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, 2020 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 its consolidated condensed statements 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 consolidated condensed financial statements for the six months ended June 30, 2021 is from March 8, 2021 through July 4, 2021. Additionally, based on the Company's assessment of the combined business, the Company modified the presentation of its consolidated condensed statements of operations for the three and six months ended June 30, 2021 and 2020, and its consolidated condensed balance sheets as of June 30, 2021 and December 31, 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 three 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 valuation allowances as well the estimated useful lives of property, plant and equipment and acquired intangible assets. 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 July 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2021-05, “Leases (Topic 842): Lessors - Certain Leases with Variable Lease Payments” which requires lessors to classify and account for a lease with variable lease payments that do not depend on a reference index or a rate as an operating lease if both of the following criteria are met: (1) the lease would have been classified as a sales-type lease or a
direct financing lease in accordance with the classification criteria in ASC 842-10-25-2 through 25-3; and (2) the lessor would have otherwise recognized a day-one loss. The amendments are effective for annual periods beginning after December 15, 2021 with early adoption permitted. The Company is currently assessing the impact of this ASU on its consolidated condensed financial statements.
In August 2020, FASB issued 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 is currently assessing the impact this ASU will have on its consolidated condensed financial statements. The Company anticipates adopting the modified retrospective approach, which may 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. In January 2021, the FASB issued Accounting Standards Update ("ASU") 2021-01, "Reference Rate Reform (Topic 848): Scope." This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. 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. This ASU did not have a material impact on the Company's consolidated condensed financial statements or disclosures.
Significant Accounting Policies
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. Certain real estate leases include one or more options to extend the lease term, options to purchase the leased property at the Company's sole 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 machinery and equipment, computer equipment 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 total gross 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 revenue 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 rates that are adjusted periodically for inflation, are included in the initial 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 for product purchases. 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.
Services Revenue
The Company recognizes revenue from the operation of its Topgolf venues consisting primarily of revenues from food and beverage sales, event deposits, fees charged for gameplay, purchases of game credits and membership fees. In addition, services revenues 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, which is one year.
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. Revenue from sales-based royalties is recognized as the related sales occur.
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.
Variable Consideration
The Company offers certain discounts and promotions on its products and services. 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 net revenue 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 product 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 June 30, 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.
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 includes 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, Excluding Depreciation and Amortization
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. In addition, cost of services includes costs associated with Topgolf's Toptracer license agreements classified as sales-type leases. 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.
Restricted Cash
Restricted cash is primarily comprised of lender impound reserve accounts for development of one of the Company’s venues. The following is a summary of cash, cash equivalents and restricted cash as of June 30, 2021 and December 31, 2020 (in thousands):
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June 30, 2021
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December 31, 2020
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Cash and cash equivalents
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$
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415,204
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$
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366,119
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Restricted cash
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2,469
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|
|
—
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Total cash, cash equivalents and restricted cash
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$
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417,673
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$
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366,119
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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, Callaway and Jack Wolfskin brands. 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:
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Buildings and improvements
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10-40 years
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Machinery and equipment
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5-10 years
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Furniture, computer hardware and equipment
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3-5 years
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Internal-use software
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3-5 years
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Production molds
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2-5 years
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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 and internal direct labor 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. In accordance with ASC Topic 985-20, “Costs of Software to Be Sold, Leased, or Marketed,” costs incurred to establish the technological feasibility of software to be sold, leased, or otherwise marketed are expensed and recorded in research and development expense on the consolidated condensed statements of operations. Once technological feasibility is established, costs are capitalized until the product is available for general use.
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, patents and liquor licenses, 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 of the reporting unit. If the carrying value of the reporting unit 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.
Sales-Type Leases
Leasing revenue attributed to sales-type leases was $10,986,000 and $14,879,000 for the three and six months ended June 30, 2021, respectively, which is comprised of $13,585,000 in initial licensing payments and $1,294,000 in monthly lease payments. Revenue from sales-type leases are included in services revenues within the consolidated condensed statements of operations. Leasing receivables related to the Company’s net investment in sales-type leases are as follows (in thousands):
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Balance Sheet Location
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June 30, 2021
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Leasing receivables, net - current
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Other current assets
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$
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9,983
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Leasing receivables - long-term
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Other assets
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36,309
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$
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46,292
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Operating and Finance 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 June 30, 2021 the Company recorded rent deferments of $10,697,000, of which $1,804,000 was recorded in accrued expenses, and $8,894,000 was recorded in other long-term liabilities in the consolidated condensed balance sheets. Of the rent deferments recorded as of June 30, 2021, $10,309,000 was recorded in connection with the Topgolf merger in March 2021. As of December 31, 2020 the Company recorded rent deferments of $687,000. There were no rent abatements recorded for the three and six months ended June 30, 2021 or 2020.
Supplemental balance sheet information related to leases is as follows (in thousands):
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Balance Sheet Location
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June 30, 2021
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December 31, 2020
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Operating Leases
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ROU assets, net
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Operating lease ROU assets, net
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$
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1,057,225
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$
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194,776
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Lease liabilities, short-term
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Operating lease liabilities, short-term
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$
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55,492
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$
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29,579
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Lease liabilities, long-term
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Operating lease liabilities, long-term
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$
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1,174,780
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$
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177,996
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Finance Leases
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ROU assets, net,
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Other assets
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$
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2,077
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$
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1,003
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Lease liabilities, short-term
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Accrued expenses
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$
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1,169
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$
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252
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Lease liabilities, long-term
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Long-term other
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$
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1,672
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$
|
447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of lease expense are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Operating lease costs
|
$
|
40,915
|
|
|
$
|
10,279
|
|
|
$
|
61,412
|
|
|
$
|
21,301
|
|
|
Financing lease costs:
|
|
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
854
|
|
|
153
|
|
|
1,177
|
|
|
320
|
|
|
Interest on lease liabilities
|
26
|
|
|
11
|
|
|
46
|
|
|
22
|
|
|
Total financing lease costs
|
880
|
|
|
164
|
|
|
1,223
|
|
|
342
|
|
|
Variable lease costs
|
1,953
|
|
|
587
|
|
|
2,532
|
|
|
1,883
|
|
|
Total lease costs
|
$
|
43,748
|
|
|
$
|
11,030
|
|
|
$
|
65,167
|
|
|
$
|
23,526
|
|
Other information related to leases was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
Supplemental Cash Flows Information
|
|
2021
|
|
2020
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
52,513
|
|
|
$
|
18,227
|
|
|
Operating cash flows from finance leases
|
|
$
|
311
|
|
|
$
|
22
|
|
|
Financing cash flows from finance leases
|
|
$
|
200
|
|
|
$
|
206
|
|
|
|
|
|
|
|
|
Lease liabilities arising from new ROU assets:
|
|
|
|
|
|
Operating leases
|
|
$
|
33,000
|
|
|
$
|
53,417
|
|
|
Finance leases
|
|
$
|
188
|
|
|
$
|
130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
December 31, 2020
|
|
Weighted average remaining lease term (years):
|
|
|
|
|
Operating leases
|
14.4
|
|
9.8
|
|
Finance leases
|
2.6
|
|
3.0
|
|
|
|
|
|
|
Weighted average discount rate:
|
|
|
|
|
Operating leases
|
8.2
|
%
|
|
5.3
|
%
|
|
Finance leases
|
5.4
|
%
|
|
3.9
|
%
|
Future minimum lease obligations as of June 30, 2021 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Finance Leases
|
|
|
|
Remainder of 2021
|
$
|
67,587
|
|
|
$
|
584
|
|
|
|
|
2022
|
149,746
|
|
|
1,261
|
|
|
|
|
2023
|
147,019
|
|
|
771
|
|
|
|
|
2024
|
143,893
|
|
|
367
|
|
|
|
|
2025
|
142,622
|
|
|
24
|
|
|
|
|
Thereafter
|
1,514,983
|
|
|
8
|
|
|
|
|
Total future lease payments
|
2,165,850
|
|
|
3,015
|
|
|
|
|
Less: imputed interest
|
935,578
|
|
|
174
|
|
|
|
|
Total
|
$
|
1,230,272
|
|
|
$
|
2,841
|
|
|
|
Lease payments exclude $896,854,000 related to 16 non-cancellable leases that have been signed as of June 30, 2021 but have not yet commenced. Of the 16 leases, three are scheduled to commence in 2021. The Company's minimum capital commitment related to these leases was approximately $178,000,000 as of June 30, 2021. As the Company is actively involved in the construction of these properties, the Company recorded $124,731,000 in construction costs within property, plant and equipment as of June 30, 2021. Additionally, as of June 30, 2021, the Company recorded $63,636,000 in construction advances from the landlord in connection with properties. 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.
Financing Obligations (Deemed Landlord Financing Contracts)
During the six months ended June 30, 2021, the Company accounted for four deemed landlord financing (“DLF”) contracts that did not meet the sale-leaseback criteria upon the completion of construction in accordance with ASC Topic 842. As of June 30, 2021, the Company was the accounting owner of a total of twelve buildings under DLF contracts. As of June 30, 2021, the net book value included in property, plant and equipment on the consolidated condensed balance sheets related to these buildings totaled $323,590,000. Buildings capitalized in conjunction with DLF contracts are depreciated, less residual value, over 20 years or over their estimated useful life, whichever is shorter.
Supplemental balance sheet information related to DLF contracts is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location
|
|
June 30, 2021
|
|
|
|
|
|
DLF contracts liabilities, short-term
|
Accrued expenses
|
|
$
|
516
|
|
|
|
|
|
|
DLF contracts liabilities, long-term
|
Deemed landlord financing, long-term
|
|
$
|
263,219
|
|
|
|
|
|
The components of DLF contracts expenses are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2021
|
|
Six Months Ended
June 30, 2021
|
|
Amortization of DLF contracts
|
$
|
1,337
|
|
|
$
|
1,704
|
|
|
Interest on DLF contracts
|
5,638
|
|
|
7,146
|
|
|
Total DLF contracts expenses
|
$
|
6,975
|
|
|
$
|
8,850
|
|
Other information related to DLF contracts was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flows Information
|
|
Six Months Ended
June 30, 2021
|
|
|
|
Financing cash flows from DLF contracts
|
|
$
|
8,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
|
|
Weighted average remaining lease term (years)
|
19.4
|
|
|
|
Weighted average discount rate
|
8.9
|
%
|
|
|
Future minimum financing obligations related to DLF contracts as of June 30, 2021 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Remainder of 2021
|
|
$
|
9,845
|
|
|
2022
|
|
23,225
|
|
|
2023
|
|
23,062
|
|
|
2024
|
|
23,253
|
|
|
2025
|
|
23,581
|
|
|
Thereafter
|
|
412,498
|
|
|
Total future lease payments
|
|
515,464
|
|
|
Less: imputed interest
|
|
251,729
|
|
|
Total
|
|
$
|
263,735
|
|
Note 4. Revenue Recognition
The Company primarily recognizes revenue from the sale of its products and operation of its venues. Revenue from product sales include golf clubs, golf balls, lifestyle and outdoor apparel, gear and accessories and 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. The
Company's product revenues also includes royalty income from third parties from the licensing of certain soft goods 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, 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. The Company enters into licensing agreements with certain distributors and, with respect to the Company's Toptracer operations, driving ranges and hospitality and entertainment venues.
The Company has three operating and reportable segments, namely the Golf Equipment operating segment, the Apparel, Gear and Other operating segment, and the Topgolf operating segment. On March 8, 2021, the Company completed its merger with Topgolf. The Company’s results of operations, therefore, include the operations of Topgolf from that date forward. Topgolf contributed $325,453,000 in net revenues for the three months ended June 30, 2021, and $418,090,000 for the six months ended June 30, 2021, which includes approximately four months of revenues since the completion of the merger.
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 June 30, 2021
|
|
Three Months Ended June 30, 2020
|
|
|
Golf Equipment
|
|
Apparel, Gear
& Other
|
|
Topgolf
|
|
Total
|
|
Golf Equipment
|
|
Apparel, Gear
& Other
|
|
|
|
Total
|
|
Major revenue categories:
|
|
|
|
|
|
|
|
|
|
|
Golf clubs
|
$
|
319,973
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
319,973
|
|
|
$
|
156,040
|
|
|
$
|
—
|
|
|
|
|
$
|
156,040
|
|
|
Golf balls
|
81,286
|
|
|
—
|
|
|
—
|
|
|
81,286
|
|
|
53,903
|
|
|
—
|
|
|
|
|
53,903
|
|
|
Apparel
|
—
|
|
|
91,413
|
|
|
—
|
|
|
91,413
|
|
|
—
|
|
|
36,302
|
|
|
|
|
36,302
|
|
|
Gear, accessories & other
|
—
|
|
|
95,516
|
|
|
—
|
|
|
95,516
|
|
|
—
|
|
|
50,751
|
|
|
|
|
50,751
|
|
|
Venues
|
—
|
|
|
—
|
|
|
303,424
|
|
|
303,424
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
Other business lines
|
—
|
|
|
—
|
|
|
22,029
|
|
|
22,029
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
|
$
|
401,259
|
|
|
$
|
186,929
|
|
|
$
|
325,453
|
|
|
$
|
913,641
|
|
|
$
|
209,943
|
|
|
$
|
87,053
|
|
|
|
|
$
|
296,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and Reportable Segments
|
|
|
Six Months Ended June 30, 2021
|
|
Six Months Ended June 30, 2020
|
|
|
Golf Equipment
|
|
Apparel, Gear
& Other
|
|
Topgolf
|
|
Total
|
|
Golf Equipment
|
|
Apparel, Gear
& Other
|
|
|
|
Total
|
|
Major product category:
|
|
|
|
|
|
|
|
|
|
|
Golf Clubs
|
$
|
636,326
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
636,326
|
|
|
$
|
407,264
|
|
|
$
|
—
|
|
|
|
|
$
|
407,264
|
|
|
Golf Balls
|
141,815
|
|
|
—
|
|
|
—
|
|
|
141,815
|
|
|
94,340
|
|
|
—
|
|
|
|
|
94,340
|
|
|
Apparel
|
—
|
|
|
186,703
|
|
|
—
|
|
|
186,703
|
|
|
—
|
|
|
113,592
|
|
|
|
|
113,592
|
|
|
Gear, Accessories & Other
|
—
|
|
|
182,328
|
|
|
—
|
|
|
182,328
|
|
|
—
|
|
|
124,076
|
|
|
|
|
124,076
|
|
|
Venues
|
—
|
|
|
—
|
|
|
388,594
|
|
|
388,594
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
Other business lines
|
—
|
|
|
—
|
|
|
29,496
|
|
|
29,496
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
|
$
|
778,141
|
|
|
$
|
369,031
|
|
|
$
|
418,090
|
|
|
$
|
1,565,262
|
|
|
$
|
501,604
|
|
|
$
|
237,668
|
|
|
|
|
$
|
739,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Topgolf segment included $3,221,000 and $4,195,000, respectively, in sales of golf clubs, golf balls, and apparel sales, which are reflected within product sales within the consolidated condensed statements of operations for the three and six months ended June 30, 2021.
The Apparel, Gear and Other and Topgolf segments include royalty income from licensing agreements of $22,240,000 and $33,108,000, respectively, for the three and six months ended June 30, 2021. For the three months and six months ended June 30,2020, the Company recognized royalty income of $3,552,000 and $9,097,000, respectively.
As of December 31, 2020, the Company's balance for deferred revenue was $2,546,000, which included deferred revenue from gift cards. In connection with the merger with Topgolf completed on March 8, 2021, the Company acquired deferred revenue related to event deposits, lifetime and premium memberships, prepaid sponsorships, virtual currency and game credits related to the WGT digital golf game, and gift cards. As of June 30, 2021, the Company’s deferred revenue balance was $83,580,000.
The Company recognized revenues of $97,232,000 and $125,278,000 related to the redemption and amortization of deferred revenue, including gift card breakage, during the three and six months ended June 30, 2021, respectively. The Company recognized revenues of $454,000 and $1,030,000 related to the redemption and breakage of gift cards during the three and six months ended June 30, 2020, respectively.
The following table summarizes revenue by geographical areas in which the Company operates (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Revenue by Major Geographic Region:
|
|
|
|
|
|
|
|
|
United States
|
$
|
642,757
|
|
|
$
|
171,714
|
|
|
$
|
1,030,979
|
|
|
$
|
389,217
|
|
|
Europe
|
120,999
|
|
|
50,074
|
|
|
229,344
|
|
|
146,793
|
|
|
Japan
|
61,861
|
|
|
24,640
|
|
|
133,747
|
|
|
101,987
|
|
|
Rest of World
|
88,024
|
|
|
50,568
|
|
|
171,192
|
|
|
101,275
|
|
|
|
$
|
913,641
|
|
|
$
|
296,996
|
|
|
$
|
1,565,262
|
|
|
$
|
739,272
|
|
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. On a regional basis, sales of golf equipment are generally higher than sales of apparel gear and other in most regions other than Europe, which has a higher concentration of apparel, gear and other sales as a result of Jack Wolfskin, which is headquartered in Germany. Venues revenue is higher in the United States, as Topgolf has more domestic venues than international. Other business lines revenue is predominantly in the United States and Europe.
The Company records an estimate for anticipated returns as a reduction of product revenues and cost of 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 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
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Beginning balance
|
$
|
60,784
|
|
|
$
|
50,992
|
|
|
$
|
43,986
|
|
|
$
|
34,314
|
|
|
Provision
|
29,000
|
|
|
26,374
|
|
|
64,890
|
|
|
62,010
|
|
|
Sales returns
|
(18,192)
|
|
|
(20,529)
|
|
|
(37,284)
|
|
|
(39,487)
|
|
|
Ending balance
|
$
|
71,592
|
|
|
$
|
56,837
|
|
|
$
|
71,592
|
|
|
$
|
56,837
|
|
Note 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 4. Under ASC Topic 326, the “expected credit loss” model replaces the “incurred loss” model and requires consideration of a broader range of information to estimate expected credit losses over the life of the asset. 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 June 30, 2021 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
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Beginning balance
|
$
|
6,801
|
|
|
$
|
6,140
|
|
|
$
|
8,841
|
|
|
$
|
5,992
|
|
|
Adjustment due to the adoption of Topic 326
|
—
|
|
|
—
|
|
|
—
|
|
|
289
|
|
|
(Recovery)/provision for credit losses
|
152
|
|
|
3,619
|
|
|
(226)
|
|
|
3,632
|
|
|
Write-off of uncollectible amounts, net of recoveries
|
(252)
|
|
|
(815)
|
|
|
(1,914)
|
|
|
(969)
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
$
|
6,701
|
|
|
$
|
8,944
|
|
|
$
|
6,701
|
|
|
$
|
8,944
|
|
Note 6. Business Combinations
Merger with Topgolf International, Inc.
On March 8, 2021, the Company completed its previously announced merger with Topgolf, pursuant to the terms of 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 terms of the Merger Agreement, at the closing of the merger, the Company issued approximately 89,776,450 unrestricted and fully vested shares of its common stock to the stockholders of Topgolf (excluding approximately 12,329,721 shares of the Company’s common stock that would have been allocated to the Company in the merger based on the shares 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 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 included $33,051,000 in the consideration transferred in the merger for these replacement awards, which represents the fair value of the vested portion the replacement awards. The unvested portion of these replacement awards related to 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 converted 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 the 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 the merger, owned approximately 51.3% of
the outstanding shares of the combined company, and 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, except as described below. 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 2.5%, which is reflective of royalty rates paid in market transactions, and a discount rate of 7.0% to 8.5% on the future cash flows generated by the net after-tax savings. The fair value of the Topgolf hitting bays, Toptracer ball-tracking technology and the WGT 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 finite-lived intangibles, which include technology and customer relationships, over a period ranging between one and ten years. Additionally, the Company completed a 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 a market credit rating, current interest rates and repayment terms, which resulted in an overall decrease in value. As of June 30, 2021, the Company did not complete its assessment of the fair value of the right-of-use assets of operating and deemed landlord financed leases, 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 $1,965,321,000, of which the Company attributed $1,402,101,000 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 intangibles and goodwill to be tax deductible.
In connection with the merger, during the six months ended June 30, 2021, the Company recognized transaction costs of approximately $16,199,000, consisting primarily of advisor, legal, valuation and accounting fees. These transaction costs were recorded in selling, general & administrative expenses. During the three months ended June 30, 2020, the Company recognized $444,000 in transaction costs associated with the merger.
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
|
|
13,828
|
|
|
Other current assets
|
|
52,233
|
|
|
Property and equipment
|
|
1,018,647
|
|
|
Operating lease right-of-use assets
|
|
833,812
|
|
|
Investments
|
|
28,162
|
|
|
Other assets
|
|
33,664
|
|
|
Intangibles - trade name
|
|
994,200
|
|
|
Intangibles - technology & customer relationships
|
|
91,929
|
|
|
Goodwill
|
|
1,402,101
|
|
|
Total assets acquired
|
|
4,651,147
|
|
|
Liabilities Assumed
|
|
|
|
Accounts Payable and accrued liabilities
|
|
90,140
|
|
|
Accrued employee costs
|
|
36,992
|
|
|
Construction advances
|
|
60,333
|
|
|
Deferred revenue
|
|
64,359
|
|
|
Other current liabilities
|
|
7,821
|
|
|
Long-term debt
|
|
535,096
|
|
|
Deemed landlord financing
|
|
179,718
|
|
|
Operating lease liabilities
|
|
1,023,338
|
|
|
Other long-term liabilities
|
|
23,539
|
|
|
Deferred tax liabilities
|
|
144,181
|
|
|
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
|
|
Supplemental Pro-Forma Information (Unaudited)
The following table presents supplemental pro-forma information for the three and six months ended June 30, 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 $16,199,000, the amortization of estimated intangible assets and other fair value adjustments, as well as the tax effect on those costs, and a valuation allowance on certain acquired net operating losses and tax credit carryforwards (see Note 6), 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
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
|
(in thousands)
|
|
(in thousands)
|
|
Net revenues
|
$
|
913,641
|
|
|
$
|
342,767
|
|
|
$
|
1,708,206
|
|
|
$
|
1,008,901
|
|
|
Net income (loss)
|
$
|
59,552
|
|
|
$
|
(272,089)
|
|
|
$
|
103,767
|
|
|
$
|
(106,340)
|
|
Supplemental Information of Operating Results
For the three months ended June 30, 2021, the Company's consolidated condensed statements of operations included net revenues of $325,453,000 and net income of $620,000 attributable to Topgolf. For the six months ended June 30, 2021, the Company's consolidated condensed statements of operations included net revenues of $418,090,000 and a net loss of $2,437,000 for the period beginning April 5, 2021 through July 4, 2021. The Topgolf results of operations for three months ended June 30, 2021 include depreciation and amortization of $33,531,000, interest expense of $1,459,000 related to the accretion of the fair value adjustment on long-term debt, and transaction, transition and other non-recurring charges of $2,503,000. For the six months ended June 30, 2021, Topgolf results include depreciation and amortization of $44,362,000, interest expense of $1,752,000 related to the accretion of the fair value adjustment on long-term debt, and transaction, transition and non-recurring costs of $18,731,000.
Note 7. Financing Arrangements
The Company's debt obligations are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
December 31, 2020
|
|
|
|
Maturity Date
|
|
Interest Rate
|
|
Unamortized Debt Issuance Costs
|
|
Carrying Value
|
|
Carrying Value
|
|
Short-Term Credit Facilities
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Asset-Based Revolving Credit Facility
|
|
May 17, 2024
|
|
3.00
|
%
|
|
$
|
1,391
|
|
|
$
|
21,438
|
|
|
$
|
22,130
|
|
|
Japan ABL Facility
|
|
January 21, 2022
|
|
1.28
|
%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
$
|
1,391
|
|
|
$
|
21,438
|
|
|
$
|
22,130
|
|
|
Balance Sheet Location
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
$
|
1,043
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Other long-term assets
|
|
348
|
|
|
—
|
|
|
—
|
|
|
Asset-based credit facilities
|
|
—
|
|
|
21,438
|
|
|
22,130
|
|
|
|
|
|
|
|
|
$
|
1,391
|
|
|
$
|
21,438
|
|
|
$
|
22,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
December 31, 2020
|
|
|
|
Maturity Date
|
|
Interest Rate
|
|
Unamortized Original Issuance Discount and Debt Issuance Costs
|
|
Carrying Value, net
|
|
Carrying Value, net
|
|
Long-Term Debt and Credit Facility
|
|
|
|
|
|
|
|
|
|
|
|
Japan Term Loan Facility
|
|
July 31, 2025
|
|
0.86
|
%
|
|
$
|
—
|
|
|
$
|
15,300
|
|
|
$
|
18,390
|
|
|
Term Loan B Facility
|
|
January 4, 2026
|
|
4.59
|
%
|
|
17,171
|
|
|
422,029
|
|
|
428,150
|
|
|
Topgolf Term Loan
|
|
February 8, 2026
|
|
7.00
|
%
|
|
7,037
|
|
|
335,088
|
|
|
—
|
|
|
Topgolf Revolving Credit Facility
|
|
February 8, 2024
|
|
4.75
|
%
|
|
7,127
|
|
|
42,873
|
|
|
—
|
|
|
Convertible Notes
|
|
May 1, 2026
|
|
2.75
|
%
|
|
70,087
|
|
|
188,663
|
|
|
183,126
|
|
|
Equipment Notes
|
|
December 27, 2022 - March 19, 2027
|
|
2.36% - 3.79%
|
|
—
|
|
|
27,655
|
|
|
31,822
|
|
|
Mortgage Loans
|
|
July 1, 2033 -
July 29, 2036
|
|
9.75% - 11.31%
|
|
—
|
|
|
46,634
|
|
|
—
|
|
|
Financed Tenant Improvements
|
|
February 1, 2035
|
|
8.00
|
%
|
|
—
|
|
|
3,727
|
|
|
3,801
|
|
|
|
|
|
|
|
|
$
|
101,422
|
|
|
$
|
1,081,969
|
|
|
$
|
665,289
|
|
|
Balance Sheet Location
|
|
|
|
|
|
|
|
|
|
|
|
Other current liabilities
|
|
$
|
3,816
|
|
|
$
|
17,540
|
|
|
$
|
—
|
|
|
Accrued expenses
|
|
—
|
|
|
—
|
|
|
14,725
|
|
|
Long-term debt
|
|
97,606
|
|
|
1,064,429
|
|
|
650,564
|
|
|
|
|
|
|
|
|
$
|
101,422
|
|
|
$
|
1,081,969
|
|
|
$
|
665,289
|
|
Revolving Credit Facilities and Available Liquidity
In addition to cash on hand, as well as cash generated from operations, the Company relies on its U.S. and Japan asset-based revolving credit facilities and 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 June 30, 2021, the Company had $71,438,000 outstanding under these facilities and $415,204,000 in cash and cash equivalents. As of June 30, 2021, the Company's available liquidity, which is comprised of cash on hand and amounts available under the Company's revolving credit facilities, after letters of credit and outstanding borrowings, was $876,786,000. As of June 30, 2020, the Company had $55,551,000 outstanding under its U.S. and Japan facilities, and $164,416,000 in cash and cash equivalents. As of June 30, 2020, the Company's available liquidity, which is comprised of cash on hand and amounts available under its U.S. and Japan facilities, after letters of credit and outstanding borrowings, was $483,110,000.
U.S. Asset-Based Revolving Credit Facility
In May 2019, the Company entered into a Fourth Amended and Restated Loan and Security Agreement with Bank of America N.A. and other lenders, 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. 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.
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 the maturity date. Amounts available under the ABL Facility increase and decrease with changes in the Company’s inventory and accounts receivable balances. During the six months ended June 30, 2021, average outstanding borrowings were $19,008,000 and average amount available, after outstanding borrowings and letters of credit, was approximately $296,027,000.
In April 2020, the Company amended the ABL Facility to permit a customary capped call transaction (see “Convertible Senior Notes” 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 pursuant to governmental programs enacted due to the COVID-19 pandemic. As of June 30, 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. In addition, in connection with the merger with Topgolf (see Note 6), the Company amended 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, and enter into certain transactions with Topgolf. 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. The Company’s borrowing base availability was above $40,000,000 during the six months ended June 30, 2021, and the Company was in compliance with the fixed charge coverage ratio as of June 30, 2021. Had the Company not been in compliance with the fixed charge coverage ratio as of June 30, 2021, the maximum amount of additional indebtedness that could have been outstanding on June 30, 2021 would have been reduced by $40,000,000. As of June 30, 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 June 30, 2021 the Company’s trailing 12-month average interest rate applicable to its outstanding loans under the ABL Facility was 3.11%. Additionally, the ABL Facility provides for monthly fees of 0.25% of the unused portion of the ABL Facility.
Fees in connection with the origination of the ABL Facility and prior amendments are amortized in interest expense over the term of the facility.
Japan ABL Facility
In January 2021, 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. $36,000,000, using the exchange rate in effect as of June 30, 2021) over a one-year term, subject to borrowing base availability under the Japan ABL 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 June 30, 2021, 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 (“TIBOR”) plus 1.20%.
Long-Term Debt
Japan Term Loan Facility
In August 2020, the Company entered into a five-year Term Loan facility (the “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. $18,000,000 using the exchange rate in effect as of June 30, 2021).
As of June 30, 2021, the Company had 1,700,000,000 Yen (or approximately U.S. $15,300,000 using the exchange rate in effect as of June 30, 2021) outstanding, of which 400,000,000 Yen (or approximately U.S. $3,600,000 using the exchange rate in effect as of June 30, 2021) is reflected in other current liabilities in the accompanying consolidated condensed balance sheets. Total interest expense recognized during the three and six months ended June 30, 2021 was 3,721,000 Yen (or approximately U.S. $34,000) and 7,612,000 Yen (or approximately U.S. $71,000), respectively.
Loans under the 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. $900,000 using the exchange rate in effect as of June 30, 2021) are due quarterly, and the facility imposes certain restrictions including covenants to certain financial performance obligations. As of June 30, 2021, the Company was in compliance with these covenants.
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. Total interest and amortization expense recognized during the three months ended June 30, 2021 and 2020 was $6,077,000 and $6,320,000, respectively. Total interest and amortization expense recognized during the six months ended June 30, 2021 and 2020 was $11,924,000 and $13,770,000, 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.
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 June 30, 2021, the Company was in compliance with these covenants.
In connection with the merger with Topgolf (see Note 6), the Company amended the Term Loan Facility with Bank of America, N.A. and the Term Lenders to, among other things, permit the consummation of the Merger and certain other transactions contemplated in the Merger Agreement, designate Topgolf and its subsidiaries as unrestricted subsidiaries
under the Term Loan Facility and amend certain covenants and other provisions to allow the Company 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”). Subsequent to June 30, 2021, the Company paid $10,000,000 on the outstanding principal of the Topgolf Revolving Credit Facility.
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.
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 two stepdowns of 0.25% per annum upon achievement of specified first lien leverage ratio levels. 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 two 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 amount per quarter. The remaining unpaid balance on the Topgolf Term Loan, together with all accrued and unpaid interest thereon, is due upon maturity. Outstanding borrowings under the Topgolf Revolving Credit Facility do not amortize and are due and payable upon maturity.
The terms of the Topgolf Credit Facilities require 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 case unless 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. As of June 30, 2021, the Company was in compliance with these covenants.
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.
Convertible Notes
On May 4, 2020, the Company issued $258,750,000 of 2.75% Convertible Senior Notes (the “Convertible Notes”). The Convertible Notes bear interest at a rate of 2.75% per annum on the principal amount, payable semi-annually in arrears on May 1 and November 1 of each year, beginning on November 1, 2020. The Convertible Notes mature on May 1, 2026,
unless earlier redeemed or repurchased by the Company or converted. The Convertible Notes are 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. At inception, the fair value of the liability component was determined by measuring the fair value of a similar liability that does not have an associated equity component. The carrying amount of the liability component was $188,663,000 as of June 30, 2021. The carrying amount of the equity component (the conversion feature) and discount on the Convertible Notes, totaling $64,986,000 as of June 30, 2021, is amortized over the remaining term of approximately 4.9 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. The discount on the Convertible Notes as well 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 Notes 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 June 30, 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 Commission, (ii) failure to allow the Convertible 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 Convertible Notes on April 29, 2020, the Company paid $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. The Capped Calls cover the aggregate number of shares of the Company’s common stock that initially underlie the Convertible Notes, and are expected generally to reduce the potential dilution to the Company’s common stock upon any conversion of the 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 Calls is initially $27.10. The Capped 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 Convertible Notes in cash upon conversion. For the six months ended June 30, 2021, the average market
price of the Company's common stock was $31.11, 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.
Equipment Notes
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.
Interest expense recognized during the three months ended June 30, 2021 and 2020 was $221,000 and $212,000, respectively. Interest expense recognized during the six months ended June 30, 2021 and 2020 was $460,000 and $377,000, respectively.
The Equipment Notes are subject to compliance with the financial covenants in the Company's ABL Facility. As of June 30, 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 three mortgage loans related to the construction of three venues. The loans require either monthly (i) principal and interest payments or (ii) interest-only payments until their maturity dates. 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.
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 June 30, 2021. Amounts payable under the ABL Facility are excluded from this table as they are short-term in nature. Amounts payable under the Term Loan Facility included below represent the minimum principal repayment obligations. As of June 30, 2021, the Company does not anticipate excess cash flow repayments as defined by the Term Loan Facility.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Remainder of 2021
|
|
$
|
10,489
|
|
|
2022
|
|
21,237
|
|
|
2023
|
|
18,581
|
|
|
2024
|
|
67,357
|
|
|
2025
|
|
14,159
|
|
|
Thereafter
|
|
1,051,568
|
|
|
|
|
$
|
1,183,391
|
|
Note 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
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Earnings per common share—basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
91,744
|
|
|
$
|
(167,684)
|
|
|
$
|
364,205
|
|
|
$
|
(138,790)
|
|
|
Weighted-average common shares outstanding—basic(1)
|
185,225
|
|
|
94,141
|
|
|
151,541
|
|
|
94,225
|
|
|
Basic earnings (loss) per common share
|
$
|
0.50
|
|
|
$
|
(1.78)
|
|
|
$
|
2.40
|
|
|
$
|
(1.47)
|
|
|
Earnings per common share—diluted
|
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
91,744
|
|
|
$
|
(167,684)
|
|
|
$
|
364,205
|
|
|
$
|
(138,790)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding—basic(1)
|
185,225
|
|
|
94,141
|
|
|
151,541
|
|
|
94,225
|
|
|
Convertible notes weighted-average shares outstanding
|
6,850
|
|
|
—
|
|
|
6,105
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options, restricted stock units and performance share units
|
2,259
|
|
|
—
|
|
|
1,993
|
|
|
—
|
|
|
Weighted-average common shares outstanding—diluted
|
194,334
|
|
|
94,141
|
|
|
159,639
|
|
|
94,225
|
|
|
Diluted earnings (loss) per common share
|
$
|
0.47
|
|
|
$
|
(1.78)
|
|
|
$
|
2.28
|
|
|
$
|
(1.47)
|
|
(1)In connection with the Topgolf merger, on March 8, 2021, the Company issued 89,776,450 of its common stock to the stockholders of Topgolf, and 187,568 of its common stock for restricted stock awards converted in the merger (see Note 15), of which 89,964,018 and 56,662,420 weighted average shares for the three and six months ended June 30, 2021, respectively, were included in the basic and diluted share calculations based on the number of days the shares were outstanding during the periods.
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 June 30, 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 and six months ended June 30, 2021 (see Note 7).
For the three and six months ended June 30, 2021, securities outstanding totaling approximately 1,200,000 and 1,042,000 shares, respectively, 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 and six months ended June 30, 2020, securities outstanding totaling approximately 1,153,000 and 1,260,000 shares, respectively, comprised of stock options, restricted stock units and performance share units were excluded from the calculation of loss per common share—diluted as they would be anti-dilutive.
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
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
56,658
|
|
|
Acquisitions
|
|
504,568
|
|
|
58,652
|
|
|
|
|
|
|
1,402,101
|
|
|
1,965,321
|
|
|
Impairments
|
|
—
|
|
|
—
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
Foreign currency translation
|
|
(71)
|
|
|
—
|
|
|
|
|
|
|
—
|
|
|
(71)
|
|
|
Balance at June 30, 2021
|
|
$
|
531,522
|
|
|
$
|
88,285
|
|
|
|
|
|
|
$
|
1,402,101
|
|
|
$
|
2,021,908
|
|
Goodwill at June 30, 2021 increased to $2,021,908,000 from $56,658,000 at December 31, 2020. This $1,965,250,000 increase was primarily due to the addition of $1,965,321,000 in goodwill in connection with the Topgolf merger in March 2021, of which the Company attributed $1,402,101,000 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.
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. As of June 30, 2021 and December 31, 2020 the Company recognized accumulated impairment losses on goodwill of $148,375,000. There were no impairment losses recognized during the three or six months ended June 30, 2021.
The following sets forth the intangible assets by major asset class (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful
Life
(Years)
|
|
June 30, 2021
|
|
|
|
|
Gross(1)
|
|
Accumulated Amortization
|
|
Translation Adjustment
|
|
Net Book
Value
|
|
|
|
|
|
|
|
|
|
Indefinite-lived:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade name, trademark, trade dress and other
|
NA
|
|
$
|
1,441,003
|
|
|
|
$
|
—
|
|
|
|
|
$
|
6,695
|
|
|
|
$
|
1,434,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquor licenses
|
NA
|
|
7,452
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
7,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
2-16
|
|
32,041
|
|
|
|
31,617
|
|
|
|
|
—
|
|
|
|
424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer and distributor relationships and other
|
1-10
|
|
61,377
|
|
|
|
23,278
|
|
|
|
|
1,021
|
|
|
|
37,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed technology
|
10
|
|
79,994
|
|
|
|
2,496
|
|
|
|
|
123
|
|
|
|
77,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
$
|
1,621,867
|
|
|
|
$
|
57,391
|
|
|
|
|
$
|
7,839
|
|
|
|
$
|
1,556,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
—
|
|
|
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 June 30, 2021 includes additions of $1,001,600,000 and $84,528,000 in indefinite-lived and amortizing intangible assets, respectively, related to the Topgolf merger that was completed on March 8, 2021.
The Company recognized amortization expense related to intangible assets of $3,736,000 and $1,213,000 for the three months ended June 30, 2021 and 2020, respectively, and $6,037,000 and $2,393,000 for the six months ended June 30, 2021 and 2020, respectively, in selling, general and administrative expenses in the accompanying consolidated condensed statements of operations.
Amortization expense related to intangible assets at June 30, 2021 in each of the next five fiscal years and beyond is expected to be incurred as follows (in thousands):
|
|
|
|
|
|
|
|
Remainder of 2021
|
$
|
10,522
|
|
|
2022
|
14,348
|
|
|
2023
|
12,675
|
|
|
2024
|
12,532
|
|
|
2025
|
12,454
|
|
|
Thereafter
|
52,346
|
|
|
|
$
|
114,877
|
|
Note 10. Investments
Investment in Topgolf International, Inc.
Prior to the completion of the merger with Topgolf, the Company owned a minority interest of approximately 14.3% in Topgolf, the owner and operator of Topgolf entertainment centers. On March 8, 2021, the Company completed its previously announced merger with Topgolf, in which the 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 were stepped up to their fair value and applied toward the total purchase consideration in the merger. The fair value adjustment resulted in a gain of $252,531,000, which the Company recognized in other income in the first quarter of 2021.
Immediately prior to the merger and at December 31, 2020, the Company's total investment in Topgolf was $111,442,000. The Company accounted for this investment at cost less impairments in accordance with ASC 2016-01. Prior to the merger, the Company did not record any impairments with respect to this investment.
Investment in Full Swing Golf Holdings, Inc.
In connection with the merger with Topgolf, the Company acquired a minority interest of 17.7% in Full Swing Golf Holdings, Inc. (“Full Swing”), owners of indoor golf simulation technology that delivers golf ball tracking data and measures ball flight indoors. The fair value of this investment as of the merger date was $27,740,000. The Company accounts for this investment at cost less impairments in accordance with ASC 2016-01. As of June 30, 2021, the Company believed its cost investment in Full Swing approximated its fair value. Subsequent to June 30, 2021, the Company sold a portion of its investment in Full Swing for cash proceeds of approximately $18,591,000. As a result of the transaction, the Company now owns a minority interest of 7.3% in Full Swing.
Note 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 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 June 30, 2021 and December 31, 2020. Amount in the table below are in thousands.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended
June 30,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Beginning balance
|
$
|
10,700
|
|
|
$
|
9,791
|
|
|
$
|
9,364
|
|
|
$
|
9,636
|
|
|
Provision
|
3,477
|
|
|
1,562
|
|
|
5,933
|
|
|
3,370
|
|
|
|
|
|
|
|
|
|
|
|
Claims paid/costs incurred
|
(2,644)
|
|
|
(1,574)
|
|
|
(3,764)
|
|
|
(3,227)
|
|
|
Ending balance
|
$
|
11,533
|
|
|
$
|
9,779
|
|
|
$
|
11,533
|
|
|
$
|
9,779
|
|
Note 12. Selected Financial Statement Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
December 31, 2020
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories:
|
|
|
|
|
Raw materials
|
$
|
70,900
|
|
|
$
|
69,932
|
|
|
Work-in-process
|
1,098
|
|
|
1,010
|
|
|
Finished goods
|
258,760
|
|
|
281,602
|
|
|
Food and beverage
|
4,588
|
|
|
—
|
|
|
|
$
|
335,346
|
|
|
$
|
352,544
|
|
|
Property, plant and equipment, net:
|
|
|
|
|
Land
|
$
|
90,232
|
|
|
$
|
7,308
|
|
|
Buildings and leasehold improvements
|
798,078
|
|
|
100,653
|
|
|
Machinery and equipment
|
196,819
|
|
|
137,026
|
|
|
Furniture, computer hardware and equipment
|
176,141
|
|
|
100,558
|
|
|
Internal-use software
|
77,566
|
|
|
42,082
|
|
|
Production molds
|
7,163
|
|
|
6,809
|
|
|
Construction-in-process
|
181,044
|
|
|
13,299
|
|
|
|
1,527,043
|
|
|
407,735
|
|
|
Accumulated depreciation
|
(262,157)
|
|
|
(261,240)
|
|
|
|
$
|
1,264,886
|
|
|
$
|
146,495
|
|
|
Accounts payable and accrued expenses:
|
|
|
|
|
Accounts payable
|
$
|
111,255
|
|
|
$
|
66,282
|
|
|
Accrued expenses
|
207,149
|
|
|
136,277
|
|
|
Accrued inventory
|
108,173
|
|
|
73,650
|
|
|
|
$
|
426,577
|
|
|
$
|
276,209
|
|
|
Accrued employee compensation and benefits:
|
|
|
|
|
Accrued payroll and taxes
|
$
|
68,173
|
|
|
$
|
17,009
|
|
|
Accrued vacation and sick pay
|
22,355
|
|
|
12,887
|
|
|
Accrued commissions
|
4,899
|
|
|
1,041
|
|
|
|
$
|
95,427
|
|
|
$
|
30,937
|
|
During the three months ended June 30, 2021 and 2020, the Company recorded depreciation expense of $39,534,000 and $8,147,000, respectively, and $57,505,000 and $15,964,000 for the six months ended June 30, 2021 and 2020, respectively, on the accompanying consolidated condensed statements of operations.
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.” Historically, the Company calculated the provision for income taxes during the interim reporting periods by applying an estimate of the annual effective tax rate for the full fiscal year to “ordinary” income or loss (pretax income or loss excluding unusual or infrequently occurring discrete items) for the
reporting period. The Company determined that since small changes in estimated “ordinary” income would result in significant changes in the estimated annual effective tax rate, the historical method would not provide a reliable estimate for the three and six months ended June 30, 2021. Therefore, a discrete effective tax rate method was used to calculate taxes for the three and six months ended June 30, 2021.
In March 2021, the Company acquired Topgolf through a non-taxable stock acquisition in a share exchange. The purchase price of Topgolf at acquisition was approximately $3,014,174,000. The Company recorded a deferred tax liability of approximately $293,000,000 related to the acquired intangibles, offset by approximately $154,000,000 of other acquired deferred tax assets, after consideration of acquired valuation allowances.
In January 2019, the Company acquired Jack Wolfskin for approximately $521,201,000 (including cash acquired of $58,096,000). The Company recorded a deferred tax liability of $88,392,000 related to the intangibles upon acquisition in addition to $11,384,000 deferred tax assets acquired. In the second quarter of 2020, due to a decline in projected revenues caused by the COVID-19 pandemic, the Company recognized an impairment charge of $174,269,000 to write down the goodwill and trade name associated with Jack Wolfskin to its fair value (see Note 9). The impaired goodwill was comprised of book basis over tax basis with no corresponding deferred tax liability. The brand value impairment resulted in the reduction of approximately $7,900,000 of the deferred tax liability previously recorded as part of acquisition accounting.
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. As 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 three months ended March 31, 2021. In connection with the purchase accounting related to the merger with Topgolf, the Company also recorded a valuation allowance in goodwill of approximately $80,566,000 against certain Topgolf deferred tax assets acquired in the merger. For the three months ended June 30, 2021, the Company released acquired Topgolf valuation allowances of approximately $32,743,000 due to significant earnings in the period and as a consequence of using the discrete effective tax rate method described above. The Company will continue to assess this amount through the 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 recorded an income tax benefit of $15,853,000 and a tax provision of $31,890,000 for the three and six months ended June 30, 2021, respectively. As a percentage of pre-tax income, the Company's effective tax rate was (20.9)% and 8.1% for the three and six months ended June 30, 2021, respectively. In the three months ended June 30, 2021 the primary difference between the statutory rate and the effective rate relates to the tax effect of the valuation allowance release described above. In the six months ended June 30, 2021 the primary difference between the statutory rate and the effective rate relates to excluding the book gain on pre-merger Topgolf shares for tax purposes offset by the valuation allowances on the Company’s deferred tax assets discussed above.
At June 30, 2021, the gross liability for income taxes associated with uncertain tax positions was $27,028,000. Of this amount, $5,267,000 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 $470,000 during the next 12 months. The gross liability for uncertain tax positions decreased by $1,392,000 for the three months ended June 30, 2021. The decrease was primarily due to an increase in effectively settled tax positions taken in the current quarter. The gross liability for uncertain tax positions decreased by $1,274,000 for the six months ended June 30, 2021. The decrease was primarily due to an increase in effectively settled tax positions taken in the current year.
The Company recognizes interest and penalties related to income tax matters in income tax expense. For the three months ended June 30, 2021 and 2020, the Company's provision for income taxes includes a benefit of $49,000 and an expense of $25,000, respectively, related to the recognition of interest and/or penalties. For the six months ended June 30, 2021 and 2020, the Company's provision for income taxes includes a benefit of $282,000 and an expense of $54,000, respectively, related to the recognition of interest and/or penalties. As of June 30, 2021 and December 31, 2020, the gross amount of accrued interest and penalties included in income taxes payable in the accompanying consolidated condensed balance sheets was $950,000 and $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
|
|
2015 and prior
|
|
South Korea
|
|
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 believes a cumulative change in ownership occurred as a result of the merger with Topgolf, for the Company and Topgolf. The resulting limitations are not expected to have an adverse impact on future combined earnings of the Company. The limitation on losses and credits could impact future cash flows but those impacts are not expected to be 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.
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 June 30, 2021 under these agreements is $96,214,000 over the next five years and thereafter as follows (in thousands):
|
|
|
|
|
|
|
|
Remainder of 2021
|
$
|
40,895
|
|
|
2022
|
33,472
|
|
|
2023
|
20,969
|
|
|
2024
|
753
|
|
|
2025
|
125
|
|
|
|
|
|
|
$
|
96,214
|
|
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.
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 June 30, 2021 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 June 30, 2021, the Company had three shareholder approved stock plans under which shares were available for equity-based awards: the Callaway Golf Company Amended and Restated 2004 Incentive Plan, the 2013 Non-Employee
Directors Stock Incentive Plan 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 and six months ended June 30, 2021, the Company recognized $1,572,000 and $1,978,000, respectively, in compensation expense related to these awards, net of estimated forfeitures. At June 30, 2021, unamortized compensation expense related to stock options and restricted stock awards was $4,061,000 and $3,792,000, respectively, which will recognized over a weighted average period of 1.5 years and 1.7 years, respectively.
Restricted Stock Units
Restricted stock units are valued at the Company’s closing stock price on the date of grant, and generally vest over a 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 June 30, 2021 and 2020, the Company granted 122,000 and 134,000 shares underlying restricted stock units, respectively, at a weighted average grant-date fair value of $29.66 and $14.15 per share, respectively. During the six months ended June 30, 2021 and 2020, the Company granted 1,109,000 shares underlying restricted stock units, including inducement awards of 774,000, and 402,000 shares underlying restricted stock units, respectively, at a weighted average grant-date fair value of $29.61 and $17.83 per share, respectively.
Total compensation expense, net of estimated forfeitures, recognized for restricted stock units was $3,775,000 and $1,362,000 for the three months ended June 30, 2021 and 2020, respectively, and $5,950,000 and $2,977,000, for the six months ended June 30, 2021 and 2020, respectively.
At June 30, 2021, the Company had $45,873,000 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 2.3 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, including 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. 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.
During the three months ended June 30, 2021, the Company granted 95,000 shares underlying performance share units at a weighted average grant-date fair value of $27.11. During the six months ended June 30, 2021 and 2020, the Company granted 1,440,000 shares underlying performance share units, including inducement awards of 1,149,000, and 125,000, respectively, at a weighted average grant-date fair value of $29.42 and $19.66, respectively. There were no performance share units granted during three months ended June 30, 2020.
During the three months ended June 30, 2021 and 2020, the Company recognized total compensation expense, for performance-based awards of $5,692,000 and $1,572,000, respectively, net of estimated forfeitures, and $7,720,000 and $1,817,000 for the six months ended June 30, 2021 and 2020, respectively.
At June 30, 2021, unamortized compensation expense related to these awards was $70,749,000, which is expected to be recognized over a weighted-average period of 2.4 years.
Share-Based Compensation Expense
The table below summarizes the amounts recognized in the financial statements for the three and six months ended June 30, 2021 and 2020 for share-based compensation, including expense for restricted stock units, performance share units, restricted stock awards and stock options (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended
June 30,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
|
|
|
|
|
Cost of products
|
$
|
321
|
|
|
$
|
239
|
|
|
$
|
547
|
|
|
$
|
395
|
|
|
Selling, general and administrative expenses
|
10,471
|
|
|
2,526
|
|
|
14,681
|
|
|
4,114
|
|
|
Research and development expenses
|
244
|
|
|
168
|
|
|
420
|
|
|
285
|
|
|
Total cost of share-based compensation included in income, before income tax
|
11,036
|
|
|
2,933
|
|
|
15,648
|
|
|
4,794
|
|
|
Income tax benefit
|
2,649
|
|
|
704
|
|
|
3,756
|
|
|
1,151
|
|
|
Total cost of employee share-based compensation, after tax
|
$
|
8,387
|
|
|
$
|
2,229
|
|
|
$
|
11,892
|
|
|
$
|
3,643
|
|
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 June 30, 2021 and December 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
June 30, 2021
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts—asset position(1)
|
$
|
6,552
|
|
|
$
|
—
|
|
|
$
|
6,552
|
|
|
$
|
—
|
|
|
Foreign currency forward contracts—liability position(1)
|
(378)
|
|
|
—
|
|
|
(378)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate hedge agreements—liability position(2)
|
(13,303)
|
|
|
—
|
|
|
(13,303)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(7,129)
|
|
|
$
|
—
|
|
|
$
|
(7,129)
|
|
|
$
|
—
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts—asset position(1)
|
$
|
90
|
|
|
$
|
—
|
|
|
$
|
90
|
|
|
$
|
—
|
|
|
Foreign currency forward contracts—liability position(1)
|
(1,553)
|
|
|
—
|
|
|
(1,553)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate hedge agreements—liability position(2)
|
(17,922)
|
|
|
—
|
|
|
(17,922)
|
|
|
—
|
|
|
|
$
|
(19,385)
|
|
|
$
|
—
|
|
|
$
|
(19,385)
|
|
|
$
|
—
|
|
(1)The fair value of the Company’s foreign currency forward contracts is 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 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 (see Note 17).
(2)The fair value of interest rate hedge contracts is 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 June 30, 2021 and December 31, 2020 are categorized within Level 1 of the fair value hierarchy. The table below illustrates 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 June 30, 2021 and December 31, 2020 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
December 31, 2020
|
|
|
Carrying
Value
|
|
Fair
Value
|
|
Carrying
Value
|
|
Fair
Value
|
|
Term Loan Facility(1)
|
$
|
439,200
|
|
|
$
|
441,515
|
|
|
$
|
441,600
|
|
|
$
|
443,243
|
|
|
Japan Term Loan Facility(2)
|
$
|
15,300
|
|
|
$
|
15,356
|
|
|
$
|
18,390
|
|
|
$
|
16,083
|
|
|
Convertible Notes(3)
|
$
|
258,750
|
|
|
$
|
526,802
|
|
|
$
|
258,750
|
|
|
$
|
414,191
|
|
|
U.S. Asset-Based Revolving Credit Facility(4)
|
$
|
21,438
|
|
|
$
|
21,438
|
|
|
$
|
22,130
|
|
|
$
|
22,130
|
|
|
|
|
|
|
|
|
|
|
|
Equipment Notes(5)
|
$
|
27,655
|
|
|
$
|
29,380
|
|
|
$
|
31,822
|
|
|
$
|
29,385
|
|
|
Topgolf Revolving Credit Facility(6)
|
$
|
42,873
|
|
|
$
|
42,873
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Mortgage Loans(7)
|
$
|
46,634
|
|
|
$
|
52,739
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Topgolf Term Loan(8)
|
$
|
335,088
|
|
|
$
|
331,835
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)In January 2019, the 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 Japan Term Loan Facility. The fair value 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.
(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 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.
(6)The carrying amount of the Topgolf Revolving Credit Facility approximates its fair value because the applicable interest rate is adjusted regularly based on current market conditions. See Note 7 for further information.
(7)The fair value of the mortgage loans is calculated based on the future payments under the mortgage agreement discounted at the incremental borrowing rate. See Note 7 for further information.
(8)The fair value of the Topgolf Term Loan is based on quoted market rate from the lender. See Note 7 for further information.
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 the 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 no impairment losses recorded during the three and six months ended June 30, 2021.
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 products or net 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 June 30, 2021 and December 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location
|
|
Fair Value of
Asset Derivatives
|
|
|
June 30, 2021
|
|
December 31, 2020
|
|
Derivatives designated as cash flow hedging instruments:
|
|
|
|
|
|
|
Foreign currency forward contracts
|
Other current assets
|
|
$
|
1,874
|
|
|
$
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
Foreign currency forward contracts
|
Other current assets
|
|
4,678
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total asset position
|
|
$
|
6,552
|
|
|
$
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location
|
|
Fair Value of
Liability Derivatives
|
|
|
June 30, 2021
|
|
December 31, 2020
|
|
Derivatives designated as cash flow hedging instruments:
|
|
|
|
|
|
|
Foreign currency forward contracts
|
Accrued AP and expenses
|
|
$
|
116
|
|
|
$
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate hedge contracts
|
Accrued AP and expenses
|
|
4,752
|
|
|
4,780
|
|
|
Interest rate hedge contracts
|
Other long-term liabilities
|
|
8,551
|
|
|
13,142
|
|
|
|
|
|
13,419
|
|
|
17,960
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
Foreign currency forward contracts
|
Accrued AP and expenses
|
|
262
|
|
|
1,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liability position
|
|
$
|
13,681
|
|
|
$
|
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 June 30, 2021 and December 31, 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 June 30, 2021 and December 31, 2020, the notional amounts of the Company's foreign currency forward contracts designated as cash flow hedge instruments were approximately $34,075,000, and $756,000, respectively.
As of June 30, 2021, the Company recorded a net gain of $2,065,000 in accumulated other comprehensive loss related to foreign currency forward contracts. Of this amount, net gains of $192,000 for the three months ended June 30, 2021 and net losses of $78,000 for the six months ended June 30, 2021, were removed from accumulated other comprehensive loss and recognized in cost of products for the underlying sales that were recognized, and net gains of $22,000 and $44,000 for the three and six months ended June 30, 2021, respectively, related to the amortization of forward
points were removed from accumulated other comprehensive loss and recognized in cost of products. There were no ineffective hedge gains or losses recognized during the three and six months ended June 30, 2021. Based on the current valuation, the Company expects to reclassify net gains of $1,829,000 from accumulated other comprehensive loss into net earnings during the next 12 months.
The Company recognized net gains of $407,000 and $408,000 in cost of products in the three and six months ended June 30, 2020, respectively.
Interest Rate Hedge Contract and Cross-Currency Debt Swap
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 7) by converting a portion of the USD denominated Term Loan Facility, which has a higher variable interest rate, to a EUR denominated synthetic note at a lower fixed rate. During the first quarter of 2020, the Company unwound the cross-currency swap, and 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 (expense), net 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. The notional amount outstanding under the interest rate hedge contract was $195,348,000 and $196,350,000 as of June 30, 2021 and December 31, 2020, respectively.
During the three and six months ended June 30, 2021, the Company recorded net gains of $462,000 and $2,228,000 related to the remeasurement of the interest rate hedge contract in accumulated other comprehensive loss. Of these amounts, net losses of $1,206,000 and $2,391,000 were relieved from accumulated other comprehensive loss and recognized in interest expense during the three and six months ended June 30, 2021, respectively. Based on the current valuation, the Company expects to reclassify a net loss of $4,757,000 related to the interest rate hedge contract from accumulated other comprehensive loss into earnings during the next 12 months. The Company recognized net losses of $1,017,000 and $1,451,000 in interest expense during the three and six months ended June 30, 2020, respectively.
In connection with the cross-currency swap contract, during the six months ended June 30, 2020, the Company recorded a remeasurement net gain of $15,081,000 in accumulated other comprehensive loss. There were no remeasurement gains or losses recorded during the three months ended June 30, 2020. During the three and six months ended June 30, 2020, net gains of $11,463,000 and $18,510,000, respectively, were relieved from accumulated other comprehensive loss. The recognition of these net gains into earnings is summarized as follows:
•Net gains of $11,046,000 related to the discontinuation of the cross-currency swap contract were recognized in other income (expense) in the three and six months ended June 30, 2020.
•Net gains related to foreign currency of $5,735,000 were recognized in other income (expense) in the six months ended June 30, 2020. There were no net foreign currency gains or losses recognized in the six months ended June 30, 2021.
•Net gains of $417,000 and $1,730,000 were recognized in interest expense during the three and six months ended June 30, 2020, respectively. There were no net gains or losses recognized in interest income during the three and six months ended June 30, 2021.
The following tables summarize the net effect of all cash flow hedges on the consolidated condensed financial statements for the three and six months ended June 30, 2021 and 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain/(Loss) Recognized in Other Comprehensive Income
(Effective Portion)
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
Derivatives designated as cash flow hedging instruments
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Foreign currency forward contracts
|
|
$
|
(126)
|
|
|
$
|
(436)
|
|
|
$
|
2,065
|
|
|
$
|
1,974
|
|
|
Cross-currency debt swap agreements
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15,081
|
|
|
Interest rate hedge agreements
|
|
(462)
|
|
|
(1,928)
|
|
|
2,228
|
|
|
(13,161)
|
|
|
|
|
$
|
(588)
|
|
|
$
|
(2,364)
|
|
|
$
|
4,293
|
|
|
$
|
3,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain/(Loss) Reclassified from Other Comprehensive Income into Earnings
(Effective Portion)
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
Derivatives designated as cash flow hedging instruments
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Foreign currency forward contracts
|
|
$
|
215
|
|
|
$
|
638
|
|
|
$
|
(33)
|
|
|
$
|
872
|
|
|
Cross-currency debt swap agreements
|
|
—
|
|
|
11,463
|
|
|
—
|
|
|
18,510
|
|
|
Interest rate hedge agreements
|
|
(1,206)
|
|
|
(1,017)
|
|
|
(2,391)
|
|
|
(1,447)
|
|
|
|
|
$
|
(991)
|
|
|
$
|
11,084
|
|
|
$
|
(2,424)
|
|
|
$
|
17,935
|
|
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 June 30, 2021 and December 31, 2020, the notional amounts of the Company’s foreign currency forward contracts used to mitigate the exposures discussed above were approximately $177,509,000 and $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 and six months ended June 30, 2021 and 2020, respectively, in addition to the derivative contract type (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Net Gain (Loss) 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
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Foreign currency forward contracts
|
|
Other expense, net
|
|
$
|
(1,610)
|
|
|
$
|
(595)
|
|
|
$
|
9,030
|
|
|
$
|
5,261
|
|
In addition, for the three months ended June 30, 2021 and 2020, the Company recognized a net foreign currency transaction loss of $1,604,000 and a gain of $2,906,000, respectively, and net foreign currency losses of $3,067,000 and $2,241,000, respectively for the six months ended June 30, 2021 and 2020, related to transactions with its foreign subsidiaries.
Note 18. Accumulated Other Comprehensive Loss
The following table details the amounts reclassified from accumulated other comprehensive loss to cost of products, as well as changes in foreign currency translation for the three and six months ended June 30, 2021. Amounts are in thousands.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments
|
|
Foreign Currency Translation
|
|
Total
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss, March 31, 2021, after tax
|
|
$
|
(8,674)
|
|
|
$
|
(8,772)
|
|
|
$
|
(17,446)
|
|
|
Change in derivative instruments
|
|
(588)
|
|
|
—
|
|
|
(588)
|
|
|
Net gains reclassified to cost of goods sold
|
|
(215)
|
|
|
—
|
|
|
(215)
|
|
|
|
|
|
|
|
|
|
|
Net losses reclassified to interest expense
|
|
1,206
|
|
|
—
|
|
|
1,206
|
|
|
Income tax provision on derivative instruments
|
|
(617)
|
|
|
—
|
|
|
(617)
|
|
|
Foreign currency translation adjustments
|
|
—
|
|
|
5,966
|
|
|
5,966
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss, June 30, 2021, after tax
|
|
$
|
(8,888)
|
|
|
$
|
(2,806)
|
|
|
$
|
(11,694)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
4,293
|
|
|
—
|
|
|
4,293
|
|
|
Net gains reclassified to cost of products
|
|
33
|
|
|
—
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
Net losses reclassified to interest expense
|
|
2,391
|
|
|
—
|
|
|
2,391
|
|
|
Income tax provision on derivative instruments
|
|
(1,588)
|
|
|
—
|
|
|
(1,588)
|
|
|
Foreign currency translation adjustments
|
|
—
|
|
|
(10,277)
|
|
|
(10,277)
|
|
|
Accumulated other comprehensive loss, June 30, 2021, after tax
|
|
$
|
(8,888)
|
|
|
$
|
(2,806)
|
|
|
$
|
(11,694)
|
|
Note 19. Segment Information
On March 8, 2021 the Company completed 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 June 30, 2021, the Company had three reportable operating segments: Golf Equipment, Apparel, Gear and Other and Topgolf.
The Golf Equipment operating segment is comprised of product revenues and expenses that encompass golf club and golf ball products, including 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 is comprised of product revenues and expenses for the Jack Wolfskin outdoor apparel, gear and accessories business, the TravisMathew golf and lifestyle apparel and accessories business, the Callaway soft goods business and the OGIO business, which consists of golf apparel and accessories (including golf bags and gloves), storage gear for sport and personal use. 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 and six months ended June 30, 2021 or 2020.
The tables below contain information utilized by management to evaluate its operating segments for the interim periods presented (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
Golf Equipment
|
$
|
401,259
|
|
|
$
|
209,943
|
|
|
$
|
778,141
|
|
|
$
|
501,604
|
|
|
Apparel, Gear and Other
|
186,929
|
|
|
87,053
|
|
|
369,031
|
|
|
237,668
|
|
|
Topgolf(1)
|
325,453
|
|
|
—
|
|
|
418,090
|
|
|
—
|
|
|
Total net revenues
|
$
|
913,641
|
|
|
$
|
296,996
|
|
|
$
|
1,565,262
|
|
|
$
|
739,272
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes:
|
|
|
|
|
|
|
|
|
Golf Equipment
|
$
|
98,089
|
|
|
$
|
29,181
|
|
|
$
|
183,010
|
|
|
$
|
87,801
|
|
|
Apparel, Gear and Other
|
15,668
|
|
|
(11,711)
|
|
|
36,158
|
|
|
(15,510)
|
|
|
Topgolf(1)
|
24,204
|
|
|
—
|
|
|
28,158
|
|
|
—
|
|
|
Total segment operating income
|
137,961
|
|
|
17,470
|
|
|
247,326
|
|
|
72,291
|
|
|
Reconciling items(2)
|
(62,070)
|
|
|
(193,085)
|
|
|
148,769
|
|
|
(209,861)
|
|
|
Total income before income taxes
|
$
|
75,891
|
|
|
$
|
(175,615)
|
|
|
$
|
396,095
|
|
|
$
|
(137,570)
|
|
|
|
|
|
|
|
|
|
|
|
Additions to long-lived assets:(3)
|
|
|
|
|
|
|
|
|
Golf Equipment
|
$
|
9,359
|
|
|
$
|
2,778
|
|
|
$
|
15,784
|
|
|
$
|
19,740
|
|
|
Apparel, Gear and Other
|
7,507
|
|
|
3,142
|
|
|
12,574
|
|
|
13,266
|
|
|
Topgolf
|
114,009
|
|
|
—
|
|
|
140,127
|
|
|
—
|
|
|
Total additions to long-lived assets
|
$
|
130,875
|
|
|
$
|
5,920
|
|
|
$
|
168,485
|
|
|
$
|
33,006
|
|
(1)On March 8, 2021, the Company completed the merger with Topgolf and has included the results of operations of Topgolf in its consolidated condensed statements of operations from that date forward.
(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 and six months ended June 30, 2021 also include (i) transaction, transition and other non-recurring expenses in connection with the merger with Topgolf of $2,503,000 and $18,731,000, respectively, (ii) amortization and depreciation expense of $6,184,000 and $8,431,000, respectively, on the acquired intangible assets and fair value step-up of leases and property, plant and equipment (see Note 6), and (iii) $771,000 and $1,480,000, respectively, of costs related to the implementation of new IT systems for Jack Wolfskin. The six months ended June 30, 2021 also includes a gain of $252,531,000 related to the fair value step-up on the Company's pre-acquisition investment in Topgolf (see Note 10).
Reconciling items for the three and six months ended June 30, 2020 included an impairment charge of $174,269,000 related to Jack Wolfskin (see Note 9), in addition to severance related to the Company's cost reduction initiatives in response to the COVID-19 pandemic, non-recurring costs associated with the Company's transition to its new North America Distribution Center and costs related to the integration of Jack Wolfskin. These increases were partially offset by the recognition of a net gain of $11,046,000 related to a cash flow hedge that was discontinued during the second quarter of 2020.
(3)Additions to long-lived assets are comprised of purchases of property, plant and equipment.