoted prices in secondary markets combined with quantitative pricing models, and is therefore categorized within Level 2 of the fair value hierarchy. For further discussion, see Note 7.
(4)The carrying value of the amounts outstanding under the Company's ABL Facility approximates the fair value due to the short-term nature of these obligations. The fair value of this debt is categorized within Level 2 of the fair value hierarchy based on the observable market borrowing rates. See Note 7 for information on the Company's credit facilities, including certain risks and uncertainties related thereto.
(5)The Company entered into equipment notes in 2017, 2019 and 2020 that represent financial instruments (in thousands).are secured by certain equipment at the Company's golf ball manufacturing facility. The fair value of this debt is categorized within Level 2 of the fair value hierarchy. The Company used discounted cash flows and market-based expectations for interest rates, credit risk, and the contractual terms of the debt to derive the fair value. See Note 7 for further information.
|
| | | | | | | | | | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
| | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Term Loan Facility(1) | $ | 445,200 |
| | $ | 411,810 |
| | $ | 446,400 |
| | $ | 450,864 |
|
Primary Asset-Based Revolving Credit Facility(2) | $ | 300,257 |
| | $ | 300,257 |
| | $ | 114,480 |
| | $ | 114,480 |
|
Japan ABL Facility(2) | $ | 35,336 |
| | $ | 35,336 |
| | $ | 30,100 |
| | $ | 30,100 |
|
Equipment notes(3) | $ | 28,283 |
| | $ | 28,283 |
| | $ | 19,715 |
| | $ | 19,715 |
|
Standby letters of credit(4) | $ | 1,375 |
| | $ | 1,375 |
| | $ | 1,075 |
| | $ | 1,075 |
|
| |
(1) | In January 2019, the Company entered into the Term Loan Facility. The fair value of this debt is categorized within Level 2 of the fair value hierarchy. The fair value of the Term Loan Facility as of March 31, 2020 was affected by volatile market conditions resulting from to the COVID-19 pandemic. See Note 6 for further information. |
| |
(2) | The carrying value of the amounts outstanding under the Company's ABL Facility and Japan ABL Facility approximates the fair value due to the short-term nature of these obligations. The fair value of this debt is categorized within Level 2 of the fair value hierarchy based on the observable market borrowing rates. See Note 6 for information on the Company's credit facilities, including certain risks and uncertainties related thereto. |
| |
(3) | In December 2017, August 2019 and March 2020, the Company entered into equipment notes that are both secured by certain equipment at the Company's golf ball manufacturing facility. The fair value of this debt is categorized within Level 2 of the fair value hierarchy. See Note 6 for further information. |
| |
(4) | The carrying value of the Company's standby letters of credit approximates the fair value as they represent the Company’s contingent obligation to perform in accordance with the underlying contracts, using the exchange rates in effect at March 31, 2020 and December 31, 2019. As such, the fair value of this contingent obligation is categorized within Level 2 of the fair value hierarchy. |
Nonrecurring Fair Value Measurements
The Company measures certain assets at fair value on a nonrecurring basis at least annually or more frequently if certain indicators are present. These assets include long-lived assets, goodwill, non-amortizing intangible assets and investments that are written down to fair value when they are held for sale or determined to be impaired. During eachthe second quarter of 2020, the Company considered the macroeconomic conditions related to the COVID-19 pandemic and its
potential impact to sales and operating income for the remainder of fiscal 2020, and determined that there were indicators of impairment and proceeded with a quantitative assessment of goodwill for all reporting units. As a result of the second quarter assessment, the Company determined that the fair value of one of its reporting units was less than its carrying value, and therefore recognized a goodwill impairment loss of $148,375,000 in the second quarter of 2020. In addition, the Company recognized an impairment loss of $25,894,000 on one of its trade names (see Note 9). There were 0 impairment losses recorded during the three months ended March 31, 2020 and 2019, there were no impairments recorded related to the Company's assets that are measured at fair value on a nonrecurring basis. Assets purchased in connection with the acquisitions of Jack Wolfskin were valued at their fair value on the date of purchase (see Note 5).2021 or March 31, 2020.
Note 17. Derivatives and Hedging
In the normal course of business, the Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to transactions of its international subsidiaries as well as fluctuations in foreign currency exchange rates and changes in interest rates relating to its long-term debt. The Company uses designated cash flow hedges and non-designated hedges in the form of foreign currency forward contracts as part of its strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates and to mitigate the impact of foreign currency translation on transactions that are denominated primarily in Japanese Yen, British Pounds, Euros, Canadian Dollars, Australian Dollars and Korean Won. The Company also uses cross-currency debt swap contracts and interest rate hedge contracts to mitigate the impact of variable rates on its long-term debt as well as changes in foreign currencies.
The Company accounts for its foreign currency forward contracts, cross-currency debt swap contracts and interest rate hedge contracts in accordance with ASC Topic 815. ASC Topic 815 requires the recognition of all derivative instruments as either assets or liabilities on the balance sheet, the measurement of those instruments at fair value and the recognition of changes in the fair value of derivatives in earnings in the period of change, unless the derivative qualifies as a designated cash flow hedge that offsets certain exposures. Certain criteria must be satisfied in order for derivative financial instruments to be classified and accounted for as a cash flow hedge. Gains and losses from the remeasurement of qualifying cash flow hedges are recorded as a component of accumulated other comprehensive income (loss) and released into earnings as a component of cost of goods soldproducts or net sales,revenue, other income (expense) and interest expense during the period in which the hedged transaction takes place. Remeasurement gains or losses of derivatives that are not elected for hedge accounting treatment are recorded in earnings immediately as a component of other income (expense).
Foreign currency forward contracts, cross-currency debt swap contracts and interest rate hedge contracts are used only to meet the Company’s objectives of minimizing variability in the Company’s operating results arising from foreign exchange rate movements and changes in interest rates. The Company does not enter into foreign currency forward contracts, cross-currency debt swap contracts and interest rate hedge contracts for speculative purposes. The Company utilizes counterparties for its derivative instruments that it believes are credit-worthy at the time the transactions are entered into and the Company closely monitors the credit ratings of these counterparties.
The following table summarizes the fair value of the Company's derivative instruments as well as the location of the asset and/or liability on the consolidated condensed balance sheets at March 31, 20202021 and December 31, 20192020 (in thousands):
| | | | | | | | | | | | | | | | | |
| Balance Sheet Location | | Fair Value of
Asset Derivatives |
| March 31, 2021 | | December 31, 2020 |
| Derivatives designated as cash flow hedging instruments: | | | | | |
| Foreign currency forward contracts | Other current assets | | $ | 2,376 | | | $ | 37 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Derivatives not designated as hedging instruments: | | | | | |
| Foreign currency forward contracts | Other current assets | | 8,013 | | | 53 | |
| | | | | |
| | | | | |
| | | | | |
| Total asset position | | $ | 10,389 | | | $ | 90 | |
|
| | | | | | | | | |
| | Balance Sheet Location | | Fair Value of Asset Derivatives |
| | March 31, 2020 | | December 31, 2019 |
| Derivatives designated as cash flow hedging instruments: | | | | | |
| Foreign currency forward contracts | Other current assets | | $ | 1,395 |
| | $ | 53 |
|
| Derivatives not designated as hedging instruments: | | | | | |
| Foreign currency forward contracts | Other current assets | | $ | 5,714 |
| | $ | 8 |
|
|
| | | | | | | | | |
| | Balance Sheet Location | | Fair Value of Liability Derivatives |
| | March 31, 2020 | | December 31, 2019 |
| Derivatives designated as cash flow hedging instruments: | | | | | |
| Foreign currency forward contracts | Accounts payable and accrued expenses | | $ | 129 |
| | $ | 24 |
|
| | | | | | |
| Cross-currency debt swap agreements | Accounts payable and accrued expenses | | — |
| | 25 |
|
| | | | | | |
| Interest rate hedge agreements | Accounts payable and accrued expenses | | 4,402 |
| | 1,865 |
|
| | Other long-term liabilities | | 15,288 |
| | 7,030 |
|
| Total | | | $ | 19,819 |
| | $ | 8,944 |
|
| Derivatives not designated as hedging instruments: | | | | | |
| Foreign currency forward contracts | Accounts payable and accrued expenses | | $ | 1,759 |
| | $ | 741 |
|
| | | | | | | | | | | | | | | | | |
| Balance Sheet Location | | Fair Value of
Liability Derivatives |
| March 31, 2021 | | December 31, 2020 |
| Derivatives designated as cash flow hedging instruments: | | | | | |
| Foreign currency forward contracts | Accrued AP and expenses | | $ | 186 | | | $ | 38 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Interest rate hedge contracts | Accrued AP and expenses | | 4,743 | | | 4,780 | |
| Interest rate hedge contracts | Other long-term liabilities | | 9,304 | | | 13,142 | |
| | | 14,233 | | | 17,960 | |
| Derivatives not designated as hedging instruments: | | | | | |
| Foreign currency forward contracts | Accrued AP and expenses | | 533 | | | 1,515 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Total liability position | | $ | 14,766 | | | $ | 19,475 | |
The Company's derivative instruments are subject to a master netting agreement with each respective counterparty bank and are therefore net settled at their maturity date. Although the Company has the legal right of offset under the master netting agreements, the Company has elected not to present these contracts on a net settlement amount basis, and therefore present these contracts on a gross basis on the accompanying consolidated condensed balance sheets at March 31, 20202021 and December 31, 2019.2020.
Cash Flow Hedging Instruments
Foreign Currency Forward Contracts
The Company uses foreign currency derivatives designated as qualifying cash flow hedging instruments, including foreign currency forward contracts to help mitigate the Company's foreign currency exposure on intercompany sales of inventory to its foreign subsidiaries. These contracts generally mature within 12 to 15 months from their inception. At March 31, 2021 and December 31, 2020, the notional amounts of the Company's foreign currency forward contracts designated as cash flow hedge instruments were approximately $75,968,000. At December 31, 2019, the Company had 0 outstanding foreign currency forward contracts designated as cash flow hedge instruments.$53,386,000, and $756,000, respectively.
As of March 31, 2020,2021, the Company recorded a net gain of $2,410,000$2,191,000 in accumulated other comprehensive income (loss)loss related to foreign currency forward contracts. Of this amount, net losses of $1,000$270,000 for the three months ended March 31, 20202021 were relievedremoved from accumulated other comprehensive income (loss)loss and recognized in cost of goods soldproducts for the underlying intercompany sales that were recognized, and net gains $232,000of $22,000 for the three months ended March 31, 2020,2021 were relievedremoved from accumulated other comprehensive income (loss)loss related to the amortization of forward points. There were 0 ineffective hedge gains or losses recognized during the three months ended March 31, 2020.2021. Based on the current valuation, the Company expects to reclassify net gains of $2,178,000$2,170,000 from accumulated other comprehensive income (loss)loss into net earnings during the next 12 months.
The Company recognized a net gainloss of $178,000$1,000 in cost of goods sold forproducts in the three months ended March 31, 2019.
Cross-Currency Debt Swap and Interest Rate Hedge Contract
In order to mitigate the risk of changes in interest rates associated with the Company's variable-rate Term Loan Facility and EUR denominated intercompany loan, the Company used a cross-currency debt swap and interest rate hedge, both designated as cash flow hedges (see Note 6)7) by converting a portion of the USD denominated Term Loan Facility, which has a higher variable interest rate, to a EuroEUR denominated synthetic note at a lower fixed rate. AsDuring the first quarter of March 31, 2020, the Company unwound the cross currency swap, butand as of June 30, 2020 the Company determined that the forecasted transaction in connection with the underlying EUR denominated intercompany loan was no longer probable of occurring. As such, the Company discontinued the hedge and released net gains of $11,046,000 from accumulated other comprehensive income to other income during the second quarter of 2020. The Company maintained the interest rate hedge related to the USD denominated Term Loan Facility in order to continue mitigating the risk of changes in interest rates. Over the life of the facility, the Company will receive variable interest payments from the counterparty lenders in exchange for the Company making fixed rate payments, without exchange of the underlying notional amount. As of March 31, 2020, theThe notional amount outstanding under the interest rate hedge contract was $197,853,000. As$195,849,000 and $196,350,000 as of March 31, 2021 and December 31, 2019, the notional amount outstanding under the cross-currency debt swap and interest rate hedge contract was $198,353,000.2020, respectively.
During the three months ended March 31, 2020,2021, the Company recorded a net gain of $15,081,000, respectively, in accumulated other comprehensive income (loss) related to the remeasurement of the cross currency swap contract. Of this amount, net gains of $7,048,000 were relieved from accumulated other comprehensive income (loss), of which $1,313,000 was recognized in interest expense and $5,735,000 related to foreign currency exchange was recognized in other income (expense) during the three months ended March 31, 2020. The Company recognized net gains of $3,714,000 in interest expense during the three months ended March 31, 2019.
During the three months ended March 31, 2020 the Company recorded a net loss of $11,233,000$2,690,000 related to the remeasurement of the interest rate hedge contract.contract in accumulated other comprehensive loss. Of this amount,these amounts, net losses of $434,000$1,185,000 were relieved from accumulated other comprehensive income (loss)loss and recognized in interest expense during the three months ended March 31, 2020. The Company recognized net losses of $10,000 in interest expense during the three months ended March 31, 2019.
2021. Based on the current valuation, the Company expects to reclassify a net loss of $4,410,000$4,747,000 related to the interest rate hedge contract from accumulated other comprehensive income (loss)loss into earnings during the next 12 months. The Company recognized net losses of $434,000 in interest expense during the three months ended March 31, 2020.
In connection with the cross-currency swap contract, during the three months ended March 31, 2020, the Company recorded a remeasurement net gain of $15,081,000 in accumulated other comprehensive loss. There were 0 remeasurement gains or losses recorded during the three months ended March 31, 2021. During the three months ended March 31, 2020, net gains of $7,048,000 were relieved from accumulated other comprehensive loss. The recognition of these net gains into earnings is summarized as follows:
•Net gains related to foreign currency of $5,735,000 were recognized in other income (expense) in the three months ended March 31, 2020. There were 0 net foreign currency gains or losses recognized in the three months ended March 31, 2021.
•Net gains of $1,313,000 were recognized in interest expense during the three months ended March 31, 2020, respectively. There were 0 net gains or losses recognized in interest income during the three months ended March 31, 2021.
The following tables summarize the net effect of all cash flow hedges on the consolidated condensed financial statements for the three months ended March 31, 20202021 and 20192020 (in thousands):
| | | | | | | | | | | | | | | | | | |
| | | | | | Gain/(Loss) Recognized in Other Comprehensive Income
(Effective Portion) |
| | | | Three Months Ended
March 31, |
| Derivatives designated as cash flow hedging instruments | | | | | | 2021 | | 2020 |
| Foreign currency forward contracts | | | | | | $ | 2,191 | | | $ | 2,410 | |
| Cross-currency debt swap agreements | | | | | | 0 | | | 15,081 | |
| Interest rate hedge agreements | | | | | | 2,690 | | | (11,233) | |
| | | | | | $ | 4,881 | | | $ | 6,258 | |
| | | | | Gain/(Loss) Recognized in Other Comprehensive Income
(Effective Portion) | | | Gain/(Loss) Reclassified from Other Comprehensive Income into Earnings
(Effective Portion) |
| | | Three Months Ended
March 31, | | | Three Months Ended
March 31, |
| Derivatives designated as cash flow hedging instruments | | 2020 | | 2019 | Derivatives designated as cash flow hedging instruments | | | 2021 | | 2020 |
| Foreign currency forward contracts | | $ | 2,410 |
| | $ | 546 |
| Foreign currency forward contracts | | | $ | (248) | | | $ | 233 | |
| Cross-currency debt swap agreements | | 15,081 |
| | 4,071 |
| Cross-currency debt swap agreements | | | 0 | | | 7,048 | |
| Interest rate hedge agreements | | (11,233 | ) | | (3,941 | ) | Interest rate hedge agreements | | | (1,185) | | | (434) | |
| | | $ | 6,258 |
| | $ | 676 |
| | | $ | (1,433) | | | $ | 6,847 | |
|
| | | | | | | | |
| | | Gain/(Loss) Reclassified from Other Comprehensive Income into Earnings (Effective Portion) |
| | | Three Months Ended
March 31, |
| Derivatives designated as cash flow hedging instruments | | 2020 | | 2019 |
| Foreign currency forward contracts | | $ | 233 |
| | $ | 146 |
|
| Cross-currency debt swap agreements | | 7,048 |
| | 3,714 |
|
| Interest rate hedge agreements | | (434 | ) | | (10 | ) |
| | | $ | 6,847 |
| | $ | 3,850 |
|
Foreign Currency Forward Contracts Not Designated as Hedging Instruments
The Company uses foreign currency forward contracts that are not designated as qualifying cash flow hedging instruments to mitigate certain balance sheet exposures (payables and receivables denominated in foreign currencies), as well as gains and losses resulting from the translation of the operating results of the Company’s international subsidiaries into U.S. dollars for financial reporting purposes. These contracts generally mature within 12 months from their inception. At March 31, 20202021 and December 31, 2019,2020, the notional amounts of the Company’s foreign currency forward contracts used to mitigate the exposures discussed above were approximately $193,617,000$248,253,000 and $72,119,000,$81,627,000, respectively. The Company estimates the fair values of foreign currency forward contracts based on pricing models using current market rates, and records all derivatives on the balance sheet at fair value with changes in fair value recorded in the consolidated
condensed statements of operations. The foreign currency contracts are classified under Level 2 of the fair value hierarchy (see Note 16).
The following table summarizes the location of net gains and losses in the consolidated condensed statements of operations that were recognized during the three months ended March 31, 20202021 and 2019,2020, respectively, in addition to the derivative contract type (in thousands):
|
| | | | | | | | | | |
| | Location of Net Gain Recognized in Income on Derivative Instruments | | Amount of Net Gain/(Loss) Recognized in Income on Derivative Instruments |
| Derivatives not designated as hedging instruments | | Three Months Ended
March 31, |
| | 2020 | | 2019 |
| Foreign currency forward contracts | | Other expense, net | | $ | 5,856 |
| | $ | 750 |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Location of Net Gain Recognized in Income on Derivative Instruments | | | | | | Amount of Net Gain Recognized in Income on
Derivative Instruments |
| Derivatives not designated as hedging instruments | | | | Three Months Ended
March 31, |
| | | | | 2021 | | 2020 |
| Foreign currency forward contracts | | Other expense, net | | | | | | $ | 10,628 | | | $ | 5,856 | |
In addition, for the three months ended March 31, 20202021 and 2019,2020, the Company recognized net foreign currency transaction losses of $5,147,000$1,463,000 and $5,338,000,$5,147,000, respectively, related to transactions with its foreign subsidiaries, respectively.subsidiaries.
Note 18. Accumulated Other Comprehensive Loss
The following table details the amounts reclassified from accumulated other comprehensive loss to cost of goods sold,products, as well as changes in foreign currency translation for the three months ended March 31, 2020.2021. Amounts are in thousands.
| | | | | | | | | | | | | | | | | | | | |
| | Derivative Instruments | | Foreign Currency Translation | | Total |
| | | | | | |
| Accumulated other comprehensive loss, December 31, 2020, after tax | | $ | (14,017) | | | $ | 7,471 | | | $ | (6,546) | |
| Change in derivative instruments | | 4,881 | | | 0 | | | 4,881 | |
| Net gains reclassified to cost of products | | 248 | | | 0 | | | 248 | |
| | | | | | |
| Net gains reclassified to interest expense | | 1,185 | | | 0 | | | 1,185 | |
| Income tax provision on derivative instruments | | (971) | | | 0 | | | (971) | |
| Foreign currency translation adjustments | | 0 | | | (16,243) | | | (16,243) | |
| Accumulated other comprehensive loss, March 31, 2021, after tax | | $ | (8,674) | | | $ | (8,772) | | | $ | (17,446) | |
|
| | | | | | | | | | | | |
| | | Derivative Instruments | | Foreign Currency Translation | | Total |
| Accumulated other comprehensive loss, December 31, 2019, after tax | | $ | (4,203 | ) | | $ | (18,219 | ) | | $ | (22,422 | ) |
| Change in derivative instruments | | 6,258 |
| | — |
| | 6,258 |
|
| Net gains reclassified to cost of goods sold | | (233 | ) | | — |
| | (233 | ) |
| Net gains reclassified to other income (expense) | | (5,735 | ) | | — |
| | (5,735 | ) |
| Net gains reclassified to interest expense | | (879 | ) | | — |
| | (879 | ) |
| Income tax benefit on derivative instruments | | 430 |
| | — |
| | 430 |
|
| Foreign currency translation adjustments | | — |
| | (14,936 | ) | | (14,936 | ) |
| Accumulated other comprehensive loss, March 31, 2020, after tax | | $ | (4,362 | ) | | $ | (33,155 | ) | | $ | (37,517 | ) |
Note 19. Segment Information
TheOn March 8, 2021 the Company has 2completed its merger with Topgolf. Topgolf is primarily a services-based business that provides hospitality offerings and golf entertainment experiences, which is uniquely different compared to the Company's Golf Equipment and Apparel, Gear and Other businesses, which produce, distribute and sell goods through various sales channels. Accordingly, based on the Company's re-assessment of its operating segments, the Company added a third operating segment for its Topgolf business. Therefore, as of March 31, 2021, the Company had 3 reportable operating segments: Golf Equipment, operating segment and Apparel, Gear and Other operating segment. and Topgolf.
The Golf Equipment operating segment which is comprised of product revenues and expenses that encompass golf club and golf ball products, includesincluding Callaway Golf brandedGolf-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 includesis comprised of product revenues and expenses for the newly acquired Jack Wolfskin outdoor apparel, gear and accessories business, the TravisMathew golf and lifestyle apparel and accessories business, the Callaway soft goods business and the Callaway and OgioOGIO business, which consists of golf apparel and accessories (including golf bags and gloves), storage gear for sport and personal use, anduse. This segment also includes royalties from licensing of the Company’s trademarks and service
marks for various soft goods products.
The Topgolf operating segment is primarily comprised of service revenues and expenses for its Company-operated Topgolf venues equipped with technology-enabled hitting bays, multiple bars, dining areas and event spaces, as well as Toptracer ball-flight tracking technology used by independent driving ranges and broadcast television, and the Company's WGT digital golf game.
There are no significant intersegment transactions during the three months ended March 31, 2021 or 2020.
The tables below containcontains information utilized by management to evaluate its operating segments for the interim periods presented (in thousands).
| | | | | | | | | | | | | | | |
| | | | Three Months Ended
March 31, |
| | | | | | 2021 | | 2020 |
| Net revenues: | | | | | | | |
| Golf Equipment | | | | | $ | 376,882 | | | $ | 291,661 | |
| Apparel, Gear and Other | | | | | 182,102 | | | 150,615 | |
Topgolf(1) | | | | | 92,637 | | | 0 | |
| Total net revenues | | | | | $ | 651,621 | | | $ | 442,276 | |
| | | | | | | |
| Income before income taxes: | | | | | | | |
| Golf Equipment | | | | | $ | 84,921 | | | $ | 58,620 | |
| Apparel, Gear and Other | | | | | 20,490 | | | (3,799) | |
| Topgolf | | | | | 3,954 | | | 0 | |
| Total segment operating income | | | | | 109,365 | | | 54,821 | |
Reconciling items(2) | | | | | 210,839 | | | (16,776) | |
| Total income before income taxes | | | | | $ | 320,204 | | | $ | 38,045 | |
| | | | | | | |
Additions to long-lived assets:(3) | | | | | | | |
| Golf Equipment | | | | | $ | 6,425 | | | $ | 16,962 | |
| Apparel, Gear and Other | | | | | 5,066 | | | 10,124 | |
| Topgolf | | | | | 26,118 | | | 0 | |
| Total additions to long-lived assets | | | | | $ | 37,609 | | | $ | 27,086 | |
|
| | | | | | | |
| | Three Months Ended
March 31, |
| | 2020 | | 2019(1) |
| Net sales: | | | |
| Golf Equipment | $ | 291,661 |
| | $ | 323,619 |
|
| Apparel, Gear and Other | 150,615 |
| | 192,578 |
|
| | $ | 442,276 |
| | $ | 516,197 |
|
| Income before income taxes: | | | |
| Golf Equipment | $ | 58,620 |
| | $ | 70,652 |
|
| Apparel, Gear and Other | (3,799 | ) | | 22,060 |
|
Reconciling items(2) | (16,776 | ) | | (34,655 | ) |
| | $ | 38,045 |
| | $ | 58,057 |
|
Additions to long-lived assets:(3) | | | |
| Golf Equipment | $ | 16,962 |
| | $ | 5,417 |
|
| Apparel, Gear and Other | 10,124 |
| | 4,392 |
|
| | $ | 27,086 |
| | $ | 9,809 |
|
(2)Reconciling items represent the deduction of corporate general and administration expenses and other income (expenses), which are not utilized by management in determining segment profitability. Reconciling items for the three months ended March 31, 2021 also include transaction costs of $15,755,000 and $2,248,000 for non-cash amortization expense for intangible assets acquired in connection with the merger with Topgolf (See Note 6), in addition to a gain of $252,531,000 related to the fair value step-up on the Company's investment in Topgolf (see Note 10). Reconciling items for the three months ended March 31, 2020 included expenses related to the Company's transition to the new North America Distribution Center, in addition to other integration costs associated with Jack Wolfskin.
(3)Additions to long-lived assets are comprised of purchases of property, plant and equipment.
| |
(1) | The Company continues to refine its expense allocation methodology between operating segments. As a result, the Company reclassified certain information technology expenses between the segments in the first quarter of 2019 in order to conform with the current presentation. |
| |
(2) | Reconciling items represent the deduction of corporate general and administration expenses and other income (expenses), which are not utilized by management in determining segment profitability. The decrease in reconciling items for the three months ended March 31, 2020 compared to March 31, 2019 was primarily due to an increase of $8,325,000 in net gains recognized on hedging contracts combined with a decrease, primarily in employee costs and general and administrative expenses, in the first quarter of 2020. Additionally, during the first quarter of 2019, the reconciling items included non-recurring charges of $4,723,000 in the first quarter of 2019 related to the acquisition of Jack Wolfskin. See Note 6 for information on the Company's credit facilities and long-term debt obligations. |
| |
(3) | Additions to long-lived assets are comprised of purchases of property, plant and equipment. |
Note 20. Subsequent Event39
The Company's golf equipment and soft goods businesses in the first quarter of 2020 were significantly, adversely impacted by the COVID-19 outbreak, which the World Health Organization declared a pandemic in early March 2020. The pandemic resulted in the temporary closure of many of the Company's facilities around the world, including its headquarters in the U.S., sales offices, distribution centers, manufacturing facilities and retail locations. As a result of these regulatory responses, portions of the Company's worldwide business operated, and continues to operate, on a limited basis. This had a significant adverse impact on the Company's net sales in the first quarter of 2020, most notably in its retail and wholesale businesses. While this business disruption is expected to be temporary, the current circumstances are dynamic and the impacts of COVID-19 on the Company’s business operations, including the duration and impact on overall customer demand, cannot be reasonably estimated at this time. The Company will continue to monitor its business and market conditions as new developments occur.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 months ended March 31, 2021, including a gain to step-up the Company's former investment in Topgolf to its fair value, amortization expense of intangible assets associated with the Jack Wolfskin, OGIO, TravisMathew acquisitions and more recently the merger with Topgolf, the discount amortization of the Convertible Notes issued in May 2020, a valuation allowance on certain deferred tax assets, in addition to other non-recurring expenses. For the three months ended March 31, 2020, non-GAAP financial results exclude certain non-cash charges, including amortization expense of intangible assets associated with the Jack Wolfskin, OGIO and TravisMathew acquisitions, in addition to non-recurring costs associated with the Company's transition to the new North America Distribution Center, in addition to other integration costs associated with Jack Wolfskin.
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 developssells a full line of high quality soft goods, including golf bags, apparel, footwear and other golf accessories. In 2017, the Company expanded its soft goods lines with the acquisitions of OGIO and TravisMathew. Under the OGIO brand, the Company offers a full line of premium personal storage gear for sport and personal use a line of performance outerwear for men, and golf and apparel accessories. TravisMathew offers a full line of premium golf and lifestyle apparel as well as footwear and accessories. In January 2019, the Company completed the acquisition of JW Stargazer Holding GmbH, the owner of the international, premium outdoor apparel, gear and accessories brand, Jack Wolfskin. This acquisition to further enhanced the Company's lifestyle category and provides a platform for future growth in the active outdoor and urban outdoor categories. The Company's soft goods under the Callaway, OGIO, TravisMathew and Jack Wolfskin brands are largely designed and developed internally.
On March 8, 2021, the Company completed its previously announced merger with Topgolf. Topgolf is a leading tech-enabled golf entertainment business, with an innovative platform that comprises its state-of-the-art open-air golf and entertainment venues, revolutionary Toptracer ball-tracking technology and innovative media platform. The combined
company will benefit from a compelling family of brands with reach across multiple channels including retail, venues, e-commerce and digital communities. The Company's results of operations below therefore present the consolidated results of the Company and Topgolf for the quarter ended March 31, 2021.
The Company’s Topgolf subsidiary operates on a 52- or 53-week fiscal year ending on the Sunday closest to December 31. As such, the Topgolf financial information included in the Company’s consolidated condensed financial statements for the quarter ended March 31, 2021, is for the period beginning March 8, 2021 (merger date) through April 4, 2021. Additionally, based on the Company's assessment of the combined business, the Company modified the presentation of its consolidated condensed statement of operations for the three months ended March 31, 2021 and 2020. For further information about the merger with Topgolf see Note 6 "Business Combinations" to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q.
The Company’s Topgolf operating segment is comprised of Topgolf venues, Toptracer and media that leverage its brand, proprietary technology, and hospitality offerings to create entertainment experiences for its guests.
The Venues business consists of Company-operated venues within the United States and company-operated and franchised venues outside the United States. Topgolf’s venues offer state-of-the-art entertainment facilities with multiple forms of entertainment and are equipped with technology-enabled hitting bays, multiple bars, dining areas and exclusive event spaces. Revenue from company-operated venues is primarily derived from food and beverage, gameplay, and events. Topgolf receives a royalty from its franchised locations. As of March 31, 2021, Topgolf had 60 venues operating in the United States with an additional seven venues under construction, three Company-operated venues in the United Kingdom and three franchised venues (Australia, Mexico and United Arab Emirates), in addition to one Company-operated venue under construction in the United Kingdom and one franchised venue under construction in Germany.
Topgolf has other lines of business, including the Toptracer ball-flight tracking technology, which is licensed to independent driving ranges and used in golf broadcasts, the World Golf Tour digital golf game, digital content creation and sponsorship operations. As of March 31, 2021, Topgolf had 10,173 Toptracer bays installed.
Operating and Reportable Segments
The Company has twothree operating and reportable segments, namely Golf Equipment, and Apparel, Gear and Other.Other and Topgolf.
The Golf Equipment operating segment, which is comprised of golf club and golf ball products, includes Callaway Golf branded woods, hybrids, irons, wedges, Odyssey putters, including Toulon Design putters by Odyssey, packaged sets, Callaway Golf and Strata branded golf balls and sales of pre-owned golf clubs.
The Apparel, Gear and Other operating segment includes the newly acquired Jack Wolfskin outdoor apparel, gear and accessories business, the TravisMathew golf and lifestyle apparel and accessories business, and the Callaway and OGIO businesses, which consist of golf apparel and accessories, storage gear for sport and personal use, and royalties from licensing of the Company’s trademarks and service marks for various soft goods products.
The Topgolf operating segment includes Company-operated Topgolf venues equipped with technology-enabled hitting bays, multiple bars, dining areas and event spaces, franchised venues outside of the United States, Toptracer ball-flight tracking technology used by independent driving ranges and broadcast television and the Company's WGT digital golf game.
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 SalesProducts and Services
The Company’s cost of salesproducts 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. SeeIn addition, cost of products include hardware costs with respect to Topgolf's Toptracer license agreements classified as sales-type leases, and retail merchandise costs for products sold in retail shops within Topgolf venue facilities.
The Company’s cost of services primarily consists of food and beverage costs and transaction fees with respect to in-app purchases within the Company’s WGT digital golf game. Food and beverage costs are variable by nature, change with sales volume, and are impacted by product mix and commodity pricing.
Other Venue Expenses
Other venue expenses consist of salaries and wages, bonuses, commissions, payroll taxes, and other employee costs that directly support venue operations, rent and occupancy costs, property taxes, depreciation associated with venues, supplies, credit card fees and marketing expenses. The Company anticipates that expenses associated with labor and benefits will increase in the foreseeable future as the Topgolf business continues to expand its operations. Other venue expenses include both fixed and variable components and are therefore not directly correlated with revenue.
Venue Pre-Opening Costs
Venue pre-opening costs primarily include costs associated with activities prior to the opening of a new company-operated venue, as well as other costs that are not considered in the evaluation of ongoing performance. The Company expects to continue incurring pre-opening costs as it executes its growth trajectory of adding new company-operated venues. Pre-opening costs are expected to fluctuate based on the timing, size and location of new company-operated venues.
For a further discussion of revenue and costs on the Company's segments, see "Operating SegmentsSegment Results for the Three Months Ended March 31, 20202021 and 2019—2020—Segment Profitability" below for further discussion of gross margins.Profitability."
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.
Topgolf
Operating results fluctuate from quarter to quarter due to seasonal factors. Historically, venues experience nominally higher second and third quarter revenues associated with the spring and summer. Topgolf’s first and fourth quarters have historically had lower revenues at its venues as compared to the other quarters due to cooler temperatures. Seasonality is expected to be a factor in Topgolf's results of operations. As a result, factors affecting peak seasons at venues, such as adverse weather, could have a disproportionate effect on its operating results.
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
Management is pleased with the overall state and trends of the Company’s business and performance for the first quarter of 2021. The Company completed its merger with Topgolf on March 8, 2021, which has started strongly, contributing an incremental $92.6 million in revenues for the first quarter of 2021, which represented four weeks of Topgolf revenue. Additionally, the Company’s Golf Equipment business is continuing to experience unprecedented demand resulting in an increase in revenues of $85.2 million or 29.2% and the Company’s Apparel, Gear and Other business is recovering from the pandemic faster than anticipated resulting in a $31.5 million increase or 20.9% in revenue for the quarter compared to the Resultsfirst quarter of Operations2020. As a result, the Company’s net revenues for the first quarter of 2021 increased 47.3% to $651.6 million compared to the first quarter of 2020, a new first quarter record for the Company.
Operating income increased 87.1% to $76.1 million in the first quarter of 2021 compared to the first quarter of 2020. This improvement was driven by the increase in net revenues across all business segments combined with operating expense leverage and Financial Conditionfavorable foreign currency exchange rates. This improvement was partially offset by an increase in freight costs, lower in-store retail revenue primarily in the soft goods segment driven by further government mandated shutdowns in central Europe, and an increase in non-recurring charges, primarily due to acquisition costs in connection with the merger with Topgolf.
The Company'sInterest expense increased $8.3 million to $17.5 million in the first quarter of 2021 compared to $9.2 million in the first quarter of 2020, which was largely the result of interest on the Company’s convertible note offering completed in May 2020 as well as incremental Topgolf interest related to the debt and deemed landlord financed lease obligations assumed in the merger with Topgolf.
In connection with the merger with Topgolf, the Company wrote up its pre-merger investment in Topgolf to its fair value, and recognized a gain of $252.5 million in the first quarter of 2021.
In connection with the merger with Topgolf, the Company acquired cash of $171.3 million and assumed long-term debt of $535.1 million. Due to the Topgolf cash, the convertible note offering, the Company’s efforts to maximize cash and liquidity following the COVID-19 pandemic, combined with the current state of its business, the Company’s liquidity significantly improved and is at an all-time high. At March 31, 2021, the Company’s cash and available liquidity under its credit facilities increased to $713.1 million compared to $263.4 million at March 31, 2020.
Looking forward, although the COVID-19 pandemic continues to have some negative impact on the Company’s business, especially in the international markets, the Company is pleased that all of its business segments, including Topgolf, support an active outdoor lifestyle that is compatible with a world of social distancing, and it anticipates that its continued brand momentum, increased demand for golf equipment and better than anticipated recovery in its soft goods business and Topgolf business will continue in 2021.
Three-Month Period Ended March 31, 2021 and 2020
Net Revenues
Net revenues for the three months ended March 31, 2021 increased $209.3 million (47.3%) to $651.6 million compared to $442.3 million for the three months ended March 31, 2020. This increase was led by the strength of the Company's legacy Golf Equipment and Apparel, Gear and Other businesses, which increased $116.7 million or 26.4%
compared to the first quarter of 2020, in addition to incremental revenues of $92.6 million due to the merger with Topgolf, which was completed on March 8, 2021. Net revenues in the Company's legacy businesses increased in all major product categories and in most major geographic regions, resulting from the success of the Company's current year product lines and overall brand momentum, and the continued popularity of the game of golf as a safe outdoor activity compatible with the norms of social distancing. Additionally, net revenues in the first quarter of 2020 were significantly, adverselynegatively impacted by the COVID-19 outbreak, which the World Health Organization declared a pandemic in early March 2020. The pandemic resulted in the temporary closure of many of the Company's facilities around the world, including its headquarters in the U.S., sales offices, distribution centers, manufacturing facilities and retail locations. As a result of these regulatory responses, portions of the Company's worldwide business operated, and continues to operate, on a limited basis. This had a significant adverse impact on the Company's net sales in the first quarter of 2020, most notably in its retail and wholesale businesses. Priorresponse to the COVID-19 pandemic, in the first quarter of 2020 through early March, the Company continued to deliver strong results due to continued brand momentum and the strength of its 2020 product lines in its golf equipment business, combined with the continued success of the TravisMathew lifestyle apparel business, which delivered sales growth in the first quarter of 2020 compared to the first quarter of 2019, despite the operational challenges caused by COVID-19.
In response to the adverse effects of COVID-19 on the Company’s business, the Company has been proactively taking actions to protect its employees, reduce costs, maximize liquidity, and conserve cash. These actions include an almost 20% reduction in planned operating expenses and capital expenditures by reducing discretionary spending and infrastructure costs, including a voluntary reduction in compensation by the Company’s executive officers, senior management, and its Board of Directors. The Company also implemented other programs to maximize cash and liquidity, including proactive programs to reduce inventory and the suspension of open market stock repurchases. In addition, during the first quarter of 2020, the Company obtained an additional $40.0 million in loan commitments and in May 2020 the Company successfully issued $258.8 million of convertible senior notes, with net proceeds to the Company of approximately $218 million after the cost of certain capped call transactions and certain transaction costs.
Although it is unclear what the full impact of the COVID-19 pandemic will be on society, the global economy and the Company’s business, the Company is starting to see some signs of recovery, primarily in the regions that were first affected by COVID-19, namely in Asia. In the first quarter of 2020, despite the severe business disruptions caused by COVID-19, the
Company’s businesses in Japan and Korea delivered revenue growth. The Company’s golf and apparel businesses in China are also rebounding relatively well, exceeding the Company’s expectations in April. In addition, the Company’s e-commerce business for both golf equipment and soft goods exceeded expectations globally and is partially offsetting the decline in the Company’s retail and wholesale businesses.
The Company believes that with its enhanced liquidity and cost reduction initiatives, combined with its geographic diversity and the strength of its brands, that it will be able to sustain its business through this crisis.
Three-Month Periods Ended March 31, 2020 and 2019
Due to COVID-19, net sales for the first quarter of 2020 decreased $73.9 million (14.3%) to $442.3 million compared to $516.2 million in the first quarter of 2019. This decline reflects a decrease in sales in both of the Company's operating segments compared to the first quarter of 2019, and in every product category and across most major geographic regions, except for Japan and Korea, which increased period over period. Net sales in the Golf Equipment operating segment decreased $31.9 million or 9.9% to $291.7 million, and net sales in the Apparel, Gear and Other operating segment decreased $42.0 million or 21.8%, both compared to the first quarter in 2019.pandemic. Fluctuations in foreign currencies had an unfavorablea favorable impact on net salesrevenues of $3.8$16.6 million in the first quarterthree months of 2020.2021.
The Company’s net salesrevenues by operating segment are presented below (dollars in millions):
| | | | | | | | | | | | Three Months Ended
March 31, | | Growth | |
| | Three Months Ended March 31, | | Decline | | 2021 | | 2020 | | Dollars | | Percent | |
| | 2020 | | 2019 | | Dollars | | Percent | |
| Net sales: | | | | | | | | |
| Net revenues: | | Net revenues: | | | | | | | | |
| Golf Equipment | $ | 291.7 |
| | $ | 323.6 |
| | $ | (31.9 | ) | | -9.9 | % | Golf Equipment | $ | 376.9 | | | $ | 291.7 | | | $ | 85.2 | | | 29.2 | % | |
| Apparel, Gear and Other | 150.6 |
| | 192.6 |
| | (42.0 | ) | | -21.8 | % | Apparel, Gear and Other | 182.1 | | | 150.6 | | | 31.5 | | | 20.9 | % | |
| Topgolf | | Topgolf | 92.6 | | | — | | | 92.6 | | | 100.0 | % | |
| | $ | 442.3 |
| | $ | 516.2 |
| | $ | (73.9 | ) | | -14.3 | % | | $ | 651.6 | | | $ | 442.3 | | | $ | 209.3 | | | 47.3 | % | |
For further discussion of each operating segment’s results, see "Operating Segmentsbelow “Operating Segment Results for the Three Months Ended
20202021 and 2019" below.2020.”
Net salesrevenues information by region is summarized as follows (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
March 31, | | Growth/(Decline) | | Non-GAAP Constant Currency Growth/(Decline) vs. 2020 |
| | 2021 | | 2020 | | Dollars | | Percent | | Percent |
| Net revenues: | | | | | | | | | |
| United States | $ | 388.2 | | | $ | 217.5 | | | $ | 170.7 | | | 78.5 | % | | 78.5% |
| Europe | 108.3 | | | 96.7 | | | 11.6 | | | 12.0 | % | | 3.0% |
| Japan | 71.9 | | | 77.3 | | | (5.4) | | | -7.0 | % | | -9.3% |
| Rest of World | 83.2 | | | 50.8 | | | 32.4 | | | 63.8 | % | | 51.8% |
| $ | 651.6 | | | $ | 442.3 | | | $ | 209.3 | | | 47.3 | % | | 43.6% |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Growth / (Decline) | | Constant Currency Growth vs. 2019 |
| | 2020 | | 2019 | | Dollars | | Percent | | Percent |
| Net sales: | | | | | | | | | |
| United States | $ | 217.5 |
| | $ | 249.0 |
| | $ | (31.5 | ) | | -12.6 | % | | -12.6% |
| Europe | 96.7 |
| | 126.6 |
| | (29.9 | ) | | -23.6 | % | | -21.5% |
| Japan | 77.3 |
| | 73.2 |
| | 4.1 |
| | 5.6 | % | | 4.5% |
| Rest of World | 50.8 |
| | 67.4 |
| | (16.6 | ) | | -24.6 | % | | -21.7% |
| | $ | 442.3 |
| | $ | 516.2 |
| | $ | (73.9 | ) | | -14.3 | % | | -13.6% |
Net salesrevenues in the United States decreased $31.5increased $170.7 million (12.6%(78.5%) to $217.5$388.2 million during the first quarter of 2020three months ended March 31, 2021 compared to $249.0 million in the first quarter of 2019. The Company’s salesthree months ended March 31, 2020. Net revenues in regions outside of the United States decreased $42.4increased $38.6 million (15.9%(17.2%) to $263.4 million for the three months ended March 31, 2021 compared to $224.8 million duringfor the first quarterthree months ended March 31, 2020. Fluctuations in foreign currencies had a favorable impact on international net revenues of 2020 compared to $267.2$16.6 million in the first quarterthree months of 2019. Foreign currency fluctuations had an unfavorable impact of $3.8 million on net sales during the first quarter of 20202021 relative to the same period in the prior year. The general decreaseincrease in net sales by regiondomestic revenue was primarily due to the business challengesCompany's recent merger with Topgolf as well as the continued strong brand momentum of the Callaway and TravisMathew brands. The increase in sales in Rest of World was primarily driven by the success of the Jack Wolfskin outdoor apparel line in China, combined with the negative impact of COVID-19 in the first quarter of 2020 due to the temporary closure of the Company's retail locations and facilities. The increase in sales in Europe was primarily due to the favorable impact of foreign currency exchange rates combined with incremental revenues from the Company's merger with Topgolf. This was partially offset by the government-enforced retail shutdown related to COVID-19, which had a greater impact on the Company's results in Europe during the first quarter of 2021 than the first quarter of 2020. The decline in Japan was primarily caused by a fourth wave of COVID-19 in the COVID-19 pandemic.first quarter of 2021, which resulted in the temporary closure of retail stores.
Costs and Expenses
Costs of products increased $64.0 million for the three months ended March 31, 2021 compared to the same period in 2020 due to the increase in product sales period over period. As a percent of product revenue, the Company’s cost of products was 55.5% compared to 55.8% in the prior year. This decreaseslight improvement was due to an increase in direct to consumer sales primarily in the Company’s Apparel, Gear and Other segment as well as a favorable shift in foreign
currency rates. This was partially offset by an increase in net sales in Japanfreight costs as well as higher cost of improved technology built into the Company’s current year golf club products.
Costs of services primarily consists of the cost of food and Korea as a result of brand momentum in both the golf equipment and apparel businesses.
Gross profit decreased $42.8 million (17.9%) to $195.7 millionbeverage sold in the first quarterCompany’s Topgolf venues as well as certain costs associated with licensing the Company’s Toptracer ball-flight tracking technology. Cost of 2020services increased $11.0 million for the three months ended March 31, 2021 compared to $238.4the same period in 2020 due to the Company’s merger with Topgolf on March 8, 2021.
Other venue expenses consist of venue related depreciation and amortization, employee costs, rent, utilities, and other costs associated with Topgolf venues. This balance increased $65.4 million for the three months ended March 31, 2021 compared to the same period in 2020 due to the Company’s recent merger with Topgolf.
Selling, general and administrative expenses increased by $32.1 million to $173.9 million (26.7% of net revenues) during the three months ended March 31, 2021 compared to $141.8 million (32.1% of net revenues) in the first quartercomparable period of 2019. Gross profit as a percentage of net sales ("gross margin") decreased 200 basis points to 44.2% in the first quarter of 2020 compared to 46.2% in the first quarter of 2019. The decrease in gross profit2020. This increase was primarily due to $15.8 million of non-recurring consulting and legal expenses related to the decreased sales and business challenges caused by the COVID-19 pandemic. The declineTopgolf merger as well as $13.2 million in gross margin was largelyemployee costs due to
the sales decline related to COVID-19,addition of Topgolf employees combined with an overall increase in U.S. tariffs on imports from China, as well as non-recurring redundant costs as the Company transitioned its North America distribution center to a new facility. This decline was partially offset by amortization expense recognized in the first quarter of 2019 related to the inventory step-up from the Jack Wolfskin acquisition.
For further discussion of gross margin, see "Results of Operations—Overview of Business and Seasonality—Cost of Sales" above and "Operating Segments Results for the Three Months Ended March 31, 2020 and 2019—Segment Profitability" below.
Selling expenses decreased $8.2 million to $111.1 million (25.1% of net sales) in the first quarter of 2020 compared to $119.3 million (23.1% of net sales) in the first quarter of 2019. This decrease was primarily due to a decline in media spend due to the impacts of COVID-19,employee incentive compensation, and a decrease$2.8 million increase in tour expenses.
Generaladvertising and administrative expenses decreased $6.2 million to $30.7 million (6.9% of net sales) in the first quarter of 2020 compared to $36.9 million (7.2% of net sales) in the first quarter of 2019. This decrease was primarily due to $4.7 million of non-recurring acquisition and transition costs incurred in the first quarter of 2019 related to the acquisition of Jack Wolfskin, combined with a decrease in employee costs in the first quarter of 2020 due a reduction in accrued incentive compensation expense and stock compensation expense both due to the business challenges caused by the COVID-19 pandemic.promotional expense.
Research and development expenses increased $0.7decreased by $0.5 million to $12.7 million (2.0% of net revenues) during the three months ended March 31, 2021 compared to $13.2 million (3.0% of net sales)revenues) in the first quartercomparable period of 20202020.
Pre-opening costs primarily include costs associated with activities prior to the opening of a new Company-operated venue, as well as other costs that are not considered in the evaluation of ongoing performance. The Company expects to continue to incur pre-opening costs as it executes its growth trajectory of adding new Company-operated venues. Pre-opening costs are expected to fluctuate based on the timing, size and location of new Company-operated venues. Pre-opening costs were $1.8 million for the three months ended March 31, 2021 compared to $12.5 million (2.4% of net sales)zero in the first quarter of 2019, primarilysame period in 2020 due to an increase in golf ball engineering costs.the Company’s recent merger with Topgolf.
Other Income and Expense
Interest expense decreasedincreased by $0.6$8.3 million to $17.5 million during the three months ended March 31, 2021 compared to $9.2 million in the first quartercomparable period of 2020, compared to $9.8 million in the first quarter of 2019 primarily due to repayments on the Company's Term Loan Facilityissuance of $258.8 million in convertible notes in May 2020 as well as one month of interest expense related to the second quarterdebt and deemed landlord financing liabilities acquired as part of 2019, partially offset by an increase in outstanding borrowings on the Company's credit facilities (seeTopgolf merger. See Note 67 “Financing Arrangements” to the Notes to Consolidated Condensed Financial Statements included in Part I, Item 1, of this Form 10-Q).10-Q.
As a result of the merger with Topgolf, the Company wrote up the value of its pre-merger shares of Topgolf to their fair value and recorded a gain of $252.5 million during the first quarter of 2021.
Other income increased by $8.4to $9.0 million during the three months ended March 31, 2021 compared to $6.5 million in the first quartercomparable period of 2020 compared to other expense of $1.9 million in the first quarter of 2019, primarily2020. This increase was due to an increase in net foreign currency gains from non-designated foreign currency hedging contracts in the first quarter of 2020, combined with a net foreign currency loss recognized in the first quarter of 2019 due to a foreign currency forward contract that was put in place to mitigate the risk of foreign currency fluctuations on the acquisition of Jack Wolfskin, which was denominated in Euros.gains.
Income Taxes
The Company’s provision for income taxes decreased by $0.4increased $38.6 million to $47.7 million for the three months ended March 31, 2021, compared to $9.2 million in the first quartercomparable period of 2020, compared to $9.6 million in the first quarter of 2019 primarily due to a decrease in pre-tax income.2020. As a percentagepercent of pre-tax income, the Company’sCompany's effective tax rate for the first three months of 2021 decreased to 14.9% compared to 24.1% in the comparable period of 2020. The Company's tax rate was favorably impacted by the gain on Topgolf investment, which is not taxable for income tax rate increased to 24.1% compared to 16.5% in the first quarter of 2019 primarily due topurposes combined with a favorable shift in the mix of foreign versusvs. domestic earnings relative to regions with lower tax rates. This was partially offset by a $39.0 million valuation allowance that the prior year combined with a decline in projected pre-tax resultsCompany recorded against certain of its deferred tax assets as a result of the COVID-19 pandemic.Topgolf merger and the fact that Topgolf’s losses exceed Callaway’s income in recent years. 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
Net income for the first quarter of 2020 decreased $19.7three months ended March 31, 2021 increased to $272.5 million compared to $28.9 million compared to $48.6 million in the first quartercomparable period of 2019.2020. Diluted earnings per share decreased $0.20increased $1.89 to $2.19 per share in the first three months of 2021 compared to earnings per share of $0.30 in the same period in 2020.
On a non-GAAP basis, excluding the items described in the table following this paragraph, the Company's net income and diluted earnings per share for the three months ended March 31, 2021 would have been $76.6 million and $0.62 per share, respectively, compared to $31.0 million and $0.32 per share, respectively, for the comparative period in 2020. The increase in non-GAAP earnings in 2021 was primarily driven by continued strong demand for the Company's products resulting from the overall increase in popularity of the game of golf. Additionally, the Company's earnings in the first quarter of 2020 comparedwere more negatively impacted by to $0.50the business disruptions and challenges caused by the COVID-19 pandemic.
The table below presents a reconciliation of the Company's as-reported results for the three months ended March 31, 2021 and 2020 to the Company's non-GAAP results reported above for the same periods (in millions, except per share information).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2021 | | |
| GAAP | | Non-Cash Acquisition Amortization(1) | | Non-Cash Amortization of Discount on Convertible Notes(2) | | Other Non-Recurring Charges(3) | | Tax Valuation Allowance(4) | | Non-GAAP | | | | | | | | |
| Net income (loss) | $ | 272.5 | | | $ | (2.9) | | | $ | (1.9) | | | $ | 239.6 | | | $ | (38.9) | | | $ | 76.6 | | | | | | | | | |
| Diluted earnings (loss) per share | $2.19 | | $(0.02) | | $(0.02) | | $1.92 | | $(0.31) | | $0.62 | | | | | | | | |
| Weighted-average shares outstanding | 124.6 | | 124.6 | | 124.6 | | 124.6 | | 124.6 | | 124.6 | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, 2020 |
| | | | | | | | | | | GAAP | | Non-Cash Acquisition Amortization(1) | | NADC Transition Related Costs and Other(5) | | Non-GAAP |
| Net income (loss) | | | | | | | | | | | $ | 28.9 | | | $ | (0.9) | | | $ | (1.2) | | | $ | 31.0 | |
| Diluted earnings (loss) per share | | | | | | | | | | | $ | 0.30 | | | $ | (0.01) | | | $ | (0.01) | | | $ | 0.32 | |
| Weighted-average shares outstanding | | | | | | | | | | | 95.7 | | | 95.7 | | | 95.7 | | | 95.7 | |
(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 March 31, 2021 include one month of non-cash amortization expense of the intangible assets acquired in the first quartermerger with Topgolf on March 8, 2021.
(2)Represents the non-cash amortization of 2019.
the discount on the Convertible Notes issued in May 2020. (3)Other non-recurring charges include a gain to write the Company's investment in Topgolf up to fair value as well as other non-recurring charges and acquisition and transition costs related to the Topgolf merger.
(4)As Topgolf's losses exceed Callaway's income in prior years, the Company has recorded a valuation allowance against certain of its deferred tax assets until the Company can demonstrate consolidated earnings.
(5)Represents non-recurring costs associated with the Company's transition to the new North America Distribution Center, in addition to other integration costs associated with Jack Wolfskin.
Operating Segment Results for the Three Months Ended March 31, 20202021 and 20192020
Golf Equipment
Golf Equipment sales decreased $31.9equipment net revenues increased $85.2 million (29.2%) to $376.9 million for the three-months ended March 31, 2021 compared to $291.7 million for the same period in 2020 due to a $65.1 million (25.9%) increase in golf club revenue and a $20.1 million (49.7%) increase in golf ball revenue. These increases were due to an increase in sales volume and average selling prices across all product categories due the strength of the Company's current year product lines, including the Company's new EPIC, APEX and Chrome Soft products and overall brand momentum, combined with strong performance by the Company's supply chain. In addition, net revenues in the first quarter of 2020 compared to $323.6 million in the first quarter of 2019 due to a $10.6 million (4.0%) decrease in golf club sales and a $21.3 million (34.5%) decrease in golf ball sales. Sales of Golf Equipment were negatively impacted by the business challenges caused by the COVID-19 pandemic which began in mid-March of 2020. The negative impact from the pandemic was partially offset by strong sales in January, February and early March, due to the successtemporary closure of many of the core line of Mavrik golf clubs, which appeal to a larger segment of the market comparedCompany's facilities in response to the premium line of golf clubs launched in the first quarter of 2019.
Net salesrevenues information for the Golf Equipment operating segment by product category is summarized as follows (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
March 31, | | Growth | | |
| | 2021 | | 2020 | | Dollars | | Percent | | |
| Net revenues: | | | | | | | | | |
| Golf Clubs | $ | 316.4 | | | $ | 251.2 | | | $ | 65.2 | | | 26.0 | % | | |
| Golf Balls | 60.5 | | | 40.4 | | | 20.1 | | | 49.8 | % | | |
| $ | 376.9 | | | $ | 291.6 | | | $ | 85.3 | | | 29.3 | % | | |
|
| | | | | | | | | | | | | | |
| | Three Months Ended
March 31, | | Decline |
| | 2020 | | 2019 | | Dollars | | Percent |
|
| Net sales: | | | | | | | |
| Golf Clubs | $ | 251.2 |
| | $ | 261.8 |
| | $ | (10.6 | ) | | -4.0 | % |
| Golf Balls | 40.5 |
| | 61.8 |
| | (21.3 | ) | | -34.5 | % |
| | $ | 291.7 |
| | $ | 323.6 |
| | $ | (31.9 | ) | | -9.9 | % |
The $10.6Net golf club revenues increased $65.2 million (4.0%(26.0%) decrease in net sales of golf clubs to $251.2$316.4 million for the quarterthree months ended March 31, 2020,2021 compared to $261.8 millionthe same period in the comparable periodprior year primarily due to an increase in 2019,both sales volume and average selling prices. The increase in sales volume was driven by strong momentum across all golf club categories driven by an increase in the popularity of golf as a result of heightened demand for outdoor, socially-distanced activities, combined with strong performance by the Company's supply chain. The increase in average selling prices was primarily due a decline in sales volume in irons and putters due to the business challenges caused bycurrent year launch of the COVID-19 pandemic, partially offset bymore premium APEX irons compared to the Mavrik irons launched in the prior year.
Net golf ball revenues increased $20.1 million (49.8%) to $60.5 million for the three months ended March 31, 2021 compared to the same period in the prior year primarily due to an increase in sales volume combined with a slight increase in woods due toaverage selling prices. The higher sales volumes were driven by the earlier launch timingincrease in popularity of hybrid productsgolf and an increase in rounds played across all regions during the first quarter of 20202021 compared to a more staggered launch cadence throughout 2019. The decline in sales volume was partially offset by an increase in average selling prices driven by the launch of the Stroke Lab Black and Triple Track putters in the first quarter of 2020 at higher average selling prices relative to the Stroke Lab putters launched in 2019.
Net sales of golf balls decreased $21.3 million (34.5%) to $40.5 million for the quarter ended March 31, 2020 compared to $61.8 million in the comparable period in 2019 primarily due to a decline in sales volume and business challenges caused by the COVID-19 pandemic.prior year.
Apparel, Gear and Other
Net sales of Apparel, Gear and Other decreased $41.9sales increased $31.5 million (20.9%) to $182.1 million during the three months ended March 31, 2021 compared to $150.6 million for the same period in the first quarter of 2020, compared to $192.5 million in the first quarter of 2019 due to an $18.9$18.0 million (19.6%(23.3%) decreaseincrease in apparel sales and a $23.0$13.5 million (23.9%(18.4%) decreaseincrease in sales of gear, accessories and other. These increases were due to the strong rebound in sales compared to the first quarter of 2020, which was more negatively impacted by the temporary closure of many of the Company's wholesale customers and direct retail locations across all major regions as a result of COVID-19. These increases were driven by an increase TravisMathew sales, primarily in the e-commerce channel, as well as an increase in Jack Wolfskin sales, primarily in China, partially offset by lower retail revenue in Europe due to further government mandated retail shutdowns during the first quarter of 2021.
Net salesrevenues information for the Apparel, Gear and Other operating segment is summarized as follows (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
March 31, | | Growth | | |
| | 2021 | | 2020 | | Dollars | | Percent | | |
| Net revenues: | | | | | | | | | |
| Apparel | $ | 95.3 | | | $ | 77.3 | | | $ | 18.0 | | | 23.3 | % | | |
| Gear, Accessories, & Other | 86.8 | | | 73.3 | | | 13.5 | | | 18.4 | % | | |
| $ | 182.1 | | | $ | 150.6 | | | $ | 31.5 | | | 20.9 | % | | |
Topgolf
On March 8, 2021 the Company completed its merger with Topgolf, and the Company’s results of operations include the operations of Topgolf from that date forward. Topgolf contributed $92.6 million in revenue for the three months ended March 31, 2021. Topgolf revenue is primarily generated from Company-operated venues equipped with technology-enabled hitting bays, multiple bars, dining areas and event spaces, Toptracer ball-flight tracking technology used by independent driving ranges and broadcast television, and the Company's WGT digital golf game.
|
| | | | | | | | | | | | | | |
| | Three Months Ended
March 31, | | Decline |
| | 2020 | | 2019 | | Dollars |
| | Percent |
|
| Net sales: | | | | | | | |
| Apparel | $ | 77.3 |
| | $ | 96.2 |
| | $ | (18.9 | ) | | -19.6 | % |
| Gear, Accessories, & Other | 73.3 |
| | 96.3 |
| | (23.0 | ) | | -23.9 | % |
| | $ | 150.6 |
| | $ | 192.5 |
| | $ | (41.9 | ) | | -21.8 | % |
Net sales of apparel decreased $18.9 million (19.6%) to $77.3 million in the first quarter of 2020 compared to the first quarter of 2019, primarily due to a decline in sales of Jack Wolfskin outdoor apparel as a result of the business challenges caused by the COVID-19 pandemic, primarily in Europe and China, the two main markets for Jack Wolfskin products. This decline was partially offset by an increase in the apparel business in Japan and an increase in the TravisMathew business in the United States despite the impact of the COVID-19 pandemic.
Net sales of gear, accessories and other decreased $23.0 million (23.9%) to $73.3 millionrevenues information for the first quarter of 2020 compared to $96.3 millionTopgolf segment is summarized as follows (dollars in the first quarter of 2019 due to the business challenges caused by the COVID-19 pandemic.millions):
| | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | | | | |
| | 2021 | | | | | | | |
| Net revenues: | | | | | | | | | |
| Venues | | $ | 85.1 | | | | | | | | |
| Other business lines | | 7.5 | | | | | | | | |
| | $ | 92.6 | | | | | | | | |
Segment Profitability
Profitability by operating segment is summarized as follows (dollars in millions):
|
| | | | | | | | | | | | | | |
| | Three Months Ended
March 31, | | Decline |
| | 2020 | | 2019(1) | | Dollars | | Percent |
| Income before income taxes: | | | | | | | |
| Golf Equipment | $ | 58.6 |
| | $ | 70.6 |
| | $ | (12.0 | ) | | -17.0 | % |
| Apparel, Gear and Other | (3.8 | ) | | 22.1 |
| | (25.9 | ) | | -117.2 | % |
Reconciling items(2) | (16.8 | ) | | (34.6 | ) | | 17.8 |
| | 51.4 | % |
| | $ | 38.0 |
| | $ | 58.1 |
| | $ | (20.1 | ) | | -34.6 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | Growth | | Non-GAAP Constant Currency Growth vs. 2020(1) |
| 2021 | | 2020 | | Dollars | | Percent | | Percent |
| Net revenues: | | | | | | | | | |
| Golf Equipment | $ | 376.9 | | | $ | 291.7 | | | $ | 85.2 | | | 29.2 | % | | 26.3% |
| Apparel, Gear and Other | 182.1 | | | 150.6 | | | 31.5 | | | 20.9 | % | | 15.8% |
| Topgolf | 92.6 | | | — | | | 92.6 | | | 100.0 | % | | 100.0% |
| Total net revenues | $ | 651.6 | | | $ | 442.3 | | | $ | 209.3 | | | 47.3 | % | | 43.6% |
| | | | | | | | | |
| Segment operating income: | | | | | | | | | |
| Golf Equipment | $ | 84.9 | | | $ | 58.6 | | | $ | 26.3 | | | 44.9 | % | | |
| Apparel, Gear and Other | 20.5 | | | (3.8) | | | 24.3 | | | 639.5 | % | | |
| Topgolf | 4.0 | | | — | | | 4.0 | | | 100.0 | % | | |
| Total segment operating income | 109.4 | | | 54.8 | | | 54.6 | | | 99.6 | % | | |
Corporate G&A and other(2) | 33.3 | | | 14.1 | | | 19.2 | | | 136.2 | % | | |
| Total operating income | 76.1 | | | 40.7 | | | 35.4 | | | 87.0 | % | | |
Gain on Topgolf investment(3) | 252.5 | | | — | | | 252.5 | | | 100.0 | % | | |
| Interest expense, net | (17.5) | | | (9.1) | | | (8.4) | | | 92.3 | % | | |
| Other income, net | 9.0 | | | 6.5 | | | 2.5 | | | 38.5 | % | | |
| Total income before income taxes | $ | 320.2 | | | $ | 38.0 | | | $ | 282.2 | | | 742.6 | % | | |
| |
(1) | The Company continues to refine its expense allocation methodology between operating segments. As a result, the Company reclassified certain information technology expenses between the segments in the first quarter of 2019 in order to conform with the current presentation. |
| |
(2) | Reconciling items represent corporate general and administrative expenses and other income (expense) not included by management in determining segment profitability. The $17.9 million decrease in reconciling items in the first quarter of 2020 compared to the first quarter of 2019 was primarily due to an increase of $8.3 million in net gains recognized on hedging contracts combined with a decrease, primarily in employee costs, in general and administrative expenses, both in the first quarter of 2020, in addition to non-recurring acquisition charges of $4.7 million recognized in the first quarter of 2019 related to the acquisition of Jack Wolfskin, which was completed in January 2019. |
Pre-tax(1)Calculated by applying 2019 exchange rates to 2020 reported sales in regions outside the United States.
(2)Amount includes corporate general and administrative expenses not utilized by management in determining segment profitability. The amount for 2021 includes $15.8 million for transaction costs associated with the merger with Topgolf completed on March 8, 2021, expenses related to the implementation of new IT systems for Jack Wolfskin, and $2.2 million for non-cash amortization expense for intangible assets acquired in the merger. The amount for 2020 includes $1.5 million for non-recurring costs associated with the Company's transition to the new North America Distribution Center and integration costs associated with Jack Wolfskin.
(3)Amount represents gain to step-up the Company's former investment in Topgolf to its fair value in connection with the merger. See Note 10 "Investments" in the Notes to Consolidated Condensed Financial Statements included in Part I, Item 1, of this Form 10-Q
Operating income from thefor Golf Equipment operating segment decreased $12.0increased $26.3 million (17.0%(44.9%) to $84.9 million for the three months ended March 31, 2021 from $58.6 million in the first quarter of 2020 from $70.6 millioncomparable period in the first quarterprior year. This increase was driven by the increase in net revenues as discussed above, in addition to the positive impact of 2019. This decrease was primarilyleveraging fixed operating expenses on a higher revenue base period over period, and the favorable impact of foreign currency exchange rates. These increases were partially offset by increased freight costs due to a $20.9 million decreasehigher mix of air freight, higher cost of technology incorporated into the golf club models launched in gross profit (a decline of 180 basis points in gross margin), partially offset by an $8.9 million decrease in operating expenses. The decrease in gross profit was primarily due to the decreasedcurrent year, and a higher sales and business challenges caused by the COVID-19 pandemic. The decline in gross margin was largely due to the sales decline related to COVID-19, combined with an increase in U.S. tariffs on imports from China, as well as non-recurring redundant costs as the Company transitioned its North America distribution center to a new facility. The decrease in operating expenses was primarily due to a decline in media spend and the cancellationmix of golf tournaments both relatedballs and packaged sets, which have lower margins relative to the COVID-19 pandemic.golf clubs.
Operating income in the Company'sfor Apparel, Gear and Other operating segment decreased $25.9increased $24.3 million (117.2%(639.4%) to a pre-tax$20.5 million for the three months ended March 31, 2021 from an operating loss of $3.8 million in the first quartercomparable period in the prior year. This increase was driven by the increase in net revenues as discussed above, in addition to the positive impact of 2020 comparedleveraging fixed operating overhead costs and operating expenses on a higher revenue base period over period, the favorable impact of foreign currency exchange rates, and an increase in direct-to-consumer e-commerce sales, which have higher margins relative to pre-taxwholesale.
Topgolf contributed and incremental $4.0 million of operating income of $22.1 million in the first quarter of 2019. This decrease was primarily due to a $25.9 million decrease in gross profit or a decline of 470 basis points in gross margin. The decrease in gross profit was primarily due to the decreased sales and business challenges caused by the COVID-19 pandemic. The decline in gross margin was largely due to the sales decline related to COVID-19 and non-recurring redundant costs as the Company transitioned its North America distribution center to a new facility.fiscal 2021.
Financial Condition
The Company’s cash and cash equivalents increased $59.9$31.2 million to $166.6$397.3 million at March 31, 20202021 from $106.7$366.1 million at December 31, 2019. Cash used in operating activities improved to $93.7 million in the first three months of 2020, compared to $120.6 million in the first three months of 2019 primarily due to an increaseproceeds of $258.8 million from Convertible Notes issued in product launches during the fourth quarter of 2019 compared to 2018 resulting in increased cash collections during the first quarter ofMay 2020, compared to the same period in the prior year. This was partially offset by a decline in net income period overrolling 12-month period due to the operational challenges caused byadverse effects of the COVID-19 pandemic inon the first quarter ofCompany's business during 2020. During the first three months of 2020, the Company used its cash and cash equivalents combined with borrowings from its credit facilities to fund its operations, repay $12.1 million of amounts outstanding under its credit and long-term debt facilities, fund capital expenditures of $17.0$28.8 million, primarily in its golf ball manufacturing plant to increase capacity and improve its manufacturing capabilities, repurchase shares of its common stock for $21.9 million, and repay its long-term debt.$12.5 million. Management expects to fund the Company’s future operations from current cash balances and cash provided by its operating activities, combined with borrowings under its current and future credit facilities the completion of the issuance of the 2026 Notes in May 2020, andas well as from other available sources of capital, as deemed necessary. See Note 67 "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 Accountsaccounts 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. On March 8, 2021, the Company completed its merger with Topgolf, which primarily records revenue and collects payment at point-of-sale for most of its venue business. Therefore, Topgolf's accounts receivable balance is smaller than the Company's other business segments and primarily consists of sponsorship receivables and swing suite licensing receivables. As of March 31, 2020,2021, the Company’s net accounts receivable increased to $259.5$328.8 million from $140.5$138.5 million as of December 31, 2019.2020. This increase reflects the timing of golf products launched duringCompany's seasonality combined with incremental accounts receivable from the first quarter of 2020.merger with Topgolf. The Company’s net accounts receivable as of March 31, 2020 decreased $26.32021 increased $69.3 million compared to March 31, 20192020 primarily due to a decrease of $73.9 million (14.3%)an increase in net sales period over due to the operational challenges caused by the COVID-19 pandemicrevenues of $209.3 million in the first quarter of 2020.2021 compared to the first quarter of 2020 primarily due to the continued increase in demand for golf equipment as the result of the increased popularity of golf combined with incremental revenues from the merger with Topgolf. In addition, sales in the first quarter of 2020 were more negatively impacted by the economic downturn caused by the COVID-19 pandemic.
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. On March 8, 2021, the Company completed its merger with Topgolf, which is primarily a services business with lower inventory balances than the Company's other business segments, and primarily consists of food and beverage as well as retail merchandise and Toptracer inventory. The Company’s inventory decreased to $412.7$336.3 million as of March 31, 20202021 compared to $456.6$352.5 million as of December 31, 2019.2020. This decrease was primarily due to operational challenges with the Company's supply chain causedseasonal increase in demand of golf equipment in the first quarter of 2021 and the continued increase in demand for golf equipment due to the increase in popularity of golf, partially offset by the COVID-19 pandemic.incremental inventory from the merger with Topgolf. The Company’s inventory as of March 31, 2020 increased2021 decreased by $30.4$76.4 million compared to the Company's inventory as of March 31, 20192020 primarily due to higher inventory levels resulting from lower salesan increase in demand for golf equipment and golf accessories as the popularity of golf increased starting in the second half
of 2020 through the first quarter of 2020 due to2021 combined with the operational challenges causedsell-through of close-out and end-of-life inventory, partially offset by the COVID-19 pandemic.incremental food and beverage inventory from the merger with Topgolf.
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. Additionally, in May 2020, the Company issued $258.8 million in aggregate principal amount of the 2026 Notes. Based upon the Company’s current cash balances, its estimates of funds expected to be generated from operations in 2020, and2021, 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 date 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, 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 an update to Risk Factors concerning the negative impact of the COVID-19 pandemic on the Company's business contained in Part II, Item 1A of this Form 10-Q)2020). Given the uncertain duration of the COVID-19-related impact, the Company has been proactively taking actions to significantly reduce costs, maximize liquidity and conserve cash for as long as may be required in light of current conditions, For example, through April 30, 2020, the Company had achieved an almost 20% reduction in planned operating expenses and capital expenditures through efforts to reduce discretionary spending and infrastructure costs on a worldwide basis, including voluntary reductions in compensation by the Board of Directors, the Chief Executive Officer and other members of senior management. As of March 31, 2020,2021, the Company had $259.4$713.1 million in cash and availability under its credit facilities. While the Company believes its cash and credit facilities, are adequatewhich is an increase of $449.7 million or 170.7% compared to sustain its business through this crisis, the Company continues to consider other available sources of capital as market conditions and programs present themselves. During the first quarter of 2020, the Company added $40 million of available loan commitments and in April 2020, amended the ABL Facility and Term Loan Facility to increase its flexibility to opportunistically take advantage of other available sources of capital, including capital markets and government sponsored programs for which the Company may qualify in the United States and internationally.
Additionally, in May 2020, the Company issued $258.8 million in aggregate principal amount of the 2026 Notes. With this increased liquidity, cost reduction actions, the Company's geographic diversity and the strength of its brands, the Company
believes is has adequate liquidity to sustain its business through this crisis.March 31, 2020. Information about the Company's credit facilities and long-term borrowings is presented in Note 67 “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.
On March 8, 2021, the Company completed the merger with Topgolf in an all-stock transaction (see to Note 6 "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 acquired cash of $171.3 million and assumed $535.1 million in long-term debt. 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 meeting its other financial obligations.
As of March 31, 2020,2021, approximately 40%28.5% of the Company's cash was held in regions outside of the United States. DueThe Company continues to changes enacted by the Tax Actmaintain its indefinite reinvestment assertion with respect to most jurisdictions in December 2017, incremental U.S. federal income tax is no longer a consideration ifwhich it operates because of local cash requirements to operate its business. 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,balances, it may need to pay incremental foreign withholding taxes which, subject to certain limitations, generate foreign tax credits for use against the Company's U.S. tax liability, if any. Additionally, the Company may need to pay certain state income taxes. The Company continues to maintain its indefinite reinvestment assertion with respect to most jurisdictions in which it operates because of local cash requirements to operate its business.
Other Significant Cash and Contractual Obligations
The table set forth below summarizes certain significant cash obligations as of March 31, 20202021 that will affect the Company’s future liquidity.
|
| | | | | | | | | | | | | | | | | | | |
| | Payments Due By Period |
| | Total | | Less than 1 Year | | 1-3 Years | | 3-5 Years | | More than 5 Years |
| | (in millions) |
Term Loan Facility(1) | $ | 445.2 |
| | $ | 3.6 |
| | $ | 9.6 |
| | $ | 9.6 |
| | $ | 422.4 |
|
| Interest on term loan facility | 136.3 |
| | 24.2 |
| | 47.8 |
| | 46.8 |
| | 17.5 |
|
Equipment notes(2) | 28.3 |
| | 6.2 |
| | 12.3 |
| | 6.8 |
| | 3.0 |
|
| Interest on equipment notes | 2.1 |
| | 0.8 |
| | 0.9 |
| | 0.3 |
| | 0.1 |
|
| ABL Facility | 300.2 |
| | 300.2 |
| | — |
| | — |
| | — |
|
| Japan ABL Facility | 35.3 |
| | 35.3 |
| | — |
| | — |
| | — |
|
Finance leases, including imputed interest(3) | 1.1 |
| | 0.5 |
| | 0.4 |
| | 0.1 |
| | 0.1 |
|
Operating leases, including imputed interest(4) | 268.6 |
| | 29.3 |
| | 64.1 |
| | 48.6 |
| | 126.6 |
|
Unconditional purchase obligations(5) | 115.2 |
| | 52.4 |
| | 49.7 |
| | 13.1 |
| | — |
|
Uncertain tax contingencies(6) | 7.4 |
| | 0.6 |
| | 0.9 |
| | 1.1 |
| | 4.8 |
|
| Other long term liabilities | 7.9 |
| | 0.4 |
| | 0.9 |
| | 0.9 |
| | 5.7 |
|
| Total | $ | 1,347.6 |
|
| $ | 453.5 |
|
| $ | 186.6 |
|
| $ | 127.3 |
|
| $ | 580.2 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments Due By Period |
| | Total | | Less than
1 Year | | 1-3 Years | | 3-5 Years | | More than
5 Years |
| (in millions) |
Term Loan Facility(1) | $ | 440.4 | | | $ | 4.8 | | | $ | 9.6 | | | $ | 8.4 | | | $ | 417.6 | |
| Interest on Term Loan Facility | 101.4 | | | 21.5 | | | 42.9 | | | 36.8 | | | 0.2 | |
2020 Japan Term Loan Facility(2) | 16.3 | | | 3.6 | | | 7.3 | | | 5.4 | | | — | |
| Interest on Japan Term Loan Facility | 0.3 | | | 0.1 | | | 0.1 | | | 0.1 | | | — | |
Convertible Notes(3) | 258.8 | | | — | | | — | | | — | | | 258.8 | |
| | | | | | | | | |
Equipment Notes(4) | 29.8 | | | 8.5 | | | 13.9 | | | 5.9 | | | 1.5 | |
| Interest on Equipment Notes | 1.8 | | | 0.8 | | | 0.8 | | | 0.2 | | | — | |
ABL Facility(5) | 15.2 | | | 15.2 | | | — | | | — | | | — | |
| | | | | | | | | |
Topgolf Term Loan(6) | 343.0 | | | 3.5 | | | 7.0 | | | 332.5 | | | — | |
Topgolf Revolving Credit Facility(6) | 160.0 | | | — | | | 160.0 | | | — | | | — | |
Mortgage loans(7) | 46.7 | | | 0.5 | | | 1.1 | | | 1.3 | | | 43.8 | |
Finance leases, including imputed interest(8) | 3.2 | | | 0.9 | | | 1.9 | | | 0.4 | | | — | |
Operating leases, including imputed interest(9) | 2,146.4 | | | 111.6 | | | 290.0 | | | 280.4 | | | 1,464.4 | |
Deemed landlord financing leases(10) | 449.5 | | | 13.2 | | | 39.9 | | | 40.4 | | | 356.0 | |
Minimum lease payments for leases signed but not yet commenced(11) | 828.5 | | | 24.6 | | | 73.8 | | | 123.0 | | | 607.1 | |
Capital commitments(12) | 155.0 | | | 106.0 | | | 49.0 | | | — | | | — | |
Unconditional purchase obligations(13) | 109.9 | | | 44.5 | | | 65.1 | | | 0.3 | | | — | |
Uncertain tax contingencies(14) | 5.8 | | | 0.5 | | | 1.3 | | | 2.6 | | | 1.4 | |
| | | | | | | | | |
| Total | $ | 5,112.0 | | | $ | 359.8 | | | $ | 763.7 | | | $ | 837.7 | | | $ | 3,150.8 | |
| |
(1) | In January 2019, to fund the purchase price of the Jack Wolfskin acquisition, the Company entered into a Credit Agreement which provides for a Term Loan B facility in an aggregate principal of $480.0 million, which was issued less $9.6 million in original issue discount and other transaction fees. As of March 31, 2020, the Company had $445.2 million outstanding under the Term Loan Facility, which is offset by unamortized debt issuance costs of $14.9 million as presented on the Company's consolidated condensed balance sheet as of March 31, 2020. For further discussion, see Note 6 "Financing Arrangements" to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q. |
| |
(2) | In connection with the Company's investment initiatives to improve its manufacturing capabilities at its golf ball manufacturing facility in Chicopee, Massachusetts, the Company entered into a series of long-term financing agreements (the "equipment notes") between 2017 and 2020 that are secured by certain equipment at this facility. As of March 31, 2020, the Company had a combined $28.3 million outstanding under these equipment notes. For further discussion, see Note 6 "Financing Arrangements" to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q. |
| |
(3) | Amounts represent future minimum payments under financing leases. At March 31, 2020, finance lease liabilities of $0.5 million were recorded in accounts payable and accrued expenses and $0.5(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 March 31, 2021, the Company had $440.4 million outstanding under the Term Loan Facility, which is offset by unamortized debt issuance costs of $18.1 million as presented on the Company's consolidated condensed balance sheet as of March 31, 2021. For further discussion, see Note 7 "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. $18,064,000 using the exchange rate in effect as of March 31, 2021). The Company had 1,800,000,000 Yen (or approximately U.S. $16,257,000 using the exchange rate in effect as of March 31, 2021) outstanding under the Japan Term Loan Facility on the Company's consolidated condensed balance sheet as of March 31, 2021. For further discussion, see Note 7 "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 March 31, 2021, the Company had $185.9 million outstanding under the Convertible Notes, net of unamortized debt issuance costs of $5.3 million and debt discount of $67.6 million, as presented on the Company's Consolidated condensed balance sheet as of March 31, 2021. For further discussion, see Note 7 "Financing Arrangements" to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q. (4)Between December 2017 and August 2020, the Company entered into four long-term financing agreements (the "Equipment Notes") with Bank of America N.A. and other lenders to invest in its golf ball manufacturing facility in
Chicopee, Massachusetts, its North American Distribution Center in Roanoke, Texas, and in corporate IT equipment. The loans are secured by the underlying equipment at each facility and the IT equipment. As of March 31, 2021, the Company had a combined $29.7 million outstanding under these Equipment Notes. For further discussion, see Note 7 "Financing Arrangements" to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q. (5)The Company has a senior secured asset-based revolving credit facility of up to $400.0 million (the "ABL Facility) subject to borrowing base availability. The amounts outstanding under the ABL Facility are secured by certain assets, including cash (to the extent pledged by the Company), certain intellectual property, certain eligible real estate, inventory and accounts receivable of the Company’s subsidiaries in the United States, Germany, Canada and the United Kingdom. For further discussion, see Note 7 "Financing Arrangements" to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q. (6)In connection with the merger with Topgolf on March 8, 2021, the Company assumed a $350.0 million term loan facility (the “Topgolf Term Loan”), and a $175.0 million revolving credit facility with JPMorgan Chase Bank, N.A (the “Topgolf Revolving Credit Facility”), both with JPMorgan Chase Bank, N.A. At March 31, 2021, the outstanding balances under the Topgolf Term Loan and Topgolf Revolving Credit Facility were $343.0 million and $160.0 million, respectively. For further discussion, see Note 7 "Financing Arrangements" to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q. (7)In connection with the merger with Topgolf on March 8, 2021, the Company assumed three mortgage loans related to the construction of three venues. For further discussion, see Note 7 "Financing Arrangements" to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q. (8)Amounts represent future minimum payments under financing leases. At March 31, 2021, finance lease liabilities of $1.1 million were recorded in accounts payable and accrued expenses and $1.9 million were recorded in other long-term liabilities in the accompanying consolidated condensed balance sheets. For further discussion, see Note 2 "Leases" to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q. |
| |
(4) | The Company leases certain manufacturing facilities, distribution centers, warehouses, office facilities, vehicles and office equipment under operating leases. The amounts presented in this line item represent commitments for minimum lease payments under non-cancelable operating leases. AtMarch 31, 2020, short-term and long-term operating lease liabilities of $28.5 million
|
and $176.0 million, respectively, were recorded in the accompanying consolidated condensed balance sheets. For further discussion, see Note 23 "Leases" to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q.
| |
(5) | During the normal course of its business, the Company enters into agreements to purchase goods and services, including purchase commitments for production materials, endorsement agreements with professional golfers and other endorsers, employment and consulting agreements, and intellectual property licensing agreements pursuant to which the Company is required to pay royalty fees. It is not possible to determine the amounts the Company will ultimately be required to pay under these agreements as they are subject to many variables including performance-based bonuses, severance arrangements, the Company’s sales levels, and reductions in payment obligations if designated minimum performance criteria are not achieved. The amounts listed approximate minimum purchase obligations, base compensation, and guaranteed minimum royalty payments the Company is obligated to pay under these agreements. The actual amounts paid under some of these agreements may be higher or lower than the amounts included. In the aggregate, the actual amount paid under these obligations is likely to be higher than the amounts listed as a result of the variable nature of these obligations. In addition, the Company also enters into unconditional purchase obligations with various vendors and suppliers of goods and services in the normal course of operations through purchase orders or other documentation or that are undocumented except for an invoice. Such unconditional purchase obligations are generally outstanding for periods less than a year and are settled by cash payments upon delivery of goods and services and are not reflected in this line item. |
| |
(6) | Amount represents the current and non-current portions of uncertain income tax positions as recorded on the Company's consolidated condensed balance sheet as of March 31, 2020. Amounts exclude uncertain income tax positions that the Company would be able to offset against deferred taxes. For further discussion, see Note 13 “Income Taxes” to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q. |
(9)The Company leases certain manufacturing facilities, distribution centers, warehouses, office facilities, vehicles and office equipment under operating leases. The amounts presented in this line item represent commitments for minimum lease payments under non-cancelable operating leases. At March 31, 2021, short-term and long-term operating lease liabilities of $51.5 million and $1,155.6 million, respectively, were recorded in the accompanying consolidated condensed balance sheets. For further discussion, see Note 3 "Leases" to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q.
(10)In connection with the merger with Topgolf on March 8, 2021, the Company assumed certain deemed landlord financed leases in connection with the construction of Topgolf venue facilities. At March 31, 2021, the short-term and long-term obligations under these leases were $1.6 million and $221.6 million, respectively. For further discussion, see Note 3 "Leases" to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q.
(11)Amount represents the future minimum lease payments under lease agreements related to future Topgolf facilities that have not yet commenced as of March 31, 2021. For further discussion, see Note 3 "Leases" to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q.
(12)Amount represents capital expenditure commitments under lease agreements for Topgolf venues under construction that have been signed as of March 31, 2021.
(13)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.
(14)Amountrepresents the current and non-current portions of uncertain income tax positions as recorded on the Company's consolidated condensed balance sheet as of March 31, 2021. Amounts exclude uncertain income tax positions that the Company would be able to offset against deferred taxes. For further discussion, see Note 13 “Income Taxes” to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q.
During its normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These include (i) intellectual property indemnities to the Company’s customers and licensees in connection with the use, sale and/or license of Company products or trademarks, (ii) indemnities to various lessors in connection with facility leases for certain claims arising from such facilities or leases, (iii) indemnities to vendors and service providers pertaining to the goods or services provided to the Company or based on the negligence or willful misconduct of the Company, and (iv) indemnities involving the accuracy of representations and warranties in certain contracts. In addition, the Company has made contractual commitments to each of its officers and certain other employees providing for severance payments upon the termination of employment. The Company has also issued guarantees in the form of a standby letter of credit in the amount of $1.4 million primarily as security for contingent liabilities under certain workers’ compensation insurance policies.
The duration of these indemnities, commitments and guarantees varies, and in certain cases may be indefinite. The majority of these indemnities, commitments and guarantees do not provide for any limitation on the maximum amount of future payments the Company could be obligated to make. Historically, costs incurred to settle claims related to indemnities have not been material to the Company’s financial position, results of operations or cash flows. In addition, the Company believes the likelihood is remote that payments under the commitments and guarantees described above will have a material effect on the Company’s financial condition. The fair value of indemnities, commitments and guarantees that the Company issued during the three months ended March 31, 20202021 was not material to the Company’s financial position, results of operations or cash flows.
In addition to the contractual obligations listed above, the Company’s liquidity could also be adversely affected by an unfavorable outcome with respect to claims and litigation that the Company is subject to from time to time (see Note 14 “Commitments & Contingencies” to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 and “Legal Proceedings” in Part II, Item 1 of this Form 10-Q).
Capital Expenditures
The Company does not currentlyhas certain capital expenditure commitments under lease agreements for Topgolf venues under construction that have any material commitmentsbeen signed as of March 31, 2021. Estimated capital expenditures for capital expenditures. Previously,the year ended December 31, 2021 in connection with these leases total approximately $106.0 million. In addition, in 2021, the Company announced it would invest an estimated $55.0 million inexpects to have additional capital expenditures in 2020. Due toof approximately $129.0 million for 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 ofCallaway legacy business and Topgolf, combined. Total estimated capital expenditures are expected to be in the range of approximately $32.5 million to $37.5$235.0 million for the year endingended December 31, 2020.2021.
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 changesDue to the Company's criticalrecent merger with Topgolf, the Company updated its significant accounting policies. For an update to the Company’s significant accounting policies and estimates from the information provided in Part II, Item 7, “Management’s Discussion8, “Financial Statements and Analysis of Financial Condition and Results of Operations,”Supplementary Data” included in the Company's Form 10-K for the fiscal year ended December 31, 2019, except for the Company's adoption of the Accounting Standards Update ("ASU") No 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" which became effective as of January 1, 2020. For further discussion on the adoption of this new accounting standard please2020, see Note 1 "Basis2 “Summary of Presentation" toSignificant Accounting Policies” in the Notes to the Consolidated Condensed Financial Statements in Part I, Item 1I 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 67 "Financing Arrangements" to the Notes to Consolidated Condensed Financial Statements in Part 1, Item 1 of this Form 10-Q). The use of these instruments exposes the Company to market and credit risk which may at times be concentrated with certain counterparties, although counterparty nonperformance is not anticipated.
Foreign Currency Fluctuations
Information about the Company's foreign currency hedging activities is set forth in Note 17 “Derivatives and Hedging,” to the Notes to Consolidated Condensed Financial Statements included in Part I, Item 1, of this Form 10-Q, which is incorporated herein by this reference.
As part of the Company’s risk management procedure, a sensitivity analysis model is used to measure the potential loss in future earnings of market-sensitive instruments resulting from one or more selected hypothetical changes in interest rates or foreign currency values. The sensitivity analysis model quantifies the estimated potential effect of unfavorable movements of 10% in foreign currencies to which the Company was exposed at March 31, 20202021 through its foreign currency forward contracts.
At March 31, 2020,2021, the estimated maximum loss from the Company’s foreign currency forward contracts, calculated using the sensitivity analysis model described above, was $32.2$31.9 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 67 "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 resultresults of operations, the Company performed a sensitivity analysis as part of its risk management procedures. The sensitivity analysis quantified that the incremental expense incurred by a 10% increase in interest rates would be $0.8$0.1 million over the 12-month period ending on March 31, 2020.2021.
Item 4. Controls and Procedures
Disclosure Controls and Procedures. The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness, as of March 31, 2020,2021, of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2020.2021.
Changes in Internal Control over Financial Reporting. DuringOn March 8, 2021, the Company completed its merger with Topgolf. See Note 6 "Business Combinations" to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q. The Company is in the process of integrating the Topgolf business and evaluating its internal controls over financial reporting. As a result of these integration activities, certain controls will be evaluated and may be revised. Except as otherwise noted, during the quarter ended March 31, 2020,2021, 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information set forth in Note 14 “Commitments & Contingencies,” to the Notes to Consolidated Condensed Financial Statements included in Part I, Item 1, of this Form 10-Q, is incorporated herein by this reference.
Item 1A. Risk Factors
Certain Factors Affecting Callaway Golf Company
The Company has included in Part I, Item 1A of its Annual Report on Form 10-K for the year ended December 31, 2019,2020, a description of certain risks and uncertainties that could affect the Company’s business, future performance or financial condition (the “Risk Factors”). Investors should consider the Risk Factors prior to making an investment decision with respect to the Company’s stock. There are no material changes from the disclosure provided in the Form 10-K for the year ended December 31, 20192020 with respect to the Risk Factors, other than the addition of the Risk Factor below.
The Company, including Topgolf, its franchisees and its licensees, may face increased labor costs or labor shortages that could slow growth and adversely affect its business, results of operations and financial condition.
Labor is a primary component in the cost of operating the business of the Company, including Topgolf and its franchisees and licensees. If the Company faces labor shortages or increased labor costs because of increased competition for employees, higher employee turnover rates, the impact of the ongoing COVID-19 pandemic or other pandemics, increases in the federally-mandated or state-mandated minimum wage, changes in exempt and non-exempt status, or other employee benefits costs (including costs associated with health insurance coverage or workers’ compensation insurance), the Company’s operating expenses could increase and its growth could be adversely affected.
In particular, Topgolf has a substantial number of Associates who are paid wage rates at or based on the applicable federal or state minimum wage, and increases in the applicable minimum wage will increase labor costs. From time to time, legislative proposals are made to increase the minimum wage at the federal or state level. As federal, state or other applicable minimum wage rates increase, the Company may be required to increase not only the wage rates of minimum wage Associates or other employees, but also the wages paid to other hourly employees. It may not be possible to increase prices in order to pass future increased labor costs on to customers, in which case the Company’s margins would be negatively affected. At Topgolf, reduced margins could make it more difficult to attract new franchisees and licensees and to retain existing franchisee and licensee relationships. If the Company is able to increase prices to cover increased labor costs, the higher prices could result in lower revenues, which may also reduce margins, as well as the fees received from Topgolf’s franchisees and licensees.
Furthermore, the successful operation of the Company’s business depends upon its ability to attract, motivate and retain a sufficient number of qualified executives, managers and skilled employees. From time to time, there may be a shortage of skilled labor in certain of the communities in which the Company operates, including where its Topgolf venues are located. Shortages of skilled labor may make it increasingly difficult and expensive to attract, train and retain the services of a satisfactory number of qualified employees, which, with respect to Topgolf, could delay the planned openings of new Company-operated and franchised venues and adversely impact the operations and profitability of existing venues. Furthermore, competition for qualified employees, particularly in markets where such shortages exist, could require the Company to pay higher wages, which could result in higher labor costs. In particular, Top experiences competition to attract and retain skilled game developers and content creators is intense, and failure to do so may delay the implementation of Topgolf’s business strategy and growth plans. Companies in the Company’s industry have also historically experienced relatively high turnover rates, which may also result in higher labor costs. Accordingly, if the Company is unable to recruit and retain sufficiently qualified individuals, its business, results of operations, financial condition and growth prospects could be materially and adversely affected.
Some, but not all, of the Company’s employees are currently covered under collective bargaining agreements. In the future, additional employees, including Topgolf Associates, may elect to be represented by labor unions. If a significant number of additional employees were to become unionized and collective bargaining agreement terms were significantly different from current compensation arrangements, it could adversely affect the Company’s business, financial condition or results of operations. In addition, a labor dispute involving some or all employees may harm the Company’s reputation, disrupt operations and reduce revenue, and resolution of disputes may increase costs. Further, if Topgolf or its franchisees
enter into a new market with unionized construction companies, or the construction companies in Topgolf or its franchisees’ current markets become unionized, construction and build-out costs for new venues in such markets could materially increase.
In addition, immigration reform continues to attract significant attention in the public arena and the U.S. Congress. If new immigration legislation is enacted, such laws may contain provisions that could increase the Company’s, including Topgolf’s and its U.S. franchisees’ and licensees’, costs in recruiting, training and retaining employees. Also, although the Company’s hiring practices comply with the requirements of federal law in reviewing employees’ citizenship or authority to work in the United States, the Company does not monitor or control the hiring practices of Topgolf’s franchisees and licensees, and increased enforcement efforts with respect to existing immigration laws by governmental authorities may disrupt a portion of the Company’s workforce or the operations at its venues, or the workforce or operations of licensees, thereby negatively impacting its business.
The outbreak and spread COVID-19 has had, and is expected to continue to have, a material and adverse effectimpact on ourTopgolf’s business, operations and financial condition for an extended period of time.
As a result of the ongoing COVID-19 pandemic, various domestic and resultsinternational governmental bodies issued orders, mandates, decrees and directives (collectively, “COVID Orders”), including statewide executive orders in Texas and Florida, where Topgolf operates a significant portion of operations.
The outbreakits venues, and other states in which Topgolf operates venues, ordering the closure of COVID-19 has created considerable instability and disruptionnon-essential business establishments, mandating or recommending that residents “stay at home” other than in the U.S.case of limited exceptions, imposing curfews, suspending alcohol sales for certain establishments, limiting occupancy, ordering the implementation of strict social distancing measures in business establishments and world economies. In March 2020, the World Health Organization declared COVID-19mandating health screens and face coverings for employee associates (“Associates”) and customers and imposed heightened cleanliness standards, including cleaning and disinfecting golf clubs, golf balls, game screens and other frequently touched bay surfaces between each group of guests, which has had a global pandemic, and governmental authorities around the world have implementedmaterial adverse impact on Topgolf’s business throughout 2020. Further, Topgolf enacted various measures to reduce cash expenses to weather its temporary venue closures, including (i) suspension of non-essential capital expenditures, including the spreadsuspension of COVID-19,construction of future venues, (ii) execution of substantial reductions in expenses, including travel restrictions, “stay-at home” orders and “social distancing” measures and business shutdowns. These measures have adversely affected workforces, customers, consumer sentiment, economies, and financial markets, and, along with decreased consumer spending, have led to an economic downturn in manyfurlough or lay-off of our markets. In particular, the COVID-19 pandemic has caused significant disruption in our supply and distribution chains for our golf equipment, apparel and other products sold globally, and resulted in temporary closures of our corporate offices and retail stores around the world, such that a majority of our employees in the United States and Europe are currently working from home. Additionally, the COVID-19 pandemic has resulted in the cancellation of golf tournaments, closures of golf courses and a significant decrease in demandnumber of Associates, (iii) temporary salary reductions for consumer products,certain Associates, including our golf equipment, apparelexecutive officers, (iv) extension of payment terms with Topgolf’s vendors and other products.
We are unable to accurately predict the impact that the COVID-19 pandemic and the resulting disruptions will have on our operations going forward due to the(v) negotiation of rent deferrals for a portion of Topgolf’s leases. Although currently unknowable duration, scope and severity of the COVID-19 pandemic and the impact of governmental regulations that might be imposed in response to the pandemic. To date, such disruptions have resulted in, among other things, production delays and closures of our manufacturing facilities, retail locations and warehouses, any or all of which could materially and adversely affect our supply and distribution chains and ability to manage our operations. We may also experience staffing shortages as a result of remote working requirements or otherwise. WeTopgolf venues have been impacted, and expect to continue to be impacted by, the instability and disruption in global economic and market conditions, and the related decreases in customer demand and spending. To the extent that third parties on whom we rely for revenue, including, among others, our customers and licensees, are negatively impacted by COVID-19, such third parties may be unwilling or unable to make payments otherwise due to us on a timely basis, or at all. In the event of a nonpayment, default or bankruptcy by such third party, our cash flows may be adversely impacted, we may incur costs in protecting our contractual rights, and we may be unable to recognize the revenue that we otherwise expected to receive from such third party.
Although we are taking actions to significantly reduce costs, maximize liquidity and strengthen our operating and financial position,re-opened, there can be no assurance that additional closures or re-closures will not be mandated in the future. Even with respect to venues that may remain open, a number of its venues have reduced operating hours and foot traffic at Topgolf’s venues has not returned to pre-pandemic levels, and Topgolf has reduced headcount at its offices in response to these changes. Additionally, as a result of COVID Orders, Topgolf has not been able to host large group events in certain jurisdictions, which has limited its ability to drive revenue through such actionsevents per past practice. Topgolf expects that occupancy limits imposed under COVID Orders and a shift in consumer demand away from out-of-home entertainment will result in lower guest traffic at venues and continue to negatively impact revenues, and that it will incur additional costs to ensure compliance with safety measures at venues, including mandatory measures under applicable COVID Orders as well as voluntary measures to enhance safety for guests and Associates. In addition, Topgolf may face difficulties in maintaining adequate staffing at venues due to illness, difficulty in recalling Associates that may be furloughed if venues are required to temporarily close again or a reduction in Associates willing to work in public gathering places. As a result, its business, operating results and financial condition have been, and will continue to be, materially and adversely affected. The ongoing COVID-19 pandemic and restrictions under COVID Orders could also delay construction of new venues, present difficulties in staffing venues and result in supply chain interruptions, including for manufactured components for the Toptracer Range system, which may materially adversely affect Topgolf’s ability to implement growth plans. Future outbreaks of other diseases such as avian flu, sudden acute respiratory syndrome (also known as SARS), swine flu or influenza may similarly impact Topgolf.
In addition, Topgolf has been, and will continue to be, negatively impacted by COVID-19 related developments, including heightened governmental regulations and travel advisories, recommendations by the U.S. Department of State, the Centers for Disease Control and Prevention and similar foreign authorities, and travel bans and restrictions, each of which has significantly impacted, and is expected to continue to significantly impact, travel of customers to Topgolf’s domestic and international venues. Topgolf cannot predict how quickly customers will return to its venues, which may be affected by continued concerns over safety and/or depressed consumer sentiment due to adverse economic conditions,
including high unemployment. Demand for Topgolf’s products and services may remain weak for a significant length of time and Topgolf cannot predict if and when such demand will return to pre-outbreak demand.
Topgolf’s growth strategy depends in part on its and its franchisees’ ability to open new venues in existing and new markets.
A key element of Topgolf’s growth strategy is to open additional venues in locations that it believes will provide attractive unit economics and returns on investment. As of March 31, 2021, Topgolf had 60 venues operating in the United States with an additional seven venues under construction, three Company-operated venues in the United Kingdom and three franchised venues (Australia, Mexico and United Arab Emirates), one Company-operated venue under construction in the United Kingdom and one franchised venue under construction in Germany. The Company plans to open additional new venues across flexible venue formats in the years to come. In addition, Topgolf has signed development agreements with five partners to open over 100 franchised venues in 14 countries across the world. In response to the ongoing COVID-19 pandemic, Topgolf suspended construction on certain venues and temporarily paused negotiations on new leases and purchase agreements. Further, construction on future venues could be delayed by additional COVID Orders, reduced availability of labor and supply chain interruptions. As a result, some of the projects in Topgolf’s development pipeline may not be completed on the anticipated timeline, or at all, and new projects may not continue to enter Topgolf’s pipeline at the same rate as in the past.
Topgolf and its franchisees’ ability to open new venues on a timely and cost-effective basis, or at all, is dependent on a number of factors, many of which are beyond Topgolf’s control, including Topgolf and its franchisees’ ability to:
•identify and successfully compete against other potential lessees or purchasers to secure quality locations;
•reach acceptable agreements regarding the lease or purchase of locations;
•secure acceptable financing arrangements;
•comply with applicable zoning, licensing, land use and environmental regulations;
•overcome litigation or other opposition efforts brought by special interest groups;
•raise or have available an adequate amount of money for construction and opening costs;
•respond to unforeseen construction, engineering, environmental or other problems (including delays in construction due to applicable COVID Orders);
•avoid or mitigate the impact of inclement weather, natural disasters and other calamities;
•respond to infectious diseases, health epidemics and pandemics (including the ongoing COVID-19 pandemic);
•timely hire, train and retain the skilled management and other Associates necessary to meet staffing needs;
•obtain, in a timely manner and for acceptable cost, required licenses, permits and regulatory approvals, including liquor licenses, and respond effectively to any changes in local, state or federal law and regulations that adversely affect costs or ability to open new venues; and
•efficiently manage the amount of time and money used to build and open each new venue.
In addition, Topgolf has relied, and expects to continue to rely, primarily on the services of a single design/build contractor for the construction of venues. For venues in certain locations, Topgolf’s reliance on this contractor may result in additional costs or delay. Though Topgolf believes it would be able to counteractfind one or more replacements if it were to lose its relationship with this contractor or if its services otherwise became unavailable, there can be no guarantee that Topgolf would be able to do so without incurring additional costs and delay, or that the global economic impactsterms of arrangements with any such replacement would not be less favorable to Topgolf.
There can be no guarantee that a sufficient number of suitable venue sites will be available in desirable areas or on terms that are acceptable to Topgolf in order to achieve its growth plan, or that Topgolf will be successful in addressing the other risks set forth above in a manner that will allow it to open new venues in a timely and cost-effective manner or at all. If Topgolf is unable to open new venues, or if venue openings are significantly delayed or face other obstacles, Topgolf’s revenue and earnings growth could be adversely affected and its business negatively impacted. New venues,
once opened, may not be profitable or may close, which would adversely affect Topgolf’s business, results of operations and financial condition, and ability to execute its growth strategy.
Even if Topgolf and its franchisees succeed in opening new venues on a timely and cost-effective basis, there can be no guarantee that the profitability of these venues will be in line with that of existing venues or the performance targets Topgolf has set. New venues may even operate at a loss or close after a short operating period, which could have a significant adverse effect on overall operating results. Historically, new venues often experience an initial start-up period with considerable sales volumes, which subsequently decrease to stabilized levels after their first year of operation, followed by increases in same venue sales in line with the rest of Topgolf’s comparable venue base, although there can be no assurance that the same venue sales of any new venues opened in the future will increase in line with the rest of Topgolf’s comparable venue base, particularly in light of the ongoing COVID-19 pandemic.pandemic, or that a new venue will succeed in the long term. Topgolf and its franchisees’ ability to operate new venues profitably may be affected by a number of factors, many of which are beyond its control, including:
•general economic conditions, which can affect venue traffic, local labor costs and prices for food products and other supplies to varying degrees in the markets in which venues are located;
•changes in consumer preferences and discretionary spending;
•difficulties obtaining or maintaining adequate relationships with distributors or suppliers in a given market;
•inefficiency in labor costs and operations as newly hired Associates gain experience;
•competition from other out-of-home entertainment options, including existing venues and the businesses of the Toptracer Range licensees, as well as a variety of home-based entertainment options;
•temporary or permanent site characteristics of new venues;
•changes in government regulation, including required licenses, permits and regulatory approvals, including liquor licenses;
•the impact of infectious diseases, health epidemics and pandemics (including the ongoing COVID-19 pandemic) on factors impacting Topgolf’s business, including but not limited to changes in consumer preferences and discretionary spending, the ability and cost of suppliers to deliver required products and health and public safety regulations; and
•other unanticipated increases in costs, any of which may impair profitability at a specific venue or more broadly.
Furthermore, as part of Topgolf’s longer-term growth strategy, it may open venues in geographic markets in which Topgolf has little or no operating experience. These markets may have different competitive conditions, consumer tastes and discretionary spending patterns than existing markets, which may cause new venues to be less successful or profitable than venues in existing markets. The challenges of opening venues in new markets include, among other things: difficulties in hiring experienced personnel, lack of familiarity with local real estate markets and demographics, lack of familiarity with local legal and regulatory requirements, different competitive and economic conditions, and consumer tastes and discretionary spending patterns that may be more difficult to predict or satisfy than in existing markets. In addition, Topgolf’s marketing and advertising programs may not be successful in generating brand awareness in all local markets, and lack of market awareness of the Topgolf brand may pose additional risks. Venues opened in new markets may open at lower average weekly revenues than venues opened in existing markets, and may have higher venue-level operating expense ratios than venues in existing markets. Sales at venues opened in new markets may also take longer to reach expected revenue levels, if they are able to do so at all, thereby adversely affecting overall profitability. Any failure to recognize or respond effectively to these challenges may adversely affect the success of any new venues and impair Topgolf’s ability to grow its business.
The markets in which Topgolf operates are highly competitive, and its inability to compete effectively could have a material adverse effect on Topgolf’s business, results of operations, financial condition and growth prospects.
The consumer entertainment industry is highly competitive. Consumers today have a wide variety of options when deciding how to spend their leisure time and discretionary entertainment dollars. Topgolf’s venues compete for consumers’ time and discretionary entertainment dollars against a broad range of other out-of-home entertainment options, as well as increasingly sophisticated forms of home-based entertainment. Other out-of-home entertainment options against which Topgolf competes include other dining and entertainment venues, sports activity centers, traditional driving ranges and other establishments offering simulated golf or multi-sport experiences (including Toptracer Range and Full Swing
licensees), arcades and entertainment centers, movie theaters, sporting events, bowling alleys, nightclubs, bars and restaurants. In many cases, these businesses, or the entities operating them, are larger and have significantly greater financial resources and name recognition, longer operating histories, and concepts with which consumers may be more familiar, and are better established in the markets where venues are located or are planned to be located. As a result, these competitors may be able to invest greater resources or implement more aggressive strategies to attract consumers, including with respect to pricing, and, accordingly, may succeed in attracting those who would otherwise come to Topgolf’s venues. Additionally, the legalization of casino gambling in geographic areas near any current or future venue would create the possibility for additional out-of-home entertainment alternatives, which could have a material adverse effect on Topgolf’s business, results of operations and financial condition. Home-based entertainment options against which Topgolf’s venues compete include internet and video gaming, as well as movies, television and other on-demand content from streaming services. Further, in some cases consumer demand has shifted towards home-based entertainment options and away from out-of-home entertainment, including Topgolf’s products and services, as a result of the impact of the ongoing COVID-19 pandemic and related COVID Orders, which may result in greater competition from home-based entertainment options in the future. The failure of Topgolf’s venues to compete favorably against these other out-of-home and home-based entertainment options could have a material adverse effect on Topgolf’s business, results of operations and financial condition.
Topgolf also faces intense competition across its other business lines. In particular, the International and Toptracer business lines compete against other companies to attract and retain qualified franchisees and licensees. WGT and the content Topgolf produces through Topgolf Studios also competes for consumer attention and leisure time against the other home-based entertainment alternatives described above, particularly content focused on sports, including golf. From a commercial perspective, Topgolf also competes against other businesses seeking corporate sponsorships and other commercial partners, such as sports teams, entertainment events and television and digital media outlets, and compete against television and digital content providers seeking advertiser or sponsorship income. Topgolf’s growth strategy and prospects will be materially impaired if it is unable to compete successfully in these aspects of its business.
Topgolf has incurred operating losses in the past, expects to incur operating losses in the future, and may not achieve or maintain profitability.
Topgolf has incurred operating losses each year since its inception, including net losses of $78.5 million, $114.9 million and $346.3m in fiscal years 2018 2019 and 2020, respectively, and expects to continue to incur net losses in the future. As a result, Topgolf had a total stockholders’ deficit of $468.1 million and $928.0 million as of December 29, 2019 and January 3, 2021, respectively. Topgolf expects operating expenses to increase in the future as it continues to grow its network of venues and expand other business lines, including its international franchised venues and licensed Toptracer Range bays. Topgolf revenue growth may slow or revenue may decline for a number of other reasons, including a reduction in guest visits to and spending at Topgolf’s venues, a reduction in revenues from franchisees, licensees and commercial partners, Topgolf’s inability to attract and retain franchisees, licensees and commercial partners, increased competition, a decrease in the growth or reduction in the size of Topgolf’s markets, or if Topgolf is unable to capitalize on growth opportunities. If revenue does not grow at a greater rate than operating expenses, Topgolf will not be able to achieve and maintain profitability.
Some of Topgolf’s products and services contain open source software, which may pose particular risks to its proprietary software, technologies, products, and services in a manner that could harm its business.
Topgolf uses open source software in its products and services and anticipates using open source software in the future. Some open source software licenses require those who distribute open source software as part of their own software products to publicly disclose all or part of the source code to such software product or to make available any modifications or derivative works of the open source code on unfavorable terms or at no cost. This could allow competitors to create similar technologies with less development effort and in less time and could lead to a loss of sales of Topgolf’s products and services. The terms of many open source licenses to which Topgolf is subject have not been interpreted by U.S. or foreign courts, and there is a risk that open source software licenses could be construed in a manner that imposes unanticipated conditions or restrictions on Topgolf’s ability to provide or distribute products or services. Additionally, Topgolf could face claims from third parties claiming ownership of, or demanding release of, works that it developed using open source software, which could include Topgolf’s proprietary source code, or otherwise seeking to enforce the terms of, or alleging breach of, the applicable open source license. These claims could result in litigation and could require Topgolf to make its proprietary software source code freely available, purchase a costly license, or cease offering the implicated
products or services unless and until it can re-engineer them to avoid infringement. This re-engineering process could require Topgolf to expend significant additional financingresearch and development resources, and there can be no guarantee that it will be successful.
Additionally, the use of certain open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or controls on the origin of software. There is typically no support available for open source software, and there can be no assurance that the authors of such open source software will implement or push updates to address security risks or will not abandon further development and maintenance. Many of the risks associated with the use of open source software, such as the lack of warranties or assurances of title or performance, cannot be eliminated, and could, if not properly addressed, negatively affect Topgolf’s business. Topgolf has processes to help alleviate these risks, including a review process for screening requests from developers for the use of open source software, but Topgolf cannot be sure that all open source software is identified or submitted for approval prior to use in its products and services. Any of these risks could be difficult to eliminate or manage, and, if not addressed, could adversely affect Topgolf’s business, results of operations and financial condition..
Topgolf, its franchisees and its licensees are subject to many federal, state, local and foreign laws, as well as other statutory and regulatory requirements, with which compliance is both costly and complex. Failure by Topgolf, its franchisees or its licensees to comply with, or changes in these laws or requirements, could have an adverse impact on its business.
Topgolf is subject to extensive federal, state, local and foreign laws and regulations, as well as other statutory and regulatory requirements, including, among others:
•nutritional content labeling and disclosure requirements;
•food safety regulations;
•employment regulations;
•the Patient Protection and Affordable Care Act of 2010 (the “PPACA”);
•the Americans with Disabilities Act (the “ADA”) and similar state laws;
•data privacy and cybersecurity laws;
•environmental, health and human safety laws and regulations, including COVID Orders;
•laws and regulations related to franchising and licensing operations;
•U.S. Foreign Corrupt Practices Act (the “FCPA”) and other similar anti-bribery and anti-kickback laws; and
•laws regarding sweepstakes and promotional contests.
Topgolf is also subject to U.S. financial services regulations, a myriad of consumer protection laws, including economic sanctions, laws and regulations, anticorruption laws, escheat regulations and data privacy and security regulations. Changes to legal rules and regulations, or interpretation or enforcement of them, could increase Topgolf’s cost of doing business, affect its competitive abilities, and increase the difficulty of compliance. Failure to comply with regulations may have an adverse effect on Topgolf’s business, including the limitation, suspension or termination of services provided to, or by, third parties, and the imposition of penalties or fines.
Many of Topgolf’s franchisees and licensees are also subject to these or similar laws and regulations in the jurisdictions in which they operate. The impact of current laws and regulations, the effect of future changes in laws or regulations that impose additional requirements and the consequences of litigation relating to current or future laws and regulations, uncertainty around future changes in laws made by new regulatory administrations or Topgolf’s, its franchisees’ and its licensees’ inability to respond effectively to significant regulatory or public policy issues, could increase compliance and other costs of doing business and, therefore, have an adverse effect on Topgolf’s results of operations or the results of operations of franchisees and licensees. Failure to comply with the laws and regulatory requirements of applicable federal, state, local and foreign authorities could result in, among other things, revocation of required licenses, administrative enforcement actions, fines and civil and criminal liability. In addition, certain laws, including the ADA, could require Topgolf to expend significant funds to make modifications to its venues if it fails to comply with applicable standards. Compliance with all of these laws and regulations, including any future changes in these laws or requirements, can be costly and can increase exposure to litigation or governmental investigations or proceedings, as further described below. To the extent any franchisees or licensees are subject to these laws and regulations, or similar
laws and regulations in the jurisdictions in which they operate, they will be subject to the same risks described below with respect to Topgolf’s business.
Topgolf may not be able to obtain and maintain licenses and permits necessary to operate venues in compliance with applicable laws, regulations and other requirements, which could adversely affect its business, results of operations and financial condition.
The development, construction and operation of Topgolf’s venues depend, to a significant extent, on the selection of suitable sites, which are subject to zoning, land use, environmental, traffic and other regulations and requirements. Topgolf is also subject to licensing and regulation by federal, state, local and foreign authorities relating to, among other things, alcoholic beverage control, amusement, health, sanitation, stormwater and wastewater management, protection of endangered and threatened plant, wildlife and species, wetlands protection, safety and fire standards. Typically, licenses, permits and approvals under such laws and regulations must be renewed annually and may be revoked, suspended or denied renewal for cause at any time if governmental authorities determine that Topgolf’s conduct violates applicable regulations. In some jurisdictions, the loss of a license for cause with respect to one location may lead to the loss of licenses at all locations in that jurisdiction and could make it more difficult to obtain additional licenses.
With respect to the sale of alcoholic beverages, each of Topgolf’s venues is required to operate ourobtain a license to sell alcoholic beverages on the premises from a state authority and, in certain locations, county and municipal authorities. Certain jurisdictions, however, have only a fixed number of liquor licenses available. As a result, in order to obtain a license in one of these jurisdictions, Topgolf is required to purchase that license from another business, such financingwhich it may not be availableable to usdo on acceptable terms or at all. WhileAlcoholic beverage control regulations impact numerous aspects of the daily operations of each venue, including the minimum age of patrons and Associates, hours of operation, advertising, wholesale purchasing, other relationships with alcohol manufacturers, wholesalers and distributors, inventory control and the handling, storage and dispensing of alcoholic beverages. Any failure by one of Topgolf’s venues to comply with these regulations, or any failure of a franchisee or licensee to comply with similar regulations to which its business is subject, could result in fines or the loss or suspension of the liquor license for that venue or business, and potentially the loss or suspension of other licenses in that jurisdiction.
Difficulties or failure in obtaining a liquor license or any other licenses, permits or approvals, or in continuing to qualify for, or being able to renew, any existing licenses, permits or approvals, could adversely affect existing venues, or Topgolf’s ability to develop or construct venues, and delay or result in Topgolf’s decision to cancel the opening of new venues, which could have a material adverse effect on its business, results of operations and financial condition. Similarly, the inability of any franchisee or licensee to maintain or obtain the licenses, permits and approvals required to develop, construct or operate one or more of their locations would also reduce franchise and licensing revenues, impair growth prospects and adversely affect Topgolf’s business, results of operation and financial condition.
Instances of food-borne illness and outbreaks of disease could negatively impact Topgolf’s business.
Incidents or reports of food-borne or water-borne illness or other food safety issues, food contamination or tampering, Associate hygiene and cleanliness failures or improper Associate conduct at venues could lead to product liability or other claims. Such incidents or reports could negatively affect Topgolf’s brand and reputation as well as its business, revenues and profits regardless of whether the allegations are valid or whether Topgolf is held to be responsible. Similar incidents or reports occurring at franchisees’ or licensees’ businesses or other businesses unrelated to Topgolf could likewise create negative publicity, which could negatively impact consumer behavior towards Topgolf.
There can be no guarantee that Topgolf’s internal policies and training will be fully effective in preventing all food-borne illnesses at its venues. In addition, because Topgolf does not control the day-to-day operations of franchisees and licensees, there can be no guarantee that franchisees and licensees will implement appropriate internal policies and training intended to prevent food-borne illnesses, that their employees will follow such policies and training or that such policies and training will be effective even if complied with. Furthermore, Topgolf’s reliance, and the reliance by any franchisees or licensees, on third-party food processors, distributors and suppliers makes it is prematuredifficult to predictmonitor food safety compliance and may increase the ultimate impactrisk that food-borne illness would affect multiple locations rather than a single venue. Some food-borne illness incidents could be caused by third-party food suppliers and transporters outside of these developments, we expect our resultsTopgolf’s control. New illnesses resistant to Topgolf’s current precautions may develop in the near-termfuture, or diseases with long incubation periods could arise, that could give rise to claims or allegations on a retroactive basis. One or more instances of food-borne illness
in one of company-operated or franchised venues, if highly publicized, could negatively affect revenues at all of Topgolf’s venues by changing consumers’ perceptions of Topgolf’s venues and beyond willthe food that it offers, negatively impacting demand for menu offerings and reducing guest visits at venues. This risk is particularly great with respect to franchised venues given Topgolf’s limited oversight, and exists even if it were later determined that the illness was wrongly attributed to a company- or a franchisee-operated venue. There is also a risk that instances of food-borne illness at a licensee’s businesses could be improperly attributed to Topgolf. Additionally, even if food-borne illnesses were not identified at or otherwise attributed to a Topgolf venue, Topgolf’s revenue could be adversely impacted in a significant manner. Furthermore, when conditions returnaffected if instances of food-borne illnesses at other businesses were highly publicized. A number of companies have experienced incidents related to a more normal state, we may experience difficulties efficiently ramping up ourfood-borne illnesses that have had material adverse effects on their business, operations to pre-COVID-19 levels in an effective manner.
To the extent the COVID-19 pandemic adversely affects our business,and financial condition, and there can be no assurance that Topgolf could avoid a similar impact if such an incident were to occur at one or more of venues.
Guest complaints, litigation on behalf of guests or Associates or other proceedings may adversely affect Topgolf’s business, results of operations and financial condition.
Topgolf may be adversely affected by legal or governmental proceedings brought by or on behalf of guests, Associates, suppliers, commercial partners, franchisees, licensees or others through private actions, class actions, administrative proceedings, regulatory actions or other litigation. The outcome of such proceedings, particularly class actions and regulatory actions, is difficult to assess or quantify. In recent years, a number of companies in Topgolf’s industry and adjacent industries have been subject to lawsuits, including class action lawsuits, alleging violations of federal and state law regarding workplace and employment matters, discrimination and similar matters, and a number of these lawsuits have resulted in the payment of substantial damages by the defendants. Topgolf could also face potential liability if it is found to have misclassified certain Associates as exempt from the overtime requirements of the federal Fair Labor Standards Act and state labor laws, or if it is found to have failed to provide or continue health insurance or benefits to Associates in violation of the Employee Retirement Income Security Act or the PPACA. Lastly, Topgolf faces potential liability if it is found to have failed to comply with data privacy laws relating to the collection of data about Associates/employees, such as use of biometric information under state biometric information statutes, such as Illinois’ Biometric Information Privacy Act (“BIPA”). Topgolf has had, from time to time, and now has, such lawsuits pending, and there can be no guarantee that Topgolf will not be named in any such lawsuit in the future or that Topgolf will not be required to pay substantial expenses and/or damages at the conclusion of such lawsuits.
In addition, from time to time, guests file complaints or lawsuits against Topgolf alleging that it is responsible for some illness or injury they suffered at or after a visit to a venue, and Topgolf may face greater risk of such complaints or lawsuits in light of the ongoing COVID-19 pandemic. From time to time, animal activist and other third-party special interest groups may bring claims before government agencies or lawsuits against Topgolf relating to the impact of its venues. Topgolf is also subject to a variety of other claims in the ordinary course of business, including personal injury, lease and contract claims.
Topgolf is also subject to “dram shop” statutes in certain states in which its venues are located. These statutes generally provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated individual. Topgolf has been in the past, and may be in the future, the subject of lawsuits that allege violations of these statutes. Recent litigation under dram shop statutes has resulted in significant judgments and settlements against other businesses and establishments similar to Topgolf’s venues. Because these cases often seek punitive damages, which may not be covered by insurance, such litigation if successful could have an adverse effect on Topgolf’s business, results of operations and financial condition.
Regardless of whether any claims against Topgolf are valid or whether Topgolf is liable, claims may be expensive to defend, generate negative publicity, divert time and money away from core operations and hurt financial performance. Similarly, claims brought against franchisees and licensees may generate negative publicity that could harm Topgolf’s brand and reputation. Although Topgolf maintains what it believes to be adequate levels of insurance to cover any liabilities it may alsoface, insurance may not be available at all or in sufficient amounts with respect to these or other matters. Any negative publicity concerning such claims, whether involving Topgolf or franchisees or licensees, or any judgment or other liability significantly in excess of Topgolf’s insurance coverage or not covered by insurance, could have a material adverse effect on its business, results of operations and financial condition.
The venues business line is susceptible to the effectavailability and cost of heightening manyfood commodities and other supplies, some of which are available from a limited number of suppliers, which subjects Topgolf to possible risks of shortages, interruptions and price fluctuations.
The profitability of the other risks describedvenues business line depends in “Risk Factors” under Item 1Apart on Topgolf’s ability to anticipate and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2019 that we filed with the SEC on March 2, 2020, including, without limitation, risks relatingreact to changes in demandproduct costs. The price and availability of food commodities and other supplies may be affected by a number of factors beyond Topgolf’s control, including changes in general economic conditions, seasonal economic fluctuations, increased competition, general inflation, shortages or supply interruptions due to weather, disease (including the ongoing COVID-19 pandemic) or other factors, food safety concerns, product recalls, fluctuations in the U.S. dollar and changes in government regulations. These and other events could increase commodity prices or cause shortages that could affect the cost and quality of the items that Topgolf buys or require Topgolf to raise prices or limit menu options. The profitability of the venues business line may also be adversely affected by increases in the price of utilities, such as natural gas, electric, and water, whether as a result of inflation, shortages, interruptions in supply or otherwise.
While Topgolf has historically been able to partially offset inflation and other changes in the costs of core operating resources used in the venues business line by gradually increasing menu prices, coupled with more efficient purchasing practices, productivity improvements and greater economies of scale, there can be no assurance that Topgolf or franchisees will be able to continue to do so in the future. From time to time, competitive or macroeconomic conditions could limit menu pricing flexibility, and there can be no assurance that increased menu prices will be fully absorbed by guests without any resulting change to their visit frequencies or purchasing patterns that may offset such increases. If Topgolf or its franchisees are unable to increase prices in response to higher food commodity and other supplies costs, or if such price increases decrease guest traffic or purchasing patterns, Topgolf’s operating results could be materially and adversely affected. In addition, there can be no assurance that Topgolf will generate same venue sales growth in an amount sufficient to offset inflationary or other cost pressures.
Topgolf has entered into a long-term contract with a single distributor, which Topgolf refers to as its “broadline” distributor, which provides for ourthe purchasing, warehousing and distributing of a substantial majority of Topgolf’s food, non-alcoholic beverage and other supplies. Topgolf also contracts directly with the suppliers of certain food and non-alcoholic beverage products, usually with a single supplier for each such product. These agreements, however, are typically for the purpose of establishing an agreed-upon price for the relevant product and do not require the supplier to provide Topgolf’s requirements, or any particular quantity, of such product. If Topgolf’s broadline distributor or any of its other suppliers or substitute suppliers do not perform adequately or otherwise fail to deliver products or supplies to venues, if Topgolf were to lose its relationship with its broadline distributor or any single-source suppliers for which it has not approved a substitute supplier, or if any substitute suppliers also fail to perform, Topgolf may be unable to find satisfactory replacements in a short period of time, on acceptable terms, or at all, which could increase costs, cause shortages of food and other items at venues and cause Topgolf to remove certain items from its menu, any of which could adversely affect its business, results of operations and financial condition.
Other than forward purchase contracts for certain food items, Topgolf currently does not engage in futures contracts or other financial risk management strategies with respect to potential price fluctuations in the supplycost of food commodities and other supplies. Furthermore, these arrangements generally are relatively short in duration and may provide only limited protection from price changes. In addition, the use of these arrangements may limit Topgolf’s ability to benefit from favorable price movements.
In addition, the radio-frequency identification (“RFID”) enabled golf balls and golf clubs that are used in Topgolf’s venues are produced by third-party manufacturers in Taiwan and China. As a result, natural disasters and other adverse events or conditions affecting these countries (including, without limitation, adverse weather conditions, political instability, civil unrest, economic instability, outbreaks of disease, such as the current COVID-19 pandemic, or other public health emergencies and the impact of public fears regarding any of the componentsforegoing) could halt or disrupt production, impair the movement of finished products out of these countries, damage or destroy the tooling and materials usedother equipment necessary to make ourmanufacture these products ourand otherwise cause Topgolf to incur additional costs and expenses, any of which could also have a material adverse effect on its results of operations and financial condition. The location of these manufacturers outside the United States also exposes Topgolf to the various international risks.
levelTopgolf may become subject to liabilities or other costs under environmental, health and human safety laws that could increase operating expenses and adversely affect Topgolf’s business, results of indebtedness, our need to generate sufficient cash flows to service our indebtedness, our ability to comply with the obligationsoperations and financial covenants contained in our existing credit facilities, availabilitycondition.
As discussed above, Topgolf is subject to a number of adequate capital, our abilityfederal, state, local and foreign laws, rules and regulations relating to execute our strategic plans, U.S. trade, tax the protection of the environment, health and human safety. As the operator and/or other policies that restrict imports or increase import tariffs, and regulatory restrictions. In addition, if inowner of the future there is a further outbreak of COVID-19, or an outbreak of another highly infectious or contagious disease or other health concern, weproperties on which venues are situated, Topgolf may be subject to liability and clean-up obligations under environmental laws for any contamination of, or releases of regulated substances at or from, these properties, in some cases without regard to whether Topgolf knew of or was responsible for the presence or release of the contaminants or regulated substances. Liability under environmental laws has been interpreted to be joint and several unless the harm is divisible and there is a reasonable basis for allocating the responsibility. In addition, Topgolf’s lease agreements typically provide that Topgolf will indemnify the landlord for environmental conditions which may be found on or about the leased property. Accordingly, should unknown contamination be discovered at any of the properties Topgolf owns, operates or leases, or should a release occur at one of these properties, Topgolf could be required to investigate and clean up the release and could also be held responsible to a governmental entity or third parties for property or natural resource damage, personal injury and investigation and clean-up costs incurred by them in connection with the contamination, and these costs and liabilities could be substantial. Topgolf may also be subject to liability under environmental laws as a result of contamination at properties previously owned or operated by Topgolf or its predecessors in interest or for third-party contaminated facilities to which it has sent waste for treatment or disposal. In the past, certain construction activities driven by Topgolf’s development plans at certain sites (such as the removal of excess soil or the de-watering of shallow groundwater to install targets) have exposed, and any similar risksconstruction activities Topgolf undertakes at other sites in the future may also expose, soil or water that has been contaminated from historical activities at the site which must be disposed of or otherwise handled or addressed in accordance with applicable environmental laws. With respect to any of the properties Topgolf owns, operates or leases, the presence of contaminants (including as poseda result of failure to properly dispose of or otherwise handle or address any contaminants exposed by COVID-19.construction activities), or the failure to properly remediate a property, may impair Topgolf’s ability to use, mortgage or sell that property in the future. Any of these events could impair Topgolf’s reputation and have a material adverse effect on its business, results of operations and financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Stock Purchases
In July 2019, the Board of Directors authorized $100.0 million share repurchase program (the "2019 Repurchase Program"), under which the Company is authorized to repurchase shares of its common stock in the open market or in private transactions, subject to the Company's assessment of market conditions and buying opportunities. Repurchases under the 2019 Repurchase Program are made consistent with the terms of the Company's ABL Facility and long-term debt, which limits the amount of stock that can be repurchased. Although the 2019 Repurchase Program will remain in effect until completed or until terminated by the Board of Directors, the Company has temporarily suspended the 2019 Repurchase Program. The Company has the ability to resume purchases if it deems circumstances warrant it.
The following table summarizes the purchases by the Company during the first quarter of 2020 under2021. These repurchases represent the 2019 Repurchase Program. Included in these amounts are $9.9 millionnumber of shares the Company withheld to satisfy payroll tax withholding obligations in connection with the vesting and settlement of employee restricted stock unit awards and performance share unit awards. The Company’s repurchases of shares of common stock are recorded at cost and result in a reduction of shareholders’ equity.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2021 |
| Total Number
of Shares
Purchased | | Weighted
Average Price
Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program | | Maximum Dollar Value that May Yet Be Purchased Under the Program |
| (in thousands, except per share data) |
| January 1, 2021-January 31, 2021 | | — | | | | | $ | — | | | | | — | | | | | $ | 77,369 | | |
| February 1, 2021-February 28, 2021 | | 400 | | | | | $ | 31.27 | | | | | — | | | | | $ | 77,369 | | |
| March 1, 2021-March 31, 2021 | | — | | | | | $ | — | | | | | — | | | | | $ | 77,369 | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Total | | 400 | | | | | $ | 31.27 | | | | | — | | | | | $ | 77,369 | | |
|
| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 |
| | Total Number
of Shares
Purchased | | Weighted
Average Price
Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program(1) | | Maximum Dollar Value that May Yet Be Purchased Under the Program |
| | (in thousands, except per share data) |
| January 1, 2020-January 31, 2020 | | — |
| | | | $ | — |
| | | | — |
| | | | $ | 99,322 |
| |
| February 1, 2020-February 29, 2020 | | 748 |
| | | | $ | 19.86 |
| | | | 748 |
| | | | $ | 84,456 |
| |
| March 1, 2020-March 31, 2020 | | 418 |
| | | | $ | 16.92 |
| | | | 418 |
| | | | $ | 77,384 |
| |
| Total | | 1,166 |
| | | | $ | 18.80 |
| | | | 1,166 |
| | | | $ | 77,384 |
| |
| |
(1) | The Company has suspended the 2019 Repurchase Program. The Company has the ability to resume purchases if it deems circumstances warrant it. |
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None
Item 5. Other Information
None.
Item 6. Exhibits
|
| | | | | | | |
3.12.1 |
| | CertificateAgreement and Plan of Incorporation,Merger, dated as of October 27, 2020, by and among Callaway Golf Company, 51 Steps, Inc., and Topgolf International, Inc., incorporated herein by this reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K, as filed with the Commission on October 27, 2020 (file no. 1-10962). |
| | |
| | |
| | |
| | |
| | |
| 3.1 | | | |
| | |
| 3.2 |
| | |
| | |
4.1 |
| | |
| | |
4.2 |
| | |
| | |
10.1 |
| | |
| | |
10.2 |
| | First Amendment to Fourth Amended and Restated Loan and Security Agreement, dated as of August 28, 2019, by and among Callaway Golf Company, Callaway Golf Sales Company, Callaway Golf Ball Operations, Inc., Ogio International, Inc., travisMathew, LLC, Callaway Golf Canada Ltd., Callaway Golf Europe Ltd., Jack Wolfskin North America, Inc, and JACK WOLFSKIN Ausrüstung für Draussen GmbH, Bank of America, N.A. as administrative agent and certain financial institutions as lenders. † |
| | |
10.3 |
| |
| | |
| | |
| | |
| | |
| | |
| 10.1 | | | Second Amendment to Fourth Amended and Restated Loan and SecurityIndemnification Agreement, dated as of March 20, 2020, among8, 2021, between Callaway Golf Company Callaway Golf Sales Company, Callaway Golf Ball Operations, Inc., Ogio International, Inc., travisMathew, LLC, Callaway Golf Canada Ltd., Callaway Golf Europe Ltd., Jack Wolfskin North America, Inc, and JACK WOLFSKIN Ausrüstung für Draussen GmbH, Bank of America, N.A. as administrative agent and certain financial institutions as lenders,Erik J Anderson, incorporated herein by this reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, as filed with the Commission on March 25, 20208, 2021 (file no. 1-10962). |
| | |
10.410.2 |
| | Third Amendment to Fourth Amended and Restated Loan and SecurityIndemnification Agreement, dated as of April 28, 2020, amongMarch 8, 2021, between Callaway Golf Company Callaway Golf Sales Company, Callaway Golf Ball Operations, Inc., Ogio International, Inc., travisMathew, LLC, Callaway Golf Canada Ltd., Callaway Golf Europe Ltd., Jack Wolfskin North America, Inc, and JACK WOLFSKIN Ausrüstung für Draussen GmbH, Bank of America, N.A. as administrative agent and certain financial institutions as lenders,Thomas G. Dundon, incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, as filed with the Commission on April 29, 2020 (file no. 1-10962). |
| | |
10.5 |
| | Amendment No. 1, dated as of April 28, 2020, to the Credit Agreement, dated as of January 4, 2019, by and among Callaway Golf Company, Bank of America, N.A., as administrative agent, and the financial institutions party thereto, incorporated herein bythis reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, as filed with the Commission on April 29, 2020March 8, 2021 (file no. 1-10962). |
| | |
10.610.3 |
| | Confirmation of Base Capped Call Transaction,Indemnification Agreement, dated April 29, 2020,March 8, 2021, between Callaway Golf Company and Goldman Sachs & Co. LLC,Scott M. Marimow, incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, as filed with the Commission on May 4, 2020 (file no. 1-109-62). |
| | |
10.7 |
| | |
| | |
10.8 |
| | |
| | |
10.910.4 |
| | |
| | |
|
| | | |
10.1010.5 |
| | |
| | |
10.1110.6 |
| | |
| | |
31.110.7 |
| | |
| | |
| | |
| | |
| 31.1 | | | |
| | |
| 31.2 |
| | |
| | |
| 32.1 |
| | |
| | |
| 101.1 |
| | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| |
| 101.2 |
| | XBRL Taxonomy Extension Schema Document † |
| |
| 101.3 |
| | XBRL Taxonomy Extension Calculation Linkbase Document † |
| |
| 101.4 |
| | XBRL Taxonomy Extension Definition Linkbase Document † |
| |
| 101.5 |
| | XBRL Taxonomy Extension Label Linkbase Document † |
| |
| 101.6 |
| | XBRL Taxonomy Extension Presentation Linkbase Document † |
| | |
| 104 |
| | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) † |
(†) Included with this Report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | |
| CALLAWAY GOLF COMPANY |
| |
CALLAWAY GOLF COMPANY |
| By: | |
By: | /s/ Jennifer Thomas |
| Jennifer Thomas |
| Vice President and
Chief Accounting Officer
|
Date: May 11, 202010, 2021