Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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ý | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2018
OR
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o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period to Commission file number 001-10962
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Callaway Golf Company |
(Exact name of registrant as specified in its charter) |
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Delaware | | 95-3797580 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
2180 Rutherford Road, Carlsbad, CA 92008
(760) 931-1771
(Address, including zip code, and telephone number, including area code, of principal executive offices)
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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.
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Large accelerated filer | ý | Accelerated filer | o |
Non-accelerated filer | o | Smaller reporting company | o |
| | Emerging growth company | o |
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 o No ý
As of September 30, 2018, the number of shares outstanding of the Registrant’s common stock was 94,502,035.
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," "on track," and similar references to future periods. Forward-looking statements include, among others, statements that relate to future plans, events, liquidity, financial results or performance including, but not limited to, statements relating to future stock repurchases, cash flows and liquidity, compliance with debt covenants, estimated unrecognized stock compensation expense, projected capital expenditures and depreciation and amortization expense, market conditions, 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 related financial impact of the future business and prospects of the Company, TravisMathew, LLC ("TravisMathew") and OGIO International, Inc. ("OGIO"), the expected continued financial impact of the Company's joint venture in Japan 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. 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:
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• | certain risks and uncertainties, including changes in capital market or economic conditions; |
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• | a material impact on the Company's tax provision as a result of the Tax Act; |
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• | consumer acceptance of and demand for the Company’s products; |
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• | future retailer purchasing activity, which can be significantly affected by adverse industry conditions and overall retail inventory levels; |
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• | any unfavorable changes in U.S. trade, tax or other policies, including restrictions on imports or an increase in import tariffs; |
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• | the level of promotional activity in the marketplace; |
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• | future consumer discretionary purchasing activity, which can be significantly adversely affected by unfavorable economic or market conditions; |
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• | significant fluctuations in foreign currency exchange rates and the degree of effectiveness of the Company’s hedging programs; |
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• | the ability of the Company to manage international business risks; |
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• | adverse changes in the credit markets or continued compliance with the terms of the Company’s credit facilities; |
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• | 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; |
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• | adverse weather conditions and seasonality; |
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• | any rule changes or other actions taken by the USGA or other golf association that could have an adverse impact upon demand or supply of the Company’s products; |
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• | the ability of the Company to protect its intellectual property rights; |
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• | a decrease in participation levels in golf; |
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• | the effect of terrorist activity, armed conflict, natural disasters or pandemic diseases 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 |
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• | 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. 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 Callaway Golf Company: Apex, Apex Tour, APW, Aqua Dry, Arm Lock, Backstryke, Big Bertha, Big Bertha Alpha, Big T, Black Series, Bounty Hunter, C, C Grind, Callaway, Callaway Golf, Callaway Media Productions, Callaway Supersoft, Chev, Chev 18, Chevron Device, Chrome Soft, Cirrus, Comfort Tech, CUATER, Cup 360, CXR, 360 Face Cup, D.A.R.T., Dawn Patrol, Demonstrably Superior And Pleasingly Different, Divine, Eagle, Engage, Epic, ERC, Exo, Cage, Fast Tech Mantle, FT Optiforce, FT Performance, FT Tour, FTiZ, Fusion, GBB, GBB Epic, Gems, Gravity Core, Great Big Bertha, Great Big Bertha Epic, Griptac, Grom, Groove, In, Groove Technology, Heavenwood, Hex Aerodynamics, Hex Chrome, Hex Solaire, HX, Hyper Dry, Hyper, Lite, Hyper Speed Face, I, MIX, Innovate or Die, Ion-X, Jailbird, Jailbreak, Kings of Distance, Legacy, Longer From Everywhere, Mack Daddy, Majestic, MarXman, MD3 Milled, MD4 Tactical, MD5, Metal-X, Microhinge Face Insert, Number One Putter in Golf, O OGIO, O Works, Odyssey, Odyssey Works, Ogio, OGIO ALPHA, OGIO ARORA, OGIO CLUB, OGIO FORGE, OGIO ME, OGIO MY EXPRESSION, OGIO RENEGADE, OGIO SAVAGE, OGIO SHADOW, Opti Flex, Opti Grip, Opti Shield, Opti Therm, OptiFit, ORG 14, ORG 15, PRESTIGE 7, ProType, ∙R∙, R-Moto, Renegade, Rig 9800, Rossie, RSX, S2H2, Sabertooth, Shredder, SLED, SoftFast, Solaire, Speed Regime, Speed Step, SR1, SR2, SR3, Steelhead XR, Steelhead, Strata, Strata Jet, Stronomic, Sub Zero, Superhot, T M, Tank, Tank Cruiser, Tech Series, Teron, TI, HOT, TMCA, Toe Up, Toulon, Toulon Garage, Tour Authentic, Trade In! Trade Up!, TRAVISMATHEW, Trionomer Cover, Truvis, Truvis Pattern, Tyro, udesign, Uptown, Versa, VFT, W Grind, Warbird, Weather Series, Wedgeducation, White Hot, White Hot Pro, White Hot Pro Havok, White Hot Tour, White Ice, World's Friendliest, X-12, X-14, X-16, X-18, X-20, X-22, X-24, X-ACT, X Hot, X Hot Pro, X² Hot, X Series, XR, XR 16, XSPANN, Xtra Traction Technology, Xtra Width Technology, XTT, 2-Ball, 3 Deep.
CALLAWAY GOLF COMPANY
INDEX
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Item 1. | | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
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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) |
| | | | | | | |
| September 30, 2018 | | December 31, 2017 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 70,821 |
| | $ | 85,674 |
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Accounts receivable, net | 130,033 |
| | 94,725 |
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Inventories | 237,472 |
| | 262,486 |
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Income taxes receivable | 13,762 |
| | 542 |
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Other current assets | 21,028 |
| | 22,557 |
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Total current assets | 473,116 |
| | 465,984 |
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Property, plant and equipment, net | 82,074 |
| | 70,227 |
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Intangible assets, net | 224,958 |
| | 225,758 |
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Goodwill | 56,106 |
| | 56,429 |
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Deferred taxes, net | 65,045 |
| | 91,398 |
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Investment in golf-related venture | 70,777 |
| | 70,495 |
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Other assets | 10,625 |
| | 10,866 |
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Total assets | $ | 982,701 |
| | $ | 991,157 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable and accrued expenses | $ | 142,661 |
| | $ | 176,127 |
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Accrued employee compensation and benefits | 38,425 |
| | 40,173 |
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Asset-based credit facilities | 4,300 |
| | 87,755 |
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Accrued warranty expense | 8,532 |
| | 6,657 |
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Equipment note, short-term | 2,400 |
| | 2,367 |
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Income taxes payable | 10,827 |
| | 1,295 |
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Total current liabilities | 207,145 |
| | 314,374 |
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Long-term liabilities: | | | |
Income tax liability | 4,164 |
| | 4,602 |
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Deferred taxes, net | 1,795 |
| | 1,822 |
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Long-term other | 2,050 |
| | 1,536 |
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Equipment note, long-term | 7,783 |
| | 9,448 |
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Commitments and contingencies (Note 12) |
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Shareholders’ equity: | | | |
Preferred stock, $0.01 par value, 3,000,000 shares authorized, none issued and outstanding at September 30, 2018 and December 31, 2017 | — |
| | — |
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Common stock, $0.01 par value, 240,000,000 shares authorized, 95,648,648 and 95,042,557 shares issued at September 30, 2018 and December 31, 2017, respectively | 956 |
| | 950 |
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Additional paid-in capital | 337,902 |
| | 335,222 |
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Retained earnings | 443,247 |
| | 324,081 |
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Accumulated other comprehensive loss | (13,521 | ) | | (6,166 | ) |
Less: Common stock held in treasury, at cost, 1,146,613 and 411,013 shares at September 30, 2018 and December 31, 2017, respectively | (17,857 | ) | | (4,456 | ) |
Total Callaway Golf Company shareholders’ equity | 750,727 |
| | 649,631 |
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Non-controlling interest in consolidated entity (Note 8) | 9,037 |
| | 9,744 |
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Total shareholders’ equity | 759,764 |
| | 659,375 |
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Total liabilities and shareholders’ equity | $ | 982,701 |
| | $ | 991,157 |
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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)
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Net sales | $ | 262,654 |
| | $ | 243,604 |
| | $ | 1,062,156 |
| | $ | 857,079 |
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Cost of sales | 147,415 |
| | 138,702 |
| | 553,758 |
| | 456,297 |
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Gross profit | 115,239 |
| | 104,902 |
| | 508,398 |
| | 400,782 |
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Operating expenses: | | | | | | | |
Selling expense | 68,605 |
| | 65,754 |
| | 234,826 |
| | 205,618 |
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General and administrative expense | 26,706 |
| | 23,957 |
| | 73,008 |
| | 68,976 |
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Research and development expense | 9,229 |
| | 9,154 |
| | 29,561 |
| | 26,899 |
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Total operating expenses | 104,540 |
| | 98,865 |
| | 337,395 |
| | 301,493 |
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Income from operations | 10,699 |
| | 6,037 |
| | 171,003 |
| | 99,289 |
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Interest income | 70 |
| | 63 |
| | 485 |
| | 399 |
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Interest expense | (1,126 | ) | | (705 | ) | | (4,730 | ) | | (2,306 | ) |
Other income (expense), net | 1,432 |
| | (820 | ) | | 2,448 |
| | (6,197 | ) |
Income before income taxes | 11,075 |
| | 4,575 |
| | 169,206 |
| | 91,185 |
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Income tax provision | 1,335 |
| | 1,486 |
| | 35,801 |
| | 30,742 |
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Net income | 9,740 |
| | 3,089 |
| | 133,405 |
| | 60,443 |
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Less: Net income attributable to non-controlling interest | 223 |
| | 29 |
| | 166 |
| | 251 |
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Net income attributable to Callaway Golf Company | $ | 9,517 |
| | $ | 3,060 |
| | $ | 133,239 |
| | $ | 60,192 |
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Earnings per common share: | | | | | | | |
Basic | $ | 0.10 |
| | $ | 0.03 |
| | $ | 1.41 |
| | $ | 0.64 |
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Diluted | $ | 0.10 |
| | $ | 0.03 |
| | $ | 1.37 |
| | $ | 0.62 |
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Weighted-average common shares outstanding: | | | | | | | |
Basic | 94,477 |
| | 94,450 |
| | 94,605 |
| | 94,246 |
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Diluted | 97,320 |
| | 96,879 |
| | 97,076 |
| | 96,343 |
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The accompanying notes are an integral part of these financial statements.
CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Net income | $ | 9,740 |
| | $ | 3,089 |
| | $ | 133,405 |
| | $ | 60,443 |
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Other comprehensive income: | | | | | | | |
Change in derivative instruments | 88 |
| | 696 |
| | 426 |
| | (2,922 | ) |
Foreign currency translation adjustments | (2,457 | ) | | 3,431 |
| | (7,447 | ) | | 12,002 |
|
Comprehensive income, before income tax on other comprehensive income items | 7,371 |
| | 7,216 |
| | 126,384 |
| | 69,523 |
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Income tax expense (benefit) on derivative instruments | (216 | ) | | (277 | ) | | (386 | ) | | 521 |
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Comprehensive income | 7,155 |
| | 6,939 |
| | 125,998 |
| | 70,044 |
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Less: Comprehensive income (loss) attributable to non-controlling interests | (240 | ) | | (14 | ) | | (52 | ) | | 176 |
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Comprehensive income attributable to Callaway Golf Company | $ | 7,395 |
| | $ | 6,953 |
| | $ | 126,050 |
| | $ | 69,868 |
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The accompanying notes are an integral part of these financial statements.
CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands) |
| | | | | | | |
| Nine Months Ended September 30, |
| 2018 | | 2017 |
Cash flows from operating activities: | | | |
Net income | $ | 133,405 |
| | $ | 60,443 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 14,762 |
| | 12,806 |
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Amortization of inventory step-up from acquisitions | — |
| | 1,701 |
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Deferred taxes, net | 30,123 |
| | 32,586 |
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Non-cash share-based compensation | 9,975 |
| | 9,583 |
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(Gain)/loss on disposal of long-lived assets | (30 | ) | | 1,035 |
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Unrealized (gain)/loss on foreign currency hedges | (1,138 | ) | | 1,373 |
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Change in assets and liabilities, net of effect from acquisitions: | | | |
Accounts receivable, net | (54,559 | ) | | (6,540 | ) |
Inventories | 21,257 |
| | 24,038 |
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Other assets | 1,585 |
| | (4,835 | ) |
Accounts payable and accrued expenses | (31,358 | ) | | (20,563 | ) |
Accrued employee compensation and benefits | (1,636 | ) | | 1,762 |
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Accrued warranty expense | 1,875 |
| | 2,155 |
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Income taxes receivable/payable, net | (3,437 | ) | | (4,835 | ) |
Other liabilities | 75 |
| | 76 |
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Net cash provided by operating activities | 120,899 |
| | 110,785 |
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Cash flows from investing activities: | | | |
Capital expenditures | (26,103 | ) | | (16,846 | ) |
Investments in golf related ventures | (282 | ) | | (1,499 | ) |
Acquisitions, net of cash acquired | — |
| | (181,824 | ) |
Proceeds from sales of property and equipment | 43 |
| | 560 |
|
Net cash used in investing activities | (26,342 | ) | | (199,609 | ) |
Cash flows from financing activities: | | | |
Proceeds from (repayments of) credit facilities, net | (83,455 | ) | | 58,652 |
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Exercise of stock options | 1,636 |
| | 4,205 |
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Repayments of long-term debt | (1,632 | ) | | — |
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Dividends paid, net | (2,841 | ) | | (2,827 | ) |
Acquisition of treasury stock | (22,373 | ) | | (16,479 | ) |
Distributions to non-controlling interests | (821 | ) | | (974 | ) |
Net cash (used in)/provided by financing activities | (109,486 | ) | | 42,577 |
|
Effect of exchange rate changes on cash and cash equivalents | 76 |
| | 2,293 |
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Net decrease in cash and cash equivalents | (14,853 | ) | | (43,954 | ) |
Cash and cash equivalents at beginning of period | 85,674 |
| | 125,975 |
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Cash and cash equivalents at end of period | $ | 70,821 |
| | $ | 82,021 |
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Supplemental disclosures: | | | |
Cash paid for income taxes, net | $ | 8,216 |
| | $ | 9,787 |
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Cash paid for interest and fees | $ | 4,419 |
| | $ | 1,865 |
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Non-cash investing and financing activities: | | | |
Issuance of treasury stock and common stock for compensatory stock awards released from restriction | $ | 5,521 |
| | $ | 5,556 |
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Accrued capital expenditures at period-end | $ | 2,073 |
| | $ | 1,865 |
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The accompanying notes are an integral part of these financial statements.
CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
(In thousands)
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| 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 | | |
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| Shares | | Amount | | | | | Shares | | Amount | | | | Total |
Balance at June 30, 2018 | 95,649 |
| | $ | 956 |
| | $ | 335,025 |
| | $ | 434,674 |
| | | $ | (11,176 | ) | | | (1,209 | ) | | $ | (18,797 | ) | | | $ | 740,682 |
| | | $ | 9,054 |
| | $ | 749,736 |
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Acquisition of treasury stock | — |
| | — |
| | — |
| | — |
| | | — |
| | | (3 | ) | | (72 | ) | | | (72 | ) | | | — |
| | (72 | ) |
Exercise of stock options | — |
| | — |
| | (493 | ) | | — |
| | | — |
| | | 56 |
| | 871 |
| | | 378 |
| | | — |
| | 378 |
|
Compensatory awards released from restriction | — |
| | — |
| | (107 | ) | | 47 |
| | | — |
| | | 6 |
| | 60 |
| | | — |
| | | — |
| | — |
|
Share-based compensation | — |
| | — |
| | 3,511 |
| | — |
| | | — |
| | | — |
| | — |
| | | 3,511 |
| | | — |
| | 3,511 |
|
Stock dividends | — |
| | — |
| | (34 | ) | | (47 | ) | | | — |
| | | 3 |
| | 81 |
| | | — |
| | | — |
| | — |
|
Cash dividends ($0.01 per share) | — |
| | — |
| | — |
| | (944 | ) | | | — |
| | | — |
| | — |
| | | (944 | ) | | | — |
| | (944 | ) |
Equity adjustment from foreign currency translation | — |
| | — |
| | — |
| | — |
| | | (2,217 | ) | | | — |
| | — |
| | | (2,217 | ) | | | (240 | ) | | (2,457 | ) |
Change in fair value of derivative instruments, net of tax | — |
| | — |
| | — |
| | — |
| | | (128 | ) | | | — |
| | — |
| | | (128 | ) | | | — |
| | (128 | ) |
Net income | — |
| | — |
| | — |
| | 9,517 |
| | | — |
| | | — |
| | — |
| | | 9,517 |
| | | 223 |
| | 9,740 |
|
Balance at September 30, 2018 | 95,649 |
| | $ | 956 |
| | $ | 337,902 |
| | $ | 443,247 |
| | | $ | (13,521 | ) | | | (1,147 | ) | | $ | (17,857 | ) | | | $ | 750,727 |
| | | $ | 9,037 |
| | $ | 759,764 |
|
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| 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 at December 31, 2017 | 95,043 |
| | $ | 950 |
| | $ | 335,222 |
| | $ | 324,081 |
| | | $ | (6,166 | ) | | | (411 | ) | | $ | (4,456 | ) | | | $ | 649,631 |
| | | $ | 9,744 |
| | $ | 659,375 |
|
Adoption of accounting standard | — |
| | — |
| | — |
| | (11,185 | ) | | | — |
| | | — |
| | — |
| | | (11,185 | ) | | | — |
| | (11,185 | ) |
Acquisition of treasury stock | — |
| | — |
| | — |
| | — |
| | | — |
| | | (1,407 | ) | | (22,373 | ) | | | (22,373 | ) | | | — |
| | (22,373 | ) |
Exercise of stock options | — |
| | — |
| | (1,734 | ) | | — |
| | | — |
| | | 231 |
| | 3,370 |
| | | 1,636 |
| | | — |
| | 1,636 |
|
Compensatory awards released from restriction | 606 |
| | 6 |
| | (5,527 | ) | | — |
| | | — |
| | | 437 |
| | 5,521 |
| | | — |
| | | — |
| | — |
|
Share-based compensation | — |
| | — |
| | 9,975 |
| | — |
| | | — |
| | | — |
| | — |
| | | 9,975 |
| | | — |
| | 9,975 |
|
Stock dividends | — |
| | — |
| | (34 | ) | | (47 | ) | | | — |
| | | 3 |
| | 81 |
| | | — |
| | | — |
| | — |
|
Cash dividends ($0.03 per share) | — |
| | — |
| | — |
| | (2,841 | ) | | | — |
| | | — |
| | — |
| | | (2,841 | ) | | | — |
| | (2,841 | ) |
Equity adjustment from foreign currency translation | — |
| | — |
| | — |
| | — |
| | | (7,395 | ) | | | — |
| | — |
| | | (7,395 | ) | | | (52 | ) | | (7,447 | ) |
Change in fair value of derivative instruments, net of tax | — |
| | — |
| | — |
| | — |
| | | 40 |
| | | — |
| | — |
| | | 40 |
| | | — |
| | 40 |
|
Distribution to non-controlling interest | — |
| | — |
| | — |
| | — |
| | | — |
| | | — |
| | — |
| | | — |
| | | (821 | ) | | (821 | ) |
Net income | — |
| | — |
| | — |
| | 133,239 |
| | | — |
| | | — |
| | — |
| | | 133,239 |
| | | 166 |
| | 133,405 |
|
Balance at September 30, 2018 | 95,649 |
| | $ | 956 |
| | $ | 337,902 |
| | $ | 443,247 |
| | | $ | (13,521 | ) | | | (1,147 | ) | | $ | (17,857 | ) | | | $ | 750,727 |
| | | $ | 9,037 |
| | $ | 759,764 |
|
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 June 30, 2017 | 95,043 |
| | $ | 950 |
| | $ | 328,650 |
| | $ | 342,300 |
| | | $ | (12,905 | ) | | | (671 | ) | | $ | (7,201 | ) | | | $ | 651,794 |
| | | $ | 9,132 |
| | $ | 660,926 |
|
Acquisition of treasury stock | — |
| | — |
| | — |
| | — |
| | | — |
| | | (5 | ) | | (69 | ) | | | (69 | ) | | | — |
| | (69 | ) |
Exercise of stock options | — |
| | — |
| | (558 | ) | | — |
| | | — |
| | | 157 |
| | 1,678 |
| | | 1,120 |
| | | — |
| | 1,120 |
|
Compensatory awards released from restriction | — |
| | — |
| | (142 | ) | | — |
| | | — |
| | | 13 |
| | 142 |
| | | — |
| | | — |
| | — |
|
Share-based compensation | — |
| | — |
| | 4,181 |
| | — |
| | | — |
| | | — |
| | — |
| | | 4,181 |
| | | — |
| | 4,181 |
|
Stock dividends | — |
| | — |
| | 2 |
| | (2 | ) | | | — |
| | | — |
| | — |
| | | — |
| | | — |
| | — |
|
Cash dividends ($0.01 per share) | — |
| | — |
| | — |
| | (945 | ) | | | — |
| | | — |
| | — |
| | | (945 | ) | | | — |
| | (945 | ) |
Equity adjustment from foreign currency translation | — |
| | — |
| | — |
| | — |
| | | 3,445 |
| | | — |
| | — |
| | | 3,445 |
| | | (14 | ) | | 3,431 |
|
Change in fair value of derivative instruments, net of tax | — |
| | — |
| | — |
| | — |
| | | 419 |
| | | — |
| | — |
| | | 419 |
| | | — |
| | 419 |
|
Net Income | — |
| | — |
| | — |
| | 3,060 |
| | | — |
| | | — |
| | — |
| | | 3,060 |
| | | 29 |
| | 3,089 |
|
Balance, September 30, 2017 | 95,043 |
| | $ | 950 |
| | $ | 332,133 |
| | $ | 344,413 |
| | | $ | (9,041 | ) | | | (506 | ) | | $ | (5,450 | ) | | | $ | 663,005 |
| | | $ | 9,147 |
| | $ | 672,152 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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, 2016 | 94,214 |
| | $ | 942 |
| | $ | 330,206 |
| | $ | 287,129 |
| | | $ | (18,466 | ) | | | (98 | ) | | $ | (905 | ) | | | $ | 598,906 |
| | | $ | 9,694 |
| | $ | 608,600 |
|
Acquisition of treasury stock | — |
| | — |
| | — |
| | — |
| | | — |
| | | (1,527 | ) | | (16,479 | ) | | | (16,479 | ) | | | — |
| | (16,479 | ) |
Exercise of stock options | — |
| | — |
| | (2,173 | ) | | — |
| | | — |
| | | 600 |
| | 6,378 |
| | | 4,205 |
| | | — |
| | 4,205 |
|
Compensatory awards released from restriction | 825 |
| | 8 |
| | (5,564 | ) | | — |
| | | — |
| | | 519 |
| | 5,556 |
| | | — |
| | | — |
| | — |
|
Share-based compensation | — |
| | — |
| | 9,583 |
| | — |
| | | — |
| | | — |
| | — |
| | | 9,583 |
| | | — |
| | 9,583 |
|
Stock dividends | 4 |
| | — |
| | 81 |
| | (81 | ) | | | — |
| | | — |
| | — |
| | | — |
| | | — |
| | — |
|
Cash dividends ($0.03 per share) | — |
| | — |
| | — |
| | (2,827 | ) | | | — |
| | | — |
| | — |
| | | (2,827 | ) | | | — |
| | (2,827 | ) |
Equity adjustment from foreign currency translation | — |
| | — |
| | — |
| | — |
| | | 11,826 |
| | | — |
| | — |
| | | 11,826 |
| | | 176 |
| | 12,002 |
|
Change in fair value of derivative instruments, net of tax | — |
| | — |
| | — |
| | — |
| | | (2,401 | ) | | | — |
| | — |
| | | (2,401 | ) | | | — |
| | (2,401 | ) |
Distributions to non-controlling interests | — |
| | — |
| | — |
| | — |
| | | — |
| | | — |
| | — |
| | | — |
| | | (974 | ) | | (974 | ) |
Net Income | — |
| | — |
| | — |
| | 60,192 |
| | | — |
| | | — |
| | — |
| | | 60,192 |
| | | 251 |
| | 60,443 |
|
Balance, September 30, 2017 | 95,043 |
| | $ | 950 |
| | $ | 332,133 |
| | $ | 344,413 |
| | | $ | (9,041 | ) | | | (506 | ) | | $ | (5,450 | ) | | | $ | 663,005 |
| | | $ | 9,147 |
| | $ | 672,152 |
|
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, 2017 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.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at 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 provisions for warranty, uncollectible accounts receivable, inventory obsolescence, estimates for variable consideration related to sales returns and promotional programs, tax contingencies and provisional estimates due to the Tax Act enacted in December 2017, estimates on the valuation of share-based awards and recoverability of long-lived assets and investments. 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 August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 will remove, modify or add to the disclosure requirements for fair value measurements in ASC Topic 820, "Fair Value Measurement" ("ASC Topic 820). The amendments are effective for all entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. An entity is permitted to early adopt the removed or modified disclosures upon the issuance of this ASU and may delay adoption of the additional disclosures required for public companies until the effective date of this ASU. The Company is currently evaluating the impact this ASU will have on its consolidated condensed financial statements and disclosures.
In August 2017, the FASB issued ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." The new standard is designed to refine and expand hedge accounting for both financial (e.g., interest rate) and commodity risks. Its provisions create more transparency around how economic results are presented, both on the face of the financial statements and in the footnotes. It also makes certain targeted improvements to simplify the application of hedge accounting guidance. The new standard is effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption, including adoption in an interim period, is permitted. If early adoption is elected in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period (i.e., the initial application date). The Company is currently evaluating this ASU; however, it does not anticipate this ASU will have a material impact on its consolidated condensed financial statements and disclosures.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)," as amended by ASU 2018-11 issued in July 2018, which provides entities with an additional (and optional) transition method to adopt the new lease standard, as well as a practical expedient for lessors on non-lease components. Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (i) a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged and lessees will no longer be provided with a source of off-balance sheet financing. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into, after the beginning of the earliest
comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. In July 2018, the FASB issued ASU 2018-11, under which entities have the option to not restate the comparative periods in the period of adoption when transitioning to Topic 842, and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company plans to adopt ASU 2016-02 and the transition amendments provided by ASU 2018-11, on the effective date of January 1, 2019. The Company plans to elect transition-related accounting policies under ASU 2016-02, which allow entities to not reassess, as of the adoption date, (1) any expired or existing contracts that are leases or contain leases, (2) the classification of any expired or existing leases and (3) initial direct costs for any existing leases. The Company has a significant amount of operating leases that are classified as off-balance sheet commitments under the current accounting rules. The adoption of ASU 2016-02 will require the Company to record right-of-use assets and lease liabilities related to these lease commitments, which will result in a significant increase in assets and liabilities on the Company's consolidated balance sheet. The Company is completing its analysis of ASU 2016-02, including the transition amendments provided by ASU 2018-11, and the impact it will have on its consolidated financial statements.
Adoption of New Accounting Standards
On January 1, 2018, the Company adopted ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" using the modified retrospective approach, and applied this guidance to all contracts as of the adoption date as discussed in Note 2 below. This new standard requires companies to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time based on when control of goods and services transfers to a customer. In addition, it requires companies to determine the transaction price for a contract, which is the price used to recognize revenue as well as the amount of consideration companies expect to collect from its customers in exchange for the promised goods or services in the contract. Because the transaction price can vary as a result of variable consideration for items such as sales returns, discounts, rebates, price concessions and incentives, companies are required to include an estimate of variable consideration in the transaction price. The adoption of this new standard accelerated the timing of when the Company recognizes variable consideration for certain sales program incentives, which include sell-through promotions and price concessions or price reductions that it offers to its customers. As a result, the Company now estimates the variable consideration related to these sales programs at the time of the sale based on a rate that includes historical and forecasted data, as opposed to when these programs are approved and announced. Upon the adoption of Topic 606, the Company recorded a cumulative adjustment to beginning retained earnings of $11,185,000, as noted in the table below, which reflects the estimated amount of variable consideration related to future sales programs for revenue recognized in prior periods. 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 in those periods.
|
| | | | | | | | | | | |
Balance Sheet | Balance at December 31, 2017 | | Adjustments Due To Topic 606 | | Balance at January 1, 2018 |
Accounts receivable, net | $ | 94,725 |
| | $ | (16,156 | ) | | $ | 78,569 |
|
Deferred taxes, net | $ | 91,398 |
| | $ | 4,971 |
| | $ | 96,369 |
|
Retained earnings | $ | 324,081 |
| | $ | (11,185 | ) | | $ | 312,896 |
|
The impact of adopting the new revenue standard on the Company's consolidated condensed statements of operations for the three and nine month periods ended September 30, 2018 was as follows:
|
| | | | | | | | | | | |
| Three Months Ended September 30, 2018 |
| As Reported | | Balances Without Adoption of Topic 606 | | Effect of Change Increase/(Decrease) |
Net Sales | $ | 262,654 |
| | $ | 260,069 |
| | $ | 2,585 |
|
Income tax provision | $ | 1,335 |
| | $ | 730 |
| | $ | 605 |
|
Net income | $ | 9,740 |
| | $ | 7,760 |
| | $ | 1,980 |
|
|
| | | | | | | | | | | |
| Nine Months Ended September 30, 2018 |
| As Reported | | Balances Without Adoption of Topic 606 | | Effect of Change Increase/(Decrease) |
Net Sales | $ | 1,062,156 |
| | $ | 1,068,640 |
| | $ | (6,484 | ) |
Income tax provision | $ | 35,801 |
| | $ | 37,173 |
| | $ | (1,372 | ) |
Net income | $ | 133,405 |
| | $ | 138,517 |
| | $ | (5,112 | ) |
The impact of adopting the new revenue standard on the Company's consolidated condensed balance sheet as of September 30, 2018 was as follows:
|
| | | | | | | | | | | |
| September 30, 2018 |
| As Reported | | Balances Without Adoption of Topic 606 | | Effect of Change Increase/(Decrease) |
Assets | | | | | |
Accounts receivable, net | $ | 130,033 |
| | $ | 152,673 |
| | $ | (22,640 | ) |
Deferred taxes, net | $ | 65,045 |
| | $ | 59,791 |
| | $ | 5,254 |
|
| | | | | |
Liabilities and Equity | | | | | |
Income tax liability | $ | 10,827 |
| | $ | 11,916 |
| | $ | (1,089 | ) |
Retained earnings | $ | 443,247 |
| | $ | 459,544 |
| | $ | (16,297 | ) |
On January 1, 2018, the Company early adopted ASU No. 2018-02 “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” which provides financial statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate resulting from the Tax Act (or portion thereof) resulted in a disproportionate tax effect. The amendments are effective for all organizations for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company adopted this policy using the specific identification method, and the adoption of this policy did not have a material impact on the Company’s consolidated condensed financial statements.
On January 1, 2018, the Company adopted ASU No. 2016-16 “Intra-Entity Asset Transfer of Assets other than Inventory,” which eliminates the requirement to defer the tax effects of intra-entity asset transfers until they are disposed or sold to a third party. The adoption of this ASU did not have a material impact on the Company’s consolidated condensed financial statements.
On January 1, 2018, the Company adopted ASU No. 2016-04, "Liabilities—Extinguishment of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products," which clarifies when it is acceptable to recognize the unredeemed portion of prepaid gift cards into income. The adoption of this ASU did not change the Company's accounting for gift cards, and therefore did not impact the Company's consolidated condensed financial statements. As of September 30, 2018, the Company had $982,000 of deferred revenue related to unredeemed gift cards.
On January 1, 2018, the Company adopted No. 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." The amendment requires (i) equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, (ii) public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, and (iii) separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables). This amendment eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. As of September 30, 2018, the Company had an investment in Topgolf International, Inc., doing business as the Topgolf Entertainment Group ("Topgolf") of $70,777,000, consisting of common stock and various classes of preferred stock. Because Topgolf is a privately held company, the Company's investment in Topgolf is accounted for at cost less impairments, if any, as this investment is without a readily determinable fair value. In accordance with ASU No. 2016-01, if there is an observable price change as a result of an orderly transaction for the identical or similar investment of the same issuer, the Company would be required to assess the fair value impact, if any, on each
identified or similar class of Topgolf stock held by the Company, and write such stock up or down to its estimated fair value. If there are any observable price changes related to this investment, the adjustment to measure this investment at fair value could have a significant effect on the Company's financial position and results of operations. During the three and nine months ended September 30, 2018, the shares that were purchased from other Topgolf shareholders were not acquired in orderly transactions as these transactions were not exposed to the market and were not subject to marketing activities. As such, at September 30, 2018, the Company accounted for its investment in Topgolf at cost less impairments in accordance with ASU No. 2016-01 (see Note 9).
Note 2. Revenue Recognition
The Company recognizes revenue from the sale of its products, which include golf clubs, golf balls, golf bags and other lifestyle and golf-related 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 locations. In addition, the Company recognizes royalty income from the sale by third-party licensees of certain soft goods products, as well as revenue from the sale of gift cards.
The Company's contracts with customers 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, the Company enters into licensing agreements with certain distributors.
The following table presents the Company's revenue disaggregated by major product category and operating segment (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2018 |
| Operating Segments |
| Golf Clubs | | Golf Balls | | Gear, Accessories & Other | | Total |
Major product category: | |
Woods | $ | 52,420 |
| | $ | — |
| | $ | — |
| | $ | 52,420 |
|
Irons | 65,098 |
| | — |
| | — |
| | 65,098 |
|
Putters | 24,878 |
| | — |
| | — |
| | 24,878 |
|
Golf Balls | — |
| | 44,661 |
| | — |
| | 44,661 |
|
Gear, Accessories and Other | — |
| | — |
| | 75,597 |
| | 75,597 |
|
| $ | 142,396 |
| | $ | 44,661 |
| | $ | 75,597 |
| | $ | 262,654 |
|
|
| | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2018 |
| Operating Segments |
| Golf Clubs | | Golf Balls | | Gear, Accessories & Other | | Total |
Major product category: | |
Woods | $ | 275,180 |
| | $ | — |
| | $ | — |
| | $ | 275,180 |
|
Irons | 271,366 |
| | — |
| | — |
| | 271,366 |
|
Putters | 86,093 |
| | — |
| | — |
| | 86,093 |
|
Golf Balls | — |
| | 165,465 |
| | — |
| | 165,465 |
|
Gear, Accessories and Other | — |
| | — |
| | 264,052 |
| | 264,052 |
|
| $ | 632,639 |
| | $ | 165,465 |
| | $ | 264,052 |
| | $ | 1,062,156 |
|
The Company sells its golf clubs and golf ball products as well as its gear and accessories in the United States and internationally, with its principal international markets being Japan and Europe. Sales of golf clubs, golf balls and gear and accessories in each region are generally proportional to the Company's consolidated net sales by operating segment as a percentage of total consolidated net sales. Sales of gear and accessories in Japan are proportionally higher relative to the size of that region due to sales from the Company's apparel joint venture in Japan.
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 September 30, 2018 |
Major Geographic Region: | | | |
United States | | $ | 142,048 |
| |
Europe | | 33,086 |
| |
Japan | | 54,434 |
| |
Rest of Asia | | 20,878 |
| |
Other foreign countries | | 12,208 |
| |
| | $ | 262,654 |
| |
|
| | | | | |
| Nine Months Ended September 30, 2018 |
Major Geographic Region: | | | |
United States | | $ | 608,768 |
| |
Europe | | 130,613 |
| |
Japan | | 183,375 |
| |
Rest of Asia | | 78,712 |
| |
Other foreign countries | | 60,688 |
| |
| | $ | 1,062,156 |
| |
Product Sales
The Company recognizes 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 at a point in time 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 the customer obtains control of the goods.
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 and is included in the Company's Gear, Accessories and Other operating segment. Total royalty income for the three months ended September 30, 2018 and 2017 was $4,857,000 and $4,053,000, respectively. Total royalty income for the nine months ended September 30, 2018 and 2017 was $14,451,000 and $13,937,000, 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 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. As of September 30, 2018 and December 31, 2017, the total amount of deferred revenue on gift cards was $982,000 and $971,000, respectively, and is reflected in accounts payable and accrued expenses in the consolidated condensed balance sheets. The Company recognized $402,000 and $461,000 of deferred gift card
revenue during the three months ended September 30, 2018 and 2017, respectively, and $1,242,000 and $1,126,000 during the nine months ended September 30, 2018 and 2017, 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 longer payment terms during the initial sell-in period, as well as 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 and nine months ended September 30, 2018. 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 its customers sales programs that allow for specific returns. The Company records a return liability for anticipated returns related to these sales programs at the time of the sale based on the terms of the sales program. Historically, the Company’s actual sales returns have not been materially different from management’s original estimates.
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 above. The estimate of credit losses is based upon historical bad debts, current customer receivable balances, age of customer receivable balances, the customer’s financial condition and current economic trends, all of which are subject to change. 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 table below provides a reconciliation of the activity related to the Company’s allowance for credit losses. The increase in the provision for credit losses for the three months ended September 30, 2018 compared to the same period in 2017 resulted from the recognition of an additional bad debt reserve for one of the Company's largest customers in Europe, which entered administration during the third quarter of 2018.
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| (in thousands) |
Beginning balance | $ | 3,675 |
| | $ | 3,607 |
| | $ | 4,447 |
| | $ | 5,728 |
|
Provision for credit losses | 2,270 |
| | 1,063 |
| | 1,986 |
| | 1,854 |
|
Write-off of uncollectible amounts, net of recoveries | (307 | ) | | (113 | ) | | (795 | ) | | (3,025 | ) |
Ending balance | $ | 5,638 |
| | $ | 4,557 |
| | $ | 5,638 |
| | $ | 4,557 |
|
The Company has a two-year stated product warranty. The estimated cost associated with its product warranty continues to be recognized at the time of the sale. See Note 10 for further information.
Note 3. Business Combinations
During 2017, the Company completed the acquisitions of OGIO International, Inc. ("OGIO") and TravisMathew, LLC ("TravisMathew"). The purchase price of each acquisition was allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values as of the date of acquisition in accordance with ASC Topic 820. The excess between the purchase price and the fair value of the net identifiable tangible and intangible assets acquired and liabilities assumed was allocated to goodwill. The Company determined the estimated fair values after review and consideration of relevant information, including discounted cash flows, quoted market prices and estimates made by management. The Company may retrospectively adjust the fair value of the identifiable assets acquired and the liabilities assumed, as necessary, during the measurement period of up to one year from the acquisition date, to reflect new information about circumstances existing at the acquisition date affecting the measurement of those amounts at that date, and any additional assets or liabilities existing at that date.
Valuations of acquired intangible assets and inventory are subject to fair value measurements that were based primarily on significant inputs not observable in the market and thus represent Level 3 measurements (see Note 14).
Both acquisitions were treated as asset purchases for income tax purposes and, as such, the Company expects to deduct all of the intangible assets, including goodwill, from taxable income over time.
Acquisition of OGIO International, Inc.
In January 2017, the Company acquired all of the outstanding shares of capital stock of OGIO, a leading manufacturer of high quality bags, accessories and apparel in the golf and lifestyle categories, in a cash transaction pursuant to the terms of a Share Purchase Agreement, by and among the Company, OGIO, and each of the shareholders and option holders of OGIO.
The acquired furniture, fixtures, office equipment, leasehold improvements, computer equipment and warehouse equipment were all valued at their estimated replacement cost, which the Company determined approximated the net book value of the assets on the date of the acquisition. 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. The customer and distributor relationships were valued under the income approach based on the present value of future earnings. 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 7.5%, which is reflective of royalty rates paid in market transactions, and a discount rate of 14.0% on the future cash flows generated by the net after-tax savings. Goodwill arising from the acquisition consists largely of the synergies expected from combining the operations of the Company and OGIO. For segment reporting purposes, goodwill is reported in the Gear, Accessories and Other operating segment.
The total purchase price was valued at $65,951,000. The Company recognized transaction costs of $3,052,000 in general and administrative expenses during the nine months ended September 30, 2017.
The following table summarizes the fair values of the assets acquired and liabilities assumed as of the acquisition date based on the purchase price allocation (in thousands):
|
| | | | |
| At January 11, 2017 |
Assets Acquired | | |
Cash | | $ | 8,061 |
|
Accounts receivable | | 7,696 |
|
Inventory | | 7,092 |
|
Other current assets | | 328 |
|
Property and equipment | | 2,369 |
|
Intangibles - trade name | | 49,700 |
|
Intangibles - customer & distributor relationships | | 1,500 |
|
Intangibles - non-compete agreements | | 150 |
|
Goodwill | | 5,885 |
|
Total assets acquired | | 82,781 |
|
Liabilities Assumed | | |
Accounts Payable and accrued liabilities | | 16,830 |
|
Net assets acquired | | $ | 65,951 |
|
Acquisition of TravisMathew, LLC
In August 2017, the Company acquired TravisMathew, a golf and lifestyle apparel company in an all-cash transaction pursuant to the terms of an Agreement and Plan of Merger, by and among the Company, TravisMathew, OTP LLC, a California limited liability company and wholly-owned subsidiary of the Company (“Merger Sub”), and a representative of the equity holders of TravisMathew. The Company acquired TravisMathew by way of a merger of Merger Sub with and into TravisMathew, with TravisMathew surviving as a wholly-owned subsidiary of the Company. The primary reason for this acquisition was to enhance the Company's presence in golf while also providing a platform for future growth in the lifestyle category.
The acquired furniture, fixtures, office equipment, leasehold improvements, computer equipment and warehouse equipment were all valued at their estimated replacement cost, which the Company determined approximated the net book value of the assets on the date of the acquisition. 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. The licensing agreement was valued under the income approach based on the projected royalty income from the distributors. The customer and distributor relationships were valued under the income approach based on the present value of future earnings. 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 8.0%, which is reflective of royalty rates paid in market transactions, and a discount rate of 11.0% on the future cash flows generated by the net after-tax savings. Goodwill arising from the acquisition consists largely of the synergies expected from combining the operations of the Company and TravisMathew. For segment reporting purposes, goodwill is reported in the Gear, Accessories and Other operating segment.
The total purchase price was valued at $124,578,000. In connection with the acquisition, during the nine months ended September 30, 2017, the Company recognized transaction costs of approximately $2,423,000 in general and administrative expenses.
The following table summarizes the fair values of the assets acquired and liabilities assumed as of the acquisition date based on the purchase price allocation (in thousands):
|
| | | | |
| At August 17, 2017 |
Assets Acquired | | |
Cash | | $ | 663 |
|
Accounts receivable | | 9,715 |
|
Inventory | | 11,909 |
|
Other current assets | | 549 |
|
Property and equipment | | 4,327 |
|
Other assets | | 117 |
|
Intangibles - trade name | | 78,400 |
|
Intangibles - licensing agreement | | 1,100 |
|
Intangibles - customer & distributor relationships | | 4,450 |
|
Intangibles - non-compete agreements | | 600 |
|
Goodwill | | 23,748 |
|
Total assets acquired | | 135,578 |
|
Liabilities Assumed | | |
Accounts Payable and accrued liabilities | | 11,000 |
|
Net assets acquired | | $ | 124,578 |
|
Note 4. Financing Arrangements
In addition to cash on hand, as well as cash generated from operations, the Company relies on its primary and Japan asset-based revolving credit facilities 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 September 30, 2018, the Company had $4,300,000 outstanding under these facilities, $1,205,000 in outstanding letters of credit, and $70,821,000 in cash and cash equivalents. As of September 30, 2018, 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 $330,220,000. As of September 30, 2017, the Company had $70,618,000 outstanding under these facilities, $857,000 in outstanding letters of credit, and $82,021,000 in cash and cash equivalents. As of September 30, 2017, 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 $195,105,000.
Primary Asset-Based Revolving Credit Facility
In November 2017, the Company amended and restated its primary credit facility (the Third Amended and Restated Loan and Security Agreement) 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 $330,000,000, comprised of a $260,000,000 U.S. 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. The amounts outstanding under the ABL Facility are secured by certain assets, including cash (to the extent pledged by the Company), the Company's intellectual property, certain eligible real estate, inventory and accounts receivable of the Company’s subsidiaries in the United States, 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 September 30, 2018, the Company had $4,300,000 in borrowings outstanding under the ABL Facility and $1,205,000 in outstanding letters of credit. 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. Amounts available are highest during the first half of the year when the Company’s inventory and accounts receivable balances are higher and lowest during the second half of the year when the Company's inventory levels and accounts receivable decrease as a result of cash collections and lower sales. Average outstanding borrowings during the nine months ended September 30, 2018 were $99,999,000, and average amounts available under the ABL Facility during the nine months ended September 30, 2018, after outstanding
borrowings and letters of credit, was approximately $188,941,000. Amounts borrowed under the ABL Facility may be repaid and borrowed as needed. The entire outstanding principal amount (if any) is due and payable on November 20, 2022.
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. 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 limit the Company's ability to pay future dividends at the current dividend rate. As of September 30, 2018, the Company was in compliance with all financial covenants of the ABL Facility. Additionally, the Company is subject to compliance with a fixed charge coverage ratio covenant 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 $33,000,000. The Company’s borrowing base availability was above $33,000,000 during the nine months ended September 30, 2018, and the Company was in compliance with the fixed charge coverage ratio as of September 30, 2018. Had the Company not been in compliance with the fixed charge coverage ratio as of September 30, 2018, the maximum amount of additional indebtedness that could have been outstanding on September 30, 2018 would have been reduced by $33,000,000.
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 U.K. and the U.S. borrowing bases, as adjusted. At September 30, 2018 the Company’s trailing 12 month average interest rate applicable to its outstanding loans under the ABL Facility was 4.17%. Additionally, the ABL Facility provides for monthly fees of 0.25% of the unused portion of the ABL Facility.
The fees incurred in connection with the origination and amendment of the ABL Facility totaled $2,284,000, which will be amortized into interest expense over the term of the ABL Facility agreement. Unamortized origination fees at September 30, 2018 and December 31, 2017 were $1,890,000 and $2,197,000, respectively, of which $463,000 and $454,000, respectively, were included in other current assets and $1,427,000 and $1,743,000, respectively, were included in other long-term assets in the accompanying consolidated condensed balance sheets.
Japan ABL Facility
In January 2018, the Company refinanced the asset-based loan agreement between its subsidiary in Japan and The Bank of Tokyo-Mitsubishi UFJ, Ltd (the "Japan ABL Facility"), which provides a credit facility of up to 4,000,000,000 Yen (or U.S. $35,184,000, using the exchange rate in effect as of September 30, 2018) over a three-year term, subject to borrowing base availability under the facility. The amounts outstanding are secured by certain assets, including eligible inventory and eligible accounts receivable. The Japan ABL Facility also includes certain restrictions including covenants related to certain pledged assets and financial performance metrics. As of September 30, 2018, the Company was in compliance with these covenants. The Japan ABL Facility is subject to an effective interest rate equal to the Tokyo interbank offered rate plus 0.80%.
The Company had no borrowings outstanding under the Japan ABL Facility as of September 30, 2018, and the year to date average interest rate applicable to the Company's outstanding borrowings under this facility was 0.86%. The facility expires in January 2021.
Equipment Note
In December 2017, the Company entered into a long-term financing agreement (the "Equipment Note") secured by certain equipment at the Company's golf ball manufacturing facility. As of September 30, 2018 and December 31, 2017, the Company had $10,183,000 and $11,815,000, respectively, outstanding under the Equipment Note, of which $2,400,000 and $2,367,000 were reported in current liabilities, respectively, and $7,783,000 and $9,448,000 were reported in long-term liabilities, respectively, in the accompanying consolidated condensed balance sheets. The Company's interest rate applicable to outstanding borrowings was 3.79%. Total interest expense recognized during the three and nine months ended September 30, 2018 was $100,000 and $315,000, respectively. The equipment note amortizes over a 5-year term.
The Equipment Note is subject to compliance with the financial covenants in the Company's ABL Facility. As of September 30, 2018, the Company was in compliance with these covenants.
Note 5. 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 13).
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 September 30, | | Nine Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Earnings per common share—basic | | | | | | | |
Net income | $ | 9,740 |
| | $ | 3,089 |
| | $ | 133,405 |
| | $ | 60,443 |
|
Less: Net income attributable to non-controlling interests | 223 |
| | 29 |
| | 166 |
| | 251 |
|
Net income attributable to Callaway Golf Company | $ | 9,517 |
| | $ | 3,060 |
| | $ | 133,239 |
| | $ | 60,192 |
|
Weighted-average common shares outstanding—basic | 94,477 |
| | 94,450 |
| | 94,605 |
| | 94,246 |
|
Basic earnings per common share | $ | 0.10 |
| | $ | 0.03 |
| | $ | 1.41 |
| | $ | 0.64 |
|
Earnings per common share—diluted | | | | | | | |
Net income attributable to Callaway Golf Company | $ | 9,517 |
| | $ | 3,060 |
| | $ | 133,239 |
| | $ | 60,192 |
|
Weighted-average common shares outstanding—basic | 94,477 |
| | 94,450 |
| | 94,605 |
| | 94,246 |
|
Outstanding options, restricted stock units and performance share units | 2,843 |
| | 2,429 |
| | 2,471 |
| | 2,097 |
|
Weighted-average common shares outstanding—diluted | 97,320 |
| | 96,879 |
| | 97,076 |
| | 96,343 |
|
Dilutive earnings per common share | $ | 0.10 |
| | $ | 0.03 |
| | $ | 1.37 |
| | $ | 0.62 |
|
For the three and nine months ended September 30, 2017, securities outstanding totaling approximately 131,000 shares and 138,000 shares, respectively, comprised of stock options, have been excluded from the calculation of earnings per common share—diluted as their effect would be antidilutive. There were no securities excluded from the calculation of earnings per common share—diluted for the three and nine months ended September 30, 2018.
Note 6. Inventories
Inventories are summarized below (in thousands):
|
| | | | | | | |
| September 30, 2018 | | December 31, 2017 |
Inventories: | | | |
Raw materials | $ | 62,421 |
| | $ | 67,785 |
|
Work-in-process | 962 |
| | 868 |
|
Finished goods | 174,089 |
| | 193,833 |
|
| $ | 237,472 |
| | $ | 262,486 |
|
Note 7. Goodwill and Intangible Assets
Goodwill at September 30, 2018 decreased to $56,106,000 from $56,429,000 at December 31, 2017. This $323,000 decrease was due to foreign currency fluctuations. The Company's goodwill is reported in the Golf Clubs and Gear, Accessories and Other operating segments (see Note 17).
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. There were no impairment charges recognized during the three and nine months ended September 30, 2018. The following sets forth the intangible assets by major asset class (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Useful Life (Years) | | September 30, 2018 | | December 31, 2017 |
| Gross | | Accumulated Amortization | | Net Book Value | | Gross | | Accumulated Amortization | | Net Book Value |
Non-Amortizing: | | | | | | | | | | | | | | | | | |
Trade name, trademark and trade dress and other | NA | | $ | 218,364 |
| | | $ | — |
| | | $ | 218,364 |
| | $ | 218,364 |
| | | $ | — |
| | | $ | 218,364 |
|
Amortizing: | | | | | | | | | | | | | | | | | |
Patents | 2-16 | | 31,581 |
| | | 31,530 |
| | | 51 |
| | 31,581 |
| | | 31,491 |
| | | 90 |
|
Other | 1-9 | | 15,780 |
| | | 9,237 |
| | | 6,543 |
| | 15,780 |
| | | 8,476 |
| | | 7,304 |
|
Total intangible assets | | | $ | 265,725 |
| | | $ | 40,767 |
| | | $ | 224,958 |
| | $ | 265,725 |
| | | $ | 39,967 |
| | | $ | 225,758 |
|