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, 2016 filed with the Commission. These consolidated condensed financial statements, in the opinion of management, include all the normal and recurring adjustments necessary for the fair presentation of the financial position, results of operations and cash flows for the periods and dates presented. Interim operating results are not necessarily indicative of operating results for the full year.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates and assumptions.
Recent Accounting Standards
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-09, "Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting." This amendment is intended to simplify several aspects of the accounting for share-based payment transactions, including (i) the recognition of excess tax benefits or deficiencies in the operating statement when compensatory stock awards are vested and settled, and the presentation of these tax benefits or deficiencies as an operating cash outflow on the statement of cash flows, (ii) the option to withhold the maximum statutory tax rate on the settlement of compensatory stock without triggering liability accounting, as well as presenting the shares withheld for the settlement of these taxes as a financing outflow on the statement of cash flows, and (iii) the option to elect a change in the accounting policy to account for forfeitures as they occur. The amendment is effective for annual periods beginning after December 15, 2016, and interim periods therein. The Company adopted this ASU using the modified retrospective transition method with respect to the recognition of excess tax benefits in the consolidated condensed statement of operations. The adoption did not result in a cumulative-effect adjustment to equity as of January 1, 2017. The amendment related to the cash flow presentation of shares acquired to satisfy the Company's minimum tax withholding requirements in connection with the settlement of compensatory stock was applied retrospectively as a financing outflow. The adoption had no impact to any periods presented on the consolidated condensed statement of cash flows as these cash outflows have historically been presented as a financing activity. The Company elected not to change its accounting policy on the recognition of estimated forfeitures.
In March 2016, the FASB issued ASU No. 2016-04, "Liabilities—Extinguishment of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products." The amendment clarifies when it is acceptable to recognize the unredeemed portion of prepaid gift cards into income, and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, with early adoption permitted. As of June 30, 2017, the Company had
$993,000
of deferred revenue related to unredeemed gift cards. The Company does not expect the adoption of this ASU will have a material impact on its consolidated condensed financial statements and disclosures.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)."
Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date:
(i) a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and
(ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.
Under the new guidance, lessor accounting is largely unchanged. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted.
Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period
presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently evaluating the impact this ASU will have on its consolidated condensed financial statements and disclosures.
In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments─Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." The amendment requires (i) equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, (ii) public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes and (iii) separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables). This amendment eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost. This amendment is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. As of
June 30, 2017
, the Company had an investment in Topgolf International, Inc. of
$48,997,000
that was accounted for at cost in accordance with ASC Topic 325, “Investments—Other” (see Note 8). Based on prior observable market transactions, the Company believes that the fair value of its investment in Topgolf significantly exceeds its cost. However, the Company is currently unable to estimate the fair value of this investment as of June 30, 2017, as it was not practical to do so, and there were no recent identifiable events or changes in circumstances that had a significant effect on fair value. If there are any observable price changes related to this investment or a similar investment of the same issuer in fiscal years beginning after December 15, 2017, the Company would be required to write this investment up or down to its estimated fair value, which could have a significant effect on the Company's financial position and results of operations.
In July 2015, the FASB issued ASU No. 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory." This amendment requires an entity to measure in-scope inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. For public business entities, this ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The adoption of this amendment did not have a material impact on the Company's consolidated condensed financial statements.
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers: (Topic 606)." This ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosures regarding revenue and contracts with customers. The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Entities can adopt this ASU using the full retrospective application or the modified retrospective application. Early adoption is permitted only for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company does not intend to early adopt the new standard, and is currently evaluating the transition method of adoption. The Company is currently comparing the requirements of this ASU with the current requirements for recognizing revenue and identifying the potential differences. The Company expects that this new standard will not change the total amount of revenue recognized, but rather will shift the timing of when certain sales promotions are recognized to earlier in the product life cycle. The Company is currently unable to quantify the impact of this ASU on its consolidated financial statements until the Company has completed its full analysis.
Note 2. Business Combinations
Acquisition of OGIO International, Inc.
On January 11, 2017, the Company acquired all of the outstanding shares of capital stock of OGIO International, Inc. (“OGIO”), a leading manufacturer of high quality bags, accessories and apparel in the golf and lifestyle categories, in a cash transaction pursuant to the terms of a Share Purchase Agreement, by and among the Company, OGIO, and each of the shareholders and option holders of OGIO. The primary reason for the acquisition was to enhance the Company's presence in golf while also providing a platform for future growth in the lifestyle category.
The purchase price of the acquisition was allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values as of the date of acquisition in accordance with ASC Topic 820, "Fair Value Measurement." The excess between the purchase price and the fair value of the net identifiable tangible and intangible assets acquired and liabilities assumed
was allocated to goodwill. The Company determined the estimated fair values after review and consideration of relevant information, including discounted cash flows, quoted market prices and estimates made by management. The Company may adjust the purchase price allocation, as necessary, during the measurement period of up to one year after the acquisition closing date as it obtains more information as to facts and circumstances existing as of the acquisition date.
The acquired trade names/trademarks, customer and distributor relationships, inventory and non-compete agreements are subject to fair value measurements that were based primarily on significant inputs not observable in the market and thus represent Level 3 measurements (see Note 13). The fair value of furniture, fixtures, office equipment, leasehold improvements, computer equipment and warehouse equipment were all valued at their replacement cost, which the Company determined was the net book value of the assets on the date of the acquisition. Inventory was valued using the net realizable value approach, which was based on the estimated selling price in the ordinary course of business less reasonable disposal costs. The customer and distributor relationships were valued under the income approach based on the present value of future earnings. The trade name was valued under the royalty savings income approach method, which is equal to the present value of the after-tax royalty savings attributable to owning the trade name as opposed to paying a third party for its use. For this valuation the Company used a royalty rate of
7.5%
, which is reflective of royalty rates paid in market transactions, and a discount rate of
14.0%
on the future cash flows generated by the net after-tax savings. The goodwill of
$5,543,000
arising from the acquisition consists largely of the synergies expected from combining the operations of the Company and OGIO. The acquisition is treated as an asset purchase for tax purposes. As such, the Company expects to deduct all of the intangible assets for income tax purposes. All of the goodwill was assigned to the gear, accessories and other operating segment.
At the acquisition date, the total purchase price was valued at approximately
$66,032,000
. Due to the subsequent measurement of liabilities assumed in the acquisition, the purchase price was reduced to
$65,951,000
as of June 30, 2017. The Company incurred transaction costs of approximately
$3,052,000
, of which
$1,805,000
was recognized in general and administrative expenses during the six months ended June 30, 2017. The remainder was recognized in 2016.
The pro-forma effects of this acquisition would not have been material to the Company's results of operations in 2016 and are therefore not presented. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date based on the purchase price allocation (in thousands):
|
|
|
|
|
|
|
At January 11, 2017
|
Assets Acquired
|
|
|
Cash
|
|
$
|
8,061
|
|
Accounts receivable
|
|
8,038
|
|
Inventory
|
|
7,092
|
|
Other current assets
|
|
328
|
|
Property and equipment
|
|
2,369
|
|
Intangibles - trade name
|
|
49,700
|
|
Intangibles - customer lists
|
|
1,500
|
|
Intangibles - non-compete agreements
|
|
150
|
|
Goodwill
|
|
5,543
|
|
Total assets acquired
|
|
82,781
|
|
Liabilities Assumed
|
|
|
Accounts Payable and accrued liabilities
|
|
16,830
|
|
Net assets acquired
|
|
$
|
65,951
|
|
Note 3. Financing Arrangements
In addition to cash on hand, as well as cash generated from operations, the Company relies on its primary and Japan asset-based revolving credit facilities to manage seasonal fluctuations in liquidity and to provide additional liquidity when the Company’s operating cash flows are not sufficient to fund the Company’s requirements. As of
June 30, 2017
, the Company had
$6,231,000
in borrowings outstanding under all facilities,
$861,000
in outstanding letters of credit, and
$61,959,000
in cash and cash equivalents. At June 30, 2016, the Company had
$5,331,000
in borrowings outstanding under all facilities,
$951,000
in outstanding letters of credit, and
$67,619,000
in cash and cash equivalents. The combined maximum amount that could have been outstanding under all facilities on
June 30, 2017
, after letters of credit, was
$174,340,000
, resulting in total available liquidity including cash on hand
of
$236,299,000
compared to the maximum amount that could have been outstanding under all facilities on
June 30, 2016
, after letters of credit, of
$148,712,000
, resulting in total available liquidity including cash on hand of
$216,331,000
.
Primary Asset-Based Revolving Credit Facility
The Company's primary credit facility is a Loan and Security Agreement with Bank of America N.A. and other lenders (as amended, the “ABL Facility”), which provides a senior secured asset-based revolving credit facility of up to
$230,000,000
, comprised of a
$160,000,000
U.S. facility, a
$25,000,000
Canadian facility and a
$45,000,000
United Kingdom facility, in each case subject to borrowing base availability under the applicable facility. The amounts outstanding under the ABL Facility are secured by certain assets, including cash (to the extent pledged by the Company), inventory and accounts receivable of the Company’s subsidiaries in the United States, Canada and the United Kingdom.
As of
June 30, 2017
, the Company had
no
borrowings outstanding under the ABL Facility and
$861,000
in outstanding letters of credit. The maximum amount of additional indebtedness (as defined by the ABL Facility) that could have been outstanding on
June 30, 2017
, after outstanding borrowings and letters of credit, was approximately
$151,398,000
. The maximum availability under the ABL Facility fluctuates with the general seasonality of the business and increases and decreases with changes in the Company’s inventory and accounts receivable balances. The maximum availability is at its highest during the first half of the year when the Company’s inventory and accounts receivable balances are higher and is lower during the second half of the year when the Company's inventory levels decrease and its accounts receivable decrease as a result of cash collections and lower sales. Average outstanding borrowings during the
six
months ended
June 30, 2017
were
$39,500,000
, and the average amount available under the ABL Facility during the
six
months ended
June 30, 2017
, after outstanding borrowings and letters of credit, was approximately
$121,065,000
. Amounts borrowed under the ABL Facility may be repaid and borrowed as needed. The entire outstanding principal amount (if any) is due and payable on
June 23, 2019
.
The ABL Facility includes certain restrictions including, among other things, restrictions on the incurrence of additional debt, liens, stock repurchases and other restricted payments, asset sales, investments, mergers, acquisitions and affiliate transactions.
In addition, the ABL Facility imposes restrictions on the amount the Company could pay in annual cash dividends, including meeting certain restrictions on the amount of additional indebtedness and requirements to maintain a certain fixed charge coverage ratio under certain circumstances. The "fixed charge coverage ratio" is the ratio of (i) the 12-month trailing EBITDA (as defined in the ABL Facility) adjusted for capital expenditures and taxes paid, to (ii) interest expense and certain distributions paid in the trailing 12-month period adjusted for debt amortization, if any. These restrictions do not materially limit the Company's ability to pay future dividends at the current dividend rate.
As of
June 30, 2017
, the Company was in compliance with all financial covenants of the ABL Facility. Additionally, the Company is subject to compliance with a fixed charge coverage ratio covenant during, and continuing
30
days after, any period in which the Company’s borrowing base availability, as amended, falls below
$23,000,000
. The Company’s borrowing base availability was above
$23,000,000
during the
six
months ended
June 30, 2017
, and the Company was in compliance with the fixed charge coverage ratio as of
June 30, 2017
. Had the Company not been in compliance with the fixed charge coverage ratio as of
June 30, 2017
, the Company's maximum amount of additional indebtedness that could have been outstanding on
June 30, 2017
would have been reduced by
$23,000,000
.
The interest rate applicable to outstanding loans under the ABL Facility fluctuates depending on the Company’s “availability ratio," which is expressed as a percentage of (i) the average daily availability under the ABL Facility to (ii) the sum of the Canadian, the U.K. and the U.S. borrowing bases, as adjusted.
The applicable margin for any month could be reduced by 0.25% if the Company’s availability ratio is greater than or equal to 67% and the Company’s “leverage ratio” (as defined below) is less than 4.0 to 1.0 as of the last day of the month for which financial statements have been delivered, so long as no default or event of default exists.
The Company’s “leverage ratio” is the ratio of the amount of debt for borrowed money to the 12-month trailing EBITDA (as defined in the ABL Facility), each determined on a consolidated basis. At
June 30, 2017
, the Company’s trailing 12 month average interest rate applicable to its outstanding loans under the ABL Facility, not including the fees described below, was
3.03%
.
The ABL Facility provides for monthly fees ranging from
0.25%
to
0.375%
of the unused portion of the ABL Facility, depending on the prior month’s average daily balance of revolver loans and stated amount of letters of credit relative to lenders’ commitments.
The fees incurred in connection with the origination and amendment of the ABL Facility totaled
$5,021,000
, which are amortized into interest expense over the term of the ABL Facility agreement. Unamortized fees at
June 30, 2017
and December 31,
2016
totaled
$1,065,000
and
$1,297,000
, respectively, of which
$532,000
and
$519,000
were included in other current assets,
respectively, and
$533,000
and
$778,000
were included in other assets, respectively, in the accompanying consolidated condensed balance sheets.
In July 2017, the Company amended the ABL Facility and entered into a stretch term loan facility ("Stretch Facility") for
$60,000,000
that is in addition to the amounts available under the ABL Facility. Loans under the Stretch Facility ("Term Loans") bear interest at the current rates under the ABL Facility, plus
250
basis points. The Stretch Facility matures on the earlier of (i)
four years
from the commencement date of the facility and (ii) the maturity of the ABL Facility, and amortizes over a
three
year period, beginning in the second year of the facility. The Company must maintain a fixed charge coverage ratio of at least
1.0
to 1.0 and a leverage ratio of
4.0
to 1.0 or less at any time when there is
$20,000,000
or more outstanding in Term Loans. The Stretch Facility is collateralized by the same assets as those under the ABL Facility, and is subject to certain restrictions, including placing liens on certain assets, in addition to limits on certain distributions.
Japan ABL Facilities
The Company has a separate asset-based loan and guarantee agreement, as amended, between its subsidiary in Japan and The Bank of Tokyo-Mitsubishi UFG, Ltd and The Development Bank of Japan, which provides a credit facility of up to
2,000,000,000
Yen (or U.S.
$17,802,000
, using the exchange rate in effect as of
June 30, 2017
) over a
two
-year term, subject to borrowing base availability under the facility. The amounts outstanding are secured by certain assets, including eligible inventory. The Company had
700,000,000
Yen (or U.S.
$6,231,000
) in borrowings outstanding under this facility as of
June 30, 2017
. The maximum amount that could have been outstanding at
June 30, 2017
was
1,578,172,000
Yen (or U.S.
$14,042,000
). The facility also includes certain restrictions including covenants related to certain pledged assets and financial performance metrics. As of
June 30, 2017
, the Company was in compliance with these covenants. This facility is
subject to an effective interest rate equal to TIBOR plus 0.25%
. At
June 30, 2017
, the trailing 12-month average interest rate applicable to the Company's outstanding loans under this facility together with fees was
0.30%
.
During the first quarter of 2017, the Company entered into a second asset-based loan between its subsidiary in Japan and The Bank of Tokyo-Mitsubishi UFG, Ltd, which provides a credit facility of up to
1,000,000,000
Yen (or U.S.
$8,898,000
) over a
10
-month term, subject to borrowing base availability under the facility. The amounts outstanding are secured by certain assets, including eligible accounts receivable. The Company had
no
borrowings outstanding under this facility as of
June 30, 2017
. The maximum amount that could have been outstanding at
June 30, 2017
was
1,000,000,000
Yen (or U.S.
$8,898,000
). The facility also includes certain restrictions including covenants related to certain pledged assets and financial performance metrics. As of
June 30, 2017
, the Company was in compliance with these covenants. This facility is
subject to an effective interest rate equal to TIBOR plus 0.75%
. At
June 30, 2017
, the trailing 12-month average interest rate applicable to the Company's outstanding loans under this facility was
0.78%
.
Both facilities (the "Japan ABL Facilities") expire in January 2018.
Note 4. 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 reflects the potential dilution that could occur if securities, or other contracts to issue common stock, were exercised. Dilutive securities are included in the calculation of diluted earnings per common share using the treasury stock method in accordance with Accounting Standards Codification ("ASC") Topic 260, “Earnings per Share.” Dilutive securities include options granted pursuant to the Company’s stock option plans and outstanding restricted stock units and performance share units granted to employees and non-employee directors (see
Note 12
).
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,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Earnings per common share—basic
|
|
|
|
|
|
|
|
Net income attributable to Callaway Golf Company
|
$
|
31,443
|
|
|
$
|
34,105
|
|
|
$
|
57,132
|
|
|
$
|
72,495
|
|
Weighted-average common shares outstanding—basic
|
94,213
|
|
|
94,029
|
|
|
94,142
|
|
|
93,990
|
|
Basic earnings per common share
|
$
|
0.33
|
|
|
$
|
0.36
|
|
|
$
|
0.61
|
|
|
$
|
0.77
|
|
Earnings per common share—diluted
|
|
|
|
|
|
|
|
Net income attributable to Callaway Golf Company
|
$
|
31,443
|
|
|
$
|
34,105
|
|
|
$
|
57,132
|
|
|
$
|
72,495
|
|
Weighted-average common shares outstanding—basic
|
94,213
|
|
|
94,029
|
|
|
94,142
|
|
|
93,990
|
|
Options and restricted stock
|
1,984
|
|
|
1,864
|
|
|
1,931
|
|
|
1,668
|
|
Weighted-average common shares outstanding—diluted
|
96,197
|
|
|
95,893
|
|
|
96,073
|
|
|
95,658
|
|
Dilutive earnings per common share
|
$
|
0.33
|
|
|
$
|
0.36
|
|
|
$
|
0.59
|
|
|
$
|
0.76
|
|
For the three months ended
June 30, 2017
and 2016, securities outstanding totaling approximately
131,000
shares and
309,000
shares, respectively, comprised of stock options, have been excluded from the calculation of earnings per common share—diluted as their effect would be antidilutive. For the six months ended
June 30, 2017
and 2016, securities outstanding totaling approximately
141,000
shares and
361,000
shares, respectively, comprised of stock options and restricted stock units, have been excluded from the calculation of earnings per common share—diluted as their effect would be antidilutive.
Note 5. Inventories
Inventories are summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
Inventories:
|
|
|
|
Raw materials
|
$
|
47,243
|
|
|
$
|
46,451
|
|
Work-in-process
|
778
|
|
|
739
|
|
Finished goods
|
123,759
|
|
|
142,210
|
|
|
$
|
171,780
|
|
|
$
|
189,400
|
|
Note 6. Goodwill and Intangible Assets
Goodwill and intangible assets, consisting of trade names, trademarks, trade dress, patents and other intangible assets, were acquired in connection with the acquisition of Odyssey Sports, Inc. in 1997, FrogTrader, Inc. in 2004, (which represents the Company's pre-owned business), OGIO in 2017 (see
Note 2
) and certain foreign distributors. Internally developed intangible assets are expensed as incurred.
The Company’s goodwill and acquired intangible assets with indefinite lives are not amortized, but are subject to an annual impairment test. The Company performs an impairment analysis on its goodwill and intangible assets at least annually and whenever events or changes in circumstances indicate that the carrying value of such assets may not be fully recoverable. Acquired intangible assets with definite lives are amortized over their estimated useful lives and are tested for impairment only when impairment indicators are present.
Goodwill at
June 30, 2017
and December 31, 2016 was
$31,908,000
and
$25,593,000
, respectively. During the
six
months ended
June 30, 2017
, the Company recorded an addition to goodwill of
$5,543,000
as a result of the OGIO acquisition completed in January 2017. In addition, the goodwill balance increased
$772,000
due to foreign currency fluctuations during the period.
The following sets forth the intangible assets by major asset class (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful
Life
(Years)
|
|
June 30, 2017
|
|
December 31, 2016
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
Non-Amortizing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade name, trademark and trade dress and other
|
NA
|
|
$
|
138,290
|
|
|
|
$
|
—
|
|
|
|
$
|
138,290
|
|
|
$
|
88,590
|
|
|
|
$
|
—
|
|
|
|
$
|
88,590
|
|
Amortizing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
2-16
|
|
31,581
|
|
|
|
31,466
|
|
|
|
115
|
|
|
31,581
|
|
|
|
31,440
|
|
|
|
141
|
|
Other
|
1-10
|
|
9,631
|
|
|
|
8,076
|
|
|
|
1,555
|
|
|
7,981
|
|
|
|
7,981
|
|
|
|
—
|
|
Total intangible assets
|
|
|
$
|
179,502
|
|
|
|
$
|
39,542
|
|
|
|
$
|
139,960
|
|
|
$
|
128,152
|
|
|
|
$
|
39,421
|
|
|
|
$
|
88,731
|
|
The increase in intangible assets is related to the acquisition of non-amortizing trademarks in addition to amortizing intangibles in connection with the OGIO acquisition. Aggregate amortization expense related to intangible assets was approximately
$121,000
and
$25,000
for the
six
months ended
June 30, 2017
and 2016, respectively.
Amortization expense related to intangible assets at
June 30, 2017
in each of the next five fiscal years and beyond is expected to be incurred as follows (in thousands):
|
|
|
|
|
Remainder of 2017
|
$
|
126
|
|
2018
|
251
|
|
2019
|
238
|
|
2020
|
151
|
|
2021
|
150
|
|
2022
|
150
|
|
Thereafter
|
604
|
|
|
$
|
1,670
|
|
Note 7. Joint Venture
Effective July 1, 2016, the Company completed a joint venture, Callaway Apparel K.K. with its long-time apparel licensee, TSI Groove & Sports Co, Ltd., ("TSI"), a premier apparel manufacturer in Japan. The joint venture designs, manufactures and distributes Callaway-branded apparel, footwear and headwear in Japan. The Company contributed
$10,556,000
, primarily in cash, for a
52%
ownership of the joint venture, and TSI contributed
$9,744,000
, primarily in inventory, for the remaining
48%
. The Company has a majority voting percentage on matters pertaining to the business operations and significant management decisions of the joint venture, and as such, the Company consolidates the financial results of the joint venture with the financial results of the Company. The joint venture is consolidated one month in arrears.
As a result of the consolidation, during the three and six months ended
June 30, 2017
, the Company recorded net income attributable to the non-controlling interest of
$31,000
and
$222,000
, respectively, in its consolidated condensed statement of operations. During the three months ended June 30, 2017, the joint venture paid a dividend of
$974,000
to TSI, which was recorded as a reduction in non-controlling interests in the consolidated condensed financial statements as of June 30, 2017. Total non-controlling interests on the Company's consolidated condensed financial statements was
$9,132,000
and
$9,694,000
at
June 30, 2017
and December 31, 2016, respectively.
Note 8. Investments
Investment in Topgolf International, Inc.
The Company owns a minority interest in Topgolf International, Inc., doing business as the Topgolf Entertainment Group (“Topgolf”), the owner and operator of Topgolf entertainment centers, which ownership consists of common stock and various classes of preferred stock. In connection with this investment, the Company has a preferred partner agreement with Topgolf in which the Company has preferred signage rights, rights as the preferred supplier of golf products used or offered for use at Topgolf
facilities at prices no less than those paid by the Company’s customers, preferred retail positioning in Topgolf retail stores, access to consumer information obtained by Topgolf, and other rights incidental to those listed above.
The Company did not make any additional investment in Topgolf during the six months ended June 30, 2017. During the six months ended June 30, 2016, the Company invested an additional
$1,260,000
in preferred shares of Topgolf. In addition, in December 2015, the Company and Topgolf entered into a shareholder loan agreement, which resulted in a note receivable from Topgolf for
$3,200,000
. The loan was subject to an annual interest rate of
10.0%
and was due and payable on March 30, 2016. The loan was paid in full in February 2016.
In February 2016, Topgolf announced that Providence Equity Partners L.L.C. (“Providence Equity”) made a significant minority preferred stock investment in Topgolf (the “Providence Equity Investment”). As required by the terms of the Providence Equity Investment, Topgolf used a portion of the proceeds it received to repurchase shares from its existing shareholders, other than Providence Equity (the “Topgolf Repurchase Program”). In April 2016, the Company sold approximately
10.0%
or
$5,767,000
(on a cost basis) of its preferred shares in Topgolf under the Topgolf Repurchase Program for
$23,429,000
, and recognized a gain of approximately
$17,662,000
in other income (expense) during the second quarter of 2016.
As of each of
June 30, 2017
and December 31, 2016, the Company's total investment in Topgolf was
$48,997,000
. The Company's ownership percentage at
June 30, 2017
was approximately in the range of
14.0%
to
15.0%
. As of
June 30, 2017
, there were no impairment indicators present with respect to this investment. Based on prior observable market transactions, the Company believes that the fair value of its investment in Topgolf significantly exceeds its cost. However, the Company is currently unable to estimate the fair value of this investment as of
June 30, 2017
, as it was not practicable to do so and there were no recent identified events or changes in circumstances that had a significant effect on the fair value. In fiscal years beginning after December 15, 2017, in accordance with Subtopic 825-10 issued in January 2016, the Company would be required to report this investment at its estimated fair value, which could have a significant effect on the Company's financial position and results of operations. For further discussion, see "Recent Accounting Standards in Note 1.
The Company’s total ownership interest in Topgolf, including the Company's voting rights in the preferred shares of Topgolf, remains at less than 20.0% of the outstanding equity securities of Topgolf. As of
June 30, 2017
, the Company did not have the ability to significantly influence the operating and financing activities and policies of Topgolf, and accordingly, the Company’s investment in Topgolf is accounted for at cost in accordance with ASC Topic 325, “Investments—Other.”
Note 9. Product Warranty
The Company has a stated
two
-year warranty policy for its golf clubs. 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 following table provides a reconciliation of the activity related to the Company’s reserve for accrued warranty expense (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Beginning balance
|
$
|
5,945
|
|
|
$
|
6,350
|
|
|
$
|
5,395
|
|
|
$
|
5,706
|
|
Provision
|
2,202
|
|
|
1,503
|
|
|
4,124
|
|
|
3,240
|
|
Claims paid/costs incurred
|
(2,178
|
)
|
|
(1,681
|
)
|
|
(3,550
|
)
|
|
(2,774
|
)
|
Ending balance
|
$
|
5,969
|
|
|
$
|
6,172
|
|
|
$
|
5,969
|
|
|
$
|
6,172
|
|
Note 10. Income Taxes
The Company calculates its interim income tax provision in accordance with ASC 270, “Interim Reporting,” and ASC 740 “Accounting for Income Taxes” (together, “ASC 740”). At the end of each interim period, the Company estimates its annual effective tax rate and applies that rate to its ordinary quarterly earnings to calculate the tax related to ordinary income. The tax effects for other items that are excluded from ordinary income are discretely calculated and recognized in the period in which they occur.
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. Due to the Company’s improved profitability in 2015 and 2016, combined with future projections of profitability, the Company determined that the majority of its U.S. deferred tax assets were more likely than not to be realized and reversed a significant portion of the valuation allowance against those deferred tax assets as of December 31, 2016. The remaining valuation allowance on the Company’s U.S. deferred tax assets as of June 30, 2017 primarily relates to state net operating loss carryforwards and credits the Company estimates it may not be able to utilize in future periods. With respect to 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 income tax provision for the three months ended
June 30, 2017
and
2016
was
$16,050,000
and
$1,937,000
, respectively. The increase was primarily due to the recognition of income tax expense on the Company’s U.S. operations during the second quarter of 2017 as a result of the reversal of a significant portion of the valuation allowance on the Company's deferred tax assets in the United States in the fourth quarter of 2016. During the second quarter of 2016, the Company's full valuation allowance established against the Company's U.S. deferred tax assets resulted in minimal U.S. tax expense recorded for the quarter. The income tax provision for the six months ended
June 30, 2017
and
2016
was
$29,256,000
and
$3,338,000
, respectively. The increase was primarily due to the recognition of income tax expense on the Company’s U.S. operations during the first six months of 2017 as a result of the reversal of a significant portion of the valuation allowance on the Company's deferred tax assets in the United States in the fourth quarter of 2016.
At
June 30, 2017
, the gross liability for income taxes associated with uncertain tax positions was
$8,745,000
. Of this amount,
$1,361,000
would benefit the Company’s consolidated condensed financial statements and effective income tax rate if favorably settled. The unrecognized tax benefit liabilities are expected to decrease by approximately
$390,000
during the next 12 months. The gross liability for uncertain tax positions increased by
$233,000
and
$489,000
for the three and
six months ended June 30, 2017
, respectively. The increase was primarily due to increases for tax positions expected to be taken in the current tax year.
The Company recognizes interest and penalties related to income tax matters in income tax expense. For the three months ended
June 30, 2017
and
2016
, the Company's provision for income taxes includes expense of
$62,000
and
$54,000
, respectively, related to the recognition of interest and penalties. For the six months ended
June 30, 2017
and
2016
, the Company's provision for income taxes includes expense of
$109,000
and
$29,000
, respectively. As of
June 30, 2017
and December 31,
2016
, the gross amount of accrued interest and penalties included in income taxes payable in the accompanying consolidated condensed balance sheets was
$1,426,000
and
$1,317,000
, 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 (United States)
|
|
2008 and prior
|
Canada
|
|
2009 and prior
|
Japan
|
|
2010 and prior
|
South Korea
|
|
2011 and prior
|
United Kingdom
|
|
2012 and prior
|
Pursuant to Section 382 of the Internal Revenue Code, use of the Company's net operating losses and credit carry-forwards may be limited significantly if the Company were to experience a cumulative change in ownership of the Company's stock by “5-percent shareholders” that exceeds 50% over a rolling three-year period. The Company does not believe there has been a cumulative change in ownership in excess of 50% during any rolling three-year period, and the Company continues to monitor changes in its ownership. If such a cumulative change did occur in any three-year period and the Company were limited in the amount of losses it could use to offset taxable income, the Company's results of operations and cash flows could be adversely impacted.
Note 11. Commitments & Contingencies
Legal Matters
The Company is subject to routine legal claims, proceedings and investigations incident to its business activities, including claims, proceedings, and investigations relating to commercial disputes and employment matters. The Company also receives from time to time information claiming that products sold by the Company infringe or may infringe patent, trademark or other intellectual property rights of third parties. One or more such claims of potential infringement could lead to litigation, the need to obtain licenses, the need to alter a product to avoid infringement, a settlement or judgment or some other action or material loss by the Company, which also could adversely affect the Company’s overall ability to protect its product designs and ultimately limit its future success in the marketplace. In addition, the Company is occasionally subject to non-routine claims, proceedings or investigations.
The Company regularly assesses such matters to determine the degree of probability that the Company will incur a material loss as a result of such matters as well as the range of possible loss. An estimated loss contingency is accrued in the Company’s financial statements if it is probable the Company will incur a loss and the amount of the loss can be reasonably estimated. The Company reviews all claims, proceedings and investigations at least quarterly and establishes or adjusts any accruals for such matters to reflect the impact of negotiations, settlements, advice of legal counsel and other information and events pertaining to a particular matter. All legal costs associated with such matters are expensed as incurred.
Historically, the claims, proceedings and investigations brought against the Company, individually and in the aggregate, have not had a material adverse effect on the consolidated results of operations, cash flows or financial position of the Company. The Company believes that it has valid legal defenses to the matters currently pending against the Company. These matters are inherently unpredictable and the resolutions of these matters are subject to many uncertainties and the outcomes are not predictable with assurance. Consequently, management is unable to estimate the ultimate aggregate amount of monetary loss, amounts covered by insurance or the financial impact that will result from such matters. In addition, the Company cannot assure that it will be able to successfully defend itself in those matters or that any amounts accrued are sufficient. The Company does not believe that the matters currently pending against the Company will have a material adverse effect on the Company’s consolidated business, financial condition, cash flows or results of operations.
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 golfers and other endorsers, employment and consulting agreements, and intellectual property licensing agreements pursuant to which the Company is required to pay royalty fees. It is not possible to determine the amounts the Company will ultimately be required to pay under these agreements as they are subject to many variables including performance-based bonuses, severance arrangements, the Company’s sales levels, and reductions in payment obligations if designated minimum performance criteria are not achieved. As of
June 30, 2017
, the Company has entered into many of these contractual agreements with terms ranging from
one
to
six
years. The minimum obligation that the Company is required to pay under these agreements is
$69,717,000
over the next
six
years. 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. Future minimum commitments as of
June 30, 2017
, are as follows (in thousands):
|
|
|
|
|
Remainder of 2017
|
$
|
40,542
|
|
2018
|
16,706
|
|
2019
|
7,188
|
|
2020
|
3,624
|
|
2021
|
1,654
|
|
2022
|
3
|
|
|
$
|
69,717
|
|
Other Contingent Contractual Obligations
During its normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These include (i) intellectual property indemnities to the
Company’s customers and licensees in connection with the use, sale and/or license of Company product or trademarks, (ii) indemnities to various lessors in connection with facility leases for certain claims arising from such facilities or leases, (iii) indemnities to vendors and service providers pertaining to the goods and services provided to the Company or based on the negligence or willful misconduct of the Company and (iv) indemnities involving the accuracy of representations and warranties in certain contracts. In addition, the Company has consulting agreements that provide for payment of nominal fees upon the issuance of patents and/or the commercialization of research results. The Company has also issued guarantees in the form of standby letters of credit of
$861,000
as of
June 30, 2017
.
The duration of these indemnities, commitments and guarantees varies, and in certain cases, may be indefinite. The majority of these indemnities, commitments and guarantees do not provide for any limitation on the maximum amount of future payments the Company could be obligated to make. Historically, costs incurred to settle claims related to indemnities have not been material to the Company’s financial position, results of operations or cash flows. In addition, the Company believes the likelihood is remote that payments under the commitments and guarantees described above will have a material effect on the Company’s financial condition. The fair value of indemnities, commitments and guarantees that the Company issued during the
six
months ended
June 30, 2017
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 monetary payments and health benefits, upon the termination of employment following a change in control.
Note 12. Share-Based Employee Compensation
As of
June 30, 2017
, the Company had
two
shareholder approved stock plans under which shares were available for equity-based awards: the Callaway Golf Company Amended and Restated 2004 Incentive Plan (the "2004 Incentive Plan") and the 2013 Non-Employee Directors Stock Incentive Plan (the "2013 Directors Plan"). From time to time, the Company grants stock options, restricted stock units, performance share units, phantom stock units, stock appreciation rights and other awards under these plans.
The table below summarizes the amounts recognized in the financial statements for the
six months ended
June 30, 2017
and 2016 for share-based compensation, including expense for stock options, restricted stock units, phantom stock units, cash settled stock appreciation rights and performance share units.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(In thousands)
|
|
|
|
|
Cost of sales
|
$
|
146
|
|
|
$
|
180
|
|
|
$
|
363
|
|
|
$
|
322
|
|
Operating expenses
|
2,039
|
|
|
2,303
|
|
|
5,007
|
|
|
4,213
|
|
Total cost of share-based compensation included in income, before income tax
|
$
|
2,185
|
|
|
$
|
2,483
|
|
|
$
|
5,370
|
|
|
$
|
4,535
|
|
Stock Options
Stock options granted under the 2004 Incentive Plan are valued using the Black-Scholes option-pricing model on the date of grant. The model uses various assumptions, including a risk-free interest rate, the estimated term of the options, the estimated stock price volatility, and the estimated dividend yield. Compensation expense for stock options is recognized over the vesting period and is reduced by an estimate for forfeitures, which is based on the Company’s historical forfeitures of unvested options and awards.
There were
no
stock options granted during the first six months of 2017 or 2016. Total compensation expense recognized for stock options during the three months ended
June 30, 2017
and 2016 was
$9,000
and
$8,000
, respectively. Total compensation expense recognized for stock options during the six months ended
June 30, 2017
and 2016 was
$17,000
and
$129,000
, respectively. At
June 30, 2017
, the total amount of unamortized expense related to stock options was
$31,000
, which will be recognized over a weighted-average period of
0.9
years.
Restricted Stock Units
Restricted stock units awarded under the 2004 Incentive Plan and the 2013 Directors Plan are recorded at the Company’s closing stock price on the date of grant. Restricted stock units generally vest over a
one
- to
three
-year period. Compensation expense for restricted stock units is recognized over the vesting period and is reduced by an estimate for forfeitures. During the three months ended
June 30, 2017
and 2016, the Company granted
60,000
and
43,000
shares underlying restricted stock units, respectively, at a weighted average grant-date fair value of
$12.04
and
$9.22
, respectively. During the six months ended
June 30, 2017
and 2016, the Company granted
526,000
and
539,000
shares underlying restricted stock units, respectively, at a weighted average grant-date fair value of
$10.35
and
$8.66
, respectively.
Total compensation expense, net of estimated forfeitures, recognized for restricted stock units during the three months ended
June 30, 2017
and
2016
was
$1,439,000
and
$1,062,000
, respectively, and
$2,660,000
and
$2,102,000
, for the six months ended
June 30, 2017
and
2016
, respectively. At
June 30, 2017
, the Company had
$9,395,000
of total unamortized compensation expense related to non-vested restricted stock units under the Company’s share-based payment plans. That cost is expected to be recognized over a weighted-average period of
2.6 years
.
Performance Share Units
Performance share units granted under the 2004 Incentive Plan are stock-based awards in which the number of shares ultimately received depends on the Company's performance against specified metrics over a
one
- to
three
-year performance period from the date of grant. These performance metrics are established by the Company at the beginning of the performance period. At the end of the performance period, the number of shares of stock that could be issued is fixed based upon the degree of achievement of the performance goals. The number of shares that could be issued can range from
0%
to
200%
of the participant's target award. Performance share units are initially valued at the Company's closing stock price on the date of grant. Compensation expense, net of estimated forfeitures, is recognized over the vesting period and will vary 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 on the third anniversary of the date of grant.
The Company granted
370,000
and
420,000
shares underlying performance share units during the six months ended
June 30, 2017
and 2016, respectively, at a weighted average grant-date fair value of
$10.10
and
$8.61
per share, respectively. There were
no
shares underlying performance share units granted during the three months ended
June 30, 2017
and 2016. The awards granted in 2017 and 2016 are subject to a
three
-year performance period provided that (i) if certain first year performance goals are achieved, the participant could earn up to
50%
of the three-year target award shares, subject to continued service through the vesting date, and (ii) if certain cumulative first- and second-year performance goals are achieved, the participant could earn up to an aggregate of
80%
of the three-year target award shares (which includes any shares earned during the first year), subject to continued service through the vesting date. Based on the Company’s performance in 2016, participants earned a minimum of
50%
of the target award shares granted in 2016, subject to continued service through the vesting date.
During the three months ended
June 30, 2017
and 2016, the Company recognized total compensation expense, net of estimated forfeitures, for performance share units of
$737,000
and
$1,064,000
, respectively, and
$2,725,000
and
$2,097,000
for the six months ended
June 30, 2017
and
2016
, respectively. At
June 30, 2017
, unamortized compensation expense related to these awards was
$8,411,000
, which is expected to be recognized over a weighted-average period of
1.5
years.
Stock Appreciation Rights
Cash settled stock appreciation rights ("SARs") granted under the 2004 Incentive Plan are valued using the Black-Scholes option-pricing model on the date of grant. SARs are subsequently remeasured at each interim reporting period based on a revised Black-Scholes value until they are exercised. SARs generally vest over a
three
-year period. As of
June 30, 2017
, all outstanding SARs were fully vested.
There were
no
SARs granted during the first
six
months of 2017 or 2016. The Company reversed
$32,000
and recognized
$350,000
of compensation expense related to previously granted SARs during the three months ended
June 30, 2017
and 2016, respectively, and recognized
$0
and
$207,000
of compensation expense related to previously granted SARs during the six months ended
June 30, 2017
and 2016, respectively. Accrued compensation expense for these awards was
$0
and
$224,000
at
June 30, 2017
and December 31, 2016, respectively, which was recorded in accrued employee compensation and benefits in the accompanying consolidated condensed balance sheets.
Note 13. 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 14
) that are measured at fair value on a recurring basis by the above pricing levels at
June 30, 2017
and December 31,
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
June 30, 2017
|
|
|
|
|
|
|
|
Foreign currency forward contracts—asset position
|
$
|
328
|
|
|
$
|
—
|
|
|
$
|
328
|
|
|
$
|
—
|
|
Foreign currency forward contracts—liability position
|
(3,454
|
)
|
|
—
|
|
|
(3,454
|
)
|
|
—
|
|
|
$
|
(3,126
|
)
|
|
$
|
—
|
|
|
$
|
(3,126
|
)
|
|
$
|
—
|
|
December 31, 2016
|
|
|
|
|
|
|
|
Foreign currency forward contracts—asset position
|
$
|
3,524
|
|
|
$
|
—
|
|
|
$
|
3,524
|
|
|
$
|
—
|
|
Foreign currency forward contracts—liability position
|
(85
|
)
|
|
—
|
|
|
(85
|
)
|
|
—
|
|
|
$
|
3,439
|
|
|
$
|
—
|
|
|
$
|
3,439
|
|
|
$
|
—
|
|
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 other comprehensive income, and in other income (expense) for non-designated foreign currency forward contracts (see Note 14).
Disclosures about the Fair Value of Financial Instruments
The carrying values of cash and cash equivalents at
June 30, 2017
and December 31,
2016
are categorized within Level 1 of the fair value hierarchy due to the short-term nature of these balances. The table below illustrates information about fair value relating to the Company’s financial assets and liabilities that are recognized in the accompanying consolidated balance sheets as of
June 30, 2017
and December 31,
2016
, as well as the fair value of contingent contracts that represent financial instruments (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
Carrying
Value
|
|
Fair
Value
|
|
Carrying
Value
|
|
Fair
Value
|
Japan ABL Facilities
(1)
|
$
|
6,231
|
|
|
$
|
6,231
|
|
|
$
|
11,966
|
|
|
$
|
11,966
|
|
Standby letters of credit
(2)
|
$
|
861
|
|
|
$
|
861
|
|
|
$
|
823
|
|
|
$
|
823
|
|
Money market funds
(3)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
69,081
|
|
|
$
|
69,081
|
|
|
|
(1)
|
The carrying value of the amount outstanding under the Company's Japan ABL Facilities 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. See Note 2 for information on the Company's credit facilities, including certain risks and uncertainties related thereto.
|
|
|
(2)
|
The carrying value of the Company's standby letters of credit approximates the fair value as they represent the Company’s contingent obligation to perform in accordance with the underlying contracts. There were no amounts outstanding under these
|
letters of credit as of
June 30, 2017
and December 31,
2016
. The fair value of this contingent obligation is categorized within Level 2 of the fair value hierarchy.
|
|
(3)
|
The carrying value of the money market funds approximates fair value as the funds are highly liquid and short-term in nature. The funds seek to maintain a stable net asset value of $1.00 per share, and the market value per share of these funds are available in active markets. As such, they are categorized within Level 1 of the fair value hierarchy. The money market funds accrue dividends, which are reinvested and reflected in the carrying value as of December 31, 2016. There were no money market funds outstanding as of
June 30, 2017
.
|
Nonrecurring Fair Value Measurements
The Company measures certain assets at fair value on a nonrecurring basis at least annually or when certain indicators are present. These assets include long-lived assets, goodwill and non-amortizing intangible assets that are written down to fair value when they are held for sale or determined to be impaired. During each of the
six months ended
June 30, 2017
and
2016
, there were no impairment indicators related to the Company's assets that are measured at fair value on a nonrecurring basis.
Note 14. 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 part of its strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates, the Company uses designated cash flow hedges and non-designated hedges in the form of foreign currency forward contracts 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 accounts for its foreign currency forward contracts in accordance with ASC Topic 815, "Derivatives and Hedging ("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 other comprehensive income and released into earnings as a component of cost of goods sold or net sales during the period in which the hedged transaction takes place. Gains and losses on the ineffective portion of hedges (hedges that do not meet accounting requirements due to ineffectiveness) and derivatives that are not elected for hedge accounting treatment are immediately recorded in earnings as a component of other income (expense).
Foreign currency forward 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. The Company does not enter into foreign currency forward 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 foreign currency forward contracts as well as the location of the asset and/or liability on the consolidated condensed balance sheets at
June 30, 2017
and December 31,
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
June 30, 2017
|
|
December 31, 2016
|
Balance Sheet Location
|
|
Fair Value
|
|
Balance Sheet Location
|
|
Fair Value
|
Derivatives designated as cash flow hedging instruments:
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
Other current assets
|
|
$
|
39
|
|
|
Other current assets
|
|
$
|
2,660
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
Other current assets
|
|
$
|
289
|
|
|
Other current assets
|
|
$
|
864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives
|
June 30, 2017
|
|
December 31, 2016
|
Balance Sheet Location
|
|
Fair Value
|
|
Balance Sheet Location
|
|
Fair Value
|
Derivatives designated as cash flow hedging instruments:
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
Accounts payable and
accrued expenses
|
|
$
|
1,004
|
|
|
Accounts payable and
accrued expenses
|
|
$
|
28
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
Accounts payable and
accrued expenses
|
|
$
|
2,450
|
|
|
Accounts payable and
accrued expenses
|
|
$
|
57
|
|
The Company's foreign currency forward contracts 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, 2017
and December 31,
2016
.
Cash Flow Hedging Instruments
Beginning in January 2015, the Company entered into foreign currency forward contracts designated as qualifying cash flow hedging instruments 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, 2017
and December 31,
2016
, the notional amounts of the Company's foreign currency forward contracts designated as cash flow hedge instruments were approximately
$24,847,000
and
$27,325,000
, respectively. The reporting of gains and losses on these cash flow hedging instruments depends on whether the gains or losses are effective at offsetting changes in the cash flows of the underlying hedged items. The Company uses the critical terms method to measure the effectiveness of the foreign currency forward contracts and evaluates the effectiveness on a quarterly basis. The effective portion of the gains and losses on the hedging instruments are recorded in other comprehensive income until recognized in earnings during the period that the hedged transactions take place. Any ineffective portion of the gains and losses from the hedging instruments is recognized in earnings immediately. The Company would discontinue hedge accounting prospectively (i) if it is determined that the derivative is no longer effective in offsetting changes in the cash flows of a hedged item, (ii) when the derivative expires or is sold, terminated, or exercised, (iii) if it becomes probable that the forecasted transaction being hedged by the derivative will not occur, (iv) if a hedged firm commitment no longer meets the definition of a firm commitment, or (v) if it is determined that designation of the derivative as a hedge instrument is no longer appropriate. The Company estimates the fair value of its foreign currency forward contracts based on pricing models using current market rates. These contracts are classified under Level 2 of the fair value hierarchy (see
Note 13
).
As of
June 30, 2017
, the Company recorded a net loss of
$2,302,000
in other comprehensive income (loss) related to its hedging activities. Of this amount, net gains of
$414,000
and
$1,316,000
for the three and six months ended June 30, 2017, respectively, were relieved from other comprehensive income and recognized in cost of goods sold for the underlying intercompany sales that were recognized. There were
no
ineffective hedge gains or losses recognized during the three months ended
June 30, 2017
. Gains on forward points of
$92,000
and
$247,000
were expensed as incurred for the three and six months ended
June 30, 2017
, respectively. Based on the current valuation, the Company expects to reclassify net losses of
$1,170,000
from accumulated other comprehensive income (loss) into net earnings during the next 12 months.
The Company recognized net gains of
$272,000
and
$571,000
in cost of goods sold and net sales, respectively, for the six months ended June 30, 2016.
The following tables summarize the net effect of all cash flow hedges on the consolidated condensed financial statements for the
six
months ended
June 30, 2017
(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
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Foreign currency forward contracts
|
|
$
|
(48
|
)
|
|
$
|
57
|
|
|
$
|
(2,302
|
)
|
|
$
|
(1,614
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Foreign currency forward contracts
|
|
$
|
414
|
|
|
$
|
(629
|
)
|
|
$
|
1,316
|
|
|
$
|
(843
|
)
|
The following table details the amounts reclassified from accumulated other comprehensive loss to cost of goods sold, as well as changes in foreign currency translation for the three months ended
June 30, 2017
. Amounts are in thousands.
|
|
|
|
|
|
Accumulated other comprehensive loss, December 31, 2016
|
|
$
|
(18,466
|
)
|
Change in fair value of derivative instruments
|
|
(2,302
|
)
|
Net gains reclassified from accumulated other comprehensive income to cost of goods sold
|
|
(1,316
|
)
|
Foreign currency translation adjustments
|
|
8,571
|
|
Accumulated other comprehensive loss, June 30, 2017, before tax
|
|
(13,513
|
)
|
Income tax expense related to derivative instruments
|
|
798
|
|
Less: Comprehensive income attributable to non-controlling interest
|
|
(190
|
)
|
Accumulated other comprehensive loss, June 30, 2017, after tax and non-controlling interest
|
|
$
|
(12,905
|
)
|
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, 2017
and December 31, 2016, the notional amounts of the Company’s foreign currency forward contracts used to mitigate the exposures discussed above were approximately
$74,535,000
and
$14,821,000
, respectively. The increase in foreign currency forward contracts reflects the general timing of when the Company enters into these contracts. 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 statement of operations. The foreign currency contracts are classified under Level 2 of the fair value hierarchy (see
Note 13
).
The following table summarizes the location of net gains and losses in the consolidated condensed statements of operations that were recognized during the
six months ended
June 30, 2017
and 2016, respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Net Loss Recognized in Income on Derivative Instruments
|
|
Amount of Net Loss Recognized in Income on
Derivative Instruments
|
Derivatives not designated as hedging instruments
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Foreign currency forward contracts
|
|
Other income (expense), net
|
|
$
|
(1,128
|
)
|
|
$
|
(3,546
|
)
|
|
$
|
(6,303
|
)
|
|
$
|
(9,858
|
)
|
In addition, for the three months ended
June 30, 2017
and 2016, the Company recognized net foreign currency gains related to transactions with its foreign subsidiaries of
$24,000
and
$1,353,000
, respectively. In addition, for the six months ended
June 30, 2017
and 2016, the Company recognized net foreign currency gains related to transactions with its foreign subsidiaries of
$699,000
and
$2,665,000
, respectively.
Note 15. Segment Information
As a result of the Company's recently completed apparel joint venture in Japan in July 2016, as well as the Company's recent acquisition of OGIO in January 2017, the Company reassessed its operating segments during the first quarter of 2017 consistent with the way management reviews it's business operations on an ongoing basis. With the addition of the apparel joint venture and OGIO acquisition, the Company anticipates generating significant growth within its accessories and other product category that
was previously included within the Company's golf clubs segment. As a result, and based on the Company's assessment, starting as of January 1, 2017, sales generated from golf apparel and footwear, golf bags, golf gloves, travel gear, headwear and other golf-related accessories, OGIO branded gear and accessories, retail apparel sales from the Company's joint venture in Japan, in addition to royalties from licensing of the Company’s trademarks and service marks for various soft goods will be included in the gear, accessories and other operating segment. The golf clubs segment will now consist of Callaway Golf woods, hybrids, irons and wedges, Odyssey putters, including Toulon Design putters by Odyssey, packaged sets and sales of pre-owned golf clubs. The golf balls segment consists of Callaway Golf and Strata balls that are designed, manufactured and sold by the Company. The Company's operating segments are organized on the basis of products. There are no significant intersegment transactions.
The table below contains information utilized by management to evaluate its operating segments for the interim periods presented (in thousands). Prior period amounts have been reclassified to conform with the current period presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2017
|
|
2016
(1)
|
|
2017
|
|
2016
(1)
|
Net sales:
|
|
|
|
|
|
|
|
Golf Clubs
|
$
|
196,291
|
|
|
$
|
164,451
|
|
|
$
|
389,882
|
|
|
$
|
359,512
|
|
Golf Balls
|
48,767
|
|
|
46,996
|
|
|
96,991
|
|
|
88,412
|
|
Gear, Accessories and Other
|
59,490
|
|
|
34,147
|
|
|
126,602
|
|
|
71,723
|
|
|
$
|
304,548
|
|
|
$
|
245,594
|
|
|
$
|
613,475
|
|
|
$
|
519,647
|
|
Income before income taxes:
|
|
|
|
|
|
|
|
Golf Clubs
|
$
|
38,445
|
|
|
$
|
17,973
|
|
|
$
|
73,398
|
|
|
$
|
53,414
|
|
Golf Balls
|
10,939
|
|
|
7,534
|
|
|
22,460
|
|
|
18,140
|
|
Gear, Accessories and Other
|
11,877
|
|
|
6,696
|
|
|
21,496
|
|
|
16,158
|
|
Reconciling items
(2)
|
(13,737
|
)
|
|
3,839
|
|
|
(30,744
|
)
|
|
(11,879
|
)
|
|
$
|
47,524
|
|
|
$
|
36,042
|
|
|
$
|
86,610
|
|
|
$
|
75,833
|
|
Additions to long-lived assets:
|
|
|
|
|
|
|
|
Golf Clubs
|
$
|
2,817
|
|
|
$
|
1,260
|
|
|
$
|
6,612
|
|
|
$
|
3,969
|
|
Golf Balls
|
2,553
|
|
|
629
|
|
|
5,088
|
|
|
1,572
|
|
Gear, Accessories and Other
|
1,024
|
|
|
316
|
|
|
1,526
|
|
|
497
|
|
|
$
|
6,394
|
|
|
$
|
2,205
|
|
|
$
|
13,226
|
|
|
$
|
6,038
|
|
|
|
(1)
|
Prior period amounts have been reclassified to conform to the current year presentation as the result of the change in operating segments as of January 1, 2017.
|
|
|
(2)
|
Reconciling items represent corporate general and administrative expenses and other income (expense) not included by management in determining segment profitability. The change in reconciling items for the three and six months ended June 30, 2017 compared to the same periods in 2016 was primarily due to a
$17,662,000
gain recognized in the second quarter of 2016 in connection with the sale of approximately 10% of the Company's investment in Topgolf. For further information see Note 8 "Investments."
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
(1)
|
Total Assets:
(2)
|
|
|
|
Golf Clubs
|
$
|
257,247
|
|
|
$
|
277,469
|
|
Golf Balls
|
43,265
|
|
|
42,460
|
|
Gear, Accessories and Other
|
103,790
|
|
|
38,270
|
|
Reconciling items
|
450,862
|
|
|
443,083
|
|
|
$
|
855,164
|
|
|
$
|
801,282
|
|
Goodwill:
|
|
|
|
Golf Clubs
|
$
|
26,365
|
|
|
$
|
25,593
|
|
Golf Balls
|
—
|
|
|
—
|
|
Gear, Accessories and Other
|
5,543
|
|
|
—
|
|
|
$
|
31,908
|
|
|
$
|
25,593
|
|
|
|
(1)
|
Prior period amounts have been reclassified to conform to the current year presentation as the result of the change in operating segments as of January 1, 2017.
|
|
|
(2)
|
Total assets by reportable segment are comprised of net inventory, certain property, plant and equipment, intangible assets and goodwill. Reconciling items represent unallocated corporate assets not segregated between the three segments including cash and cash equivalents, net accounts receivable, and deferred tax assets.
|
Note 16. Subsequent Event
Acquisition of TravisMathew, LLC
On August 3, 2017, the Company announced it has entered into a definitive agreement to acquire TravisMathew, LLC, a high-growth golf and lifestyle apparel company, for
$125,500,000
in an all-cash transaction, subject to customary working capital adjustments. The Company believes this acquisition will align with the Company's business, growth strategy, brands and culture, and will allow the Company to further diversify its business into areas tangential to golf. The acquisition is subject to customary closing conditions, including security regulatory approvals, and is expected to close in the third quarter of 2017.