NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. The Company
Callaway Golf Company (the “Company,” “Callaway” or “Callaway Golf”), a Delaware corporation, together with its wholly-owned subsidiaries, is a modern golf and active lifestyle leader that provides world-class golf entertainment experiences, designs and manufactures premium golf equipment, and sells golf and active lifestyle apparel and other accessories through its family of brand names which include Topgolf International, Inc. ("Topgolf"), Callaway Golf, Odyssey, OGIO, TravisMathew and Jack Wolfskin.
On March 8, 2021, the Company completed a merger with Topgolf in an all-stock transaction. Under Topgolf, the Company operates state-of-the-art open-air golf and entertainment venues worldwide which provide consumers of all skill-levels an opportunity to participate in a "gamified" version of the sport of golf in an off-course setting utilizing innovative ball-tracking technology.
Under its various brand names, the Company designs and manufactures high quality golf clubs and golf balls, as well as premium golf, lifestyle and outdoor apparel, gear and accessories. The Company's family of products are sold in over 120 countries worldwide to a variety of wholesale customers and directly to consumers. The Company also licenses its trademarks and service marks to third parties in exchange for a royalty fee.
The Company's products and brands are reported under three operating segments: Topgolf, which includes the operations of the Company's Topgolf business; Golf Equipment, which includes the operations of the Company's golf clubs and golf balls business; and Apparel, Gear and Other, which includes the operations of the Company's soft goods business marketed under the Callaway, TravisMathew and Jack Wolfskin brand names.
Note 2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its domestic and foreign subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. 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 financial statements for the year ended December 31, 2021 is from March 8, 2021 through January 2, 2022. Additionally, based on the Company's assessment of the combined business, the Company modified the presentation of its consolidated statements of operations for the year ended December 31, 2021 and 2020. For further information about the merger with Topgolf, see Note 6.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("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 the fair value of acquired assets and liabilities, assessing intangible assets and goodwill for impairment, determining the incremental borrowing rate for operating and financing leases, in addition to provisions for warranty, expected credit losses, inventory obsolescence, sales returns, future price concessions, and tax contingencies and valuation allowances as well as 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 Topic 842; 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 adoption of this ASU will not impact the Company's consolidated 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 Company has convertible notes with a cash conversion feature that was recognized in equity at the time of issuance (Note 7). As such, the Company will adopt this ASU as of January 1, 2022 under the modified retrospective method of transition. Upon adoption, the Company will (1) derecognize the portion of the cash conversion feature that was accounted for in equity in addition to the remaining unamortized debt discount balance; (2) record a cumulative adjustment in beginning retained earnings representing the reversal of the debt discount amortization recorded in interest expense in prior periods; (3) reclassify the debt issuance costs recorded in equity as an offset to the convertible notes liability, as well as recognize a cumulative adjustment in beginning retained earnings representing the amortization that would have been recognized as interest expense in prior periods; and (4) derecognize the deferred tax liability accounted for in equity and record a cumulative adjustment in beginning retained earnings representing the tax benefit recognized in prior periods. Combined, these adjustments will result in a reduction in additional paid-in capital of $57,080,000, an increase to the convertible debt liability of $57,938,000, a decrease in the deferred tax liability of $13,239,000 and an increase in beginning retained earnings of $12,381,000. In addition, in periods when net income is reported, the Company will use the if-converted method for calculating diluted earnings per share, which will increase net income by the interest expense recognized during the period in connection with the convertible notes, and the diluted share count by approximately 14,700,000 shares.
Adoption of New Accounting Standards
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires an entity to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC Topic 606. The amendments in this update are effective for fiscal years beginning after December 15, 2022, with early adoption permitted for public organizations whose financial statements have not yet been issued. The Company early adopted this guidance during the year ended December 31, 2021, and derecognized a $3,600,000 deferred revenue haircut with a corresponding increase to Goodwill on its consolidated balance sheet as of December 31, 2021, which was previously included in the liabilities assumed in connection with the Topgolf merger as of March 8, 2021. The Company subsequently recognized $1,300,000 of this deferred revenue in its consolidated statement of operations for the year ended December 31, 2021.
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 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. This 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 Topic 848, 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" and simplifies certain U.S. GAAP requirements. This ASU did not have a material impact on the Company's consolidated financial statements or disclosures.
Significant Accounting Policies
Revenue Recognition
The Company accounts for revenue recognition of products and services in accordance with ASC Topic 606, “Revenue Recognition” (“ASC Topic 606”), "Revenue from Contracts with Customers." See Note 4.
Products 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 a performance obligation to 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 within 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 statements of operations and the obligation is included in accounts payable and accrued expenses on the Company’s consolidated 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 and game credit breakage. 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 or less.
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 franchise fees are recognized over the franchise term for each venue, which generally ranges from 15 to 20 years. Revenue from sales-based royalties is recognized as the related sales occur.
Leasing revenue is recognized on non-cancelable sales-type lease agreements related to the licensing of Toptracer software and hardware to driving ranges and golf courses.
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.
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 to the respective net revenue, trade accounts receivable, and sales program liability accounts.
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 years ended December 31, 2021, 2020 and 2019. Historically, the Company's actual amount of variable consideration related to these sales programs has not been materially different from its estimates.
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 consist 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 and consist of, but are not limited to, labor, rent, occupancy costs, travel and marketing expenses. 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, distribution and venue operations), amortization of intangible assets, and other miscellaneous expenses.
Research and Development Expenses
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.
Business Combinations
The Company uses its best estimates and assumptions to determine the fair value of tangible and intangible assets acquired and liabilities assumed, as well as the uncertain tax positions and tax-related valuation allowances that are initially recorded in connection with a business combination. These estimates and assumptions are uncertain and may require adjustment. During the measurement period of one year from the acquisition date, the Company continues to collect information and reevaluate these estimates and assumptions, and records adjustments to these estimates to goodwill. Any adjustments to the acquired assets and liabilities assumed that are identified subsequent to the measurement period are recorded in earnings.
Advertising Costs
The Company's primary advertising costs include television, print, Internet, and media placement. The Company’s policy is to expense advertising costs, including production costs, as incurred. Advertising expenses for the years ended December 31, 2021, 2020 and 2019 were $108,399,000, $83,361,000 and $93,331,000, respectively, which is recognized within SG&A expenses on the accompanying consolidated statement of operations.
Cash, Cash Equivalents and Restricted Cash
Cash equivalents are highly liquid investments purchased with original maturities of three months or less. Restricted cash is primarily comprised of deposits associated with gift cards as required under certain statutory mandates, and lender impound reserve accounts for the development of one of the Company’s venues. Long-term restricted cash is included in other assets on the accompanying consolidated balance sheet as of December 31, 2021. The Company had no restricted cash as of December 31, 2020. The following is a summary of cash, cash equivalents and restricted cash as of December 31, 2021 and December 31, 2020 (in thousands):
| | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 |
Cash and cash equivalents | $ | 352,221 | | | $ | 366,119 | |
Restricted cash, short-term | 1,164 | | | — | |
Restricted cash, long-term | 4,303 | | | — | |
Total cash, cash equivalents and restricted cash | $ | 357,688 | | | $ | 366,119 | |
Inventories
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:
| | | | | |
Buildings and improvements | 10-40 years |
Machinery and equipment | 5-10 years |
Furniture, computer hardware and equipment | 3-5 years |
Internal-use software | 3-5 years |
Production molds | 2-5 years |
Buildings capitalized in conjunction with Deemed Landlord Financing ("DLF") obligations where the Company is deemed to be the accounting owner are depreciated, less residual value, over the shorter of 40 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 statements of operations. Once technological feasibility is established, costs are capitalized until the product is available for general use and then depreciated over the estimated useful life. The Company's Internal-Use Software balance as of December 31, 2021 and 2020 was $81,616,000 and $42,082,000, respectively.
The Company recorded depreciation expense of $142,781,000, $34,388,000, and $30,085,000 for the years ended December 31, 2021, 2020, and 2019, respectively.
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 DLF obligation. These DLF 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 golf courses. 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 for the software and hardware as a single component, and a leasing receivable is recorded consisting of the present value of payments over the non-cancelable term. Interest income on the leasing receivable is recognized over the lease term. The Company manages its risk on its sales-type leases through pricing and the terms of the leases. Any equipment returned to the Company as a result of a cancellation of a lease may be leased or sold to other customers, therefore risk associated with the Company’s sales-type leases is considered minimal.
Long-Lived Assets and Finite-Lived Intangible Assets
The Company assesses potential impairments of its long-lived assets, namely property, plant and equipment and ROU assets, and acquired intangible assets that are subject to amortization, such as acquired customer and distributor relationships, in accordance with ASC Topic 360 “Impairment or Disposal of Long-Lived Assets” ("ASC Topic 360") whenever events or changes in circumstances indicate that the asset’s carrying value may not be recoverable. An impairment charge would be recognized when the carrying amount of a long-lived asset or asset group is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset or asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group.
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, and other intangible assets were acquired in connection with the acquisitions of Odyssey Sports, Inc., FrogTrader, Inc., OGIO, TravisMathew, Jack Wolfskin, Topgolf, and certain foreign distributors.
Costs related to the development, maintenance or renewal of internally developed intangible assets that are inherent in the Company's continuing business that were not acquired as a part of a business combination or asset acquisition, are expensed as incurred.
In accordance with ASC Topic 350, “Intangibles—Goodwill and Other,” goodwill and intangible assets with indefinite lives are not amortized but instead are measured for impairment at least annually or more frequently when events indicate that an impairment exists. The Company calculates impairment as the excess of the carrying value of goodwill and other indefinite-lived intangible assets over their estimated fair value. If the carrying value exceeds the estimate of fair value a write-down is recorded. To determine fair value, the Company uses discounted cash flow estimates, quoted market prices, royalty rates when available and independent appraisals when appropriate.
During 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 sales 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 of 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 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. 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 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.
Investments
The Company determines the appropriate classification of its investments at the time of acquisition and reevaluates such classification at each balance sheet date. Investments that do not have readily determinable fair values are stated at cost, and are evaluated for changes in fair value if there is an observable price change in an orderly transaction for an identical or similar investment in accordance with ASU 2016-01 (Subtopic 825-10) "Recognition and Measurement of Financial Assets and Financial Liabilities." The Company monitors investments for impairment whenever events or changes in circumstances indicate that the investment's carrying value may not be recoverable. An impairment charge would be recognized when the carrying amount exceeds its fair value. See Note 10 for further discussion of the Company’s investments.
Foreign Currency Translation and Transactions
A significant portion of the Company’s business is conducted outside of the United States in currencies other than the U.S. dollar. As a result, changes in foreign currency exchange rates can have a significant effect on the Company’s financial results. Revenues and expenses that are denominated in foreign currencies are translated using the average exchange rate for the period. Assets and liabilities are translated at the rate of exchange on the balance sheet date. Gains and losses from assets and liabilities denominated in a currency other than the functional currency of the entity in which they reside are generally recognized currently in the Company's statements of operations. Gains and losses from the translation of foreign subsidiary financial statements into U.S. dollars are included in accumulated other comprehensive income or loss.
Derivatives and Hedging
In order to mitigate the impact of foreign currency translation on transactions and changes in interest rates, the Company uses foreign currency forward contracts and interest rate hedge contracts that are accounted for as designated and non-designated hedges pursuant to ASC Topic 815, “Derivatives and Hedging” (“ASC Topic 815”). ASC Topic 815 requires that an entity recognize all derivatives as either assets or liabilities on the balance sheet, measure those instruments at fair value and recognize changes in fair value in earnings in the period of change unless the derivative qualifies as 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. Derivatives that are not elected for hedge accounting treatment are recorded immediately in earnings.
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 19 for further discussion of the Company's financial instruments.
Share-Based Compensation
The Company may grant restricted stock units and awards, performance based awards, stock options and stock appreciation rights, and other equity based awards to its officers, employees, consultants and other non-employees who provide services to the Company under its stock incentive plans, The Company accounts for its share-based compensation arrangements in accordance with ASC Topic 718, “Compensation—Stock Compensation,” which requires the measurement and recognition of compensation expense, less a reduction for estimated forfeitures, for all share-based payment awards to employees and non-employees based on estimated fair values. Estimated forfeitures are 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. Stock awards subject to the achievement of performance measures are accounted for under ASU No. 2014-12, "Compensation—Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period."
Restricted Stock Awards and Restricted Stock Units
The estimated fair value of restricted stock awards and restricted stock units (collectively “restricted stock”) is calculated based on the closing price of the Company's common stock on the date of grant multiplied by the number of
shares of restricted stock granted. Compensation expense, less an estimate for forfeitures, is recognized on a straight-line basis over a vesting period of three to five years from the date of grant.
Performance Based Awards
The Company grants performance based awards ("PRSUs") in which the number of shares ultimately received depends on the Company's performance against specified metrics that are measured from the grant date through the performance period end. Performance measures include adjusted earnings before interest, taxes, depreciation, amortization ("EBITDA"), earnings per share ("EPS"), adjusted pre-tax income ("APTI") and total shareholder return ("rTSR"). The performance period for these awards ranges from three to five years from the date of grant. Performance based awards based on EBITDA, EPS and APTI are initially valued at the Company's closing stock price on the date of grant. The grant date fair value of the PRSUs tied to rTSR is based on a fixed value derived from a Monte Carlo simulation, which utilizes the stock volatility, dividend yield and market correlation of the Company and the Company's peer group, and on the probable achievement of 100% of the rTSR performance goals as determined on the date of grant. Compensation expense for all performance based awards is recognized, net of an estimate for forfeitures, on a straight-line basis over a vesting period of three to five years, and is adjusted according to the anticipated cumulative performance level of achievement over the performance period relative to the grant, which ranges from 0% to 200% of the participant's target award. If the performance goals are not probable of achievement during the performance period, compensation expense is reversed. Awards that do not achieve the minimum cumulative performance threshold over the performance period are forfeited at the end of the specified performance period.
Stock Options
All stock option grants made under the 2004 Incentive Plan are made at exercise prices no less than the Company’s closing stock price on the date of grant. Outstanding stock options generally vest over a three-year period from the grant date and generally expire up to 10 years after the grant date.
The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model. The model uses various assumptions, including a risk-free interest rate, the expected term of the options, the expected stock price volatility, and the expected dividend yield. Compensation expense for employee stock options is recognized over the vesting term and is reduced by an estimate for forfeitures, which is based on the Company’s historical forfeitures of unvested options and awards.
See Note 17 for further discussion of the Company's share based compensation.
Income Taxes
Current income tax expense or benefit is the amount of income taxes expected to be payable or receivable for the current year. A deferred income tax asset or liability is established for the difference between the tax basis of an asset or liability computed pursuant to ASC Topic 740, “Income Taxes” (“ASC Topic 740”), and its reported amount in the financial statements that will result in taxable or deductible amounts in future years when the reported amount of the asset or liability is recovered or settled, respectively. In accordance with the applicable accounting rules, the Company maintains a valuation allowance for a deferred tax asset when it is deemed to be more likely than not that some or all of the deferred tax assets will not be realized. In evaluating whether a valuation allowance is required under such rules, the Company considers all available positive and negative evidence, including prior operating results, the nature and reason for any losses, its forecast of future taxable income, and the dates on which any deferred tax assets are expected to expire. These assumptions require a significant amount of judgment, including estimates of future taxable income. These estimates are based on the Company’s best judgment at the time made based on current and projected circumstances and conditions. For further information, see Note 14.
Pursuant to ASC Topic 740, the Company is required to accrue for the estimated additional amount of taxes for uncertain tax positions if it is deemed to be more likely than not that the Company would be required to pay such additional taxes. The Company is required to file federal and state income tax returns in the United States and various other income tax returns in foreign jurisdictions. The preparation of these income tax returns requires the Company to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by the Company. The Company accrues an amount for its estimate of additional tax liability, including interest and penalties in income tax expense, for any uncertain tax positions taken or expected to be taken in an income tax return. The Company reviews and updates the accrual for uncertain tax positions as more definitive information becomes available. Historically,
additional taxes paid as a result of the resolution of the Company’s uncertain tax positions have not been materially different from the Company’s expectations. The Company recognizes interest and/or penalties related to income tax matters in income tax expense. For further information, see Note 14.
Other Income, Net
Other income, net primarily includes gains and losses on foreign currency forward contracts, cross-currency swap contracts and foreign currency transactions. The components of other income, net are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
Foreign currency forward contract gain, net | $ | 14,413 | | | $ | 2,910 | | | $ | 6,947 | |
Foreign currency transaction gain (loss), net | (6,368) | | | 9,024 | | | (5,838) | |
Settlement of cross-currency swap contract (See Note 20) | — | | | 11,046 | | | — | |
Other | 916 | | | 1,989 | | | 485 | |
| $ | 8,961 | | | $ | 24,969 | | | $ | 1,594 | |
Concentration of Risk
On a consolidated basis, no single customer accounted for more than 10% of the Company’s consolidated revenues in 2021, 2020 or 2019. The Company's top five customers accounted for approximately 13% of the Company's consolidated revenues in 2021, 20% in 2020, and 18% in 2019.
The Company's top five customers specific to the Golf Equipment and Apparel, Gear and Other operating segments represented the following as a percentage of each segment's total net revenues:
•Golf Equipment customers accounted for approximately 24%, 25% and 23% of total consolidated Golf Equipment sales in 2021, 2020, and 2019, respectively; and
•Apparel, Gear and Other customers accounted for approximately 17%, 12% and 11% of total consolidated Apparel, Gear and Other sales in 2021, 2020, and 2019, respectively.
With respect to the Company's trade receivables, the Company performs ongoing credit evaluations of its customers’ financial condition and generally requires no collateral from these customers. The Company maintains reserves for estimated credit losses, which it considers adequate to cover any such losses. At December 31, 2021 and 2020, one customer represented 11% and 16%, respectively, of the Company’s outstanding accounts receivable balance.
Of the Company’s total net revenues, approximately 34%, 51% and 54% were derived from sales outside of the United States in 2021, 2020 and 2019, respectively. As a result of this international business, the Company is exposed to increased risks inherent in conducting business outside of the United States, including (i) adverse changes in foreign currency exchange rates (discussed further below); (ii) increased difficulty in protecting the Company's intellectual property rights and trade secrets; (iii) unexpected government action or changes in legal or regulatory requirements; (iv) social, economic weakness, including inflation, or political instability; (v) increased difficulty in ensuring compliance by employees, agents and contractors with the Company’s policies as well as with the laws of multiple jurisdictions; (vi) increased difficulty in controlling and monitoring foreign operations from the United States; and (vii) increased exposure to interruptions in air carrier or ship services.
The Company is dependent on a limited number of suppliers for its clubheads and shafts, some of which are single sourced. Furthermore, some of the Company’s products require specially developed manufacturing techniques and processes which make it difficult to identify and utilize alternative suppliers quickly. The Company also depends on a single or a limited number of suppliers for the materials it uses to make its golf balls. Many of these materials are customized for the Company.
The Company’s financial instruments that are subject to concentrations of credit risk consist primarily of cash equivalents, trade receivables, foreign currency forward contracts, cross-currency debt swap contracts and interest rate hedge contracts. From time to time, the Company invests its excess cash in money market accounts and short-term U.S. government securities and has established guidelines relative to diversification and maturities in an effort to maintain safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates.
The Company enters into foreign currency forward contracts for the purpose of hedging foreign exchange rate exposures on existing or anticipated transactions, and interest rate hedge contracts for the purpose of hedging interest rate exposures on its term loan facility. In the event of a failure to honor one of these contracts by one of the banks with which the Company has contracted, management believes any loss would be limited to the exchange rate differential from the time the contract was made until the time it was settled. The Company's hedging contracts are subject to a master netting agreement with each respective counterparty bank and are therefore net settled.
Note 3. Leases
Sales-Type Leases
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, which are classified as sales-type leases.
Leasing revenue attributed to sales-type leases was $34,116,000 for the year ended December 31, 2021 and are included in services revenues within the consolidated statement of operations. There were no revenues attributed to sales-type leases for the years ended December 31, 2020 and 2019. Leasing revenue attributed to sales-type leases consists of the selling price and interest income as follows (in thousands):
| | | | | | | |
| December 31, 2021 | | |
Sales-type lease selling price(1) | $ | 29,789 | | | |
Cost of underlying assets | (11,862) | | | |
Operating profit | $ | 17,927 | | | |
| | | |
Interest income | $ | 4,327 | | | |
____________
(1) Selling price is equal to the present value of lease payments over the non-cancelable term.
Leasing receivables related to the Company’s net investment in sales-type leases are as follows (in thousands):
| | | | | | | | | | | |
| Balance Sheet Location | | December 31, 2021 |
Leasing receivables, net - short-term | Other current assets | | $ | 12,843 | |
Leasing receivables - long-term | Other assets | | 44,080 | |
| | | $ | 56,923 | |
Operating and Finance Leases
As a lessee, 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. See Note 1 for the Company’s significant accounting polices related to its leasing activities
In response to the COVID-19 pandemic, the Company received certain rent concessions in the form of deferments and abatements on a few of its operating leases. The Company opted to not modify these leases in accordance with the FASB Staff Q&A: ASC Topic 842 and ASC 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. The Company received rent deferments of $687,000, which were recorded in accounts payable and accrued expenses in the Consolidated Balance Sheet as of December 31, 2020, and rent abatements of $1,435,000 which were recorded as reductions in rent expense in the Consolidated Statements of Operations for the year ended December 31, 2020. As of December 31, 2021 the Company recorded rent deferments of $3,853,000 of which $3,224,000 was recorded in accrued expenses, and $629,000 was recorded in other long-term liabilities in the consolidated balance sheets. There were no material rent abatements recorded for the year ended December 31, 2021.
Supplemental balance sheet information related to leases is as follows (in thousands): | | | | | | | | | | | | | | | | | |
| | | December 31, |
| Balance Sheet Location | | 2021 | | 2020 |
Operating leases: | | | | | |
ROU assets, net | Operating lease right-of-use assets, net | | $ | 1,384,501 | | | $ | 194,776 | |
Lease liabilities, short-term | Operating lease liabilities, short-term | | $ | 72,326 | | | $ | 29,579 | |
Lease liabilities, long-term | Operating lease liabilities, long-term | | $ | 1,385,364 | | | $ | 177,996 | |
| | | | | |
Finance Leases: | | | | | |
ROU assets, net, | Other assets | | $ | 129,500 | | | $ | 1,003 | |
Lease liabilities, short-term | Accounts payable and accrued expenses | | $ | 1,838 | | | $ | 252 | |
Lease liabilities, long-term | Long-term other | | $ | 132,461 | | | $ | 447 | |
The components of lease expense are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Operating lease costs | | $ | 146,286 | | | $ | 42,520 | | | $ | 38,449 | |
Financing lease costs: | | | | | | |
Amortization of right-of-use assets | | 3,182 | | | 870 | | | 845 | |
Interest on lease liabilities | | 4,542 | | | 47 | | | 83 | |
Total financing lease costs | | 7,724 | | | 917 | | | 928 | |
Variable lease costs | | 6,511 | | | 2,473 | | | 4,361 | |
Total lease costs | | $ | 160,521 | | | $ | 45,910 | | | $ | 43,738 | |
Other information related to leases was as follows (in thousands):
| | | | | | | | | | | | | | |
| | December 31, |
Supplemental Cash Flows Information | | 2021 | | 2020 |
Cash paid for amounts included in the measurement of lease liabilities: | | | | |
Operating cash flows from operating leases | | $ | 123,637 | | | $ | 39,774 | |
Operating cash flows from finance leases | | $ | 2,802 | | | $ | 47 | |
Operating cash flows from DLF leases | | $ | 17,695 | | | $ | — | |
Financing cash flows from finance leases | | $ | 830 | | | $ | 792 | |
| | | | |
Lease liabilities arising from new ROU assets: | | | | |
Operating leases | | $ | 19,625 | | | $ | 65,547 | |
Finance leases | | $ | 52,742 | | | $ | 139 | |
| | | | |
Weighted average remaining lease term (years): | | | | |
Operating leases | | 14.1 | | 9.8 |
Finance leases | | 36.2 | | 3.0 |
| | | | |
Weighted average discount rate: | | | | |
Operating leases | | 5.3 | % | | 5.3 | % |
Finance leases | | 5.3 | % | | 3.9 | % |
Future minimum lease obligations as of December 31, 2021 were as follows (in thousands): | | | | | | | | | | | |
| Operating Leases | | Finance Leases |
2022 | $ | 138,725 | | | $ | 15,035 | |
2023 | 136,064 | | | 15,688 | |
2024 | 133,406 | | | 15,429 | |
2025 | 130,883 | | | 15,241 | |
2026 | 125,796 | | | 15,575 | |
Thereafter | 1,230,228 | | | 629,948 | |
Total future lease payments | 1,895,102 | | | 706,916 | |
Less: imputed interest | 437,412 | | | 572,617 | |
Total | $ | 1,457,690 | | | $ | 134,299 | |
Lease payments exclude $1,518,384,000 related to 14 non-cancelable leases that have been signed as of December 31, 2021 but have not yet commenced. The Company's minimum capital commitment related to leases, net of amounts reimbursed by third-party real estate financing partners, was approximately $66,000,000 as of December 31, 2021. As the Company is actively involved in the construction of these properties, the Company recorded $208,134,000 in construction costs within property, plant and equipment as of December 31, 2021. Additionally, as of December 31, 2021, the Company recorded $22,943,000 in construction advances from the landlord in connection with properties, which is included on the Company's consolidated balance sheet as of December 31, 2021. The Company will determine the lease classification for properties currently under construction at the end of the construction period. The initial base term upon the commencement of these leases is generally 20 years.
Financing Obligations (Deemed Landlord Financing Obligations)
During 2021, the Company accounted for 29 DLF obligations, each of which represented a failed sale following the application of sale-leaseback criteria within ASC Topic 842, “Leases”. As of December 31, 2021, the Company was the accounting owner of a total of 15 buildings under DLF obligations of which the net book value included in property, plant and equipment on the consolidated balance sheet related to these buildings totaled $521,361,000. DLF obligations included in property, plant and equipment are offset by total DLF obligation liabilities of $461,537,000 on the Company's consolidated balance sheet as of December 31, 2021. Buildings capitalized in conjunction with DLF obligations are depreciated, less residual value, over 40 years or over their estimated useful life, whichever is shorter.
Supplemental balance sheet information related to DLF obligations is as follows (in thousands):
| | | | | | | | | | | | | | | |
| Balance Sheet Location | | December 31, 2021 | | | | |
DLF obligation liabilities, short-term | Accrued expenses | | $ | 903 | | | | | |
DLF obligation liabilities, long-term | Deemed landlord financing, long-term | | $ | 460,634 | | | | | |
The components of DLF obligation expenses are as follows (in thousands):
| | | | | | | | | | | | | |
| Income Statement Location | | December 31, 2021 | | |
Amortization of DLF obligations | Amortization expense | | $ | 5,707 | | | |
Interest on DLF obligations | Interest expense, net | | 28,039 | | | |
Total DLF contracts expenses | | | $ | 33,746 | | | |
Payments on DLF obligations represent payments related to interest accretion for the year ended December 31, 2021.
| | | | | | | | | | |
Supplemental Cash Flows Information (dollars in thousands) | | December 31, 2021 | | |
Operating cash outflows from DLF obligations | | $ | 17,695 | | |
| | | | |
Weighted average remaining term (years) | | 39.0 | | |
Weighted average discount rate | | 9.2 | % | | |
Future minimum financing obligations related to DLF obligations as of December 31, 2021 were as follows (in thousands):
| | | | | | | | |
2022 | | $ | 33,337 | |
2023 | | 36,403 | |
2024 | | 37,585 | |
2025 | | 37,961 | |
2026 | | 38,930 | |
Thereafter | | 1,916,536 | |
Total future payments | | 2,100,752 | |
Less: imputed interest | | 1,639,215 | |
Total | | $ | 461,537 | |
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 include royalty income from third parties from the licensing of certain soft goods products. Revenue from services primarily includes venue sales of food and beverage, 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 Topgolf operating segment, the Golf Equipment operating segment and the Apparel, Gear and Other 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 $1,087,671,000 in net revenues for the year ended December 31, 2021 which includes approximately ten months of revenues since the completion of the merger.
The following table presents the Company's revenue disaggregated by major category and operating and reportable segment (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 |
| Topgolf | | Golf Equipment | | Apparel, Gear & Other | | Total |
Venues | $ | 1,014,106 | | | $ | — | | | $ | — | | | $ | 1,014,106 | |
Other business lines | 73,565 | | | — | | | — | | | 73,565 | |
Golf clubs | — | | | 994,479 | | | — | | | 994,479 | |
Golf balls | — | | | 234,696 | | | — | | | 234,696 | |
Apparel | — | | | — | | | 490,872 | | | 490,872 | |
Gear, accessories & other | — | | | — | | | 325,729 | | | 325,729 | |
| $ | 1,087,671 | | | $ | 1,229,175 | | | $ | 816,601 | | | $ | 3,133,447 | |
| | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2020 |
| | | Golf Equipment | | Apparel, Gear & Other | | Total |
| | | | | | | |
| | | | | | | |
Golf clubs | | | $ | 787,072 | | | $ | — | | | 787,072 | |
Golf balls | | | 195,603 | | | — | | | 195,603 | |
Apparel | | | — | | | 349,272 | | | 349,272 | |
Gear, accessories & other | | | — | | | 257,513 | | | 257,513 | |
| | | $ | 982,675 | | | $ | 606,785 | | | $ | 1,589,460 | |
| | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2019 |
| | | Golf Equipment | | Apparel, Gear & Other | | Total |
| | | | | | | |
| | | | | | | |
Golf clubs | | | $ | 768,310 | | | $ | — | | | $ | 768,310 | |
Golf balls | | | 210,863 | | | — | | | 210,863 | |
Apparel | | | — | | | 410,712 | | | 410,712 | |
Gear, accessories & other | | | — | | | 311,178 | | | 311,178 | |
| | | $ | 979,173 | | | $ | 721,890 | | | $ | 1,701,063 | |
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 following table summarizes revenue by geographical areas in which the Company operates (in thousands):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
Revenue by Major Geographic Region: | | | | | |
United States | $ | 2,067,070 | | | $ | 778,600 | | | $ | 788,232 | |
Europe | 499,533 | | | 372,957 | | | 428,628 | |
Japan | 243,848 | | | 212,055 | | | 246,260 | |
Rest of world | 322,996 | | | 225,848 | | | 237,943 | |
| $ | 3,133,447 | | | $ | 1,589,460 | | | $ | 1,701,063 | |
Product Sales
The Company recognizes revenue from the sale of its products when it satisfies the terms of a performance obligation from a customer, and transfers control of the products ordered to the customer. Control transfers when products are shipped, and in certain cases, when products are received by customers. In addition, the Company recognizes revenue at the point of sale on transactions with consumers at its retail locations. Sales taxes, value added taxes and other taxes that are collected in connection with revenue transactions are withheld and remitted to the respective taxing authorities. As such, these taxes are excluded from revenue. The Company elected to account for shipping and handling as activities to fulfill the promise to transfer the good. Therefore, shipping and handling fees that are billed to customers are recognized in revenue and the associated shipping and handling costs are recognized in cost of goods sold as soon as control of the goods transfers to the customer.
The Topgolf operating segment contributed $12,946,000 in product sales for the year ended December 31, 2021 which are included within the consolidated statements of operations, which include sales of golf clubs, golf balls, apparel and equipment.
Royalty Income
Royalty income is recognized over time in net revenues as underlying product sales occur, subject to certain minimum royalties, in accordance with the related licensing agreements. Royalty income is included in the Company's Apparel, Gear and Other and Topgolf operating segments. Total royalty income for the years ended December 31, 2021, 2020 and 2019 was $68,151,000, $21,838,000 and $22,455,000 respectively.
The Apparel, Gear and Other operating segment includes royalty income from licensing agreements of $30,884,000, $21,838,000 and $22,445,000 for the years ended December 31, 2021, 2020, and 2019, respectively. The Topgolf operating segment includes royalty income from leasing agreements primarily related to Toptracer installations of $37,267,000 for the year ended December 31, 2021.
Deferred Revenue
The Company's deferred revenue balance has historically included revenues from the sale of gift cards. Revenues from gift cards are deferred and recognized when the cards are redeemed. In connection with the merger with Topgolf, completed on March 8, 2021, the Company acquired deferred revenue of $66,196,000 associated with event deposits, memberships, prepaid sponsorships, virtual currency and game credits related to the WGT digital golf game, and gift cards, which are recognized as revenue either over the estimated life of a customer’s membership, historical currency/credit usage trends, when redeemed or once the event or sponsorship occurs, as applicable.
The Company's deferred revenue balance as of December 31, 2020 was $2,546,000, which primarily included deferred revenue from gift cards. During the year ended December 31, 2021, the Company recognized revenues of $370,472,000, which was primarily related to the redemption of event deposits and gift cards at Topgolf, which are typically recognized within a twelve month period of receipt. During the years ended December 31, 2020 and 2019 the Company recognized revenues of $2,840,000 and $3,031,000, respectively, which was primarily related to breakage and unredeemed gift cards. Within the amounts noted as recognized deferred revenue, the Company recognized $32,292,000, $2,840,000, and $3,031,000 of deferred gift card revenue during the years ended December 31, 2021, 2020, and 2019, respectively. Additionally, as of December 31, 2021 and 2020 the Company had $41,967,000 and $2,546,000, respectively,
in accrued deferred revenue related to gift cards in accounts payable and accrued expenses on the accompanying consolidated balance sheets. As of December 31, 2021, the Company's balance for deferred revenue was $93,873,000.
Variable Consideration
The amount of revenue the Company recognizes is based on the amount of consideration it expects to receive from customers. The amount of consideration is the sales price adjusted for estimates of variable consideration, including sales returns, discounts and allowances as well as sales programs, sales promotions and price concessions that are offered by the Company as described below. These estimates are based on the amounts earned or expected to be claimed by customers on the related sales, and are therefore recorded as reductions to sales and trade accounts receivable.
The Company’s primary sales program, the “Preferred Retailer Program,” offers potential rebates and discounts for participating retailers in exchange for providing certain benefits to the Company, including the maintenance of agreed upon inventory levels, prime product placement and retailer staff training. Under this program, qualifying retailers can earn either discounts or rebates based upon the amount of product purchased. Discounts are applied and recorded at the time of sale. For rebates, the Company estimates the amount of variable consideration related to the rebate at the time of sale based on the customer’s estimated qualifying current year product purchases. The estimate is based on the historical level of purchases, adjusted for any factors expected to affect the current year purchase levels. The estimated year-end rebate is adjusted quarterly based on actual purchase levels, as necessary. The Preferred Retailer Program is generally short-term in nature and the actual amount of rebate to be paid under this program is known as of the end of the year and paid to customers shortly after year-end. Historically, the Company's actual amount of variable consideration related to its Preferred Retailer Program has not been materially different from its estimates.
The Company also offers short-term sales program incentives, which include sell-through promotions and price concessions or price reductions. Sell-through promotions are generally offered throughout the product's life cycle, which varies from two to three years, and price concessions or price reductions are generally offered at the end of the product's life cycle. The estimated variable consideration related to these programs is based on a rate that includes historical and forecasted data. The Company records a reduction to net revenues using this rate at the time of the sale. The Company monitors this rate against actual results and forecasted estimates, and adjusts the rate as deemed necessary in order to reflect the amount of consideration it expects to receive from its customers. There were no material changes to the rate related to the short-term sales program incentives during the year ended December 31, 2021. 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 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 sales 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 balance for cost recovery was $25,947,000 and $24,112,000 as of December 31, 2021 and 2020, respectively. The Company's provision for the sales return liability 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):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
Beginning balance | $ | 43,986 | | | $ | 29,043 | | | $ | 24,522 | |
Provision | 91,007 | | | 106,178 | | | 95,094 | |
Sales returns | (87,634) | | | (91,235) | | | (90,573) | |
| | | | | |
Ending balance | $ | 47,359 | | | $ | 43,986 | | | $ | 29,043 | |
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. The Company's prior methodology for estimating credit losses on trade accounts receivable did not differ significantly from the new requirements of ASC Topic 326. Specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. An estimate of credit losses for the remaining customers in the aggregate is based upon historical bad debts, current customer receivable balances, age of customer receivable balances, the customers' financial condition, all of which are subject to change. Additionally, the Company’s monitoring activities now considers 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.
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):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
Beginning balance | $ | 8,841 | | | $ | 5,992 | | | $ | 5,610 | |
Adjustment due to the adoption of ASC Topic 326 | — | | | 289 | | | — | |
(Benefit) provision for credit losses | (337) | | | 2,924 | | | 1,107 | |
Write-off of uncollectible amounts, net of recoveries | (2,299) | | | (364) | | | (725) | |
| | | | | |
Ending balance | $ | 6,205 | | | $ | 8,841 | | | $ | 5,992 | |
Note 6. Business Combinations
Merger with Topgolf International, Inc.
On March 8, 2021, the Company completed its 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 technology-enabled golf entertainment business, with an innovative platform that comprises its state-of-the-art open-air golf and entertainment venues, Toptracer ball-tracking technology and innovative media platform with a differentiated position in eSports. The 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 89,776,000 unrestricted and fully vested shares of its common stock to the stockholders of Topgolf (excluding approximately 12,330,000 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 approximately 188,000 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 (see Note 16). 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 Full Swing Golf Holdings, Inc. ("Full Swing"), 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. The Company expects 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. The Company utilized the options pricing model and revenue multiples of comparable companies to determine the fair value of the investment in Full Swing. 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. The estimated fair value of operating leases was determined based on current market terms, which resulted in a net unfavorable adjustment to the right-of-use asset. Property, plant and equipment was valued based on its replacement cost, which resulted in an estimated step-up in value. The estimated fair value of the debt assumed was based on a market credit rating, interest rates and repayment terms, which resulted in an overall decrease in value. In the fourth quarter of 2021, the Company recorded an estimate related to the fair value assessment of ROU assets for the acquired operating and financing leases in addition to deemed landlord financed properties. In this assessment, the Company considered certain critical terms, including extension periods and incremental borrowing rates. This assessment resulted in significant adjustments to the right-of-use and deemed landlord financed assets and the corresponding lease obligations and deemed landlord financed liabilities. As of December 31, 2021, the Company is in the process of finalizing its assessment on certain leases and certain deferred tax related items. Upon the completion of these assessments, the Company may 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 $1,903,883,000, of which the Company attributed $1,340,663,000 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 years ended December 31, 2021 and 2020, the Company recognized transaction costs of approximately $20,416,000 and $8,498,000, respectively, consisting primarily of advisor, legal, valuation and accounting fees. Transaction costs were recorded in selling, general & administrative expenses.
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 | | 10,678 | |
Inventories | | 13,944 | |
Other current assets | | 52,233 | |
Property and equipment | | 1,080,349 | |
Operating lease right-of-use assets | | 1,329,296 | |
Investments | | 28,768 | |
Other assets | | 33,664 | |
Intangibles - trade name | | 994,200 | |
Intangibles - technology, customer relationships and liquor licenses | | 81,929 | |
Goodwill | | 1,340,663 | |
Total assets acquired | | 5,137,018 | |
Liabilities Assumed | | |
Accounts payable and accrued liabilities | | 95,799 | |
Accrued employee costs | | 37,092 | |
Construction advances | | 40,491 | |
Deferred revenue | | 66,196 | |
Other current liabilities | | 7,829 | |
Long-term debt | | 535,096 | |
Deemed landlord financing | | 303,037 | |
Operating lease liabilities | | 1,402,291 | |
Other long-term liabilities | | 32,025 | |
Deferred tax liabilities | | 131,532 | |
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 years ended December 31, 2021 and 2020 as if the merger with Topgolf had occurred on January 1, 2020. These amounts have been calculated after applying the Company's accounting policies and are based upon currently available information. For this analysis, the Company assumed that certain gains and costs associated with the merger were recognized as of January 1, 2020, including a gain of $252,531,000 recognized on the Company's pre-acquisition investment in Topgolf, acquisition costs of $28,914,000, 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 14). Pre-acquisition net revenue and net income (loss) 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.
| | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 |
| (in thousands) |
Net revenues | $ | 3,276,391 | | | $ | 2,305,654 | |
Net income (loss) | $ | 72,340 | | | $ | (318,762) | |
Supplemental Information of Operating Results
For the year ended December 31, 2021, the Company's consolidated statements of operations included net revenues related to Topgolf of $1,087,671,000 and a net loss of $29,603,000 for the period beginning March 8, 2021 through January 2, 2022.
Acquisition of JW Stargazer Holding GmbH
In January 2019, the Company completed the acquisition of JW Stargazer Holding GmbH, the owner of the international, premium outdoor apparel, gear and accessories brand, Jack Wolfskin, for €457,394,000 (including cash acquired of €50,984,000) or approximately $521,201,000 (including cash acquired of $58,096,000). The Company financed the acquisition with a Term Loan B facility in the aggregate principal amount of $480,000,000 (see Note 7). This acquisition is expected to further enhance the Company's lifestyle category and provide a platform for future growth in the active outdoor and urban outdoor categories. The financial results of JW Stargazer Holding GmbH have been included in the Company's consolidated financial statements since the date of acquisition.
The Company allocated the purchase price to the net identifiable tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of the date of acquisition. Valuations of acquired intangible assets and inventory were 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 19). The excess of the purchase price over the estimated fair value of the net assets and liabilities was allocated to goodwill. The Company recognized goodwill in the amount of $150,180,000 arising from the acquisition, which consists largely of expected synergies from combining the operations of the Company and Jack Wolfskin. As a non-taxable stock acquisition, the value attributable to the acquired intangible assets and goodwill are not tax deductible, and accordingly, the Company recognized a net deferred tax liability of $77,079,000, including tax reserves of $8,281,000 on certain deferred tax assets. All of the goodwill related to the acquisition was assigned to the Apparel, Gear and Other operating segment. During the second quarter of 2020, the Company performed a quantitative assessment of goodwill for its reporting units in response to the disruptions caused by the COVID-19 pandemic and determined that the goodwill associated with the Jack Wolfskin reporting unit was impaired, in addition to the Jack Wolfskin trade name (see Note 9).
In connection with the acquisition, during the year ended December 31, 2019, the Company recognized transaction costs of approximately $9,987,000, of which $6,326,000 was recognized in general and administrative expenses during the twelve months ended December 31, 2019. The remaining $3,661,000 was recognized in general and administrative expenses during 2018. In addition, the Company recorded a loss of $3,215,000 in other income (expense) in the first quarter of 2019 upon the settlement of a foreign currency forward contract to mitigate the risk of foreign currency fluctuations on the purchase price, which was denominated in Euros (EUR).
The following table summarizes the fair values of the assets acquired and liabilities assumed as of the acquisition date based on the purchase price allocation (in thousands):
| | | | | |
| At January 4, 2019 |
Assets Acquired | |
Cash | $ | 58,096 | |
Accounts receivable | 26,637 | |
Inventories | 94,504 | |
Income tax receivable | 6,588 | |
Other current assets | 11,483 | |
Property and equipment | 20,930 | |
Operating lease right-of-use assets | 120,865 | |
Deferred tax assets | 2,930 | |
Other assets | 23 | |
Intangibles - trade name | 239,295 | |
Intangibles - retail partners & distributor relationships | 38,743 | |
Goodwill | 150,180 | |
Total assets acquired | 770,274 | |
Liabilities Assumed | |
Accounts payable and accrued liabilities | 46,124 | |
Income taxes payable, long-term | 2,416 | |
Operating lease liabilities | 120,524 | |
Deferred tax liabilities | 80,009 | |
Net assets acquired | $ | 521,201 | |
Note 7. Financing Arrangements
The Company's debt obligations are summarized as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 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 | | 2.00 | % | | $ | 916 | | | $ | 9,096 | | | $ | 22,130 | |
2022 Japan ABL Credit Facility | | January 21, 2022 | | 1.28 | % | | — | | | — | | | — | |
| | | | | | $ | 916 | | | $ | 9,096 | | | $ | 22,130 | |
Balance Sheet Location | | | | | | | | | | |
Prepaid expenses | | $ | 916 | | | $ | — | | | $ | — | |
Other long-term assets | | — | | | — | | | — | |
Asset-based credit facilities | | — | | | 9,096 | | | 22,130 | |
| | | | | | $ | 916 | | | $ | 9,096 | | | $ | 22,130 | |
| | | | | | | | | | |
| | December 31, 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 | | 0.85 | % | | $ | — | | | $ | 13,031 | | | $ | 18,390 | |
Term Loan B Facility | | January 4, 2026 | | 4.60 | % | | 15,263 | | | 421,537 | | | 428,150 | |
Topgolf Term Loan | | February 8, 2026 | | 7.00 | % | | 6,272 | | | 334,103 | | | — | |
Topgolf Revolving Credit Facility | | February 8, 2024 | | 4.75 | % | | — | | | — | | | — | |
Convertible Notes | | May 1, 2026 | | 2.75 | % | | 64,280 | | | 194,470 | | | 183,126 | |
Equipment Notes | | December 27, 2022 - March 19, 2027 | | 2.36% - 3.79% | | — | | | 31,137 | | | 31,822 | |
Mortgage Loans | | July 1, 2033 - July 29, 2036 | | 9.75% - 11.31% | | — | | | 46,407 | | | — | |
Financed Tenant Improvements | | February 1, 2035 | | 8.00 | % | | — | | | 3,650 | | | 3,801 | |
| | | | | | $ | 85,815 | | | $ | 1,044,335 | | | $ | 665,289 | |
Balance Sheet Location | | | | | | | | | | |
Other current liabilities | | $ | 3,815 | | | $ | 19,057 | | | $ | — | |
Accrued expenses | | — | | | — | | | 14,725 | |
Long-term debt | | 82,000 | | | 1,025,278 | | | 650,564 | |
| | | | | | $ | 85,815 | | | $ | 1,044,335 | | | $ | 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. Asset-Based Revolving Credit Facility, 2022 Japan ABL Credit Facility (as defined below) 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 December 31, 2021, the Company had $9,096,000 outstanding under these facilities and $352,221,000 in cash and cash equivalents. As of December 31, 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 $752,847,000. As of December 31, 2020, the Company had $22,130,000 outstanding under its U.S. and Japan facilities, and $366,119,000 in cash and cash equivalents. As of December 31, 2020, the Company's available liquidity, which is comprised of cash on hand, including cash received from the issuance of Convertible Senior Notes in May 2020, and amounts available under both facilities, after letters of credit and outstanding borrowings, was $632,233,000.
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 three-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 year ended December 31, 2021, average outstanding borrowings were $20,269,000 and average amount available, after outstanding borrowings and letters of credit, was approximately $295,259,000.
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 December 31, 2021, the Company had not drawn on these funds. In addition, the ABL Facility imposes restrictions on the amount the Company could pay in annual cash dividends, including certain restrictions on the amount of additional indebtedness and requirements to maintain a certain fixed charge coverage ratio under certain circumstances. 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 1.0:1.0 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 year ended December 31, 2021, and the Company was in compliance with the fixed charge coverage ratio as of December 31, 2021. Had the Company not been in compliance with the fixed charge coverage ratio as of December 31, 2021, the maximum amount of additional indebtedness that could have been outstanding on December 31, 2021 would have been reduced by $40,000,000. As of December 31, 2021, in addition to the fixed charge coverage ratio covenant, the Company was in compliance with all other financial covenants of the ABL Facility.
The interest rate applicable to outstanding loans under the ABL Facility fluctuates depending on the Company’s “availability ratio” which is expressed as a percentage of (i) the average daily availability under the ABL Facility to (ii) the sum of the Canadian, the German, the U.K. and the U.S. borrowing bases, as adjusted. At December 31, 2021 the Company’s trailing 12-month average interest rate applicable to its outstanding loans under the ABL Facility was 3.04%. 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 2018, the Company renewed its two asset-based loans with the Bank of Tokyo-Mitsubishi UFJ, combining them into one revolving credit facility (as amended, the “2018 Japan ABL Credit Facility”). The 2018 Japan ABL Credit Facility provided a line of credit of up to 4,000,000,000 Yen (or approximately $34,748,000, using the exchange rate in effect as of December 31, 2021) over a three-year term, subject to borrowing base availability under the facility, and
secured by certain assets, including eligible inventory and accounts receivable. The facility also included certain restrictions, including covenants related to certain pledged assets and financial performance metrics, and was subject to an effective interest rate equal to the Tokyo Interbank Offered Rate (“TIBOR”) plus 0.80%, with an expiration in January 2021. In January 2021, the Company refinanced and amended the 2018 Japan ABL Credit Facility (as amended, the “2021 Japan ABL Credit Facility”) to extend the credit facility for an additional one-year term and amended expiration date of January 2022. Under the 2021 Japan ABL Credit Facility, amounts outstanding are secured by certain assets, including eligible inventory and eligible accounts receivable and also includes certain restrictions including covenants related to certain pledged assets and financial performance metrics. The 2021 Japan ABL Credit Facility is subject to an effective interest rate equal to TIBOR plus 1.20%. As of December 31, 2021, there were no amounts outstanding under the 2021 Japan ABL Credit Facility.
In January 2022, the Company refinanced and amended the 2021 Japan ABL Credit Facility (as amended, the “2022 Japan ABL Credit Facility”) to extend the credit facility for an additional three-year term and amend the expiration date to January 2025. The 2022 Japan ABL Credit Facility provides a line of credit to the Company of up to 6,000,000,000 Yen (or approximately $52,110,000 using the exchange rate in effect as of January 31, 2022) subject to borrowing base availability under the facility, and secured by certain assets, including eligible inventory and accounts receivable. The 2022 Japan ABL Credit Facility is subject to an effective interest rate equal to TIBOR plus 0.80%.
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 $17,374,000 using the exchange rate in effect as of December 31, 2021).
As of December 31, 2021, the Company had 1,500,000,000 Yen (or approximately $13,031,000 using the exchange rate in effect as of December 31, 2021) outstanding, of which 400,000,000 Yen (or approximately $3,475,000 using the exchange rate in effect as of December 31, 2021) is reflected in other current liabilities in the accompanying consolidated balance sheets. Total interest expense recognized during the years ended December 31, 2021 and 2020 was 14,511,000 Yen (or approximately $132,000) and 6,226,000 Yen (or approximately $60,000) 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 $868,700 using the exchange rate in effect as of December 31, 2021) are due quarterly, and the facility imposes certain restrictions including covenants to certain financial performance obligations. As of December 31, 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 years ended December 31, 2021, 2020 and 2019 was $24,119,000, $25,622,000, and $31,707,000, 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 20 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.
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 December 31, 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”).
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 Topgolf 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 December 31, 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
In May 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 $194,470,000 and $183,126,000 as of December 31, 2021 and 2020, respectively. The carrying amount of the discount on the Convertible Notes, totaling $59,602,000 as of December 31, 2021, is amortized over the remaining term of approximately 4.3 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, $6,006,000 was allocated to the liability component of the Convertible Notes, and $2,521,000 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 December 31, 2021, the price of the Company's common stock was higher than the initial conversion price. Therefore, the if-converted value of the Convertible Notes exceeded the principal amount.
The Company may redeem all or part of the Convertible Notes (i) on or after May 6, 2023, but before the 40th trading day prior to the maturity date if the last reported sale price of the Company’s common stock exceeds 130% of the conversion price for any 20 of 30 consecutive trading days; (ii) upon a Fundamental Change (where holders can require settlement entirely in cash); or (iii) upon an Event of Default. The Company will also be required to pay additional interest upon (i) failure to timely file with the 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 year ended December 31, 2021, the average market price of the Company's common stock was $30.26, 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 December 2021, the Company entered into six 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.
During the years ended December 31, 2021. 2020 and 2019, the Company recognized interest expense of $852,000, $880,000 and $463,000, respectively.
The Equipment Notes are subject to compliance with the financial covenants in the Company's ABL Facility. As of December 31, 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 December 31, 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 December 31, 2021, the Company does not anticipate excess cash flow repayments as defined by the Term Loan Facility.
| | | | | | | | |
| | (in thousands) |
2022 | | $ | 22,581 | |
2023 | | 19,961 | |
2024 | | 18,774 | |
2025 | | 15,646 | |
2026 | | 1,006,832 | |
Thereafter | | 46,356 | |
| | 1,130,150 | |
Less: Unamortized Original Issuance Discount and Debt Issuance Costs | | 85,815 | |
| | $ | 1,044,335 | |
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.
In periods when net income is reported, 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 17), as well as common shares underlying convertible notes (see Note 7).
In periods when a net loss is reported or in periods when anti-dilution occurs, weighted-average common shares outstanding—diluted is the same as weighted-average common shares outstanding—basic.
The following table summarizes the computation of basic and diluted earnings per share (in thousands, except per share data):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
Earnings per common share—basic | | | | | |
Net income (loss) attributable to Callaway Golf Company | $ | 321,988 | | | $ | (126,934) | | | $ | 79,408 | |
Weighted-average common shares outstanding—basic(1) | 169,101 | | | 94,201 | | | 94,251 | |
Basic earnings (loss) per common share | $ | 1.90 | | | $ | (1.35) | | | $ | 0.84 | |
Earnings per common share—diluted | | | | | |
Net income (loss) | $ | 321,988 | | | $ | (126,934) | | | $ | 79,408 | |
Weighted-average common shares outstanding—basic(1) | 169,101 | | | 94,201 | | | 94,251 | |
Convertible notes weighted-average shares outstanding | 5,932 | | | — | | | — | |
Outstanding options, restricted stock units and performance share units | 1,892 | | | — | | | 2,036 | |
Weighted-average common shares outstanding—diluted | 176,925 | | | 94,201 | | | 96,287 | |
Diluted earnings (loss) per common share | $ | 1.82 | | | $ | (1.35) | | | $ | 0.82 | |
____________(1)In connection with the Topgolf merger on March 8, 2021, the Company issued approximately 89,776,000 of its common stock to the stockholders of Topgolf, and approximately 188,000 of its common stock for restricted stock awards converted in the merger (see Note 16), of which approximately 73,652,000 weighted-average shares for the year ended December 31, 2021 were included in the basic and diluted share calculations based on the number of days the shares were outstanding during the period.
Convertible Notes
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 December 31, 2021, the average market price of its common stock exceeded the conversion price per share and, as such, the common shares underlying convertible notes were included in the calculation of diluted earnings per common share for the year ended December 31, 2021 (see Note 7). As a net loss was reported for the year ended December 31, 2020, common shares underlying convertible notes of 663,000 were excluded from the calculation of diluted loss per common share for the period.
Options, Restricted Stock Units and Performance Share Units
For the year ended December 31, 2021, securities outstanding totaling approximately 1,265,000 shares, comprised of stock options and restricted stock units, were excluded from the calculation of dilutive earnings per common share, as they would be anti-dilutive.
As a net loss was reported for the year ended December 31, 2020, common shares underlying options, restricted stock units and performance share units of 1,425,000 were excluded from the calculation of diluted loss per common share for the period.
For the year ended December 31, 2019, there were no securities excluded from the calculation of diluted earnings per common share for the period.
Note 9. Goodwill and Intangible Assets
Changes in the carrying amount of goodwill by operating and reportable segment are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Topgolf | | Golf Equipment | | Apparel, Gear and Other | | | | Total |
Balance at December 31, 2020 | | $ | — | | | $ | 27,025 | | | $ | 29,633 | | | | | | $ | 56,658 | |
Acquisitions | | 1,340,663 | | | 504,568 | | | 58,652 | | | | | | 1,903,883 | |
Impairments | | — | | | — | | | — | | | | | | — | |
Foreign currency translation | | — | | | (471) | | | — | | | | | | (471) | |
Balance at December 31, 2021 | | $ | 1,340,663 | | | $ | 531,122 | | | $ | 88,285 | | | | | | $ | 1,960,070 | |
The $1,903,412,000 increase during the twelve months ended December 31, 2021 was primarily due to the addition of $1,903,883,000 in goodwill in connection with the Topgolf merger in March 2021, of which the Company attributed $1,340,663,000 to the Topgolf business, $504,568,000 to the golf equipment business and $58,652,000 to the apparel, gear and other business primarily due to the synergies the Company anticipates from leveraging the Topgolf business to expand its golf equipment and apparel businesses. This increase in goodwill 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. There were no impairment losses recognized during the years ended December 31, 2021 and 2019. During the year ended December 31, 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 sales and operating income for fiscal 2020 and potentially beyond. As a result, the Company determined that there were indicators of impairment, and proceeded with a quantitative assessment of goodwill for all reporting.
In performing the quantitative goodwill impairment testing during fiscal 2020, the Company prepared valuations of its reporting units using both a market comparable methodology and an income methodology, and those valuations were compared with the respective carrying values of the reporting units to determine whether any goodwill impairment existed. The Company's reporting units are one level below its reportable segment level. In preparing the valuations, past, present and future expectations of performance were considered, including the impact of the COVID-19 pandemic. This methodology was consistent with the approach used to perform the annual quantitative goodwill assessment in prior years. The weighted average cost of capital used in the goodwill impairment testing ranged between 9.0% and 9.25%, which was derived from the financial structures of comparable companies corresponding to the industry of each reporting unit. There is inherent uncertainty associated with key assumptions used in the Company's impairment testing, including the duration of the economic downturn associated with the COVID-19 pandemic and the estimated recovery period. As a result of the second quarter assessment, the Company determined that the expected decline in revenue due to the impact of COVID-19 contributed to a lower fair value of the Jack Wolfskin reporting unit compared to its carrying value. As such, the Company recognized an impairment loss during the year ended December 31, 2020 of $148,375,000 to write-off the goodwill associated with Jack Wolfskin. The Company determined that the goodwill relating to its other reporting units was not impaired as the fair value significantly exceeded the carrying value.
As of December 31, 2021, the Company’s accumulated impairment loss on goodwill was $148,375,000.
There were no impairment charges recognized on the Company's indefinite-lived intangible assets during the years ended December 31, 2021 and 2019. During the year ended December 31, 2020, in connection with the quantitative assessment performed in 2020, the Company determined that the trade name intangible asset related to Jack Wolfskin was
impaired, and as such recognized an impairment loss of $25,894,000 to write-down the Jack Wolfskin trade name to its new estimated fair value.
The following sets forth the intangible assets by major asset class (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Useful Life (Years) | | December 31, 2021 | | |
| Gross(1) | | Accumulated Amortization | | Translation Adjustment | | Net Book Value | | | | | | | | |
Indefinite-lived: | | | | | | | | | | | | | | | | | | | | | |
Trade name, trademark, trade dress and other | NA | | $ | 1,441,003 | | | $ | — | | | $ | (15,820) | | | $ | 1,425,183 | | | | | | | | | | | | | |
Liquor licenses | NA | | 7,756 | | | — | | | — | | | 7,756 | | | | | | | | | | | | | |
Amortizing: | | | | | | | | | | | | | | | | | | | | | |
Patents | 2-16 | | 32,041 | | | (31,671) | | | — | | | 370 | | | | | | | | | | | | | |
Customer and distributor relationships and other | 1-10 | | 61,718 | | | (27,405) | | | (2,335) | | | 31,978 | | | | | | | | | | | | | |
Developed technology | 10 | | 69,651 | | | (5,496) | | | (804) | | | 63,351 | | | | | | | | | | | | | |
Total intangible assets | | | $ | 1,612,169 | | | $ | (64,572) | | | $ | (18,959) | | | $ | 1,528,638 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 December 31, 2021 includes additions of $1,001,956 and $74,179 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 $13,041,000, $5,120,000, and $4,866,000 for the years ended December 31, 2021, 2020 and 2019, respectively, which is recorded in selling, general and administrative expenses in the accompanying consolidated statements of operations. Amortization expense related to intangible assets at December 31, 2021 in each of the next five fiscal years and beyond is expected to be incurred as follows (in thousands):
| | | | | |
2022 | $ | 13,263 | |
2023 | 11,695 | |
2024 | 11,606 | |
2025 | 11,394 | |
2026 | 11,348 | |
Thereafter | 36,393 | |
| $ | 95,699 | |
Note 10. Investments
Investment in Topgolf
Prior to the completion of the merger with Topgolf, the Company had an ownership interest of approximately 14.3% in Topgolf. On March 8, 2021, the Company completed its 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.
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 ASU No. 2016-01. Prior to the merger, the Company did not record any impairments with respect to this investment.
Investment in Full Swing
In connection with the merger with Topgolf, the Company acquired an ownership interest of less than 20.0% in Full Swing, owners of an 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. During the year ended December 31, 2021, the Company sold a portion of its investment in Full Swing for cash proceeds of approximately $19,096,000. As a result of the sale, the Company has a remaining investment of $9,250,000 in Full Swing, which is reflected within Investments in golf-related ventures on the Company's Consolidated Balance Sheet as of December 31, 2021.
Investment in Five Iron Golf
In November 2021, the Company completed a $30,000,000 minority investment in Five Iron Golf, an emerging, privately-owned, urban indoor golf and entertainment company that offers golf simulator rentals, golf lessons, custom club fittings, social events and a curated food and beverage menu. As a result of the transaction, the Company now has an ownership interest which is less than 20%, in Five Iron Golf. The investment in Five Iron Golf is accounted for at cost less impairments, adjusted for observable changes in fair value. As of December 31, 2021, there has been no change in the fair value of the investment, which is reflected within Investments in golf-related ventures on the Company's Consolidated Balance Sheet.
Note 11. Joint Venture
The Company had a joint venture in Japan, Callaway Apparel K.K., with its long-time apparel licensee, TSI Groove & Sports Co, Ltd., ("TSI") for the design, manufacture and distribution of Callaway-branded apparel, footwear and headwear in Japan. In July 2016, the Company contributed $10,556,000, primarily in cash, for a 52% ownership of the joint venture, and TSI contributed $9,744,000, primarily in inventory, for the remaining 48%. In May 2019, the Company entered into a stock purchase agreement with TSI to acquire the remaining shares comprising the 48% ownership in Callaway Apparel K.K. for 2 billion Yen, or approximately $18,538,000 (using the exchange rate in effect on the acquisition date). The purchase was completed as of May 2019 and, pursuant to the stock purchase agreement, the purchase price was paid in August 2019. During the year ended December 31, 2019 the Company recorded a net loss attributable to the non-controlling interest of $179,000.
As of December 31, 2021 and 2020, the Company owned 100% of this entity and controlled all matters pertaining to its business operations and significant management decisions.
Note 12. Product Warranty
The Company has a stated two-year warranty policy for its golf clubs and certain Jack Wolfskin gear, as well as a limited lifetime warranty for its OGIO line of products. The Company’s policy is to accrue the estimated cost of satisfying future warranty claims at the time the sale is recorded. In estimating its future warranty obligations, the Company considers various relevant factors, including the Company’s stated warranty policies and practices, the historical frequency of claims, and the cost to replace or repair its products under warranty.
The Company’s estimates for calculating the warranty reserve are principally based on assumptions regarding the warranty costs of each product line over the expected warranty period. Where little or no claims experience may exist, the Company’s warranty obligation calculation is based upon long-term historical warranty rates of similar products until sufficient data is available. As actual model-specific rates become available, the Company’s estimates are modified to reflect the range of likely outcomes.
The warranty reserve is included in other current liabilities in the accompanying consolidated balance sheets as of December 31, 2021 and December 31, 2020. The following table provides a reconciliation of the activity related to the Company's warranty reserve (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Beginning balance | | $ | 9,364 | | | $ | 9,636 | | | $ | 7,610 | |
Provision | | 9,109 | | | 7,926 | | | 8,311 | |
Provision liability assumed from acquisition | | — | | | — | | | 2,208 | |
Claims paid/costs incurred | | (7,486) | | | (8,198) | | | (8,493) | |
Ending balance | | $ | 10,987 | | | $ | 9,364 | | | $ | 9,636 | |
Note 13. Selected Financial Statement Information
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| (in thousands) |
Inventories: | | | |
Finished goods | $ | 415,396 | | | $ | 281,602 | |
Work in process | 1,268 | | | 1,010 | |
Raw materials | 111,658 | | | 69,932 | |
Food and beverage | 5,135 | | | — | |
| $ | 533,457 | | | $ | 352,544 | |
Other Current Assets: | | | |
Credit card receivables | $ | 31,205 | | | $ | 2,124 | |
Sales return reserve cost recovery asset | 25,947 | | | 24,112 | |
VAT/Sales tax receivable | 19,519 | | | 1,017 | |
Other current assets | 42,661 | | | 7,911 | |
| $ | 119,332 | | | $ | 35,164 | |
Property, plant and equipment, net: | | | |
Land | $ | 134,293 | | | $ | 7,308 | |
Buildings and leasehold improvements | 858,583 | | | 100,653 | |
Machinery and equipment | 204,269 | | | 137,026 | |
Furniture, computer hardware and equipment | 211,164 | | | 100,558 | |
Internal-use software | 81,616 | | | 42,082 | |
Production molds | 7,979 | | | 6,809 | |
Construction-in-process | 286,658 | | | 13,299 | |
| 1,784,562 | | | 407,735 | |
Accumulated depreciation | (333,160) | | | (261,240) | |
| $ | 1,451,402 | | | $ | 146,495 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Accounts payable and accrued expenses: | | | |
Accounts payable | $ | 138,677 | | | $ | 66,282 | |
Accrued expenses | 226,840 | | | 136,277 | |
Accrued inventory | 125,659 | | | 73,650 | |
| $ | 491,176 | | | $ | 276,209 | |
Accrued employee compensation and benefits: | | | |
Accrued payroll and taxes | $ | 100,842 | | | $ | 17,009 | |
Accrued vacation and sick pay | 21,798 | | | 12,887 | |
Accrued commissions | 6,227 | | | 1,041 | |
| $ | 128,867 | | | $ | 30,937 | |
Note 14. Income Taxes
The Company’s income before income tax provision was subject to taxes in the following jurisdictions for the following periods (in thousands):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
United States | $ | 295,322 | | | $ | 68,916 | | | $ | 55,352 | |
Foreign | 55,320 | | | (196,394) | | | 40,417 | |
| $ | 350,642 | | | $ | (127,478) | | | $ | 95,769 | |
The expense (benefit) for income taxes is comprised of (in thousands):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
Current tax provision: | | | | | |
Federal | $ | 2,916 | | | $ | 1,665 | | | $ | 1,022 | |
State | 2,267 | | | 1,467 | | | 1,403 | |
Foreign | 14,643 | | | 5,385 | | | 9,933 | |
| 19,826 | | | 8,517 | | | 12,358 | |
Deferred tax expense (benefit): | | | | | |
Federal | 11,032 | | | 8,579 | | | 10,185 | |
State | 7,146 | | | 5,166 | | | 335 | |
Foreign | (9,350) | | | (22,806) | | | (6,338) | |
| 8,828 | | | (9,061) | | | 4,182 | |
Income tax provision (benefit) | $ | 28,654 | | | $ | (544) | | | $ | 16,540 | |
On March 8, 2021, the Company acquired Topgolf through a non-taxable stock acquisition in a share exchange. The purchase price of Topgolf at acquisition was $3,014,174,000. The Company recorded a deferred tax liability of $250,000,000 related to the acquired intangibles, offset by $118,000,000 of other acquired deferred tax assets, after consideration of acquired valuation allowances.
On January 4, 2019, the Company acquired Jack Wolfskin for $521,201,000 (including cash acquired of $58,096,000) in a taxable stock acquisition. The Company recorded a deferred tax liability of $88,462,000 related to the intangibles upon acquisition in addition to $11,384,000 deferred tax assets acquired (see Note 6). 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 goodwill and trade name associated with Jack Wolfskin (see Note 9). The impaired goodwill was comprised of book basis with no corresponding deferred tax liability. The trade name impairment resulted in a tax benefit recorded for the reduction of $7,900,000 of deferred tax liability previously recorded as part of acquisition accounting.
Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2021 and 2020 are as follows (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
Deferred tax assets: | | | |
Operating loss carryforwards | $ | 149,895 | | | $ | 26,919 | |
Tax credit carryforwards | 64,250 | | | 49,525 | |
ASC Topic 842 lease liability | 396,378 | | | 52,785 | |
Deemed landlord financing | 115,060 | | | — | |
Other | 72,768 | | | 53,163 | |
Total deferred tax assets | 798,351 | | | 182,392 | |
Valuation allowance for deferred tax assets | (120,499) | | | (21,032) | |
Deferred tax assets, net of valuation allowance | 677,852 | | | 161,360 | |
| | | |
Deferred tax liabilities: | | | |
Basis difference related to fixed assets | (105,532) | | | — | |
Basis difference related to intangible assets with an indefinite life | (331,130) | | | (100,062) | |
ASC Topic 842 ROU assets | (375,697) | | | (49,910) | |
Other | (7,920) | | | (10,281) | |
Total deferred tax liabilities | (820,279) | | | (160,253) | |
Net deferred tax assets (liabilities) are shown on the accompanying consolidated balance sheets as follows: | | | |
Non-current deferred tax assets | 21,164 | | | 59,735 | |
Non-current deferred tax liabilities | (163,591) | | | (58,628) | |
Net deferred tax (liabilities)/ assets | $ | (142,427) | | | $ | 1,107 | |
The net change in net deferred taxes in 2021 of $143,534,000 is primarily comprised of net deferred tax liabilities acquired in the Topgolf transaction.
Deferred tax assets and liabilities result from temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are anticipated to be in effect at the time the differences are expected to reverse. The realization of the deferred tax assets, including loss and credit carry forwards, is subject to the Company generating sufficient taxable income during the periods in which the temporary differences become realizable. In accordance with the applicable accounting rules, the Company maintains a valuation allowance for a deferred tax asset when it is deemed to be more likely than not that some or all of the deferred tax assets will not be realized. In evaluating whether a valuation allowance is required under such rules, the Company considers all available positive and negative evidence, including prior operating results, the nature and reason for any losses, its forecast of future taxable income, and the dates on which any deferred tax assets are expected to expire. These assumptions require a significant amount of judgment, including estimates of future taxable income. These estimates are based on the Company’s best judgment at the time made based on current and projected circumstances and conditions.
The Company has evaluated all available positive and negative evidence and as a result of the Topgolf merger has determined that a portion of its U.S. deferred tax assets were not more likely than not to be realized. The valuation allowance on the Company's U.S. deferred tax assets as of December 31, 2021 and 2020 relate primarily to the definite-lived federal and state net deferred tax assets and tax credits the Company estimates it may not be able to utilize in future periods. In connection with the purchase accounting related to the merger with Topgolf, the Company also recorded a valuation allowance in goodwill of $67,000,000 against certain Topgolf deferred tax assets acquired in the merger. 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.
As of December 31, 2021, the Company had federal and state income tax credit carryforwards of $56,134,000 and $25,786,000, respectively, which will expire if unused at various dates beginning on December 31, 2027. Such credit carryforwards expire as follows (in thousands):
| | | | | | | | | | | |
U.S. foreign tax credit | $ | 3,165 | | | 2027 - 2031 |
U.S. research tax credit | 26,568 | | | 2031 - 2041 |
U.S. business tax credits | 26,401 | | | 2031 - 2041 |
State investment tax credits | 2,028 | | | Do not expire |
State research tax credits - definite lived | 1,563 | | | 2030 - 2034 |
State research tax credits - indefinite lived | $ | 22,195 | | | Do not expire |
The Company has recorded a deferred tax asset, before consideration of reflecting the benefit of NOL and interest expense carryforwards. The NOLs and interest expense carryforwards expire as follows (in thousands):
| | | | | | | | | | | |
U.S. loss carryforwards - definite lived | $ | 181,549 | | | 2028 - 2037 |
U.S. interest expense carryforwards - indefinite lived | 12,910 | | | Do not expire |
U.S. loss carryforwards - indefinite lived | 213,743 | | | Do not expire |
State loss carryforwards | $ | 269,930 | | | 2022 - 2041 |
| | | |
The Company’s ability to utilize its NOLs and credits to offset future taxable income and income tax liabilities may be deferred or limited significantly if the Company were to experience an “ownership change” as such term is used in Sections 382 and 383 of the Code. In general, an ownership change will occur if there is a cumulative change in ownership of the Company’s stock by “5-percent shareholders” (as defined in the Code) that exceeds 50 percentage points over a rolling three-year period. The Company determined that an ownership change with respect to each of the Company and Topgolf likely occurred on the date of the Topgolf merger. As such, each of the Company and Topgolf is likely subject under Sections 382 and 383 of the Code to a limitation on the utilization of its NOLs and credits. However, due to the high threshold of this limitation, it is not expected to have any material impact on the Company. In addition, Topgolf’s NOLs are presently expected to be subject to “separate return limitation year” limitations. Separate return limitation year NOLs can only be used in years that both the consolidated group and the entity that created such NOLs have taxable income, which may limit our ability to utilize Topgolf’s NOLs in the future. Therefore, the Company’s ability to utilize Topgolf tax attributes to offset future taxable income may be deferred or limited significantly.
A reconciliation of the effective tax rate on income or loss and the statutory tax rate is as follows:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
Statutory U.S. tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
State income taxes, net of U.S. tax benefit | 2.1 | % | | (4.1) | % | | 1.6 | % |
Foreign income taxed at other than U.S. statutory rate | (3.3) | % | | 7.0 | % | | (5.0) | % |
Federal tax credits | (2) | % | | 2.8 | % | | (3.5) | % |
Goodwill impairment | — | % | | (24.5) | % | | — | % |
Revaluation of Callaway stock attributable to Topgolf merger | (15.1) | % | | — | % | | — | % |
Other non-deductible expenses | 0.7 | % | | (1.7) | % | | 1.2 | % |
Non-deductible compensation | 1.4 | % | | (0.7) | % | | 1.5 | % |
Stock compensation excess tax benefits | (1.6) | % | | 1.4 | % | | (1.5) | % |
Foreign derived intangible income deduction | (2.1) | % | | 1.1 | % | | (3.2) | % |
Impact of uncertain tax positions | (2.2) | % | | (1.6) | % | | 3.7 | % |
Change in deferred tax valuation allowance | 7.8 | % | | (0.7) | % | | 0.2 | % |
Other | 1.5 | % | | 0.4 | % | | 1.3 | % |
Effective tax rate | 8.2 | % | | 0.4 | % | | 17.3 | % |
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Balance at January 1 | $ | 28,302 | | | $ | 25,993 | | | $ | 11,832 | |
Additions based on tax positions related to the current year | 1,727 | | | 3,119 | | | 3,224 | |
Additions for tax positions of prior years | 526 | | | 474 | | | 593 | |
Reductions for tax positions of prior years | (936) | | | (186) | | | (174) | |
Settlement of tax audits | (2,665) | | | — | | | (7) | |
Current year acquisitions | 6,740 | | | — | | | 11,006 | |
Reductions due to lapsed statute of limitations | (7,046) | | | (1,098) | | | (481) | |
Balance at December 31 | $ | 26,648 | | | $ | 28,302 | | | $ | 25,993 | |
As of December 31, 2021, the gross liability for income taxes associated with uncertain tax benefits was $26,648,000. This liability could be reduced by $5,273,000 of offsetting tax benefits associated with the correlative effects of potential transfer pricing adjustments, which was recorded as a long-term income tax receivable, as well as $10,359,000 of deferred taxes. The net amount of $11,016,000, if recognized, would affect the Company’s financial statements and favorably affect the Company’s effective income tax rate.
The Company does not expect changes to the unrecognized tax benefits in the next 12 months to have a material impact on its results of operations or its financial position.
The Company recognizes interest and/or penalties related to income tax matters in income tax expense. The Company recognized a tax benefit of $555,000 and $437,000, and tax expense of $9,000, for the years ended December 31, 2021, 2020, and 2019, respectively. As of December 31, 2021 and 2020, the gross amount of accrued interest and penalties included in income taxes payable in the accompanying consolidated balance sheets was $3,206,000 and $1,232,000, respectively. In connection with the purchase accounting related to the merger with Topgolf, the Company recorded penalties of $2,529,000 which is included in the gross amount of accrued interest and penalties as of December 31, 2021.
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. The Company is generally no longer subject to income tax examinations by tax authorities in its major jurisdictions as follows:
| | | | | | | | |
Major 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 | | 2017 and prior |
As of December 31, 2021, the Company had $180,218,000 of undistributed foreign earnings and profits. Pursuant to the Tax Act, the Company’s undistributed foreign earnings and profits were deemed repatriated as of December 31, 2017 and subsequent foreign profits are not expected to be subject to U.S. income tax upon repatriation. The Company has not provided deferred tax liabilities for foreign withholding taxes and certain state income taxes on the undistributed earnings and profits from certain non-U.S. subsidiaries that will be permanently reinvested outside the United States, and expects the net impact of any future repatriations of permanently invested earnings on the Company’s overall tax liability to be insignificant. For jurisdictions in which the Company is not permanently reinvested, the Company has estimated and accrued $2,300,000 for the net impact on the Company’s overall tax liability.
Note 15. 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. However, these matters are inherently unpredictable and the resolutions of these matters are subject to many uncertainties and the outcomes are not predictable with assurance. Consequently, management is unable to estimate the ultimate aggregate amount of monetary loss, amounts covered by insurance, or the financial impact that will result from such matters. In addition, the Company cannot assure that it will be able to successfully defend itself in those matters, or that any amounts accrued are sufficient.
The Company does not believe that the matters currently pending against the Company will have a material adverse effect on the Company's consolidated business, financial condition, cash flows, or results of operations on an annual basis.
Unconditional Purchase Obligations
During the normal course of its business, the Company enters into agreements to purchase goods and services, including commitments for endorsement agreements with professional athletes and other endorsers, employment, consulting and service 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 five years.
The minimum obligation that the Company is required to pay as of December 31, 2021 under these agreements is $71,853,000 over the next five years as follows (in thousands):
| | | | | |
2022 | $ | 33,883 | |
2023 | 31,031 | |
2024 | 6,639 | |
2025 | 200 | |
2026 | 100 | |
| |
| $ | 71,853 | |
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.
The Company’s minimum capital commitment related to lease agreements for Topgolf venues under construction, net of amount reimbursed by third-party real estate financing partners, of $66,000,000 is not reflected in this total. These commitments are generally outstanding for periods less than a year. See Note 3 for further information.
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 $11,484,000 as of December 31, 2021.
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 December 31, 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 16. Capital Stock
Common Stock and Preferred Stock
As of December 31, 2021, the Company has an authorized capital of 363,000,000 shares, 0.01 par value, of which 360,000,000 shares are designated common stock, and 3,000,000 shares are designated preferred stock. Of the preferred stock, 240,000 shares are designated Series A Junior Participating Preferred Stock and the remaining shares of preferred stock are undesignated as to series, rights, preferences, privileges or restrictions.
The holders of common stock are entitled to one vote for each share of common stock on all matters submitted to a vote of the Company’s shareholders. Although to date no shares of Series A Junior Participating preferred stock have been issued, if such shares were issued, each share of Series A Junior Participating Preferred Stock would entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the shareholders of the Company. The holders of Series A Junior Participating Preferred Stock and the holders of common stock shall generally vote together as one class on all matters submitted to a vote of the Company’s shareholders.
Treasury Stock and Stock Repurchases
In December 2021, the Company's Board of Directors authorized a $50,000,000 share repurchase program (the "2021 Repurchase Program"), under which the Company is authorized to repurchase shares of its common stock in the open market or in private transactions, subject to the Company's assessment of market conditions and buying opportunities. Repurchases under the 2021 Repurchase Program are made consistent with the terms of the Company's ABL Facility and long-term debt, which limits the amount of stock that can be repurchased. This new repurchase authorization replaces the pre-pandemic 2019 repurchase program (the "2019 Repurchase Program"), which has been terminated by the Board of Directors.
During the year ended December 31, 2021, the Company repurchased approximately 946,600 shares of its common stock at an average price per share of $26.41 for a total cost of $25,000,000, in relation to the 2021 Repurchase Program. As of December 31, 2021, the total available amount remaining under the 2021 Repurchase Program was $25,000,000
Additionally, during 2021, the Company withheld 433,505 shares of its common stock to satisfy the Company's tax withholding obligations in connection with the vesting and settlement of employee restricted stock unit awards and performance share units, for a total cost of $13,471,000.
The Company’s repurchases of shares of common stock are recorded at cost and result in a reduction of shareholders’ equity.
Note 17. Stock Plans and Share-Based Compensation
Stock Plans
As of December 31, 2021, 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"). The Company also had one non-shareholder approved stock plan, the 2021 Employment Inducement Plan (the "2021 Inducement Plan"), which was adopted in connection with the Company's merger with Topgolf on March 8, 2021. The 2021 Inducement Plan has substantially the same terms as the Company's 2004 Incentive Plan, with the exception that awards can only be made to new employees in connection with their commencement of employment and incentive stock options cannot be granted under the 2021 Inducement Plan. In general, the Company grants stock options, restricted stock units, performance based awards, phantom stock units and other awards under these plans.
The 2004 Incentive Plan permits the granting of stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance share units and other equity-based awards to the Company’s officers, employees, consultants and certain other non-employees who provide services to the Company. All grants under the 2004 Incentive Plan are discretionary, although no participant may receive awards in any one year in excess of 2,000,000 shares. The maximum number of shares issuable over the term of the 2004 Incentive Plan is 33,000,000.
The 2013 Directors Plan permits the granting of stock options, restricted stock awards and restricted stock units to eligible directors serving on the Company's Board of Directors. Directors may receive a one-time grant upon their initial appointment to the Board and thereafter an annual grant upon being re-elected at each annual meeting of shareholders, not to exceed 50,000 shares within any calendar year. The maximum number of shares issuable over the term of the 2013 Directors Plan is 1,000,000.
The 2021 Inducement Plan was adopted in connection with the Company's merger with Topgolf on March 8, 2021. The plan permits the granting of stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance share units and other equity-based awards to the Company’s officers, employees, consultants and certain other non-employees who provide services to the Company. The maximum number of shares issuable over the term of the 2021 Inducement Plan is 1,300,000.
Topgolf Replacement Awards & Equity Compensation Plans
In connection with the merger with Topgolf which was completed on March 8, 2021, 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 shares of Callaway common stock (together, the "replacement awards"). The Company also assumed two equity compensation plans and a stock option agreement between Topgolf and a third party in connection with the merger (collectively, the "Topgolf Equity
Compensation Plans and Option Agreement"). No additional awards may be granted by the Company under the assumed Topgolf Equity Plans and Option Agreement. Additionally, the Company included $33,051,000 in the consideration transferred for the replacement awards issued connection with the merger, which represents the fair value of the vested portion of the replacement awards. As of the year ended December 31, 2021, the unvested portion of the replacement awards, which is associated with the future services that will be rendered in the post-combination period, is comprised of 3,168,000 shares underlying stock options with an acquisition date fair value of $5,343,000, and 188,000 shares of restricted stock awards with an acquisition date fair value of $4,794,000. All activity related to share-based awards for the year December 31, 2021, includes the Replacement Awards issued in connection with the merger with Topgolf (see Note 6).
The following table presents shares authorized, available for future grant and outstanding under each of the Company’s plans as of December 31, 2021:
| | | | | | | | | | | | | | | | | |
| Authorized | | Available | | Outstanding(1) |
| (in thousands) |
2004 Incentive Plan | 33,000 | | | 4,736 | | | 2,776 | |
2013 Directors Plan | 1,000 | | | 512 | | | 48 | |
2021 Inducement Plan | 1,300 | | | 310 | | | 774 | |
Topgolf Equity Compensation Plans and Option Agreement | — | | | — | | | 1,933 | |
Total | 35,300 | | | 5,558 | | | 5,531 | |
____________
(1)Includes 1,384 shares of accrued incremental dividend equivalent rights on outstanding shares underlying restricted stock units granted under the 2004 Incentive Plan and 2013 Directors Plan.
Stock Options
There were 3,168,000 stock options granted in 2021, which were constituted of the replacement awards issued in connection with the Company's merger with Topgolf on March 8, 2021. No stock options were granted in 2020 and 2019. As of December 31, 2021, there were 1,988,000 stock options outstanding, of which 1,552,000 were fully vested. For the year ended December 31, 2021, the Company recognized $2,625,000 in compensation expense related to stock option grants. For the years ended December 31, 2020 and 2019, the Company did not recognize any compensation expense related to stock option grants.
The following table summarizes the Company’s stock option activities for the year ended December 31, 2021 (in thousands, except price per share amounts and contractual term):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Options | | Number of Shares | | Weighted- Average Exercise Price Per Share | | Weighted- Average Remaining Contractual Term | | Aggregate Intrinsic Value |
Outstanding at January 1, 2021 | | 598 | | | $ | 6.52 | | | | | |
Granted | | 3,168 | | | $ | 25.93 | | | | | |
Exercised | | (1,436) | | | $ | 15.52 | | | | | |
Forfeited | | (110) | | | $ | 33.42 | | | | | |
Expired | | (232) | | | $ | 30.93 | | | | | |
Outstanding at December 31, 2021 | | 1,988 | | | $ | 26.60 | | | 5.22 | | $ | 7,380 | |
Vested and expected to vest in the future at December 31, 2021 | | 1,979 | | | $ | 26.57 | | | 5.21 | | $ | 7,380 | |
Exercisable at December 31, 2021 | | 1,552 | | | $ | 24.81 | | | 4.62 | | $ | 7,380 | |
The following table summarizes information related to outstanding stock options as of December 31, 2021:
| | | | | | | | | | | | | | | | | | | | |
| | | | Weighted Average |
Range of Option Prices | | Options Outstanding | | Remaining Life (Years) | | Exercise Price |
$6.52 to $35.14 | | 1,988,000 | | 5.22 | | $26.60 |
As of December 31, 2021, there was $2,088,000 unamortized compensation expense related to stock options granted to employees under the Company’s share-based payment plans.
The total intrinsic value for options exercised during the years ended December 31, 2021, 2020 and 2019 was $26,344,000, $566,000 and $792,000, respectively. Cash received from the exercise of stock options for the years ended December 31, 2021, 2020 and 2019 was $22,270,000, $248,000 and $368,000, respectively.
The fair value of the stock options granted in connection with the merger was based on the Black-Scholes option-pricing model. The model uses various assumptions including an expected term, stock price volatility, risk-free interest rate, and dividend yield. Assumptions related to the expected term and stock price volatility were based on historical exercise patterns and historical fluctuations in volatility relative to the Company's stock price, respectively. Assumptions related to the risk-free interest rate and dividend yield were based on the yield-curve of a zero-coupon U.S. treasury bond on the date the grants were made with a maturity equal to the expected term of the grant, and an assumed dividend yield based on the Company's expectation to not pay dividends for the foreseeable future, respectively. The table below summarizes the range and the weighted averages of the fair value assumptions used in the Black-Scholes valuation as of March 8, 2021.
| | | | | | | | | | | | | | |
Assumptions: | | Range | | Weighted Averages |
Expected term (in years) | | 0.3 - 7.1 | | 3.7 |
Volatility | | 43.0% - 85.4% | | 55.1% |
Risk-free interest rate | | 0.1% -1.3% | | 0.6% |
Dividend yield | | — | | — |
Restricted Stock
For the years ended December 31, 2021, 2020 and 2019, the weighted average grant-date fair value of restricted stock units granted was $29.60, $17.84 and $15.63, respectively. The total fair value of restricted stock units vested during the years ended December 31, 2021, 2020 and 2019 was $6,516,000, $5,959,000 and $6,263,000, respectively.
The table below is a roll-forward of the activity for restricted stock units for the year ended December 31, 2021 (in thousands, except fair value amounts):
| | | | | | | | | | | | | | |
Restricted Stock Units | | Units | | Weighted- Average Grant-Date Fair Value |
Unvested at January 1, 2021 | | 900 | | | $ | 15.83 | |
Granted | | 1,154 | | | 29.60 | |
Vested | | (432) | | | 15.07 | |
Forfeited | | (41) | | | 27.50 | |
| | | | |
Unvested at December 31, 2021(1) | | 1,581 | | | $ | 25.79 | |
____________
(1)Excludes 1,384 shares of accrued incremental dividend equivalent rights on outstanding shares underlying restricted stock units granted under the 2004 Incentive Plan and 2013 Directors Plan.
The Company recognized $13,981,000, $6,417,000 and $6,098,000 of compensation expense related to restricted stock units for the years ended December 31, 2021, 2020 and 2019, respectively.
The weighted average grant-date fair value of restricted stock awards granted as part of the replacement awards was $28.74. The total fair value of the restricted stock awards granted as part of the replacement awards that vested during the year ended December 31, 2021 was $847,000. The table below is a roll-forward of the activity for restricted stock awards granted as part of the replacement awards for the year ended December 31, 2021 (in thousands, except fair value amounts):
| | | | | | | | | | | | | | |
Restricted Stock Awards | | Units | | Weighted- Average Grant-Date Fair Value |
Unvested at January 1, 2021 | | — | | | $ | — | |
Granted | | 188 | | | 28.74 | |
Vested | | (29) | | | 29.52 | |
Forfeited | | (11) | | | 16.63 | |
| | | | |
Unvested at December 31, 2021 | | 148 | | | $ | 29.52 | |
The Company recognized $2,356,000 of compensation expense related to restricted stock awards granted as part of replacement awards during the year ended December 31, 2021. For the years ended December 31, 2020 and 2019, the Company did not recognize any compensation expense related to restricted stock awards.
As of December 31, 2021, there was $27,776,000 of total unamortized compensation expense related to unvested restricted stock granted to employees under the Company’s share-based payment plans, which includes $2,171,000 of unrecognized compensation expense related restricted awards granted as part of the replacement awards. The unamortized compensation expense related to restricted stock units and restricted stock replacement awards is expected to be recognized over a weighted-average period of 1.8 years and 1.6 years respectively.
Performance Based Awards
During the year ended December 31, 2021, the Company granted 1,129,000 shares underlying EBITDA PRSUs at a weighted average grant-date fair value of $29.38, of which 1,063,000 shares were granted in connection with the merger with Topgolf, which was completed on March 8, 2021, and had a weighted average grant-date fair value of $29.52.
During the year ended December 31, 2021, the Company granted 155,000 shares underlying APTI PRSUs at a weighted average grant-date fair value of $29.56, of which 43,000 were granted in connection with the merger with Topgolf, which was completed on March 8, 2021, and had a weighted average grant-date fair value of $29.52.
During the year ended December 31, 2021, the Company granted 156,000 shares underlying rTSR PRSUs at a weighted average grant-date fair value of $38.23, of which 43,000 were granted in connection with the merger with Topgolf, which was completed on March 8, 2021, and had a weighted average grant-date fair value of $37.40. During the years ended December 31, 2020, and 2019, the Company granted 125,000, and 149,000 shares underlying rTSR PRSUs at a weighted average grant-date fair value of $23.22, and $16.96, respectively.
No EPS PRSUs were granted during the year ended December 31, 2021. During the years ended December 31, 2020, and 2019, the Company granted 125,000, and 226,000 shares underlying EPS PRSUs, respectively, at a weighted average grant-date fair value of $19.66, and $15.17 per share, respectively.
The total fair value of all performance based awards vested during the years ended December 31, 2021, 2020 and 2019 was $8,242,000, $7,242,000 and $6,708,000, respectively.
During the years ended December 31, 2021, 2020 and 2019, the Company recognized compensation expense on all PRSUs, net of estimated forfeitures, of $19,723,000, $4,511,000 and $6,796,000, respectively. At December 31, 2021, the combined unamortized compensation expense related to the EBITDA, APTI, EPS, rTSR, and merger PRSUs was $45,742,000, and is expected to be recognized over a weighted-average period of 1.9 years.
The table below is a roll-forward of the activity for performance based awards during the year ended December 31, 2021 (in thousands, except fair value amounts):
| | | | | | | | | | | | | | |
Performance Share Units | | Units | | Weighted- Average Grant-Date Fair Value |
Unvested at January 1, 2021 | | 835 | | | $ | 17.08 | |
Performance Share Units Granted | | 1,440 | | | $ | 30.35 | |
Target Award Adjustment(1) | | 279 | | | $ | 14.80 | |
Vested | | (557) | | | $ | 14.80 | |
Forfeited | | (36) | | | $ | 25.77 | |
Unvested at December 31, 2021 | | 1,961 | | | $ | 27.00 | |
____________
(1)Represents shares earned by participants at 200% for awards granted in 2018.
Share-Based Compensation Expense
The table below summarizes the amounts recognized in the financial statements for the years ended December 31, 2021, 2020 and 2019 for share-based compensation, including expense for restricted stock units, performance share units, stock options and cash settled stock appreciation rights (in thousands):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
Cost of products | $ | 1,219 | | | $ | 763 | | | $ | 961 | |
Selling, general and administrative expenses | 36,524 | | | 9,326 | | | 10,955 | |
Research and development expenses | 942 | | | 838 | | | 980 | |
Total cost of share-based compensation included in income, before income tax | 38,685 | | | 10,927 | | | 12,896 | |
Income tax benefit | 8,898 | | | 2,513 | | | 2,966 | |
Total cost of employee share-based compensation, after tax | $ | 29,787 | | | $ | 8,414 | | | $ | 9,930 | |
Note 18. Employee Benefit Plan
The Company has two voluntary deferred compensation plans under Section 401(k) of the Internal Revenue Code (the “Callaway Golf 401(k) Plan” and the “Topgolf 401(k) Plan”) for employees who satisfy the age and service requirements under each respective plan.
Callaway Golf 401(k) Plan
Under the Callaway Golf 401(k) Plan, each participant may elect to contribute up to 75% of annual compensation, up to the maximum allowable limit permitted by the IRS. Under the plan, the Company contributes annually an amount equal to 50% of the participant’s contributions, up to 6% of the participant's eligible annual compensation, for a maximum employer matching contribution of 3%. The portion of the participant’s account attributable to elective deferral contributions and rollover contributions made by the participant are 100% vested and are not able to be forfeited. Employer contributions vest at a rate of 50% per year, and are fully vested after two years of service. Beginning April 13, 2020, in light of the business and financial uncertainties created by the COVID-19 pandemic, the Company suspended its portion of the employer matching contribution, except for employees who are unionized and are covered under a collective bargaining agreement. The matching contribution was reinstated on January 1, 2021. During the years ended December 31, 2021, 2020 and 2019, Company matching contributions under the plan were $3,261,000, $1,103,000 and $2,719,000 respectively.
Topgolf 401(k) Plan
Under the Topgolf 401(k) Plan, employees of Topgolf may elect to contribute up to 80% of annual compensation, up to the maximum allowable limit permitted by the IRS. Under the plan, the Company contributes annually an amount equal to 50% of the participant's contribution, up to 6% of the employees eligible compensation, for a maximum employer matching contribution of 3%. The portion of the participant’s account attributable to elective deferral contributions and rollover contributions made by the participant are 100% vested and are not able to be forfeited. Employer contributions vest at a rate of 25% per year, and are fully vested after four years of service. During the year ended December 31, 2021, Company matching contributions under the plan were $2,655,000.
In January 2022, the Company amended the Topgolf 401(k) Plan (as amended, the “2022 Topgolf 401(k) Plan”). Under the 2022 Topgolf 401(k) Plan, the Company contributes annually an amount equal to 100% of the participant’s first 3% of contributions, and an amount of 50% of the participant's contributions between 3% and 5% of eligible compensation, for a maximum contribution of 4%. The portion of the participant’s account attributable to elective deferral contributions and rollover contributions made by the participant are 100% vested and are not able to be forfeited. Employer contributions under the plan are immediately 100% vested upon contribution and are not able to be forfeited.
Note 19. Fair Value of Financial Instruments
Fair Value Measurements
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. The Company measures and discloses the fair value of nonfinancial and financial assets and liabilities utilizing a hierarchy of valuation techniques based on whether the inputs to a fair value measurement are considered to be observable or unobservable in a marketplace. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. This hierarchy requires the use of observable market data when available. The measurement of assets and liabilities 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 Company measures fair value using a set of standardized procedures that are outlined herein for all assets and liabilities which are required to be measured at fair value. When available, the Company utilizes quoted market prices from an independent third-party source to determine fair value and classifies such items in Level 1. In some instances where a market price is available, but the instrument is in an inactive or over-the-counter market, the Company consistently applies the dealer (market maker) pricing estimate and uses a midpoint approach on bid and ask prices from financial institutions to
determine the reasonableness of these estimates. Assets and liabilities subject to this fair value valuation approach are typically classified as Level 2.
Items valued using internally-generated valuation techniques are classified according to the lowest level input that is significant to the fair value measurement. As a result, the asset or liability could be classified in either Level 2 or Level 3 even though there may be some significant inputs that are readily observable. The Company utilizes a discounted cash flow valuation model whenever applicable to derive a fair value measurement on long-lived assets and goodwill and intangible assets. The Company uses its internal cash flow estimates discounted at an appropriate rate, quoted market prices, royalty rates when available and independent appraisals as appropriate. The Company also considers its counterparty’s and own credit risk on derivatives and other liabilities measured at their fair value.
The following table summarizes the valuation of the Company’s foreign currency forward contracts and interest rate hedge contracts that are measured at fair value on a recurring basis as of December 31, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value | | Level 1 | | Level 2 | | Level 3 |
December 31, 2021 | | | | | | | |
Foreign currency forward contracts—asset position(1) | $ | 339 | | | $ | — | | | $ | 339 | | | $ | — | |
Foreign currency forward contracts—liability position(1) | (216) | | | — | | | (216) | | | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Interest rate hedge agreements—liability position(2) | (8,679) | | | — | | | (8,679) | | | — | |
| | | | | | | |
| | | | | | | |
| $ | (8,556) | | | $ | — | | | $ | (8,556) | | | $ | — | |
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 20).
(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 (see Note 20).
Disclosures about the Fair Value of Financial Instruments
The carrying values of the Company's cash and cash equivalents, net accounts receivable, accounts payable and accrued expenses, and other current liabilities contained in the consolidated balance sheet at December 31, 2021 and December 31, 2020 approximate fair value due to the relatively short maturity of the respective instruments.
The table below illustrates information about fair value relating to the Company’s financial assets and liabilities that are recognized in the consolidated balance sheets as of December 31, 2021 and December 31, 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Term Loan Facility(1) | $ | 436,800 | | | $ | 437,499 | | | $ | 441,600 | | | $ | 443,243 | |
Japan Term Loan Facility(2) | $ | 13,031 | | | $ | 12,185 | | | $ | 18,390 | | | $ | 16,083 | |
Convertible Notes(3) | $ | 258,750 | | | $ | 444,351 | | | $ | 258,750 | | | $ | 414,191 | |
U.S. Asset-Based Revolving Credit Facility(4) | $ | 9,096 | | | $ | 9,096 | | | $ | 22,130 | | | $ | 22,130 | |
| | | | | | | |
Equipment Notes(5) | $ | 31,137 | | | $ | 30,167 | | | $ | 31,822 | | | $ | 29,385 | |
| | | | | | | |
Mortgage Loans(6) | $ | 46,407 | | | $ | 52,349 | | | $ | — | | | $ | — | |
Topgolf Term Loan(7) | $ | 340,375 | | | $ | 346,076 | | | $ | — | | | $ | — | |
| | | | | | | |
| | | | | | | |
____________
(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 therefore is 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 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 and therefore is categorized within Level 2 of the fair value hierarchy. 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 therefore is categorized within Level 2 of the fair value hierarchy. See Note 7 for further information.
(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 based on the observable market borrowing rates and therefore is categorized within Level 2 of the fair value hierarchy. See Note 7 for further information.
(5)Between December 2017 and December 2021, the Company entered into the Equipment Notes that are secured by certain equipment at the Company's golf ball manufacturing facility. 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 of the notes and therefore the notes are categorized within Level 2 of the fair value hierarchy. See Note 7 for further information.
(6)The fair value of the mortgage loans is calculated based on the future payments under the mortgage agreement discounted at the incremental borrowing rate and therefore the fair value is categorized within Level 2 of the fair value hierarchy. See Note 7 for further information.
(7)The fair value of the Topgolf Term Loan is based on quoted market rate from the lender and therefore the fair value is categorized within Level 2 of the fair value hierarchy. See Note 7 for further information.
Nonrecurring Fair Value Measurements
The Company measures certain assets at fair value on a non-recurring basis using significant unobservable inputs (Level 3) 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, 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 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 during 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 years ended December 31, 2021 and 2019.
Note 20. Derivatives and Hedging
In the normal course of business, the Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to transactions of its international subsidiaries as well as fluctuations in foreign currency exchange rates and changes in interest rates relating to its long-term debt. The Company uses designated cash flow hedges and non-designated hedges in the form of foreign currency forward contracts as part of its strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates and to mitigate the impact of foreign currency translation on transactions that are denominated primarily in Japanese Yen, British Pounds, Euros, Canadian Dollars, Australian Dollars and Korean Won. The Company also uses cross-currency debt swap contracts and interest rate hedge contracts to mitigate the impact of variable rates on its long-term debt as well as changes in foreign currencies.
The Company accounts for its foreign currency forward contracts, cross-currency debt swap contracts and interest rate hedge contracts in accordance with ASC Topic 815. ASC Topic 815 requires the recognition of all derivative instruments as either assets or liabilities on the balance sheet, the measurement of those instruments at fair value and the recognition of changes in the fair value of derivatives in earnings in the period of change, unless the derivative qualifies as a designated cash flow hedge that offsets certain exposures. Certain criteria must be satisfied in order for derivative financial instruments to be classified and accounted for as a cash flow hedge. Gains and losses from the remeasurement of qualifying cash flow hedges are recorded as a component of accumulated other comprehensive income (loss) and released into earnings as a component of cost of goods sold or net revenues, 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 balance sheets at December 31, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | | | |
| | | Fair Value of Asset Derivatives |
| | | December 31, |
| Balance Sheet Location | | 2021 | | 2020 |
Derivatives designated as cash flow hedging instruments: | | | | | |
Foreign currency forward contracts | Other current assets | | $ | 128 | | | $ | 37 | |
| | | | | |
| | | | |
Derivatives not designated as hedging instruments: | | | | | |
Foreign currency forward contracts | Other current assets | | 211 | | | 53 | |
| | | | | |
Total asset position | | $ | 339 | | | $ | 90 | |
| | | | | | | | | | | | | | | | | |
| | | Fair Value of Liability Derivatives |
| | | December 31, |
| Balance Sheet Location | | 2021 | | 2020 |
Derivatives designated as cash flow hedging instruments: | | | | | |
Foreign currency forward contracts | Accounts payable and accrued expenses | | $ | 7 | | | $ | 38 | |
| | | | | |
Interest rate hedge contracts | Accounts payable and accrued expenses | | 4,072 | | | 4,780 | |
Interest rate hedge contracts | Other long-term liabilities | | 4,607 | | | 13,142 | |
| | | 8,686 | | | 17,960 | |
Derivatives not designated as hedging instruments: | | | | | |
Foreign currency forward contracts | Accounts payable and accrued expenses | | 209 | | | 1,515 | |
| | | | | |
Total liability position | | $ | 8,895 | | | $ | 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 balance sheets at December 31, 2021 and 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 months to 15 months from their inception. At December 31, 2021 and 2020, the notional amounts of the Company's foreign currency forward contracts designated as cash flow hedge instruments were approximately $3,335,000 and $756,000, respectively.
As of December 31, 2021, the Company recorded a net gain of $2,440,000 in accumulated other comprehensive loss related to foreign currency forward contracts. Of this amount, net gains of $1,700,000 were relieved from accumulated other comprehensive loss and recognized in cost of goods sold for the underlying intercompany sales that were recognized, and net gains of $86,000 were relieved from accumulated other comprehensive income (loss) related to the amortization of forward points. There were no ineffective hedge gains or losses recognized during 2021. Based on the current valuation, the Company expects to reclassify net gains of $471,000 from accumulated other comprehensive income (loss) into net earnings during the next 12 months.
In the years ended December 31, 2020 and 2019, the Company recognized net gains of $756,000 and $398,000, respectively, in cost of goods sold related to foreign currency forward contracts.
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 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 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 $194,346,000 and $196,350,000 as of December 31, 2021 and 2020, respectively.
During the years ended December 31, 2021, 2020, and 2019 the Company recorded a net gain of $4,406,000, and net losses of $12,881,000 and $9,434,000, respectively, related to the remeasurement of the interest rate hedge contract in accumulated other comprehensive loss. Of this amount, net losses of $4,829,000, $3,852,000, and $552,000 were relieved from accumulated other comprehensive loss and recognized in interest expense during December 31, 2021, 2020 and 2019, respectively. Based on the current valuation, the Company expects to reclassify a net loss of $4,072,000 related to the interest rate hedge contract from accumulated other comprehensive loss into earnings during the next 12 months.
In connection with the cross-currency swap contract, during the year ended December 31, 2020, the Company recorded a remeasurement net gain of $15,081,000 in accumulated other comprehensive loss. During the year ended December 31, 2020, net gains of $18,510,000 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 in 2020.
•Net gains of $5,735,000 related to foreign currency were recognized in other income in 2020.
•Net gains of $1,730,000 were recognized in interest expense during the year ended December 31, 2020.
The following tables summarize the net effect of all cash flow hedges on the consolidated financial statements for the year ended December 31, 2021, 2020, and 2019 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Net Gain (Loss) Recognized in Accumulated Other Comprehensive Income (Loss) (Effective Portion) |
| | Year Ended December 31, |
Derivatives designated as cash flow hedging instruments | | 2021 | | 2020 | | 2019 |
Foreign currency forward contracts | | $ | 2,440 | | | $ | 756 | | | $ | 1,033 | |
Cross-currency debt swap contracts | | — | | | 15,081 | | | 11,212 | |
Interest rate hedge contracts | | 4,406 | | | (12,881) | | | (9,434) | |
| | $ | 6,846 | | | $ | 2,956 | | | $ | 2,811 | |
| | | | | | | | | | | | | | | | | | | | |
| | Net Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Earnings (Effective Portion) |
| | Year Ended December 31, |
Derivatives designated as cash flow hedging instruments | | 2021 | | 2020 | | 2019 |
Foreign currency forward contracts | | $ | 1,700 | | | $ | 1,028 | | | $ | 1,165 | |
Cross-currency debt swap contracts | | — | | | 18,510 | | | 7,783 | |
Interest rate hedge contracts | | (4,829) | | | (3,852) | | | (552) | |
| | $ | (3,129) | | | $ | 15,686 | | | $ | 8,396 | |
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 December 31, 2021, 2020 and 2019, the notional amounts of the Company’s foreign currency forward contracts used to mitigate the exposures discussed above were approximately $67,831,000, $81,627,000, and $72,119,000, 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 statements of operations. The foreign currency contracts are classified under Level 2 of the fair value hierarchy (see Note 19).
The following table summarizes the location of gains on the consolidated statements of operations that were recognized during the years ended December 31, 2021, 2020 and 2019, in addition to the derivative contract type (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Amount of Net Gain Recognized in Income on Derivative Instruments |
Derivatives not designated as hedging instruments | | Location of Net gain recognized in income on derivative instruments | | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Foreign currency forward contracts | | Other income, net | | $ | 14,413 | | | $ | 2,156 | | | $ | 4,176 | |
In addition, during the years ended December 31, 2021 and 2019, the Company recognized net foreign currency losses of $6,368,000 and $5,838,000, respectively and a net foreign currency gain of $9,024,000 during the year ended December 31, 2020 related to transactions with foreign subsidiaries.
Note 21. Accumulated Other Comprehensive Income
The following table details the amounts reclassified from accumulated other comprehensive income to cost of goods sold, as well as changes in foreign currency translation for the years ended December 31, 2021, 2020 and 2019 (in thousands):
| | | | | | | | | | | | | | | | | |
| Derivative Instruments | | Foreign Currency Translation | | Total |
Accumulated other comprehensive loss, January 1, 2019, after tax | $ | 107 | | | $ | (13,807) | | | $ | (13,700) | |
Change in derivative instruments | 2,811 | | | — | | | 2,811 | |
Net losses reclassified to cost of goods sold | (1,165) | | | — | | | (1,165) | |
Net gains reclassified to other income (expense) | (2,756) | | | | | (2,756) | |
Net gains reclassified to interest expense | (4,475) | | | | | (4,475) | |
Income tax provision on derivative instruments | 1,275 | | | — | | | 1,275 | |
Foreign currency translation adjustments | — | | | (4,412) | | | (4,412) | |
Accumulated other comprehensive loss, December 31, 2019, after tax | (4,203) | | | (18,219) | | | (22,422) | |
Change in derivative instruments | 2,956 | | | — | | | 2,956 | |
Net gains reclassified to cost of goods sold | (1,028) | | | — | | | (1,028) | |
Net gains reclassified to other income (expense) | (16,780) | | | — | | | (16,780) | |
Net gains reclassified to interest expense | 2,122 | | | — | | | 2,122 | |
Income tax provision on derivative instruments | 2,916 | | | — | | | 2,916 | |
Foreign currency translation adjustments | — | | | 25,690 | | | 25,690 | |
Accumulated other comprehensive loss, December 31, 2020, after tax | (14,017) | | | 7,471 | | | (6,546) | |
Change in derivative instruments | 6,846 | | | — | | | 6,846 | |
Net gains reclassified to cost of goods sold | (1,700) | | | — | | | (1,700) | |
Net gains reclassified to other income (expense) | — | | | — | | | — | |
Net losses reclassified to interest expense | 4,829 | | | — | | | 4,829 | |
Income tax provision on derivative instruments | (1,557) | | | — | | | (1,557) | |
Foreign currency translation adjustments | — | | | (29,215) | | | (29,215) | |
Accumulated other comprehensive loss, December 31, 2021, after tax | $ | (5,599) | | | $ | (21,744) | | | $ | (27,343) | |
Note 22. 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 December 31, 2021, the Company had three reportable operating segments: Topgolf, Golf Equipment and Apparel, Gear and Other.
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.
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 table below contains information utilized by management to evaluate its operating segments.
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
Net revenues: | | | | | |
Topgolf(1) | $ | 1,087,671 | | | $ | — | | | $ | — | |
Golf equipment | 1,229,175 | | | 982,675 | | | 979,173 | |
Apparel, gear and other | 816,601 | | | 606,785 | | | 721,890 | |
Total net revenues | $ | 3,133,447 | | | $ | 1,589,460 | | | $ | 1,701,063 | |
| | | | | |
Income (loss) before income taxes: | | | | | |
Topgolf(1) | $ | 58,225 | | | $ | — | | | $ | — | |
Golf equipment | 203,846 | | | 148,578 | | | 140,316 | |
Apparel, gear and other | 68,511 | | | 679 | | | 75,490 | |
Total segment operating income | 330,582 | | | 149,257 | | | 215,806 | |
Corporate G&A and other(2) | (125,867) | | | (80,503) | | | (83,138) | |
Goodwill and tradename impairment(3) | — | | | (174,269) | | | — | |
Total operating income (loss) | 204,715 | | | (105,515) | | | 132,668 | |
Gain on Topgolf investment(4) | 252,531 | | | — | | | — | |
Interest expense, net | (115,565) | | | (46,932) | | | (38,493) | |
Other income, net | 8,961 | | | 24,969 | | | 1,594 | |
| | | | | |
Total income (loss) before income taxes | $ | 350,642 | | | $ | (127,478) | | | $ | 95,769 | |
| | | | | |
| | | | | |
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
Identifiable assets: | | | |
Topgolf(1) | $ | 4,909,968 | | | $ | — | |
Golf equipment | 1,107,632 | | | 481,214 | |
Apparel, gear and other | 840,466 | | | 754,601 | |
Reconciling items(5) | 889,714 | | | 744,785 | |
Total identifiable assets | $ | 7,747,780 | | | $ | 1,980,600 | |
| | | |
Additions to long-lived assets:(6) | | | |
Topgolf(1) | $ | 286,813 | | | $ | — | |
Golf equipment | 30,657 | | | 25,695 | |
Apparel, gear and other | 20,996 | | | 21,235 | |
Total additions to long-lived assets | $ | 338,466 | | | $ | 46,930 | |
| | | |
Goodwill:(7) | | | |
Topgolf(1) | $ | 1,340,663 | | | $ | — | |
Golf equipment | 531,122 | | | 27,025 | |
Apparel, gear and other | 88,285 | | | 29,633 | |
Total goodwill | $ | 1,960,070 | | | 56,658 | |
| | | |
Depreciation and amortization: | | | |
Topgolf(1) | $ | 114,618 | | | $ | — | |
Golf equipment | 14,073 | | | 19,212 | |
Apparel, gear and other | 27,131 | | | 20,296 | |
Total depreciation and amortization | $ | 155,822 | | | $ | 39,508 | |
____________
(1)On March 8, 2021, the Company completed the merger with Topgolf and has included the results of operations of Topgolf in its consolidated statements of operations from that date forward.
(2)Corporate general and administrative expenses for the year ended December 31, 2021 include (i) $22.3 million of non-cash amortization expense for intangible assets acquired in connection with the merger with Topgolf, combined with depreciation expense from the fair value step-up of Topgolf property, plant and equipment and amortization expense related to the fair value adjustments to Topgolf leases, (ii)$21.2 million of transaction, transition and other non-recurring costs associated with the merger with Topgolf completed on March 8, 2021, and (iii) $2.8 million of costs related to the implementation of new IT systems for Jack Wolfskin. The amount for the year ended December 31, 2020 includes certain non-recurring costs, including (i) $8.5 million in transaction, transition, and other non-recurring costs associated with the Topgolf Merger Agreement, (ii) $3.7 million of costs associated with the Company’s transition to its new North America Distribution Center; (iii) $3.8 million related to cost-reduction initiatives, including severance charges associated with workforce reductions due to the COVID-19 pandemic, and (iv) $1.5 million related to the implementation of new IT systems for Jack Wolfskin. The amount for the year ended December 31, 2019 includes $26.4 million of non-recurring transaction fees and transition costs associated with the acquisition of Jack Wolfskin completed in January 2019, as well as other non-recurring advisory fees.
(3)The $174.3 million goodwill and tradename impairment for the year ended December 31, 2020 was primarily related to an impairment in goodwill at Jack Wolfskin (see Note 9).
(4)The $252.5 million gain on Topgolf investment included in the year ended December 31, 2021 was related to the fair value step-up on the Company's pre-acquisition investment in Topgolf (see Note 10).
(5)Reconciling items represent unallocated corporate assets not segregated between the three segments including income taxes receivable, prepaid expense and other current assets. The $144.9 million increase in reconciling items in 2021 compared to 2020 was primarily due to an increase of $84.2 million in other current assets and an increase of $33.9 million in prepaid expenses.
(6)Additions to long-lived assets are comprised of purchases of property, plant and equipment.
(7)The $1,903.4 million increase in goodwill in 2021 compared to 2020 was primarily due to the Topgolf merger in March 2021 (see Note 9).
The Company markets its products in the United States and internationally, with its principal international markets being Japan and Europe. The tables below contain information about the geographical areas in which the Company operates. Net revenues are attributed to the location to which the product was shipped. Long-lived assets are based on location of domicile.
| | | | | | | | | | | |
| Net Revenues | | Long-Lived Assets(1) |
| (in thousands) |
2021 | | | |
United States | $ | 2,067,070 | | | $ | 1,383,614 | |
Europe | 499,533 | | | 48,854 | |
Japan | 243,848 | | | 7,205 | |
Rest of World | 322,996 | | | 11,729 | |
| $ | 3,133,447 | | | $ | 1,451,402 | |
2020 | | | |
United States | $ | 778,600 | | | $ | 116,459 | |
Europe | 372,957 | | | 17,078 | |
Japan | 212,055 | | | 6,028 | |
Rest of World | 225,848 | | | 6,930 | |
| $ | 1,589,460 | | | $ | 146,495 | |
2019 | | | |
United States | $ | 788,232 | | | $ | 103,111 | |
Europe | 428,628 | | | 19,148 | |
Japan | 246,260 | | | 5,655 | |
Rest of World | 237,943 | | | 4,846 | |
| $ | 1,701,063 | | | $ | 132,760 | |
____________
(1)In 2021, the Company re-evaluated its definition of long-lived assets to include property, plant and equipment. As a result, the information presented for 2020 and 2019 was recast to conform with the current year presentation.
Note 23. Transactions with Related Party
The Callaway Golf Company Foundation (the “Foundation”) oversees and administers charitable giving and makes grants to selected organizations. Officers of the Company also serve as directors of the Foundation and the Company’s employees provide accounting and administrative services for the Foundation. During the year ended December 31, 2021, the Company recognized charitable contribution expense of $1,000,000. During the year ended December 31, 2020, the Company did not make a contribution to the Foundation. During the year ended December 31, 2019, the Company recognized charitable contribution expense of $750,000 for the Foundation.
Note 24. Summarized Quarterly Data (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year 2021 Quarters |
| 1st | | 2nd | | 3rd | | 4th | | Total |
| (in thousands, except per share data) |
Net revenues | $ | 651,621 | | | $ | 913,641 | | | $ | 856,461 | | | $ | 711,724 | | | $ | 3,133,447 | |
Income (loss) from operations | $ | 76,099 | | | $ | 107,269 | | | $ | 76,010 | | | $ | (54,663) | | | $ | 204,715 | |
| | | | | | | | | |
| | | | | | | | | |
Net income (loss) | $ | 272,461 | | | $ | 91,744 | | | $ | (15,991) | | | $ | (26,226) | | | $ | 321,988 | |
Earnings (loss) per common share(1) | | | | | | | | | |
Basic | $ | 2.32 | | | $ | 0.50 | | | $ | (0.09) | | | $ | (0.14) | | | $ | 1.90 | |
Diluted | $ | 2.19 | | | $ | 0.47 | | | $ | (0.09) | | | $ | (0.14) | | | $ | 1.82 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year 2020 Quarters |
| 1st | | 2nd | | 3rd | | 4th | | Total |
| (in thousands, except per share data) |
Net revenues | $ | 442,276 | | | $ | 296,996 | | | $ | 475,559 | | | $ | 374,629 | | | $ | 1,589,460 | |
Income (loss) from operations | $ | 40,680 | | | $ | (177,449) | | | $ | 63,509 | | | $ | (32,255) | | | $ | (105,515) | |
| | | | | | | | | |
| | | | | | | | | |
Net income (loss) | $ | 28,894 | | | $ | (167,684) | | | $ | 52,432 | | | $ | (40,576) | | | $ | (126,934) | |
Earnings (loss) per common share(1) | | | | | | | | | |
Basic | $ | 0.31 | | | $ | (1.78) | | | $ | 0.56 | | | $ | (0.43) | | | $ | (1.35) | |
Diluted | $ | 0.30 | | | $ | (1.78) | | | $ | 0.54 | | | $ | (0.43) | | | $ | (1.35) | |
____________
(1)Earnings per share is computed individually for each of the quarters presented; therefore, the sum of the quarterly earnings per share may not necessarily equal the total for the year.