UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20212023
or
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number 1-10962
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Topgolf Callaway Golf CompanyBrands Corp. |
| (Exact name of registrant as specified in its charter) |
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| Delaware | | 95-3797580 |
(State or other jurisdiction of
incorporation or organization) | | (I.R.S. Employer
Identification No.) |
2180 Rutherford Road, Carlsbad, CA 92008
(760) 931-1771
(Address, including zip code, and telephone number, including area code, of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
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| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on which Registered |
| Common Stock, $0.01 par value per share | ELYMODG | The New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act.
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| Large accelerated filer | ý | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☒ No ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. □
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). □
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of June 30, 2021,2023, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $4,007,252,039$2,808,466,571 based on the closing sales price of the registrant’s common stock as reported on the New York Stock Exchange. Such amount was calculated by excluding all shares held by directors and executive officers and shares held in treasury, without conceding that any of the excluded parties are “affiliates” of the registrant for purposes of the federal securities laws.
As of January 31, 2022, theof February 19, 2024, the number of shares outstanding of the registrant’s common stock, $.01 par value,value, was 185,187,055.183,598,015.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the registrant’s Definitive Proxy Statement to be filed with the Securities and Exchange Commission ("SEC"(“SEC” or “Commission”) pursuant to Regulation 14A in connection with the registrant’s 20222024 Annual Meeting of Shareholders, which is scheduled to be held on May 25, 2022. Such30, 2024. Such Definitive Proxy Statement will be filed with the Commission not later than 120 days after the conclusion of the registrant’s fiscal year ended December 31, 2021.2023.
Important Notice to Investors Regarding Forward-Looking Statements: This report contains "forward-looking statements"“forward-looking statements” as defined under the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as: "may," "should," "will," "could," "would," "anticipate," "plan," "believe," "project," "estimate," "expect," "strategy," "future," "likely,"“may,” “should,” “will,” “could,” “would,” “anticipate,” “plan,” “believe,” “project,” “estimate,” “expect,” “strategy,” “future,” “likely,” and similar references to future periods. Forward-looking statements include, among others, statements that relate to future plans, events, liquidity, financial results, performance, prospects or growth and scale opportunities including, but not limited to, statements relating to future industry and market conditions, the impact of the COVID-19 pandemic on the Company's business, results of operations and financial condition and the impact of any measures taken to mitigate the effect of the COVID-19 pandemic, strength and demand of the Company'sour products and services, continued brand momentum, demand for golf and outdoor activities and apparel, continued investments in the business, increases in shareholder value, post pandemic consumer trends and behavior, future industry and market conditions, the benefits of the merger with Topgolf International, Inc. (“Topgolf”), including the anticipated operations, venue/bay expansion plans, financial position, liquidity, performance, prospects or growth and scale opportunities of the Company, Topgolf or the combined company, the strength of the Company'sour brands, product lines and e-commerce business, geographic diversity, market recovery, availability of capital under the Company'sour credit facilities, the capital markets or other sources, the Company'sour conservation and cost reduction efforts, future stock repurchases, cash flows and liquidity, compliance with debt covenants, estimated unrecognized stock compensation expense, projected capital expenditures and depreciation and amortization expense, future contractual obligations, the realization of deferred tax assets, including loss and credit carryforwards, future income tax expense,provision, the future impact of new accounting standards, the Topgolf mergerimpacts of inflation and the related financial impactchanges in foreign exchange rates, future prospects and growth of the futureour business, and prospects of the Company,including TravisMathew, LLC ("TravisMathew"(“TravisMathew”), OGIO International, Inc. ("OGIO"(“OGIO”), JW Stargazer Holding GmbH ("(“Jack Wolfskin"Wolfskin”) and Topgolf. These statements are based upon current information and the Company'sour current beliefs, expectations and assumptions regarding the future of the Company'sour business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of the Company'sour control. As a result of these uncertainties and because the information on which these forward-looking statements is based may ultimately prove to be incorrect, actual results may differ materially from those anticipated. Important factors that could cause actual results to differ include, among others, the following:
•certain risks and uncertainties, including changes in capital markets or economic conditions, particularly the uncertainty related to the duration and impact of the COVID-19 pandemic, inflation, and related decreases in consumer demand and spending;spending and any severe or prolonged economic downturn;
•consumer acceptance of and demand for our products and services;
•future retailer purchasing activity, which can be significantly affected by adverse industry conditions and overall retail inventory levels;
•unfavorable changes in U.S. trade or other policies, including restrictions on imports or an increase in import tariffs;
•the impactlevel of promotional activity in the COVID-19 pandemicmarketplace;
•future consumer discretionary purchasing activity, which can be significantly adversely affected by unfavorable economic or market conditions;
•future changes in foreign currency exchange rates and its related variantsthe degree of effectiveness of our hedging programs;
•our ability to manage international business risks;
•our ability to recognize operational synergies and other potential future outbreaks of infectious diseases or other health concerns, and measures taken to limit their impact, which could adversely affect the Company’s business, consumer demand andscale opportunities across our supply chain and the global economy;business platform;
•disruptionsadverse changes in the credit markets or continued compliance with the terms of our credit facilities;
•our ability to business operations from the COVID-19 pandemic, such as travel restrictions, government-mandated shut-down orders or quarantines or voluntary “social distancing” that affects employees, customers and suppliers, production delays, closures of manufacturing facilities, retail locations, warehouses and supply and distribution chains, price inflation, and staffing shortages as a result of remote working requirements or otherwise;monetize our investments;
•costs, expenses or difficulties related to the merger with Topgolf, including the integration of the Topgolf business, or the failure to realize the expected benefits and synergies of the transaction in the expected timeframes or at all;
•the potential impact of the Topgolf merger on relationships with the Company’s and/or Topgolf’s employees, customers, suppliers and other business partners;
•consumer acceptance of and demand for the Company’s products;
•future retailer purchasing activity, which can be significantly affected by adverse industry conditions and overall retail inventory levels;
•any unfavorable changes in U.S. trade or other policies, including restrictions on imports or an increase in import tariffs;
•the level of promotional activity in the marketplace;
•future consumer discretionary purchasing activity, which can be significantly adversely affected by unfavorable economic or market conditions;
•future changes in foreign currency exchange rates and the degree of effectiveness of the Company’s hedging programs;
•the ability of the Company to manage international business risks;
•the Company'sour ability to recognize operational synergies and scale opportunities across its supply chain and global business platform;
•the costs and disruption associated with activist investors;
•significant developments stemming from the U.K.’s withdrawal from the European Union, which could have a material adverse effect on the Company;
•adverse changes in the credit markets or continued compliance with the terms of the Company’s credit facilities;
•the Company's ability to monetize its investments;
•the Company's ability to successfully integrate, operate and expand the retail stores of the acquired TravisMathew, and Jack Wolfskin, and our Japan and Korea apparel businesses, and venue locations of the Topgolf business;and BigShots businesses;
•delays, difficulties or increased costs in the supply of components needed to manufacture the Company’sour products or in manufacturing the Company’sour products, including the Company'sour dependence on a limited number of suppliers for some of itsour products;
•adverse weather conditions and seasonality;
•any rule changes or other actions taken by the United States Golf Association or other golf associationassociations that could have an adverse impact upon demand or supply of the Company’sour products;
•theour ability of the Company to protect itsour intellectual property rights;
•a decrease in participation levels in golf;
•the effect of terrorist activity, armed conflict, including any escalation of hostility arising out of the conflict between Russia and Ukraine or Israel and Hamas, natural disasters or pandemic diseases, including without limitation the COVID-19 pandemic and its related variants, on the economy generally, on the level of demand for the Company’sour products or on the Company’sour ability to manage itsour supply and delivery logistics in such an environment; and
•the general risks and uncertainties applicable to the Companyus and itsour business.
Investors should not place undue reliance on these forward-looking statements, which are based on current information and speak only as of the date hereof. The Company undertakesWe undertake no obligation to update any forward-looking statements to reflect new information or events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Additionally, the risks, uncertainties and other factors set forth above or otherwise referred to in the reports that the Company has filed with the Securities and Exchange Commission may be further amplified by the global impact of the COVID-19 pandemic. Investors should also be aware that while the Companywe from time to time does communicate with securities analysts, it is against the Company’sour policy to disclose to them any material non-public information or other confidential commercial information. Furthermore, the Company haswe have a policy against distributing or confirming financial forecasts or projections issued by analysts and any reports issued by such analysts are not the responsibility of the Company.our responsibility. Investors should not assume that the Company agreeswe agree with any report issued by any analyst or with any statements, projections, forecasts or opinions contained in any such report. For details concerning these and other risks and uncertainties, see Part I, Item IA, “Risk Factors” contained in this report, as well as the Company’sour quarterly reports on Form 10-Q and current reports on Form 8-K subsequently filed with the Securities and Exchange CommissionSEC from time to time.
Topgolf Callaway Golf CompanyBrands Trademarks: The following marks and phrases, among others, are trademarks of the Company:our trademarks: AI Smoke, Alpha Convoy, Apex, Apex CB, Apex DCB, Apex Pro,TCB, Apex Tour, Apex UW, APW, ArcLite, Arm Lock, At Home Outdoors, B21, Backstryke, Batwing Technology, Big Bertha, Big Bertha B21, Big Bertha REVA, Big T, Bird of Prey, Black Series, Bounty Hunter, C Nanuk, C Grind, Callaway, Callaway Capital, Callaway Golf, Callaway Media Productions, Callaway Super Hybrid, Callaway X, Capital, Chev, Chev 18, Chevron Device, Chrome Soft, Chrome Soft X, Chrome Soft X LS, Chrome Tour, Chrome Tour X, Cirrus, Comfort Tech, CUATER, Cuater C logo, Cup 360, CXR, 360 Face Cup, Dawn Patrol, Demonstrably Superior And Pleasingly Different, DFX, DSPD, Divine, Double Wide, Down Fiber, Eagle, Engage, Epic, Epic Flash, Epic Max, Epic Max LS, Epic Speed, ERC, ERC Soft, Everyone’s Game, Exo, Cage, Fast Tech Mantle, Fibercloud, FitDisc, Flash Face Technology, FlexContact, FlexShield,Forceplate,Flash Face, FT Optiforce, FT Performance, FT Tour, Function65,Fusion, Fusion Zero, GBB, GBB Epic, Gems, Golf Fusion, Gravity Core, Great Big Bertha, Great Big Bertha Epic, Grom, Groove- In- Groove Technology, Heavenwood, Hersatility, Hex Aerodynamics, Hex Chrome, HX, Hyper Dry, Hyper-Lite, Hyper Speed Face, I.D. Ball, Jack Wolfskin, Jailbird, Jailbreak, Jailbreak AI Speed Frame, Jailbreak AI Velocity Blades, JAWS Full Toe,MD5, Jaws Raw, Jewel Jam, Kings of Distance, Legacy, Life On Tour, Longer From Everywhere, Lowrider, Luxe, Mack Daddy, Mack Daddy CB, Magna, Majestic, MarXman, Mavrik, MD3 Milled, MD4 Tactical, MD5, MD 5 Jaws, Metal-X, Microguard, Microhinge Face Insert, Microhinge Star, Mission:Ambition, Nanuk, NipIt, Number One Putter in Golf, O OGIO, O Works, Odyssey, Odyssey Eleven, Odyssey Works, Offset Groove in Groove, OG, Ogio, OGIO AERO, OGIO ALPHA, Ogio Aero, OGIO ARORA, Ogio Convoy, OGIO CLUB, OGIO FORGE, OGIO FUSE, OGIO ME, OGIO PACE, OGIO RENEGADE, OGIO RISE, OGIO SAVAGE, OGIO SHADOW, OGIO XIX, OptiColor, Opti Flex, Opti Grip, Opti Shield, OptiFit, OptiTherm, Opti Vent, ORG 7, ORG 14, ORG 15, Paradym, Paradym AI Smoke, Paradym X, Paw Print, PRESTIGE 7, ProType, ⋅R⋅, RCH, Real Dome Technology,⋅R, Rainspann, Red Ball, REVA, R-Moto, Renegade, Rig 9800, Rossie,Rogue ST, RSX, S2H2, Sabertooth, Shoxx,Shankstar, Shredder, Silencer, SLED, Slicestopper,Slice Stopper, SoftFast, Solaire, Speed Cartridge, Speed Regime, Smoozip, Speed Step, Speed Tuned, Steelhead XR, Steelhead, Strata, Stroke Lab, Stormlock, Stronomic, Sub Zero, Superfast, Superhot, Supersoft, Supersoft MAX,SureOut, Swing Suite, Tee Time Adventures, TM, Tank, Tank Cruiser, Tech Series, Teron, Texapore, Texapore Ecosphere,TMCA, TopContender,Thermal Grip, Toe Up, TopChallenge, TopChip, TopContender, TopDrive, TopGolf, TopGolf Crush, Topgolf Entertainment Group, TopGolf Media, Topgolf Shield Logo, TopLife, Toptracer, Toptracer Range,TopPressure, TopScore, TopScramble, TopShot, TopPressure, Toe Up,TopTracer, TopTracer Range, Toulon, Toulon Garage, Tour Authentic, Tour Tested, Trade In! Trade Up!, TRAVISMATHEW, TravisMathew TM logo, TriHot 5K,Tri Hot, Trionomer Cover, Truvis, Truvis Pattern, Tyro, udesign, Uptown, Vent Support System, Versa, VFT, VTec,VTEC, W Grind, Warbird, Weather Series, Weather Spann, Wedgeducation, WGT, White Hot, White Hot OG, White Hot Tour, White Ice, WireSupport, Wolfskin Tech Lab, Woode,WOODE, World's Friendliest, X-12, X-14, X-16, X-18, X-20, X-22, X-24, X-ACT,XACT, X Face VFT, X Hot, X Hot Pro, X² Hot, X Series, X Spann, X Tech, XR, XR 16, XSPANN, Xtra Traction Technology, Xtra Width Technology, XTT, 2-Ball.
Risk Factors Summary
The following is a summary of the principal risks that could adversely affect our business, operating results, cash flows and financial conditions.
Risks Related to our Industry and Business
•Unfavorable economic conditions, including as a result of inflation or otherwise, could have a negative impact on consumer discretionary spending and therefore negatively impact our results of operations, financial condition and cash flows.
•A reduction in the number of rounds of golf played or in the number of golf participants could adversely affect our sales.
•We may have limited opportunities for future growth in sales of golf clubs and golf balls.
•We may face increased labor costs or labor shortages, in particular with respect to our Topgolf venues business and our franchisees and licensees, that could slow growth and adversely affect our business, results of operations and financial condition.
•A severe or prolonged economic downturn could adversely affect our customers’ financial condition, their levels of business activity and their ability to pay trade obligations.
•We face intense competition in each of our markets and operating segments, and if we are unable to compete effectively, it could have a material adverse effect on our business, results of operations, financial condition and growth prospects.
•Our expanding apparel business, and operation of related retail locations, is subject to various risks and uncertainties, and our growth and strategic plans may not be fully realized.
•Our Topgolf growth strategy depends in part on our and our franchisees’ ability to open new venues in existing and new markets.
•There can be no guarantee that a sufficient number of suitable Topgolf venue sites will be available in desirable areas or on terms that are acceptable to us in order to achieve our growth plan, or that we will be successful in addressing the other risks inherent in our business that will allow us to open new Topgolf venues in a timely and cost-effective manner or at all. If we are unable to open new Topgolf venues, or if venue openings are significantly delayed or face other obstacles, our revenues could be adversely affected and our business negatively impacted. New Topgolf venues, once opened, may not be profitable or may close, which would adversely affect our Topgolf business as well as our financial condition and results of operations and ability to execute our growth strategy.
•If we are unable to successfully manage the frequent introduction of new products in our golf equipment business that satisfy changing consumer preferences, it could significantly and adversely impact our financial performance and prospects for future growth.
•Our active lifestyle and Topgolf venues businesses face risks associated with changed consumer tastes and preferences and fashion trends.
•Our golf equipment business and our active lifestyle business each have a concentrated customer base. The loss of one or more of our top customers could have a significant effect on our sales.
•Changes in equipment standards under applicable Rules of Golf, including new rules intended to reduce distances through limitations on golf ball specifications, could adversely affect our business.
Risks Related to Operations, Manufacturing, and Technology
•We have significant international operations and are therefore exposed to risks associated with doing business globally.
•We have significant international sales and purchases, and unfavorable changes in foreign currency exchange rates could have a significant negative impact on our results of operations.
•The costs and availability of finished products, product components, raw materials and ingredients could affect our operating results.
•Any difficulties from strategic acquisitions that we pursue or consummate, including our merger with Topgolf, could adversely affect our business, financial condition and results of operations.
•If we inaccurately forecast demand for our products, we may manufacture either insufficient or excess quantities, which, in either case, could adversely affect our financial performance.
•Our expanding international operations could be harmed if we fail to successfully transition our business processes on a global scale.
•We may not be able to obtain and maintain licenses and permits necessary to operate our Topgolf business and our venues in compliance with applicable laws, regulations and other requirements, which could adversely affect our business, results of operations and financial condition.
•We depend on a limited number of suppliers for some of the components of our products, and the loss of any of these suppliers could harm our business.
•A significant disruption in the operations of our golf club assembly and golf ball manufacturing and assembly facilities could have a material adverse effect on our sales, profitability and results of operations.
•A disruption in the service or a significant increase in the cost of our primary delivery and shipping services for our products and component parts or a significant disruption at shipping ports could have a material adverse effect on our business.
•Guest complaints, litigation on behalf of guests or employee associates (“Playmakers”) or other proceedings may adversely affect our business, results of operations and financial condition.
Risks Related to Regulations
•We, as well as our Topgolf franchisees and licensees, are subject to many federal, state, local and foreign laws, as well as other statutory and regulatory requirements, with which compliance is both costly and complex. Failure by us or our franchisees or licensees to comply with, or changes in these laws or requirements, could have an adverse impact on our business.
•Changes in, or any failure to comply with, data privacy laws, regulations, and standards may adversely affect our business.
Risks Related to Tax and Financial Matters
•Changes in tax law and unanticipated tax liabilities could adversely affect our effective income tax rate, profitability and cash flows.
•Our ability to utilize all or a portion of our U.S. deferred tax assets may be subject to limitations.
•Our obligations and certain financial covenants contained under our existing credit facilities expose us to risks that could materially and adversely affect our liquidity, business, operating results, financial condition and limit our flexibility in operating our business, including the ability to make any dividend or other payments on our capital stock.
TOPGOLF CALLAWAY GOLF COMPANYBRANDS CORP.
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| Item 16. | Form 10-K Summary | |
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PART I
Item 1. Business Overview
OVERVIEW
Topgolf Callaway Golf Company (the “Company,” “Callaway”Brands Corp., together with our wholly-owned subsidiaries (collectively, the “Company”, “Topgolf Callaway Brands”, “we”, “our”, or “Callaway Golf”“us”), is a technology-enabledleading modern golf and active lifestyle leadercompany that provides world-class golf entertainment experiences, designs and manufactures premium golf equipment, and sells golf and active lifestyle apparel and other accessories through our family of brand names which include Topgolf, Callaway Golf, Odyssey, TravisMathew, Jack Wolfskin, OGIO and Toptracer.
We were incorporated in California in 1982 under our previous name, “Callaway Golf Company,” with a portfolioprimary focus on the design, manufacture and sale of global brands, including Callaway Golf, Topgolf, Odyssey,high-quality golf clubs. In 1992, we became a publicly-traded corporation on the New York Stock Exchange under the ticker symbol “ELY” and in 1999, we reincorporated in the State of Delaware. In 2000, we entered into the golf ball business with the release of our first golf ball product. In 2017, we expanded our business into active lifestyle apparel and accessories with our acquisitions of OGIO, TravisMathewa leading manufacturer of high-quality bags and Jack Wolfskin. The Company has evolved over time fromaccessories, and TravisMathew, a manufacturer of premium golf clubs to a modern golf,and active lifestyle apparel and entertainment Company. In an effort to diversify and explore new growth opportunities, in 2017, the Company expanded its soft goods business to include premium lifestyle product lines, namely apparel, footwear, bags and accessories, that are complementary to golf with the acquisitions of OGIO and TravisMathew.accessories. In 2019, the Companywe acquired Jack Wolfskin, a premium outdoor apparel, footwear and equipment brand, which further enhanced the Company's lifestyle category and providedin 2021, we completed a platform in the active outdoor and urban outdoor categories. More recently, on March 8, 2021, the Company completed its merger with Topgolf, a leading technology-enabled golf entertainment business that offers an innovative platform comprised of state-of-the-art open-air golf and entertainment venues, in addition to proprietary Toptracer ball-tracking technology, under the Toptracer brand and an innovative mediacontent creation platform. Through these acquisitionsThe combination of products and the recent merger with Topgolf, the Company transformed into a modern golf, lifestyle and entertainment company with a compellingservices offered by our family of brands that are sold across multiple channels to consumers both in the United States and internationally in over 120 countries,countries. On September 6, 2022, we changed our corporate name from “Callaway Golf Company” to “Topgolf Callaway Brands Corp.”, and, across multiple channels including wholesale, retail, on-line through its websites, and at Topgolf venues. Callaway was incorporated in California in 1982 and became a publicly traded corporation in 1992, and in 1999, reincorporated in the State of Delaware.on September 7, 2022, we changed our New York Stock Exchange ticker symbol from “ELY” to “MODG.”
GROWTH AND OVERALL STRATEGY
In 2021, the golf and outdoor industries benefited from strong industry tailwinds and positive market trends, which the Company believes will continue to provide strong foundationWe believe we are well-positioned for underlyinglong-term growth for the business. The golf industry in particular is expanding through increased on-course and off-course golf participation, and also through increased participation in golf entertainment, all of which have contributed to an increased number of new players to the sport in recent years. Callaway believes itsgiven our diversified portfolio especially with its recent merger with Topgolf, combined with its clear growth strategyof product and service offerings and consumer reach and scalability within each segment, will result in both short-term and long-term results that will outpace the industry average.
Looking ahead, the Company may continue to explore additional opportunities for inorganic growth through strategic mergers and acquisitions that help strengthen the current lines of business and reinforce Callaway’s leadership position in the growing active lifestyle and evolvingmodern golf outdoorecosystem. Our path to long-term growth is anchored on four key initiatives: innovation, expansion, synergy, and entertainment industries.efficiency across our family of brands. We believe that execution of our long-term strategy to achieve each of these initiatives, will create long-term value for shareholders.
REPORTABLE SEGMENTS AND PRODUCTS
The Company manages itsWe manage global business operations through itsour operating and reportable business segments. Due to its recent merger with Topgolf, the Company reassessed its operating segments and added a third operating segment for its Topgolf business. Therefore, asAs of December 31, 2021, the Company2023, we had three reportable operating business segments: Topgolf, Golf Equipment and Apparel, Gear and Other.Active Lifestyle.
TOPGOLF
In March 2021, the Company completed its merger with Topgolf International, Inc. (“Topgolf”), in an all-stock transaction. Topgolf is a leading technology-enabled golf entertainment business with an innovative platform of products and services comprised of its state-of-the-art open-air golf and entertainment venues, a revolutionary proprietary Toptracer ball-tracking technology, and a digital media platform.
Venues
The Topgolf venues business, which is the largest line is Topgolf’s largest business. Topgolf's other business lines includeof the Toptracer Range ball tracking technology and digital media.
Domestic and International Venues
The venuesTopgolf business, is comprised of company-operated venue operationsCompany-operated Topgolf venues located within the United States and Company-operated and franchised venues located outside of the United States.
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| As of December 31, |
| Topgolf Venues by region: | 2023 | | 2022 | | 2021 |
| Domestic Owned and Operated | 88 | | 77 | | 67 |
Domestic Acquired(1) | 1 | | 0 | | 0 |
| International Owned and Operated | 4 | | 4 | | 3 |
| International Franchised | 5 | | 5 | | 3 |
| Total | 98 | | 86 | | 73 |
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(1) Represents the Company-operated venue acquired as a part of the BigShots acquisition. |
As of December 31, 2021, Topgolf2023, we had 6789 Company-operated venues in the United States, threefour Company-operated venues in the United Kingdom and threefive franchised venues in Australia, Mexico, and the United Arab Emirates. OverEmirates, Thailand and Germany. Our focus over the next several years is to improve the Company’s focus isearnings contribution from venues, and to maintain a strong pipeline of new venue openings both domestically and internationally throughby increasing the number of Company-operated venues as well as venues operated through itsinternational franchise partners.
Venue Design and Development
We tailor the design of our venues to thrive in varying climates, conditions and market sizes. The location of each venue is carefully selected through a rigorous site selection process, led by an experienced real estate team. Venue construction timelines may vary based on the size and complexity of the venue model, existing site conditions, the season and weather, as well as other factors, with a typical venue taking between 10 and 15 months to build from ground break until we are substantially complete. We primarily use the services of design/build contractors for the construction of our venues, and we generally estimate the gross development cost to build a venue to be between $15 million and $60 million depending on the size, location and various other factors. While we typically seek to finance the construction of our venues through third-party developers or real estate financing partners, internationally.there are certain instances where we may fund a portion or all of the construction ourselves. When we acquire land directly or finance the venue construction ourselves, we may enter into arrangements to sell the assets and lease them back from a financing partner.
Technology and game development for games used in Topgolf venue gameplay and on Topgolf digital media is supported by teams located in offices and studios in Dallas, Texas, San Francisco, California and Stockholm, Sweden. These teams are comprised of a variety of engineers, computer vision and data analysis scientists and mobile app developers. We also utilize a number of proprietary, industry standard and third-party management information systems in our business and rely on our own servers and third-party infrastructure to operate games and to maintain and provide analytical data.
Venue Management and Operations
Venue operations are supported by a multi-disciplined operations team which is responsible for a number of areas, including pre-opening activities (including employee recruitment, selection and training), culinary development, event sales support, marketing, technology services, supply chain support for food, beverages and equipment, and ongoing training and development for associates. Maintaining a high quality of service in the venues depends in part on our ability to work with reliable suppliers to acquire food and beverage ingredients, venue hardware, golf equipment and/or other supplies that meet our high standards. We use a third-party verification company to ensure that all of our vendors meet specified United States guidelines and regulations, and for produce, we use a third-party vendor that regulates a nationwide network of produce distributors. For gameplay, we utilize our own engineers to support the development of custom digital content and certain risks associatedgolf equipment for use at our venues. We also have supply agreements in place with manufacturers in Taiwan and China to produce specially designed radio-frequency identification (“RFID”)-enabled golf equipment for use during game play at a Topgolf venue, and bay equipment within the opening of venues see “Risk Factors” contained in Item 1A.is custom built, primarily by domestic manufacturers.
Sales
RevenueRevenues from Company-operated venues are primarily derived from the sale of food and beverage, gameplay, events, and events. Topgolf’s venue facilitiesadvertising partnerships and sponsorships. Our venues offer multiple forms of entertainment and are equipped with technology-enabled hitting bays, multiple bars, dining areas, and exclusive event spaces. Topgolf’s venuesThe technology-enabled hitting bays incorporate proprietary ball-tracking technologies towhich “gamify” the sport of golf and offer guests the chance to enjoyof varying skill levels a variety of games developedthat are aimed to appeal to a broad range of players of different skills. Topgolfplayers. Our venues also provide flexible spaces that are used for enjoying food and beverage,dining, watching sports, charity fundraisers, corporate outings,events, golf instruction, playing gamesgame play and watching live music. Topgolf rents spaces rangingmusic performances, in size from 12addition to up to 1,000 attendees for events to individuals and organizations for a variety of different occasions, including corporate events and social gatherings. Topgolf also hostshosting events similar to arenas and other types of entertainment venues such as livewhich range in size from seven to over 1,000 attendees. These events provide food and beverage and game play throughout the venue for corporate and social groups, and can include meetings, team-building events, client entertainment, birthday parties, tournaments, fundraisers, concerts and team-building events.more.
Competition
TopgolfOur venues compete for consumers’ leisure time and discretionary entertainment dollars against a broad range of other out-of-home entertainment options including other dining and entertainment venues, sports activity centers, traditional driving ranges and other establishments offering simulated golf or multi-sport experiences, arcades and entertainment centers, movie theaters, sporting events, bowling alleys, nightclubs, and bars and restaurants.
Design and Development
Topgolf tailors the design of its venues to thrive in varying climates, conditions and market sizes. The location of each of Topgolf’s venues is carefully selected through a disciplined, data-driven site selection process, led by an experienced real estate team and augmented by a nationwide broker network. A typical venue takes between 10 and 15 months to build, though build times vary based on the size and complexity of the model, existing site conditions, the season and other factors. Topgolf primarily uses the services of design/build contractors for the construction of its venues, and generally estimates the gross development cost to build a venue to be between $10 million and $55 million depending on the size and location of the facility. Topgolf typically seeks to finance the construction of its venues through third-party developers or real estate financing partners. While Topgolf is still required to fund a portion of venue development costs, its financing partner will purchase or lease the land and fund a majority of venue development costs during and after construction. Once construction is completed, Topgolf leases the venue and underlying land back from the financing partner, or in cases where Topgolf does not choose to finance venue construction through one of its financing partners, Topgolf will fund 100% of venue development costs.
Venue Management and Operations
The operations of domestic venues are supported by a multi-disciplined operations team. This team is responsible for a number of areas, including pre-opening activities (such as employee recruitment, selection and training), culinary development, event sales support, technology services, supply chain support for food, beverages and equipment, marketing, and ongoing training and development for associates. Maintaining a high degree of quality in the venues depends in part on Topgolf’s ability to acquire food and beverage ingredients, venue hardware, golf equipment and other supplies that meet Topgolf’s high standards from reliable suppliers. Topgolf uses a third-party verification company to ensure that all vendors meet United States guidelines and regulations, and for produce, it uses a third-party vendor that regulates a network of produce distributors nationwide. Topgolf has supply agreements in place with manufacturers in Taiwan and China to produce the radio-frequency identification ("RFID")-enabled golf equipment, which is specially designed for venue use. Bay equipment is custom-built for Topgolf, primarily by domestic manufacturers.
Advertising & Marketing
TheOur marketing campaigns are aimed to increase consumer brand awareness and support our overall growth strategy. Our venues play a lead role in connectingconnect people in meaningful ways by introducing guests to theour brand, culture and technologies. Topgolf placestechnologies, and are advertised across various marketing channels, including content distributed through paid advertising networks, email and text message subscriber lists, on Topgolf’s and other social media and influencer pages and websites, by word-of-mouth, or through other media coverage. We place a large focus on itsour owned channels of communication to fuel a more personalized approach for attracting repeat visits through email and text messages to its largeour subscriber base. Venues are also promoted across various marketing channels, including content distributed through paid advertising networks, email and text message subscriber lists, Topgolf social media pages and online word-of-mouth or other media coverage.
Content Design and Development
The technology and game development for Topgolf is supported by teams located in offices and studios across Dallas, Texas, San Francisco, California and Stockholm, Sweden. These teams are comprised of front-end and back-end
engineers including software, network, structural, radio frequency, electrical, mechanical, machine learning, visual recognition, system test, computer vision scientists and data analysis, user experience and industrial design engineers, and mobile app developers. Topgolf utilizes a number of proprietary, industry standard and third-party management information systems in its business and relies on its own servers and third-party infrastructure to operate games and to maintain and provide analytics data.
For certain risks associated with content design and development, see “Risk Factors” contained in Item 1A.
Seasonality
Sales of the Topgolf businesssales generally fluctuate from quarter to quarter due to seasonal factors. Historically, our venues experience higher sales during the secondsecond- and third quartersthird-quarter revenues associated with the spring and summer, seasons. Comparatively, Topgolf’swhile the first and fourth quarters have historically seenhad lower sales at its venues duringrevenues, with the cold-weather months of fallfirst quarter being the lowest, due to cooler temperatures and winter. Seasonalityfewer corporate events. Given that seasonality is an expected to be a factor in Topgolf'sour results of operations. As a result, factors affecting peakoperations, adverse weather may impact all seasons at our venues, such as adverse weather, could havewhich may result in a disproportionate effect on itsour operating results.
Other Lines of Business
Topgolf licensesWe license Toptracer, itsour proprietary ball-tracking technology to independent driving ranges and golf courses and for use in golf broadcasts. To date, Topgolf has installed over 15,000 Toptracer bays worldwide. Toptracer delivers a data-driven and "gamified"“gamified” enhancement to the traditional driving range experience by delivering instant shot replays, gameplay for all skill levels and a data record of all shots. The Toptracer ball-tracking technology actively tracks all ball flight paths across an entire field of vision and itswhile our custom-built sensor is able to provideprovides real-time shot analytics, such as ball speed, apex, curve, carry and more. Topgolf sources theToptracer components used in the Toptracer businessare sourced from a number of third-party suppliers located in Germany, Taiwan, the United Kingdom and the United States, either directly or indirectly through distributors. Topgolf has developedIn the United States we distribute Toptracer using our own warehousing and logistics. For our international Toptracer operations, we partner with a global distribution strategy for the Toptracer range business that utilizes a third-party logistics partner for warehousing and distribution, withand currently have warehouses currently located in the United States and the United Kingdom. To help build brand awareness, Topgolfwe primarily utilizesutilize public relations, influencer marketing, professional athletes, social media, conferences, event marketing and paid media to support lead generation and sales efforts. Toptracer competes against other companies with similar products and technologies to attract and retain qualified licensees. The ability to attract new franchisees and licenseesToptracer customers is based primarily on the strength and quality of the brand and reputation, the products and revenue opportunities Topgolf iswe are able to provide, as well as on the structure of the operating models and the terms of the respective agreements. The Company anticipates expanding the global reach
In addition to Toptracer, we license Swing Suite, which offers simulated game play on well-known golf courses in addition to other games including football, baseball and soccer, among others, to a variety of its Toptracer range technology product by leveraging both the Toptracerindoor hospitality and Callaway sales teams that have strong relationships with driving range owners around the world.entertainment operators, including hotels, casinos and restaurants.
Our Topgolf digital mediagaming platform is primarily comprised of digital games such as the mobile golf game World Golf Tour (“WGT”), advertising partnerships (sponsorships) and other digital content creation. WGT is an online multiplayer virtual golf game that utilizes proprietary GPS and 3D technology to enable players to gather online as a community and experience simulated gameplay on photorealistic recreations of more than 1516 world-famous golf courses. Advertising partnerships provide corporate sponsors the opportunity to feature their names and logos at Topgolf venues and on other media platforms. Digital gaming corporate partnerships, and the digital content produced by Topgolf competewe produce competes for consumers’ attention, leisure time and discretionary spending against the other home-basedat-home entertainment alternatives, particularly content focused on golf or other sports.alternatives.
GOLF EQUIPMENT
The Company designs, manufacturesWe design, manufacture and sellssell a full line of high-quality golf equipment, which is comprised of the golf clubs and golf balls product groups. The Company designs itsWe design our golf equipment products to be technologically advanced for amateur and professional golfers of all skill levels, both amateur and professional, andthe golf equipment products are generally designed to conform to the Rules of Golf as published by the United States Golf Association ("USGA"(“USGA”) and the ruling authority known as The R&A.
Products
Golf clubs include woods (drivers, fairway woods and hybrids) and irons (irons, wedges and packaged sets) sold under the Callaway brand, and putters sold under the Odyssey brand, including Toulon Design by Odyssey.brand. This product group also includes Callaway and non-Callaway pre-owned golf clubs. Callaway’s golf clubs are generally made of steel, titanium alloys, carbon fiber and various thermoplastic and thermoset materials.
Golf balls are sold under the Callaway Golf and Strata brands and are generally either a 2-piece golf ball (consisting of a core and cover) or a multilayer golf ball (consisting of two or more components in addition to the cover). The Company’sOur golf ball products include covers that incorporate a traditional dimple pattern as well as covers that incorporate innovative designs, including the Company’sour proprietary HEX Aerodynamics (i.e., a lattice of tubes that form hexagons and pentagons), Hybrid Cover, Triple Track Technology and Truvis patterns. Callaway brand golf balls are generally made of various combinations of synthetic rubber, ionomer blends and urethane which are processed with other chemicals in order to optimize performance.
Product Design and Development
The Company is innovatingWe innovate to maintain itsour market share leadership position in both golf clubs and golf balls by continuously investing in research and development and also leveraging artificial intelligence in itsour product design process. The Company designs its golf equipmentprocess in order to help create products that are designed to be technologically advanced and has not limited itself in its research efforts by trying to duplicate designs that arethe duplication of traditional or conventional. The Company has the ability toconventional product designs. We create and modify product designs by using computer aidedcomputer-aided design software, finite element analysis software and structural optimization techniques employing Artificial Intelligence methods. Further, the Company utilizeswhich leverage artificial intelligence. Furthermore, we utilize a variety of testing equipment and computer software, including golf robots, launch monitors, a proprietary virtual test center, a proprietary performance analysis system, an indoor test range and other methods to develop and test itsour golf equipment products.
Manufacturing
The Company has itsWe have a primary golf club assembly facility located in Monterrey, Mexico, and maintainsa limited golf club assembly in its facilitiesfacility located in Carlsbad, California. In addition, used clubs that the Company receives from its Trade-In Trade-Up program are refurbished at itsCalifornia, and a facility in Austin, Texas. The Company'sTexas where we refurbish used clubs we receive from our Trade-In! Trade-Up! program. Additionally, we utilize golf clubs areclub contract manufacturers in China and Vietnam. We also assembledhave custom golf club assembly facilities in Tokyo, Japan; Swindon, England; Melbourne, Australia, and other local markets based onto support regional demand for custom clubs. In addition, the Company utilizes golf club contract manufacturers in China and Vietnam. In 2021 and 2020 and 2019, mostdemand. Currently, more than 50% of the Company’sour golf club assembly volume was madeis performed in regions outside of the United States. Overall, the golf club assembly process is fairly labor intensive, requires extensive global supply chain coordination and utilizes raw materials that are obtained from international and domestic suppliers, both internationally and within the United States.requires extensive global supply chain coordination.
The Company hasWe have a golf ball manufacturing facility in Chicopee, Massachusetts, and also utilizesutilize golf ball contract manufacturers in TaiwanChina and China.Taiwan. In 2021, 2020 and 2019,2023, approximately 75%, 70% and 60%, respectively, of the Company'sour golf ball unit volume wasballs were manufactured in regions outside of the United States. The overall golf ball manufacturing process utilizes raw materials that are obtained from suppliers both internationallyinternational and within the United States.domestic suppliers.
Sales
The Company sells itsWe sell our golf equipment products in the United Statesdomestically and internationally, directly and through itsour wholly-owned subsidiaries, to wholesale customers, including pro-shops at golf courses andcourse pro shops, off-course retailers, sporting goods retailers, on-lineonline retailers, and third-party distributors, and certain productsas well as to mass merchants as well asfor certain products. We also sell directly to consumers through itsour websites and retail locations in Japan. The Company offers custom club fitting programs at its performance centersJapan and at participating on- and off- course retail stores to help consumers find a set of golf clubs to fit their personal specifications. In addition, the Company sellsKorea as well as to corporate customers who want their corporate logo imprinted on certain of our golf equipment products. In addition to the Company’ssale of our golf equipment.equipment products, we also offer custom club fitting programs at our performance centers and at participating on- and off-course retail stores to help consumers find golf clubs that fit their personal specifications.
The CompanyWe also sellssell certified pre-owned golf clubs directly to the consumer through itsour website. The Companypre-owned golf clubs are generally acquires the pre-owned clubsacquired through itsour Trade In! Trade Up! program, which gives golfers the opportunity to trade in their used Callaway brand golf clubs and certain competitor golf clubs at authorized retailers or through itsour website for credit toward the purchase of new golf equipment or pre-owned golf clubs.
Competition
For itsOur golf equipment products the Company generally competescompete on the basis of technology, quality, product performance, customer service and price. In order to gauge the effectiveness of the Company’s responseour performance relative to such factors, management receiveswe receive and evaluatesevaluate Company-generated market trendstrend reports for the United States and foreign markets, as well as periodic public and customized market research for the United States and United Kingdom (“U.K.”) markets from Golf Datatech and The National Golf Foundation thatwhich include trends from certain on- and off-course retailers. In addition,Additionally, we utilize the Company utilizes Growth from Knowledge Group for data and analysis onof the consumer goods market in Japan. We believe that we are a technological leader in every golf club and golf ball market in which we compete.
The Company’sOur major competitors for drivers, fairway woods and irons are TaylorMade, Ping, Acushnet (Titleist brand), Puma (Cobra brand), SRI Sports Limited (Cleveland and Srixon brands), Mizuno, Bridgestone, and Parsons Xtreme Golf (PXG). For putters, the Company’sour major competitors are Acushnet (Titleist & Scotty Cameron brands), Ping and TaylorMade. The Company believes that it is a technological leader in every golf club market in which it competes.
The Company’sOur major competitors for golf balls include Acushnet (Titleist and Pinnacle brands), SRI Sports Limited (Dunlop and Srixon brands), Bridgestone (Bridgestone and Precept brands), TaylorMade and others. These competitors compete for market share in the golf ball business, with Acushnet having a market share of over 50% of the golf ball business in the United States and a leading market share position in certain other regions outside of the United States. The Company believes that it is a technological leader in the golf ball category.
For certain risks associated with competition, see “Risk Factors” contained in Item 1A.
Advertising & Marketing
The Company’sOur marketing campaigns on itsfor our golf equipment products are aimed to increase consumer product awareness of the products and support theour overall growth strategy. The Company has focused its advertising efforts mainly on televisionAdvertising for our golf equipment products is primarily in the form of televised commercials during golf telecasts, primarily on The Golf Channel, and on network television during golf telecasts, web-based digital and social media advertising, printed advertisements in national magazines, such as Golf Magazine and Golf Digest, as well as in-store advertising. Additionally, the Company advertises its golf equipmentadvertising and other types of marketing to the Topgolf consumerconsumers who isare part of the Topgolf community. The CompanyWe also establishesestablish relationships with professional athletes and personalities, including members of various professional golf tours as well as other athletes and media personalities, in order to promote the Company’sour golf equipment product lines.products.
For certain risks associated with such endorsements, see “Risk Factors” contained in Item 1A.
Seasonality
In most of the regions where the Company conducts business, theThe game of golf is played primarily on a seasonal basis.basis in most of the regions where we conduct business. Weather conditions generally restrict golf from being played year-round, except in a few markets, with many of the Company’sour on-course customers closing for the cold weather months. The Company’smonths, making our golf equipment business is therefore subject to seasonal fluctuations. In general, during the first quarter, the Company beginswe begin selling itsour golf club and golf ball products into the golf retail channel for the new golf season. This initial sell-in generally continues into the second quarter. Second-quarterquarter when sales are significantly affected by the amount of reorder business of the products sold during the first quarter. Third-quarter sales are generally dependentalso depend on reorder business, but can also include smaller new product launches, and typically resulting inhave lower sales than the second quarter assince many retailers begin decreasing their inventory levels in anticipation of the end of the golf season. Fourth-quarter golf equipment sales are generally less than the other quarters due to it being the end of the golf season in many of the Company’sour key regions. However, third-quarter sales can be affected by a mid-year product launch, and fourth-quarter sales canregions, but may also be affected from time to time by the early launch of product introductions related to the new golf season of the subsequent year. This seasonality, and therefore quarter-to-quarter fluctuations, can be affected by many factors, including the timing of new product introductions as well as weather conditions. In general, because of this seasonality, a majority of the Company’sour sales from itsour Golf Equipment operating segmentbusiness and most, if not all, of itsour profitability from this segment generally occurs during the first half of the year.
APPAREL, GEAR AND OTHERACTIVE LIFESTYLE
The Company designs, developsWe design, develop and sellssell high quality soft goodsgood products under the Callaway, TravisMathew, OGIO and Jack Wolfskin brands. TheThese brands deliver a range of premium performance and lifestyle products in the United States and select globalinternational markets. The Company isWe are focused on maintaining strong brand momentum by increasing its TravisMathew, Jack Wolfskincategory and Callaway apparel geographic footprint in the United States and internationally. In addition to new retail locations, the Company ismarket share growth with key trade partners. We are also focused on enhancing itsour digital marketing, e-commerce and e-commerceretail store presence to increase direct-to-consumer sales toand drive increased profitability over time.
Products
Callaway soft goodsgood products include golf apparel, footwear, and a full range of golf accessories includingsuch as golf bags, golf gloves, headwear and practice aids. Callaway branded golf apparel offerings include tops, bottoms and outerwear for men, women and children, and are made offrom high-quality fabrics designed for style, comfort and performance.
TravisMathew is a progressive men’sactive lifestyle brand producingthat produces its own line of men’s, women’s, and youth apparel and accessories under the TravisMathew and Cuater by TravisMathew ("Cuater"(“Cuater”) brands. TravisMathew offers high quality, premium golf and lifestyle apparel, hats, luggage and accessories designed to deliver superior performance. Cuater'sCuater’s primary product is versatile, premium performance footwear. Cuaterfootwear but the brand also offers belts, hats, facemasks, sunglasses, socks and underwear. Although the brand is known for its men’s apparel, the Company anticipates launching a limited women’s line in 2022.
OGIO is an active lifestyle brand that offers a variety of storage and active travel gear for sport and personal use includinguse. OGIO’s product offerings include backpacks, travel bags, duffle bags, golf bags and storage gear accessories, in addition toas well as a line of outerwear, headwear and other accessories. OGIO storage offersproducts focus on organization, protection, durability and sustainability, and offer innovative organization features, durable waterproof construction, and ergonomic and aerodynamic designs, as well as a unique style all of which is why athletesand the ability for customization. Athletes from the worlds ofsports such as golf, skate, snow, surf and BMX put their trust in the protection, comfort, organization and style of OGIO products.
Jack Wolfskin offersis a global eco-performance apparel and active lifestyle brand which was founded on the principles of product sustainability, functionality and quality. Jack Wolfskin’s product offerings include a full line of functional outdoor apparel for men, women and children, including jackets, trousers, dresses, skirts and tops, in addition to footwear and outdoor equipment, including packs and bags, travel bags, tents, sleeping bags and accessories. Jack Wolfskin outdoor apparel includes softshellsoft shell jackets, fleece jackets, windbreakers, down jackets, functional jackets and rain jackets for men, women, and children, which are made of waterproof, windproof and breathable fabrics. Jack Wolfskin is a global eco-performance apparel brand, founded on the tenants of product sustainability, functionality and quality. Founded in Frankfurt, Germany, Jack Wolfskin is one of the largest outdoor retailers in Europe, and it is now one of thea major supplierssupplier of outdoor products across the worldEurope and China with a versatile portfolio of smartly and sustainably engineered technologies, including itsour popular Texapore weather protection technology group of materials.
Product Design, Development and Manufacturing
The Company'sOur soft goods products are designed and developed internally and created through third-party manufacturing partners in Vietnam, China, Indonesia, Thailand, Bangladesh, the Philippines, and Peru, who source materials and create the products according to the Company's brands'our brands’ specifications.
For certain risks associated with product design and development, see below, “Risk Factors” contained in Item 1A.
Sales
The Company sells itsWe sell our soft goods products in the United States and internationally, directly and through itsour wholly-owned subsidiaries, to wholesale customers and directly to consumers through itsour retail locations and on-lineonline through itsour websites.
The Company sells itsWe sell our Callaway soft goods products to golf retailers (including pro-shopspro shops at golf courses and off-course retailers), sporting goods retailers, on-lineonline retailers, and third partythird-party distributors, as well as directly to consumers through the Callaway Golf website and various retail, outlet and store-in-store locations in Japan and most recently, in Korea. In exchange for a royalty fee, the Companywe also licenses itslicense our trademarks and service marks to third parties for use on certain Callaway apparel and golf accessories.
In addition to the sales channels mentioned above, TravisMathew is also sold to luxury department stores and lifestyle specialty stores, and directly to consumers through the TravisMathew website and various TravisMathew retail locations in the United States, Japan, Europe, and Japan. Canada.
OGIO products are also sold through the OGIO website. Inwebsite in addition OGIO licenses itsto the sales channels mentioned above. We also license our line of OGIO motorsport products to a third party in exchange for a royalty fee, and also licenses itslicense our other OGIO products to a third party for distribution in the corporate channel in the United States, Canada and Mexico.
The Company sellsWe sell Jack Wolfskin products directly and through itsour wholly-owned subsidiaries in Germany, China, the U.K., Switzerland, Poland and Japan to third partythird-party distributors and retail stores, on-lineonline retailers, department stores, mail order stores, as well as directly to consumers through itsour Company-owned retail locations and website. Jack Wolfskin retail stores are located primarily in Europe and in 2020, Jack Wolfskin opened its first North American online retail store, followed by the opening of its first United States showroom retail location in Park City, Utah in 2021.
Competition
The Company’sOur major competitors for itsour golf apparel and accessories are generally other golf companies and premium golf apparel companies, as well as specialty retailers. While the TravisMathew business faces competition from the premium golf apparel companies, it also competes in department stores with other men’s apparel companies, including Bonobos, johnnie-O, Nike, Peter Millar, Ted Baker London and Vince. With the addition of theThe Jack Wolfskin business there arecompetes with a number of well-established and well-financed companies with recognized brand names, with which the Company competes, including Patagonia, Columbia and The North Face. The Company seeksWe seek to differentiate itselfourselves through elevated design, premium materials and product innovation. For certain risks associated with competition, see “Risk Factors” contained in Item 1A.
Advertising & Marketing
The Company marketsWe market and advertises itsadvertise our soft goods brands on various platforms, including television, traditional digital and print media, web-based media and social media, as well as at experimental events and the Topgolf venues and media. The CompanyWe also establishesestablish relationships with professional athletes and personalities, including members of various professional golf tours, as well as other athletes and personalities, in order to promote the Company’sour soft goods product lines.
For certain risks associated with such endorsements, see “Risk Factors” contained in Item 1A.
Seasonality
Sales of the Callaway-branded golf apparel and accessories generally follow the same seasonality as golf equipment, and are therefore generally higher during the first half of the year. Sales of TravisMathew branded golf and lifestyle apparel and accessories are more evenly spread throughout the year as sales are more diversified due to an increase in direct-to-consumer sales resulting from the expansion of TravisMathew stores, which is expected to continue.stores. Sales of outdoor apparel, footwear and equipment related to the Jack Wolfskin business focuses primarily on outerwear and consequently experiences stronger sales for such products during the cold-weather months and the corresponding prior sell-in periods. Therefore, sales of Jack Wolfskin productsperiods, and therefore, are generally greater during the second half of the year.
DISTRIBUTION
The Company has itsWe have our primary distribution center in Fort Worth, Texas for the distribution of golf equipment products and soft goods products in North America, in addition toAmerica. We also have Company-operated distribution centers in Toronto, Canada; Swindon, England; Melbourne, Australia; Hamburg, Germany; and Shanghai, China, and third-party logistical operations in Tokyo, Japan and Seoul, Korea to support the distribution needs of markets they serve.
For certain risks associated with manufacturing and distribution, see “Risk Factors” contained in Item 1A.
INTELLECTUAL PROPERTY
The Company is the owner ofWe own approximately 4,3005,300 U.S. and foreign trademark registrations and over 1,8001,900 U.S. and foreign patents relating to the Company’sour products, product designs, manufacturing processes and research and development concepts. Other patent and trademark applications are pending and await registration. In addition, the Company ownswe own various other protectable rights under copyright, trade dress and other statutory and common laws. The Company’sOur intellectual property rights are very important to the Company,us, and the Company seekswe seek to protect such rights through the registration of trademarks and utility and design patents, the maintenance of trade secrets and the creation of trade dress. When necessary and appropriate, the Company enforces itswe enforce our rights through litigation. Information regarding current litigation matters in connection with intellectual property is contained in Note 15. "Commitments13. “Commitments & Contingencies"Contingencies” in the Notes to Consolidated Financial Statements in this Form 10-K.
The Company’sOur patents are generally in effect for up to 20 years from the date of the filing of the patent application. The Company’sOur trademarks are generally valid as long as they are in use and their registrations are properly maintained and have not been found to become generic.
For certain risks associated with intellectual property, see “Risk Factors” contained in Item 1A.
HUMAN CAPITAL RESOURCES
Employee Profile
Callaway views itsWe view our employees as itsour most valuable asset and seeksseek to attract and maintain the highest quality talent by offering competitive benefits and wellness services, opportunities to grow professionally across diverse industries, and regular evaluations,receive performance feedback, among other initiatives. As of December 31, 2021, and 2020, the Company and its subsidiaries2023, we had approximately 24,800 and 4,20032,000 full-time and part-time employees respectively. The increaseworldwide in 2021 was due to the merger with Topgolf completed in March 2021, which resulted in the addition of 20,100 Topgolf Associates. The Company employs27 different countries. We also employ temporary manufacturing workers as needednecessary based on the labor demands thatacross the organization, which also may fluctuate with the Company's seasonality.seasonality of our products.
The Company’sOur golf ball manufacturing employees in Chicopee, Massachusetts are unionized and are covered under a collective bargaining agreement, with International Brotherhood of Boilermakers, Iron Ship Builders, Blacksmiths, Forgers and Helpers A.F.L.-C.I.O. Local Lodge 1851, which expiresrenewed for an additional three years on September 30,October 16, 2022. In addition, certain of the Company’s production employees in Australia and Mexico are also unionized. The Company considers itsWe consider our employee relations to be good.in good standing.
Culture and Values
Each of our businesses is driven by a desire to deliver exceptional products and experiences for our customers and guests, as well as a commitment to our late founder Ely Callaway’s belief that, “good ethics is good business.” The Company,We uphold our cultural values to establish our brand identity and unique work environment in an effort to enable employee engagement and retention. Every employee receives training on our culture and values during their onboarding process, training experience, and during their phases of leadership team and employees are guided by our core values: be humble and hungry, act with integrity and respect, dare to be great, do what you say you’re going to do, put the team and customer before self and be “one team-one company”.development.
Diversity, Equity and Inclusion (DE&I)
The Company isWe are headquartered in Carlsbad, California and maintainsmaintain regional offices, distribution centers, venues, and retail stores in numerous locations around the world. The Company’sOur employees bring a wide range of cultures, experiences, talents, capabilities, and perspectives from around the world. The Company isworld, and we are committed to recruiting, developing and promoting a diverse and inclusive workforce while offering unique opportunities and career paths for itsour employees. The Company hasWe have an ongoing commitment to increase the number of women and diverse candidates throughout all levels of management while also hiring the most qualified individuals. The Company doesWe do not discriminate on the basis of actual or perceived race, creed, color, religion, national origin, citizenship status, age, disability, marital status, sexual orientation, gender, gender identity and similar classifications. In 2021,2023, in the United States, more than half of management levelmanagement-level new hires, promoted employees, and interns were of a diverse background, which encompasses employees who are non-white, female, or both. The Company also requires all of its employeesIn 2022, we were selected as a DiversityFIRST Corporate Award recipient, which seeks to complete Diversity and Inclusion Training and Unconscious Bias Training. Additionally, Callaway striveshonor companies that demonstrate excellence in diversity best practices.
We strive to bringattract more women and minorities intoto participate in the game of golf and remainsare dedicated to making the sportgolf more accessible to a diverse range of customers. To achieve this, the Company promotes a variety of diversity, equity and inclusion ("DE&I") initiatives within the Company and throughout local communities.
Callaway’s merger with Topgolf has strengthened the Company's efforts to promote DE&I throughout the Company. Topgolf strives to bring accessibility to the game of golfcustomers by creating an experienceproducts and experiences that isare fun, social, entertaining, and entertaining. It is partinviting to a diverse range of Topgolf’s goal to break down barriers, promote inclusion,customers and invite diverse groupsfirst-time golfers. Over the course of people to enjoy the game of golf for the first time. Additionally, Topgolf haslast few years, we have been awarded three different prestigious employer awards in recognition of itsour DE&I efforts, including the Diversity Jobs Top Employer 2021, Forbes 2020 Best Employers for Women, and National Down Syndrome Congress 2018 Employer of the Year.
Employee Well Being
The Company isWe are committed to the health and well-being of itsour employees and designs itsdesign our compensation and benefits programs to demonstrate this commitment. For example, in addition to offeringOur approach supports our employees’ total wellness by addressing physical, mental and financial well-being. We provide competitive compensation packages alongside a comprehensive array of benefits designed to nurture total well-being. This includes robust health and a full suite of standardwelfare benefits, including comprehensive health, life and disability insurance coverage, and a retirement plan with employer matching benefits,contributions.
At the Company offersheart of our commitment to well-being is a dedicated focus on mental health. We recognize its paramount importance and have integrated robust resources, such as an Employee Assistance Program (“EAP”), which empowers employees product discounts as well asand their families to manage their holistic health – mental, emotional, and physical. In addition, our employees have the abilityopportunity to participateengage in a variety of wellness programs, which includeranging from fitness facilities to exercise programs and diverse educational resources.
By prioritizing well-being, we not only invest in our employees' present, but we also cultivate a variety of educational resources which address various aspects of physical, mental, nutritional and financial health. The Company also offers benefit plan participants the opportunity to reduce employee health care costs through wellness incentives and provides an Employee Assistance program to all employees.resilient foundation for their flourishing future.
In addition, the Company's commitment to its employees’ and customers’ health and safety continues to be paramount in its response to the evolving circumstances surrounding the COVID-19 pandemic. The Company undertook various safety measures which were outlined in the Safe Reopening Plans at each location and included implementing work from home measures, establishing social distancing guidelines, increasing cleaning protocols at sites, requiring face coverings to be worn at offices, venues and retail stores, as well as temperature or wellness checks upon entering certain of the Company's office locations and buildings. Additionally, the Company established a global COVID-19 core team (including senior leadership) to strategize about impacts to employees and customers, develop and implement comprehensive COVID-19 policies, procedures, and reopening plans in support of country, federal, state, and local guidelines, and train employees on site-specific protocols.
The Company providesWe provide a work environment where opportunities for training and development are providedavailable to employees. The core trainingtrainings provided include Code of Conduct, Anti-Corruption and Business Ethics, Safety, Cybersecurity Awareness, and Diversity & Inclusion training. In addition to the on-the-job skills training Callaway Golf offersemployees receive on the job, we offer various leadership programs including Emerging Leadership Programs, including Corporate Operations andLeadership Development, Sales Training, Callaway Leadership Academy, Global Operations Leadership Training, Sales Management Training, and other various ad hoc leadership courses. The CompanyWe also offersoffer product training to itsour customers and requiresrequire a Supplier Code of Conduct training for itsour suppliers.
Community Giving
The Company also hasWe have three existing programs focusing on the community:community giving programs: the Callaway Golf Company Foundation (the "Foundation"“Foundation”), the Callaway Golf Company Employee Community Giving Program (the "Community“Community Giving Program"Program”), and the Topgolf Driving for Good Program. Through these programs, the Company and itsour employees are able to give back to the community through monetary and/or in-kind donations, andor by providing community services.service. Through the Foundation, the Company striveswe strive to create healthy communities where itsour stakeholders live and work, by focusing on supporting programs that improve lives and contribute to communities on a select basis.
In 2021,2023, the Company contributedFoundation announced that it would be making a $1.0 million contribution to the Foundation towards these programs. In April 2021, Callaway and the Foundation were chosen as the recipients of the 2021 Corporate Philanthropy Award by the San Diego-based North County Philanthropy Council. Through the Community GivingPro Kids Scholarship Program, Companywhich will be paid over five years beginning in March 2023. Additionally, during 2023 our employees and their family members volunteer with local non-profit organizations.provided over 700 hours of community service and made over $0.1 million in product donations through the Community Giving Program. Through the Topgolf Driving for Good Program, the Company contributeswe contribute funds and volunteer efforts to national partners such as Make a Wish, Bunkers in Baghdad, Folds of Honor and National Urban League. Life to date,Since the inception of the program, Topgolf has hosted more than 3,500 charitable events together with community partners, schools, and non-profit organizations. These projects are coordinated by a volunteer steering committee andorganizations, which focus on a variety of charitable endeavors, including improving the environment,environmental preservation, youth empowerment, helpingaid for the homeless and disadvantaged, animal care and military care. Additional information on both of these programs is available on our website www.topgolfcallawaybrands.com.
In addition to the Company’s website www.callawaygolf.com.
Callaway gives itsaforementioned programs, we give our global subsidiaries the ability to lead their own community engagement initiatives. To facilitate this, the Company provides the sales teamsinitiatives by providing them with product donation accounts to manageand other forms of support for their contributions to charitiescharitable contribution and fundraiser events. Callawayfundraising efforts. We also encouragesencourage global offices and subsidiaries to engage in community partnerships at their discretion.
GOVERNMENT REGULATION
The Company isWe are subject to extensive federal, state, local and foreign laws and regulations, as well as other statutory and regulatory requirements, including those related to, among others, nutritional content labeling and disclosure requirements, food safety regulations, employment regulations, the Patient Protection and Affordable Care Act (the “PPACA”), the Americans with Disabilities Act (the "ADA"“ADA”), and similar state laws, privacy and cybersecurity laws, environmental, health and human safety laws and regulations, laws and regulations related to franchising and licensing operations, the Foreign Corrupt Practices Act and other similar anti-bribery and anti-kickback laws, as well as federal, state and local licensing requirements and other regulations relating to alcoholic beverage control, amusement, health, sanitation, human safety, zoning and land use. New laws and regulations or new interpretations of existing laws and regulations may also impact the business.
Historically, the costs of regulation compliance have not had a material adverse effect on the Company’sour business. The Company believesWe believe that itsour operations are in substantial compliance with all applicable Government Laws.government laws. Due to the nature of the Company’sour operations and the frequently changing nature of compliance regulation, the Companywe cannot predict with certainty that future material capital or operating expenditures will not be required in order to comply with applicable Government Regulation.
For certain risks associated with regulation compliance, see “Risk Factors” contained in Item 1A.
ENVIRONMENTAL AND SOCIAL RESPONSIBILITY
By being active and visible in the community and by embracing the principles of environmental stewardship, the Company believes it iswe believe that we are acting in an environmentally and socially responsible manner. In 2019, the Company, at the direction of its Chief Executive Officer with oversight from the Board of Directors, formally launched theThrough our Global Sustainability Program. The goal of this program isProgram, we aim to bring increased awareness and structure to the Company’sour existing social and environmental sustainability initiatives, while also enhancing the sustainability efforts across itsour global businesses. In connection with launching theThe Global Sustainability Program the Company established anis managed by our Executive Sustainability Committee, comprising itswhich is comprised of our Chief Executive Officer, Chief Financial Officer, all other executive officers, and theour General Counsel. A Sustainability Core Team meets and then reports progress of the Global Sustainability Program quarterly to the Executive Sustainability Committee. Members of the Sustainability Core Team, known as Sustainability Champions, are employees who have been selected from throughout the organization to drive large-scale global projects that build upon the Company’sour existing environmental and social sustainability efforts. Sustainability Champions also promote smaller-scale employee-driven initiatives at the local levels. These projects and initiatives are benchmarked against the sustainability frameworks published by the Global Reporting Initiative and the Sustainability Accounting Standards Board with respect to sustainability issues that are likely to affect the financial conditions or operating performances of companies in the consumer goods, apparel and entertainment sectors.
The Company’sOur entire Board of Directors overseeoversees the Global Sustainability Program and receives a comprehensive report regarding the program’s initiatives and progress on an annual basis. Additionally, the General Counsel of the Companymanagement provides a quarterly update to the Board’s Nominating and Corporate Governance Committee on the Company’sour latest third-party performance scores on environmental, social and governance (“ESG”) topics to maintain a consistent pulse on the Company’sour ESG performance.
The Global Sustainability Program has played an integral role in assessing the Company’sour material ESG concerns and developing the Company’sour sustainability strategy and goals, and the inaugural Sustainability Report for the year ended December 31, 2021, which includes Topgolf within its scope. The Company intends to publish and make available this Sustainability Reportas well as in supporting our sustainability reporting. In 2023, we published an ESG data table on the Investor Relations section of our website, which reports our performance on certain ESG metrics for the Company's website during the first half of 2022.years ended December 31, 2022 and 2021. The Global Sustainability Program has also introduced a variety of new initiatives, across the Company, including: establishing a quarterly internal sustainability newsletter;including enhancing sustainability content on the Company’s website;our website and engaging employees globally to devise new sustainability action plans for the Company’sour various brands and workspaces.
Environmental Matters
The Company’sOur operations are subject to federal, state and local environmental laws and regulations that impose limitations on the discharge of pollutants into the environment and establish standards for the handling, generation, emission, release, discharge, treatment, storage and disposal of certain materials, substances and wastes and the remediation of environmental contaminants (collectively, “Environmental Laws”). InDuring the ordinary course of itsour manufacturing processes, the Company useswe use paints, chemical solvents and other materials which generate waste and generates waste by-products that are subject to these Environmental Laws. In addition, in connection with the Company'sour Top-Flite asset acquisition in 2003, the Companywe assumed certain monitoring and remediation obligations at itsour manufacturing facility in Chicopee, Massachusetts. In February 2013, the Companywe sold this facility and leased back a reduced portion of the square footage that it believes is adequate for itsour ongoing golf ball manufacturing operations. As part of the terms of this sale, the Companywe assumed certain ongoing environmental remediation obligations.
We strive to adhere to all applicable Environmental Laws and takestake action as necessary to comply with these laws. The Company maintainsWe maintain an environmental and safety program andwhich employs full-time environmental, health and safety professionals at its facilities located in Carlsbad, California, Chicopee, Massachusetts and Monterrey, Mexico.responsible for all of our facilities. The environmental and safety program includes obtaining environmental permits as required, capturing and appropriately disposing of any waste by-products, tracking hazardous waste generation and disposal, air emissions, safety situations, material safety data sheet management, storm water management and recycling, and auditing and reporting on itsour compliance. The Company conductsWe conduct third party social, safety and environmental responsibility audits to evaluate and improve itsour environmental performance through itsour global supply chain. The audits facilitate compliance with applicable Environmental Laws and good manufacturing practices within the global supply chain. Historically, the costs of environmental compliance have not had a material adverse effect on the Company’sour business. The Company believesWe believe that
its our operations including Topgolf, are in substantial compliance with all applicable Environmental Laws. Due to the nature of the Company’sour operations and the frequently changing nature of environmental compliance standards and technology, the Companywe cannot predict with certainty that future material capital or operating expenditures will not be required in order to comply with applicable Environmental Laws.
Social Matters
The Company maintainsWe maintain a Code of Conduct, Supplier Code of Conduct and Human Rights Policy, which establish the foundation of itsour Corporate Social Responsibility ("CSR"(“CSR”) Program that was established in 2007. In 2019, the Companywe updated itsour CSR audit policy and procedure, benchmarking against the United Nations Universal Declaration of Human Rights and International Labor Organization Guidelines. The Company takesWe take actions as necessary to ensure supplier compliance, and actively workswork with suppliers to improve performance through training, internal and third-party audits and corrective action plan validation. The Company employsWe employ a team to conduct and oversee corporate social responsibility audits globally and hashave not identified any material compliance issues with itsour suppliers to date. In addition to the CSR Program, the Company participateswe participate in environmental, social and product compliance working groups through the American Apparel and Footwear Association ("AAFA") and isare a signatory to the Responsible Recruiting Commitment and Cambodia (Worker’s Rights) Brand Letter. Also,In addition, Jack Wolfskin’s engagementWolfskin is engaged in the Fair Wear Foundation, which promotes social responsibility and transparency in the supply chain.
INFORMATION ABOUT THE COMPANY'SOUR EXECUTIVE OFFICERS
Biographical information concerning the Company’sour executive officers is set forth below.
| | | | | | | | |
| Name | Age | Position(s) Held |
| Oliver G. Brewer III | 5860 | President and Chief Executive Officer, Director |
| Brian P. Lynch | 6062 | Executive Vice President, Chief Financial Officer |
| Glenn Hickey | 6062 | Executive Vice President and President, Callaway Golf |
| Mark F. Leposky | 5759 | Executive Vice President Global Operations |
Joe B. Flannery | 50 | Executive Vice President, Apparel and Soft GoodsChief Supply Chain Officer |
| Rebecca Fine | 5961 | Executive Vice President and Chief People Officer |
| Arthur F. Starrs | 4547 | Chief Executive Officer, Topgolf International |
Oliver G. Brewer III is a Director, and the President and Chief Executive Officer of the Company and has served in such capacity since March 2012. Prior to the Company's merger with Topgolf, Mr. Brewer served as a Director of Topgolf sincefrom 2012 until our merger with Topgolf in 2021, and Mr. Brewer also served on the National Golf Foundation'sFoundation’s Board from 2014 to 2019. Before joining Topgolf Callaway Golf,Brands, Mr. Brewer served as the President and Chief Executive Officer of Adams Golf, Inc. beginning in January 2002. He was President and Chief Operating Officer of Adams Golf from August 2000 to January 2002 and Senior Vice President of Sales and Marketing of Adams Golf from September 1998 to August 2000. Mr. Brewer also served on the Board of Directors of Adams Golf from 2000 until his resignation effective February 2012. He currently serves on the Board of Directors of The First Tee of San Diego/Pro Kids as well as the Executive Committee of The Legacy charity. Mr. Brewer has an M.B.A. from Harvard University and a B.S. in Economics from the College of William and Mary.
Brian P. Lynch is the Executive Vice President, and Chief Financial Officer, and Chief Legal Officer of the Company and has served in such capacity, as well as the Company's Senior Vice President, Chief Financial Officer and Chief Legal Officer, since July 2017. He served as the Company’s Senior Vice President, General Counsel and Corporate Secretary commencing in June 2012 before being appointed the additional role of Interim Chief Financial Officer in April 2017 and Chief Financial Officer in July 2017. Mr. Lynch is responsible for the Company’s finance, accounting, law, information technology, corporate audit, and compliance functions. Mr. Lynch serves on the Board of Directors of the Callaway Golf Foundation. Mr. Lynch also formerly served as the Company’s Chief Ethics Officer from 2012 to 2018. Mr. Lynch first joined Topgolf Callaway GolfBrands in December 1999 as Senior Corporate Counsel and thereafter served in various other capacities, including Associate General Counsel and Corporate Secretary. Mr. Lynch received a J.D. from the University of Pittsburgh and a B.A. in Economics from Franklin and Marshall College.
Glenn Hickey is Executive Vice President, Topgolf Callaway GolfBrands and has served in such capacity since January 2019. In addition, Mr. Hickey was named President, Callaway Golf in March 2023 and leads the Company’sglobal sales and marketing for Callaway golf equipment business globally.clubs and balls, branded apparel and performance gear. Mr. Hickey joined Topgolf Callaway GolfBrands in 1991 and was a top-producing Inside Sales Representative for seven years prior to being promoted to Inside Sales - National Account Manager in March 1997, Regional Sales Manager - East United States in November 2002, Director of Special Markets in June 2006, Vice President, Special Markets and Mass Merchants in August 2008, and Senior Vice President, Americas Sales in July 2012.2012, and Executive Vice President, Callaway Golf in January 2019. Prior to joining Topgolf Callaway Golf,Brands, Mr. Hickey was a bond trader for four years in the Los Angeles and New York offices of First Interstate Bank through its transition to Wedbush Securities. He completed a Financial Analysis for Non-Financial Managers certification from the University of Chicago, Graduate School of Business. He currently serves as a board member for the San Diego Junior Golf Association. Mr. Hickey received a B.S. in Business Administration from San Diego State University.
Mark F. Leposky is Executive Vice President and Chief Supply Chain Officer, Topgolf Callaway Brands. Mr. Leposky previously served as Executive Vice President of Global Operations and has servedfrom January 2019 until his appointment to Chief Supply Chain Officer in this capacity sinceMarch 2023. Prior to January 2019. He2019, he served as Senior Vice President, Global Operations since April 2012. Mr. Leposky is responsible for all areas of the Company’sour global operationssupply chain inclusive of industrial design,product development, engineering, manufacturing, supply chain planning, program management, purchasing, and transportation and logistics, as well as category leadership of golf accessories and the Odyssey and OGIO brands.brand. Prior to joining Topgolf Callaway Brands, Mr. Leposky served from 2005-20112005 until 2011 as co-founder, President and Chief Executive Officer of Gathering Storm Holding Company, LLC/ TMAX Gear LLC (collectively, “TMAX”), which, as exclusive licensee, designed, developed, manufactured, and distributed accessory products for TaylorMade-Adidas Golf. Prior to that, Mr. Leposky served as the Chief Supply Chain Officer for Fisher Scientific International, Chief Operations Officer for TaylorMade-Adidas Golf, and in senior management roles with The Coca-Cola Company and the United Parcel Service Company. Mr. Leposky began his career serving as a United States Army and Army National Guard Infantry Officer (Rank Major). Mr. Leposky received an M.B.A. from the Keller Graduate School of Management and a B.S. in Industrial Technology from Southern Illinois University.
Joe B. Flannery joined the Company in the first quarter of 2020 as its Executive Vice President, Apparel and Soft Goods. Mr. Flannery is responsible for the Company’s global apparel and soft goods business, including the TravisMathew and Jack Wolfskin brands. Prior to joining the Company, Mr. Flannery was Senior Vice President and General Manager of Newell Brands’ technical apparel division, consisting of Marmot, ExOfficio and Coleman apparel, where he worked since January 2016. Mr. Flannery’s experience also includes holding executive positions at The Meriwether Group from March 2008 to October 2012, in addition to serving as Vice President of Global Marketing at The North Face from March 2005 to March 2008, and as Global VP and GM of the Originals Division at Adidas Group AG from September 2000 to March 2005. Mr. Flannery received a B.S. in Business Administration from Miami University.
Rebecca Fine joined the Company as our Executive Vice President and Chief People Officer following the merger with Topgolf in March 2021, after having served as Chief People Officer for Topgolf from March 2019 to March 2021. Ms. Fine has more than 30 years of human resources and operations experience in the food and beverage industry, and is responsible for the Company’s global human resources, including human capital strategy and systems, talent acquisition and retention, learning and development, total rewards, and compliance. Prior to joining Topgolf, Ms. Fine worked as Chief Operating Officer of Millstone Capital Advisors DBA LC Restaurants from August 2016 to March 2019, as Chief Operating Officer of Honolulu Coffee Company from December 2012 to March 2019 and as Chief People Officer of Panera Bread from August 2004 to January 2012. Ms. Fine has been a member of the Board of Directors for Native Foods and Lion’s Choice since April 2018, and for the Texas Diversity Council and the National Women’s Council since August 2020. Also, Ms. Fine previously served as Chairwoman of Winning Women until March 2019. Ms. Fine attended Lindenwood University for Business and Human Resources Management and the University of Missouri, St. Louis for Industrial Psychology.
Arthur F. Starrs, IIIis the Chief Executive Officer of Topgolf and has served in such capacity since April 2021. Mr. Starrs is responsible for Topgolf’s global businesses, which include domestic and international Topgolf venues and other businesses including Toptracer, Swing Suite and Topgolf Media. Prior to Topgolf, Mr. Starrs was the Global CEO of Pizza Hut, a division of Yum! Brands from July 2019 until April 2021. He was President of Pizza Hut U.S. from April 2016 to July 2019, and General Manager of Pizza Hut U.S. from October 2015 to April 2016. Prior to that, he served as Chief Financial Officer of Pizza Hut U.S. from January 2014 to October 2015 and Vice President, Finance from August 2013 to December 2013. Mr. Starrs was previously Executive Vice President and Chief Financial Officer of Rave Cinemas from March 2005 to July 2013 and began his career as a Financial Analyst and Associate at Dresdner Kleinwort Wasserstein (originally Wasserstein Perella & Co.) from September 1998 to January 2005. He serves on the Board of Directors of Dine Brands Global and the First Tee of Greater Dallas and previously served on the Board of Directors for Grubhub, Inc. and
currently serves on the board of The First Tee of Greater Dallas. Mr. Starrs received an A.B. in Economics from Princeton University.
Information with respect to the Company’sour employment agreements with itsthe Chief Executive Officer, Chief Financial Officer and other three most highly compensated executive officers will be contained in the Company’sour definitive Proxy Statement in connection with the 20222024 Annual Meeting of Shareholders. In addition, copies of the employment agreements for all the executive officers are included as exhibits to this report.
ACCESS TO THE SEC FILLINGS THROUGH COMPANY WEBSITE
Interested readers can access the Company’sour annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) through the Investor Relations section of the Company’sour website at www.callawaygolf.com.www.topgolfcallawaybrands.com. These reports can be accessed free of charge from the Company’sour website as soon as reasonably practicable after the Companywe electronically filesfile such materials with, or furnishesfurnish them to the Commission. In addition, the Company’sour Corporate Governance Guidelines, Code of Conduct and the written charters of the committees of the Board of Directors are available in the Corporate Governance portion of the Investor Relations section of the Company’sour website and are available in print to any shareholder who requests a copy. We also use our investor relationsInvestor Relations website as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. Investors should monitor such website, in addition to following our press releases, SEC filings and public conference calls and webcasts. The information contained on the Company’sour website shall not be deemed to be incorporated into this report.
Item 1A. Risk Factors
Certain Factors Affecting Topgolf Callaway Golf CompanyBrands
The Company’sOur business, operations and financial condition are subject to various risks and uncertainties. The Company urgesWe urge you to carefully consider the risks and uncertainties described below, together with all of the other information in this Annual Report on Form 10-K, including those risks set forth under the heading entitled “Important Notice to Investors Regarding Forward-Looking Statements,” and in other documents that the Company fileswe file with the Commission, before making any investment decision with respect to the Company’sour securities. If any of the risks or uncertainties actually occur or develop, the Company’sour business, financial condition, results of operations and future growth prospects could be adversely affected. Under these circumstances, the trading prices of the Company’sour securities could decline, and you could lose all or part of your investment in the Company’sour securities.
Risk Factors Summary
The following is a summary of the principal risks that could adversely affect our business, operating results, cash flows and financial conditions.
Risks Related to the Company'sour Industry and Business
•A reduction in the number of rounds of golf played or in the number of golf participants could adversely affect the Company’s sales.
•The Company may have limited opportunities for future growth in sales of golf clubs and golf balls.
•The Company, including Topgolf, its franchisees and licensees, may face increased labor costs or labor shortages that could slow growth and adversely affect its business, results of operations and financial condition.
•The COVID-19 pandemic has had, and is expected to continue to have, a material and adverse effect on the Company's business, financial condition, results of operations, supply and distribution chains and ability to manage its operations.
•Unfavorable economic conditions, including as a result of the COVID-19 pandemic, inflation or otherwise, could have a negative impact on consumer discretionary spending and therefore negatively impact the Company’sour results of operations, financial condition and cash flows.
•Our golf-related products and entertainment offerings are recreational in nature and are therefore discretionary purchases for consumers. In addition, our Topgolf venues business is dependent upon consumer and corporate discretionary spending on leisure and entertainment-based offerings. Consumers are generally more willing to make discretionary purchases of golf products and to spend on leisure and out-of-home entertainment during favorable economic conditions and when consumers are feeling confident and prosperous. Our soft goods and apparel products are similarly dependent on consumer discretionary spending and retail traffic patterns. In particular, our outdoor apparel, gear and accessories brands are premium in nature and, therefore, the purchasing patterns of consumers can vary year to year. Our Topgolf venues business offers a leading technology-enabled golf entertainment option for consumers, with an innovative platform that comprises our state-of-the-art open-air golf and entertainment venues. The demand for these entertainment and recreational activities is highly sensitive to downturns in the economy and the corresponding impact on discretionary consumer spending. Any actual or perceived deterioration or weakness in general, regional or local economic conditions, unemployment levels, the job or housing markets, consumer debt levels or consumer confidence, as well as other adverse economic or market conditions due to inflation or otherwise may lead to customers having less discretionary income to spend on entertainment and recreational activities, and may result in significant fluctuations and spending patterns year to year. Discretionary spending is also affected by many other factors, including general business conditions, interest rates, the availability of consumer credit, taxes and consumer confidence in future economic conditions. Purchases of our products and entertainment offerings could decline during periods when disposable income is lower, or during periods of actual or perceived unfavorable economic conditions. A severesignificant or prolonged decline in general economic downturn couldconditions or uncertainties regarding future economic prospects that adversely affect consumer discretionary spending, whether in the Company's customers’ financial condition, their levelsUnited States or in our international markets, could result in reduced sales of business activityour products and their ability to pay trade obligations.
•The Company faces intense competitionreduce demand and spending on our entertainment offerings, including Topgolf, which in each of its markets, and if it is unable to compete effectively, it couldturn would have a material adverse effectnegative impact on its business,our results of operations, financial condition and growth prospects.
•The Company’s expanding apparel business, and operation of related retail locations, is subject to various risks and uncertainties, and the Company’s growth and strategic plans may not be fully realized.
•Topgolf’s growth strategy depends in part on its and its franchisees’ ability to open new venues in existing and new markets.
•The Company may be unable to successfully manage the frequent introduction of new products that satisfy changing consumer preferences.
•The Company’s soft goods and apparel and Topgolf venues businesses face risks associated with changed consumer tastes and preferences and fashion trends.
•The Company’s business depends on strong brands and related reputations, and if the Company is not able to maintain and enhance the Company’s brands or preserve its strong reputation, including as a result of actions taken by franchisees and licensees , its sales may be adversely affected.
•The Company’s business and operating results are subject to seasonal fluctuations, which could result in fluctuations in its operating results and stock price.
•The Company’s sales and business could be materially and adversely affected if professional athletes, celebrities and other endorsers do not endorse or use the Company’s products.
•Any significant changes in U.S. trade or other policies that restrict imports or increase import tariffs could have a material adverse effect on the Company’s results of operations.
Risks Related to Operations, Manufacturing, and Technology
•The Company has significant international operations and is exposed to risks associated with doing business globally.
•Any difficulties from strategic acquisitions that the Company pursues or consummates, including its recent acquisition of Topgolf, could adversely affect its business, financial condition and results of operations.
•If the Company inaccurately forecasts demand for its products, it may manufacture either insufficient or excess quantities, which, in either case, could adversely affect its financial performance.
•The Company’s expanding international operations could be harmed if it fails to successfully transition its business processes on a global scale.
•Instances of food-borne illness and outbreaks of disease could negatively impact Topgolf’s business.
•The Company may be subject to product warranty claims that require the replacement or repair of products sold. Such warranty claims could adversely affect the Company’s results of operations and relationships with its customers.
•Failure to adequately enforce the Company’s intellectual property rights could adversely affect its reputation and sales.
•Cyber-attacks, unauthorized access to, or accidental disclosure of, consumer personally-identifiable information that the Company collects may result in significant expense and negatively impact the Company's reputation and business.
Risks Related to Regulations
•Regulations related to “conflict minerals” require the Company to incur additional expenses and could limit the supply and increase the cost of certain metals used in manufacturing the Company’s products.
•Changes in, or any failure to comply with, data privacy laws, regulations, and standards may adversely affect the Company’s business.
Risks Related to Tax and Financial Matters
•Changes in tax law and unanticipated tax liabilities could adversely affect the Company’s effective income tax rate and profitability.
•The Company’s ability to utilize all or a portion of its U.S. deferred tax assets may be subject to limitations.
•The Company’s obligations and certain financial covenants contained under its existing credit facilities expose it to risks that could materially and adversely affect its liquidity, business, operating results, financial condition and limit its flexibility in operating its business.
Risks Related to the Company's Industry and Businesscash flows.
A reduction in the number of rounds of golf played or in the number of golf participants could adversely affect the Company’sour sales.
The Company generatesWe are a technology-enabled modern golf company delivering leading golf equipment, apparel and entertainment, with a portfolio of global brands including Callaway Golf, Topgolf, Odyssey, OGIO, TravisMathew and BigShots Golf. We generate a substantial portion of itsour revenues from the sale of golf-related products, including golf clubs, golf balls and golf accessories.
In addition, the Company generateswe generate substantial revenues from the sale of golf-related soft goods, including apparel, gear and other accessories. The demand for golf-related products in general, and golf balls in particular, as well as the demand for golf-related soft goods, is directly related to the number of golf participants and the number of rounds of golf being played by these participants. Golf participation is impacted by, among other things, the demographics (including age of golfers), dedication levels, weather and economic conditions. If golf participation decreases or the number of rounds of golf played decreases, sales of the Company’sour products may be adversely affected. In the future, the overall dollar volume of the market for golf-related products may not grow or may decline. Further, the Company generateswe generate substantial revenuesrevenue from itsour Topgolf business. The demand for golf and overall popularity of the sport, including through increased off-course golf participation, is tangentially related to overall guest traffic and spending at each of the Topgolf venues, and therefore, if demand for golf or the overall popularity of the sport decreases, Topgolf sales could be adversely affect Topgolf sales.affected.
In addition, the demand for golf products, golf entertainment and other soft goods and apparel is directly related to the popularity of magazines, cable channels and other media dedicated to golf, television coverage of golf tournaments and attendance at golf events. The Company dependsWe depend on the exposure of itsour products through advertising and the media or at golf tournaments and events. Any significant reduction in television coverage of, or attendance at, golf tournaments and events (whether as a result of COVID-19-related restrictions or otherwise) or any significant reduction in the popularity of golf magazines or golf television channels, could reduce the visibility of the Company’sour brand and could adversely affect the Company’sour sales.
We may have limited opportunities for future growth in sales of golf clubs and golf balls.
In order for the Companyus to significantly grow itsour sales of golf clubs or golf balls, the Companywe must either increase itsour share of the market for golf clubs or golf balls, develop markets in geographic regions historically underrepresented by the Company’sour products, or the overall market for golf clubs or golf balls must grow. The CompanyWe already hashave a significant share of worldwide sales of golf clubs and golf balls and the golf industry is very competitive. As such, gaining incremental market share quickly or at all is difficult. Therefore, opportunities for additional market share may be limited given the challenging competitive nature of the golf industry, and the overall dollar volume of worldwide sales of golf clubs or golf balls may not grow or may decline.
The Company, including Topgolf, its franchisees and licensees,We may face increased labor costs or labor shortages, in particular with respect to our Topgolf venues business and our franchisees and licensees, that could slow growth and adversely affect itsour business, results of operations and financial condition.
Labor is a significant component in the cost of operating theour business of the Company,generally, and a primary component in operating theour Topgolf venues business ofand in our relationships with our Topgolf and its franchisees and licensees. If the Company faceswe face labor shortages or increased labor costs because of increased competition for employees, higher employee turnover rates, the impact of the ongoing COVID-19 pandemic or other pandemics, increases in the federally-mandated or state-mandated minimum wage, changes in exempt and non-exempt status, or other employee benefits costs (including costs associated with health insurance coverage or workers’ compensation insurance), the Company’sour operating expenses could increase and itsour growth could be adversely affected.
In particular, Topgolf has a substantial number of employee associates (“Associates”)Playmakers who are paid wage rates at or based on the applicable federal or state minimum wage, and increases in the applicable minimum wage will increase labor costs. From time to time, legislative proposals are made to increase the minimum wage at the federal or state level. As federal, state or other applicable minimum wage rates increase, the Companywe may be required to increase not only the wage rates of minimum wage AssociatesPlaymakers or other employees, but also the wages paid to other hourly employees. It may not be possible to increase prices in order to pass future increased labor costs on to customers, in which case the Company’sour margins would be negatively affected. AtWith respect to our Topgolf business, reduced margins could make it more difficult to attract new franchisees and licensees and to retain existing franchisee and licensee relationships. If the Company iswe are able to increase prices to cover increased labor costs, the higher prices could result in lower participation and therefore lower revenues, which may also reduce margins, as well as the fees received from Topgolf’sour franchisees and licensees.
Furthermore, the successful operation of the Company’sour business depends upon itsour ability to attract, motivate and retain a sufficient number of qualified executives, managers and skilled employees. From time to time, there may be a shortage of skilled labor in certain of the communities in which the Company operates,we operate, including where itsour Topgolf venues are located. Shortages of skilled labor may make it increasingly difficult and expensive to attract, train and retain the services of a satisfactory number of qualified employees, which, with respect to Topgolf, could delay the planned openings of new Company-operated and franchised venues and adversely impact the operations and profitability of existing venues. Furthermore, competition for qualified employees, particularly in markets where such shortages exist, could require the Companyus to pay higher wages, which could result in higher labor costs. In particular, Topgolf experienceswe experience intense competition to attract and retain skilled game developers and content creators, is intense, and failure to do so may delay the implementation of Topgolf’sour business strategy and growth plans. Companies in the Company’sour industry have also historically experienced relatively high turnover rates, which may also result in higher labor costs. Accordingly, if the Company iswe are unable to recruit and retain sufficiently qualified individuals, itsour business, results of operations, financial condition and growth prospects could be materially and adversely affected.
Some, but not all, of the Company’sour employees are currently covered under collective bargaining agreements. In the future, additional employees, including Topgolf Associates,Playmakers, may elect to be represented by labor unions. If a significant number of additional employees were to become unionized and collective bargaining agreement terms were significantly different from current compensation arrangements, it could adversely affect the Company’sour business, financial condition or results of operations. In addition, a labor dispute involving some or all employees may harm the Company’sour reputation, disrupt operations and reduce revenue, and resolution of disputes may increase costs. Further, if Topgolfwe or itsour franchisees enter into a new market with unionized construction companies, or the construction companies in Topgolfour or itsour franchisees’ current markets become unionized, construction and build-out costs for new venues in such markets could materially increase.
In addition, immigration reform continues to attract significant attention in the public arena and the U.S. Congress. If new immigration legislation is enacted, such laws may contain provisions that could increase the Company’s, including Topgolf’sour and itsour U.S. franchisees’ and licensees’, costs in recruiting, training and retaining employees. Also, although the Company’sour hiring practices comply with the requirements of federal law in reviewing employees’ citizenship or authority to work in the United States, the Company doeswe do not monitor or control the hiring practices of Topgolf’sour Topgolf franchisees and licensees, and increased enforcement efforts with respect to existing immigration laws by governmental authorities may disrupt a portion of the Company’sour workforce or the operations at itsour venues, or the workforce or operations of licensees, thereby negatively impacting itsour business.
The COVID-19 pandemic has had, and is expected to continue to have, a material and adverse effect on the Company's business, financial condition and results of operations.
The outbreak of COVID-19 has created considerable instability and disruption in the U.S. and world economies. In March 2020, the World Health Organization declared COVID-19 a global pandemic, and domestic and international governmental authorities around the world have issued orders, mandates, decrees and directives (collectively, “COVID Orders”), including travel restrictions, “stay-at home” orders and “social distancing” measures and business shutdowns. These measures have adversely affected workforces, customers, consumer sentiment, economies, and financial markets, and, along with decreased consumer spending, have led to an economic downturn in many of the Company's markets.
With respect to the Topgolf business, for example, statewide executive orders were issued in Texas and Florida, where Topgolf operates a significant portion of its venues, and other states in which Topgolf operates venues, ordering the closure of non-essential business establishments, mandating or recommending that residents “stay at home” other than in
the case of limited exceptions, imposing curfews, suspending alcohol sales for certain establishments, limiting occupancy, ordering the implementation of strict social distancing measures in business establishments and mandating health screens and face coverings for Associates and customers and imposed heightened cleanliness standards, including cleaning and disinfecting golf clubs, golf balls, game screens and other frequently touched bay surfaces between each group of guests, which has had a material adverse impact on Topgolf’s business throughout 2020 and 2021.Further, Topgolf enacted various measures to reduce cash expenses to weather its temporary venue closures, including (i) suspension of non-essential capital expenditures, including the suspension of construction of future venues for a period of time, (ii) execution of substantial reductions in expenses, including furlough or lay-off of a significant number of Associates, (iii) temporary salary reductions for certain Associates, including executive officers, (iv) extension of payment terms with Topgolf’s vendors and (v) negotiation of rent deferrals for a portion of Topgolf’s leases. Although currently all Topgolf venues have been re-opened, there can be no assurance that additional closures or re-closures will not be mandated in the future. Even with respect to venues that may remain open, a number of its venues have reduced operating hours and foot traffic at Topgolf’s venues has not returned to pre-pandemic levels, and Topgolf has reduced headcount at its offices in response to these changes. Additionally, as a result of COVID Orders, Topgolf has been limited in its ability to host large group events in certain jurisdictions, which has resulted in a reduction of revenue from such events per past practice. Topgolf expects that occupancy limits imposed under COVID Orders and a shift in consumer demand away from out-of-home entertainment will result in lower guest traffic at venues and continue to negatively impact revenues, and that it will incur additional costs to ensure compliance with safety measures at venues, including mandatory measures under applicable COVID Orders as well as voluntary measures to enhance safety for guests and Associates. In addition, Topgolf may face difficulties in maintaining adequate staffing at venues due to illness, difficulty in recalling Associates that may be furloughed if venues are required to temporarily close again or a reduction in Associates willing to work in public gathering places. As a result, its business, operating results and financial condition have been, and will continue to be, materially and adversely affected. The ongoing COVID-19 pandemic and restrictions under COVID Orders could also delay construction of new venues, present difficulties in staffing venues and result in supply chain interruptions, including for manufactured components for the Toptracer Range system, which may materially adversely affect Topgolf’s ability to implement growth plans. Future outbreaks of other diseases such as avian flu, sudden acute respiratory syndrome (also known as SARS), swine flu or influenza may similarly impact Topgolf.
In addition, the COVID-19 pandemic has caused significant disruption in the Company’s supply and distribution chains for its golf equipment, apparel and other products sold globally, and resulted in temporary closures of its corporate offices and retail stores around the world. A majority of the Company's employees in the United States and Europe are continuing to work from home. Additionally, the COVID-19 pandemic has resulted in the cancellation of golf tournaments, restrictions on attendance at golf tournaments and related events, closures of golf courses and a significant decrease in demand for consumer products, including the Company's golf equipment, apparel and other products.
Further, the Company has been, and will continue to be, negatively impacted by the heightened governmental regulations and travel advisories, recommendations by the U.S. Department of State, the Centers for Disease Control and Prevention and similar foreign authorities, and travel bans and restrictions, each of which has significantly impacted, and is expected to continue to significantly impact, travel of customers to its retail locations and to Topgolf’s domestic and international venues. Topgolf, in particular, cannot predict how quickly customers will return to its venues, which may be affected by continued concerns over safety and/or depressed consumer sentiment due to adverse economic conditions, including high unemployment.
The Company is unable to accurately predict the impact that the COVID-19 pandemic and the resulting disruptions will have on its operations going forward due to the currently unknowable duration, scope and severity of the COVID-19 pandemic and the timing and effectiveness of vaccine distribution. Also, the Company is unable to accurately predict the impact of the ongoing governmental regulations that have been imposed or new regulations that may be imposed in response to the pandemic. To date, such disruptions have resulted in, among other things, production delays and closures of the Company's manufacturing facilities, retail locations and warehouses, any or all of which could materially and adversely affect its supply and distribution chains and ability to manage its operations. The Company has also experienced staffing shortages as a result of remote working requirements or otherwise. Although certain aspects of the Company's business have improved and net revenues increased during 2021 as compared to 2020, the Company expects to continue to be impacted by the instability and disruption in global economic and market conditions, and the related decreases in customer demand and spending. Demand for the Company’s products and services may weaken for a significant length of time and the Company cannot predict if and when such demand will return to pre-outbreak demand.To the extent that third parties
on whom the Company relies for revenue, including, among others, its customers and licensees, are negatively impacted by COVID-19, such third parties may be unwilling or unable to make payments otherwise due to the Company on a timely basis, or at all. In the event of a nonpayment, default or bankruptcy by such third party, the Company’s cash flows may be adversely impacted, costs may be incurred to protect its contractual rights, and the Company may be unable to recognize the revenue that the Company otherwise expected to receive from such third party.
Although the Company has taken actions to significantly reduce costs, maximize liquidity and strengthen its operating and financial position, there can be no assurance that such actions will be able to counteract the global economic impacts of the COVID-19 pandemic. If the Company experiences a decline in revenues, cash flows or earnings due to COVID-19, the Company may have difficulty paying interest and principal amounts due on its existing credit facilities or other indebtedness and meeting certain of the financial covenants contained in such credit facilities. Also, if additional financing is required to operate the Company's business, such financing may not be available to the Company on acceptable terms, or at all. While it is premature to predict the ultimate impact of these developments, the Company expects its results in the near-term and beyond will be adversely impacted in a significant manner. Furthermore, when conditions return to a more normal state, the Company may experience difficulties efficiently ramping up its operations to pre-COVID-19 levels in an effective manner.
To the extent the COVID-19 pandemic adversely affects the Company's business, financial condition and results of operations, it may also have the effect of heightening many of the other risks described in this Item 1A and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 7 below, including, without limitation, risks relating to changes in demand for the Company's products or the supply of the components and materials used to make its products, level of indebtedness, need to generate sufficient cash flows to service the Company’s indebtedness, ability to comply with the obligations and financial covenants contained in the Company’s existing credit facilities, availability of adequate capital, the ability to execute the Company's strategic plans, U.S. trade, tax or other policies that restrict imports or increase import tariffs, ability to successfully operate its expanding retail stores and venues, and regulatory restrictions. In addition, if in the future there is a further outbreak of COVID-19 or a variation thereof, or an outbreak of another highly infectious or contagious disease or other health concern, the Company may be subject to similar risks as posed by COVID-19.
Unfavorable economic conditions, including as a result of the COVID-19 pandemic, inflation or otherwise, could have a negative impact on consumer discretionary spending and therefore negatively impact the Company’s results of operations, financial condition and cash flows.
The Company’s golf-related products are recreational in nature and are therefore discretionary purchases for consumers. In addition, the Topgolf venues business is dependent upon consumer and corporate discretionary spending on leisure and entertainment based offerings.Consumers are generally more willing to make discretionary purchases of golf products and to spend on leisure and out-of-home entertainment during favorable economic conditions and when consumers are feeling confident and prosperous. The Company’s soft goods and apparel products are similarly dependent on consumer discretionary spending and retail traffic patterns.In particular, the Company’s recently acquired outdoor apparel, gear and accessories brands are premium in nature and, therefore, the purchasing patterns of consumers can vary year to year.The recently acquired Topgolf venues business offers a leading technology-enabled golf entertainment option for consumers, with an innovative platform that comprises its state-of-the-art open-air golf and entertainment venues.The demand for these entertainment and recreational activities is highly sensitive to downturns in the economy and the corresponding impact on discretionary consumer spending. Any actual or perceived deterioration or weakness in general, regional or local economic conditions, unemployment levels, the job or housing markets, consumer debt levels or consumer confidence, as well as other adverse economic or market conditions due to COVID-19, inflation, or otherwise may lead to customers having less discretionary income to spend on entertainment and recreational activities, and may result in significant fluctuations and spending patterns year to year.Discretionary spending is also affected by many other factors, including general business conditions, interest rates, the availability of consumer credit, taxes and consumer confidence in future economic conditions. Purchases of the Company’s products and services could decline during periods when disposable income is lower, or during periods of actual or perceived unfavorable economic conditions, including as a result of the COVID-19 pandemic. A significant or prolonged decline in general economic conditions or uncertainties regarding future economic prospects that adversely affect consumer discretionary spending, whether in the United States or in the Company’s international markets, could result in reduced sales of the Company’s products and reduce demand and
spending on the Company’s entertainment offerings, including Topgolf, which in turn would have a negative impact on the Company’s results of operations, financial condition and cash flows.
A severe or prolonged economic downturn could adversely affect the Company'sour customers’ financial condition, their levels of business activity and their ability to pay trade obligations.
The CompanyWe primarily sells itssell our golf and apparel products to retailers directly and through wholly-owned domestic and foreign subsidiaries, and to foreign distributors. The Company performsWe perform ongoing credit evaluations of itsour customers’ financial condition and generally requiresrequire no collateral from these customers. However, a severe or prolonged downturn in the general economy could adversely affect the retail market which in turn, would negatively impact the liquidity and cash flows of the Company's customers, including the ability of such customers to obtain credit to finance purchases of the Company'sour products and to pay their trade obligations. In addition, as a result of COVID-19 related restrictions or public safety measures, many retail stores have been and may continue to operate in a more limited capacity, which could result in fewer consumers purchasing our products. This could result in increased delinquent or uncollectible accounts for some of the Company’s customers. A failure by the Company’sour customers to pay on a timely basis a significant portion of outstanding account receivable balances would adversely impact the Company’sour results of operations, financial condition and cash flows.
The Company facesWe face intense competition in each of itsour markets and operating segments, and if it iswe are unable to compete effectively, it could have a material adverse effect on itsour business, results of operations, financial condition and growth prospects.
Golf Equipment. The golf equipment business, which is comprised of golf club and golf ball products, is highly competitive, and is served by a number of well-established and well-financed companies with recognized brand names. The golf ball business, in particular, includes one competitor with an estimated U.S. market share of over 50%.
With respect to golf club sales, new product introductions, price reductions, consignment sales, extended payment terms, “closeouts,” including closeouts of products that were recently commercially successful, and significant tour and advertising spending by competitors continue to generate intense market competition. Furthermore, downward pressure on pricing in the market for new clubs could have a significant adverse effect on the Company’s pre-owned golf club business as the gap narrows between the cost of a new club and a pre-owned club. Successful marketing activities, discounted pricing, consignment sales, extended payment terms or new product introductions by competitors could negatively impact the Company’s future sales.
With respect to golf ball sales, the Company’s competitors continue to incur significant costs in the areas of advertising, tour and other promotional support.The Company believes that to be competitive, the Company also needs to continue to incur significant expenses in tour, advertising and promotional support. In addition, the Company has invested, and may continue to invest in the future, significant capital into upgrades to its manufacturing and assembly facilities, including its golf ball manufacturing facility in Chicopee, Massachusetts, to remain on the forefront of technological and competitive innovation. Unless there is a change in competitive conditions, these competitive pressures and increased costs will continue to adversely affect the profitability of the Company’s golf equipment business.
Apparel, Gear and Other. The Company’s apparel, gear and other business includes the Jack Wolfskin outdoor apparel, gear and accessories business, the TravisMathew golf and lifestyle apparel and accessories business, and 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, and royalties from licensing of the Company’s trademarks and service marks for various soft goods products.The Company faces significant competition in every region with respect to each of these product categories. In most cases, the Company is not the market leader with respect to its apparel, gear and accessory markets.
Topgolf.The Topgolf business operates primarily in the consumer entertainment industry, which remains highly competitive.Consumers today have a wide variety of options when deciding how to spend their leisure time and discretionary entertainment dollars. Topgolf’s venues compete for consumers’ time and discretionary entertainment dollars against a broad range of other out-of-home entertainment options, as well as increasingly sophisticated forms of home-based entertainment. Other out-of-home entertainment options against which Topgolf competeswe compete include other dining and entertainment venues, sports activity centers, traditional driving ranges and other establishments offering simulated golf or multi-sport experiences (including Toptracer Range and Full Swing Suite licensees), arcades and entertainment centers, movie theaters, sporting events, bowling alleys, nightclubs, casinos, bars and restaurants. In many cases, these businesses, or the
entities operating them, are larger than us and have significantly greater financial resources and name recognition, longer operating histories, and concepts with which consumers may be more familiar, and are better established in the markets where venues are located or are planned to be located. As a result, these competitors may be able to invest greater resources or implement more aggressive strategies to attract consumers, including with respect to pricing, and, accordingly, may succeed in attracting those who would otherwise come to Topgolf’s venues.venues, causing us to lose market share or sales, or forcing us to reduce our prices to meet the competition. Home-based entertainment options against which Topgolf’s venues compete include internet and video gaming, as well as movies, television and other on-demand content from streaming services. Further, in some cases consumer demand has shifted towards home-based entertainment options and away from out-of-home entertainment, including Topgolf’s products and services, including as a result of the impact of the ongoing COVID-19 pandemic, and related COVID Orders, which may result in greater competition from home-based entertainment options in the future. The failure of Topgolf’sour Topgolf venues to compete favorably against these other out-of-home and home-based entertainment options could have a material adverse effect on Topgolf’sour business, results of operations and financial condition.
TopgolfWe also facesface intense competition across itsour other Topgolf business lines. In particular, the International and Toptracer business lines compete against other companies to attract and retain qualified franchisees and licensees. WGT and the content Topgolf produceswe produce through Topgolf Studios also competes for consumer attention and leisure time against the other home-based entertainment alternatives described above, particularly content focused on sports, including golf. From a commercial perspective, Topgolfwe also competescompete against other businesses seeking corporate sponsorships and other commercial partners, such as sports teams, entertainment events and television and digital media outlets, and competecompetes against television and digital content providers seeking advertiser or sponsorship income. Topgolf’sOur Topgolf growth strategy and prospects will be materially impaired if it iswe are unable to compete successfully in these aspects of itsour business.
Golf Equipment. The golf equipment business, which is comprised of golf club and golf ball products, is highly competitive, and is served by a number of well-established and well-financed companies with recognized brand names. The golf ball business, in particular, includes one competitor with an estimated U.S. market share of over 50%.
With respect to golf club sales, new product introductions, price reductions, consignment sales, extended payment terms, “closeouts,” including closeouts of products that were recently commercially successful, and significant tour and advertising spending by competitors continue to generate intense market competition. Furthermore, downward pressure on pricing in the market for new golf clubs could have a significant adverse effect on our pre-owned golf club business as the gap narrows between the cost of a new club and a pre-owned club. Successful marketing activities, discounted pricing, consignment sales, extended payment terms or new product introductions by competitors could negatively impact our future sales.
With respect to golf ball sales, our competitors continue to incur significant costs in the areas of advertising, tour and other promotional support. We believe that to be competitive, we also need to continue to incur significant expenses in tour, advertising and promotional support. In addition, we have invested, and may continue to invest in the future, significant capital into upgrades to our manufacturing and assembly facilities, including our golf ball manufacturing facility in Chicopee, Massachusetts, to remain on the forefront of technological and competitive innovation. Unless there is a change in competitive conditions, these competitive pressures and increased costs will continue to adversely affect the profitability of our golf equipment business.
Active Lifestyle. Our Active Lifestyle segment includes the TravisMathew golf and lifestyle apparel and accessories business, the Jack Wolfskin outdoor apparel, gear 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, and royalties from licensing of our trademarks and service marks for various soft goods products. We face significant competition in every region with respect to each of these product categories. In most cases, we are not the market leader with respect to our apparel, gear and accessory markets, and many of our competitors have significant competitive advantages, including longer operating histories, larger customer bases, greater brand recognition and greater financial resources. Our competitors may be willing to discount prices and accept lower profit margins to compete with us and, as a result, we may lose market share and sales, or be forced to reduce our prices to meet competition.
If the Company iswe are unable to grow or maintain itsour competitive position in any of itsour business areas, it could materially adversely affect the Company’sour business, financial condition and results of operations.
The Company’sOur expanding apparel business, and operation of related retail locations, is subject to various risks and uncertainties, and the Company’sour growth and strategic plans may not be fully realized.
The Company hasWe have been expanding itsour focus over the last several years to include soft goods and apparel, in addition to itsour core golf business, primarily through theour acquisitions of the OGIO, and TravisMathew in 2017 and Jack Wolfskin in 2019.brands. Jack Wolfskin is an international, premium outdoor apparel, footwear and equipment brand, and itour Jack Wolfskin business designs products targeted at the active outdoor and urban outdoor customer categories.The scale and global scope of Jack Wolfskin involves various risks and uncertainties described throughout this Annual Report on Form 10-K, including in this “Risk Factors” section, as well as the following:
•Maintaining itsmaintaining our market share in itsour key markets such as Germany, Austria, Switzerland and China in the face of increasing competition and new competitors;
•Difficultiesdifficulties in developing the Jack Wolfskin brand in the North AmericanAmerica and other target markets;regions;
•Significantsignificant competition from existing premium outdoor apparel companies in target markets;
•Continuallycontinually changing consumer preferences; and
•Difficultiesdifficulties in managing or realizing sustainable profitability from Jack Wolfskin’s large network of global wholesale retail partners, consisting of hundreds of third party owned retail locations.
Additionally, as a result of the Company’sour TravisMathew, Jack Wolfskin, and golf apparel joint ventureretail businesses in Japan in July 2016 and the acquisitions of TravisMathew in August 2017 and Jack Wolfskin in January 2019, the CompanyKorea, we now maintainsmaintain over 150234 retail locations around the world. The Company’sOur retail operations are subject to various factors that pose risks and uncertainties and which could adversely impact the Company’sour financial condition and operating results. Such factors include, but are not limited to, macro-economic factors that could have an adverse effect on retail activity generally; the Company’sour ability to successfully manage retail operations and a disparate retail workforce across various jurisdictions; the Company'sour ability to successfully open and maintain new retail stores in new markets; governmental restrictions or public safety measures put in place as a result of the COVID-19 pandemic or other pandemics, resulting in such retail stores operating in a more limited capacity and with fewer in-person customers; to manage costs associated with retail store operations and fluctuations in the value of retail
inventory; to manage relationships with existing retail partners; and to obtain and renew leases in quality retail locations at a reasonable cost and on reasonable and customary terms.
If the Company failswe fail to realize the expected benefits from itsour expansion into soft goods and apparel or isare unsuccessful in itsour operation of itsour retail locations, the Company’sour growth and strategic plans may not be fully realized, and itsour business, financial condition and results of operations could be adversely affected.
Topgolf’sOur Topgolf growth strategy depends in part on itsour and itsour franchisees’ ability to open new venues in existing and new markets.
The Company has recently entered into the consumer entertainment industry with its acquisition of Topgolf in 2021.A key element of Topgolf’sour Topgolf growth strategy is to open additional venues in locations that it believeswe believe will provide attractive unit economics and returns on investment. As of December 31, 2021, Topgolf had 67 venues operating in the United States with an additional eight venues under construction, three Company-operated venues in the United Kingdom and three franchised venues (Australia, Mexico and United Arab Emirates), one Company-operated venue under construction in the United Kingdom and one franchised venue under construction in Germany. The Company plansWe plan to open additional new Topgolf venues across flexible venue formats in the years to come. In November 2023, we also purchased certain assets from affiliates of Invited, Inc. related to its BigShots Golf business. The acquisition included four BigShots-branded domestic venues, as well as certain other development rights for other potential venues, among other assets. In addition, Topgolf haswe have signed development agreements with various partners to open additional franchised Topgolf venues in countries across the world. In response to the ongoing COVID-19 pandemic, Topgolf suspended construction on certain venues
Our and temporarily paused negotiations on new leases and purchase agreements. Further, construction on future venues could be delayed by additional COVID Orders, reduced availability of labor and supply chain interruptions. As a result, some of the projects in Topgolf’s development pipeline may not be completed on the anticipated timeline, or at all, and new projects may not continue to enter Topgolf’s pipeline at the same rate as in the past.
Topgolf and itsour franchisees’ ability to open new venues on a timely and cost-effective basis, or at all, is dependent on a number of factors, many of which are beyond Topgolf’sour control, including Topgolfour and itsour franchisees’ ability to:
•identify and successfully compete against other potential lessees or purchasers to secure quality locations;
•reach acceptable agreements regarding the lease or purchase of locations;
•secure acceptable financing arrangements;
•comply with applicable zoning, licensing, land use and environmental regulations;
•overcome litigation or other opposition efforts brought by special interest groups;
•raise or have available an adequate amount of money for construction and opening costs;
•respond to unforeseen construction, engineering, environmental or other problems (including delays in construction due to applicable COVID Orders);problems;
•avoid or mitigate the impact of inclement weather, natural disasters and other calamities;
•respond to infectious diseases, health epidemics and pandemics (including the ongoing COVID-19 pandemic);
•timely hire, train and retain the skilled management and other AssociatesPlaymakers necessary to meet staffing needs;
•obtain, in a timely manner and for acceptable cost, required licenses, permits and regulatory approvals, including liquor licenses, and respond effectively to any changes in local, state or federal law and regulations that adversely affect costs or ability to open new venues; and
•efficiently manage the amount of time and money used to build and open each new venue.
In addition, Topgolf haswe have relied, and expectsexpect to continue to rely, primarily on the services of a single design/build contractor for the construction of Topgolf venues. For venues in certain locations, Topgolf’sour reliance on this contractor may result in additional costs or delay. Though Topgolf believes itwe believe we would be able to find one or more replacements if itwe were to lose itsour relationship with this contractor or if itstheir services otherwise became unavailable, there can be no guarantee that Topgolf
we would be able to do so without incurring additional costs and delay, or that the terms of arrangements with any such replacement would not be less favorable to Topgolf.us.
There can be no guarantee that a sufficient number of suitable Topgolf venue sites will be available in desirable areas or on terms that are acceptable to Topgolfus in order to achieve itsour growth plan, or that Topgolfwe will be successful in addressing the other risks inherent in itsour business that will allow itus to open new Topgolf venues in a timely and cost-effective manner or at all. If Topgolf iswe are unable to open new Topgolf venues, or if venue openings are significantly delayed or face other obstacles, the Company’sour revenues could be adversely affected and itsour business negatively impacted. New Topgolf venues, once opened, may not be profitable or may close, which would adversely affect theour Topgolf business as well the Company’s business,as our financial condition and results of operations and ability to execute itsour growth strategy.
Even if Topgolfwe and itsour franchisees succeed in opening new Topgolf venues on a timely and cost-effective basis, there can be no guarantee that the profitability of these venues will be in line with that of existing venues or the performance targets Topgolf haswe have set. New venues may even operate at a loss or close after a short operating period, which could have a significant adverse effect on our overall operating results. Historically, new venues often experience an initial start-up period with considerable sales volumes, which subsequently decrease to stabilized levels after their first year of operation, followed by increases in same venue sales in line with the rest of Topgolf’sour comparable venue base, although there can be no assurance that the same venue sales of any new venues opened in the future will increase in line with the rest of Topgolf’sour comparable venue base particularly in light of the ongoing COVID-19 pandemic, or that a new venue will succeed in the long term. TopgolfOur and itsour franchisees’ ability to operate new venues profitably may be affected by a number of factors, many of which are beyond itsour control, including:
•general economic conditions, which can affect venue traffic, local labor costs and prices for food products and other supplies to varying degrees in the markets in which venues are located;
•changes in consumer preferences and discretionary spending;
•difficulties obtaining or maintaining adequate relationships with distributors or suppliers in a given market;
•inefficiency in labor costs and operations as newly hired AssociatesPlaymakers gain experience;
•competition from other out-of-home entertainment options, including existing venues and the businesses of the Toptracer Range licensees, as well as a variety of home-based entertainment options;
•temporary or permanent site characteristics of new venues;
•changes in government regulation, including required licenses, permits and regulatory approvals, including liquor licenses;
•the impact of infectious diseases, health epidemics and pandemics (including the ongoing COVID-19 pandemic) on factors impacting Topgolf’sour business, including but not limited to changes in consumer preferences and discretionary spending, the ability and cost of suppliers to deliver required products and health and public safety regulations; and
•other unanticipated increases in costs, any of which may impair profitability at a specific venue or more broadly.
Furthermore, as part of Topgolf’sour longer-term growth strategy, itwe may open Topgolf venues in geographic markets in which Topgolf haswe have little or no operating experience. These and other markets that we enter may have different competitive conditions, consumer tastes and discretionary spending patterns than existing markets, which may cause new venues to be less successful or profitable than venues in existing markets. The challenges of opening venues in new markets include, among other things: difficulties in hiring experienced personnel, lack of familiarity with local real estate markets and demographics, lack of familiarity with local legal and regulatory requirements, different competitive and economic conditions, and consumer tastes and discretionary spending patterns that may be more difficult to predict or satisfy than in existing markets. In addition, Topgolf’sour marketing and advertising programs may not be successful in generating brand awareness in all local markets, and lack of market awareness of the Topgolf brand may pose additional risks. Venues opened in new markets may open at lower average weekly revenues than venues opened in existing markets, and may have higher venue-level operating expense ratios than venues in existing markets. Sales at venues opened in new markets may also take longer to reach
expected revenue levels, if they are able to do so at all, thereby adversely affecting overall profitability. Any failure to recognize or respond effectively to these challenges may adversely affect the success of any new venues and impair Topgolf’sour ability to grow itsour Topgolf business.
If the Company iswe are unable to successfully manage the frequent introduction of new products in our golf equipment business that satisfy changing consumer preferences, it could significantly and adversely impact itsour financial performance and prospects for future growth.
The Company’sOur main golf equipment products, like those of itsour competitors, generally have life cycles of two years to threetwo-to-three years, with sales occurring at a much higher rate in the first year than in the second.second and third years. Factors driving these short product life cycles include the rapid introduction of competitive products and consumer demands for the latest technology. In this marketplace, a substantial portion of the Company’sour annual revenues is generated each year by products that are in their first year of their product life cycle.
These marketplace conditions raise a number of issues that the Companywe must successfully manage. For example, the Companywe must properly anticipate consumer preferences and design products that meet those preferences while also complying with significant restrictions imposed on golf equipment by the Rules of Golf (see further discussion of the Rules of Golf below) or itsour new products will not achieve sufficient market success to compensate for the usual decline in sales experienced by products already in the market. Second, the Company’sour research and development and supply chain groups face constant pressures to design, develop, source and supply new products that perform better than their predecessors, many of which incorporate new or otherwise untested technology, suppliers or inputs. Third, for new products to generate equivalent or greater revenues than their predecessors, they must either maintain the same or higher sales levels with the same or higher pricing, or exceed the performance of their predecessors in one or both of those areas. Fourth, the relatively short window of opportunity for launching and selling new products requires great precision in forecasting demand and assuring that supplies are ready and delivered during the critical selling periods. Finally, the rapid changeover in products creates a need to monitor and manage the closeout of older products both at retail and in the Company’sour own inventory. Should the Companywe not successfully manage the frequent introduction of new products that satisfy consumer demand, the Company’sour results of operations, financial condition and cash flows could be significantly adversely affected.
The Company’s soft goods and apparelOur active lifestyle and Topgolf venues businesses face risks associated with changed consumer tastes and preferences and fashion trends.
The Company’sOur expanding apparelactive lifestyle business and itsour Topgolf venues business are subject to pressures from changing consumer tastes and preferences on a global level and, as a result, the Company iswe are dependent on itsour ability to timely introduce products and services that anticipate and/or satisfy such preferences.
With respect to Topgolf, consumer and corporate discretionary spending on entertainment and leisure is affected by consumer tastes and preferences, which are subject to change, and there can be no guarantee that golf-oriented entertainment will continue to appeal to consumers, particularly given the recent shift in consumer spending away from out-of-home entertainment in light of the ongoing COVID-19 pandemic.consumers. Any decline in guest traffic, and/or guest spending, or both, in Topgolf’sour Topgolf venues, whether resulting from unfavorable economic conditions or changes in consumer preferences, will reduce revenue in Topgolf’sour Topgolf venues business, impair the value of Topgolf’sthe Topgolf brand and impact Topgolf’sour ability to attract new franchisees, licensees and commercial partners and generate sponsorship revenue, all of which could have a material adverse effect on Topgolf’sour business, results of operations, financial condition and growth prospects.
With respect to the Company’s soft goods and apparelour active lifestyle business, changes in consumer preferences, consumer purchasing behavior, consumer interest in recreational or other outdoor activities, and fashion trends could have a significant effect on the Company'sour sales. The Company’sOur success depends on itsour ability to identify and originate product trends as well as to anticipate, gauge and react to changing consumer demands and buying patterns in a timely manner. However, significant lead times for many of the Company’sour products, including the OGIO, TravisMathew and Jack Wolfskin-branded products, may make it more difficult for the Companyus to respond rapidly to new or changing product trends or consumer preferences.All of the Company’sour products are subject to changing consumer preferences that cannot be predicted with certainty. The Company’sOur new products may not receive consumer acceptance as consumer preferences could shift rapidly to different types of lifestyle products or away from these types of products altogether, and itsour future success depends in part on itsour ability to anticipate and respond to these changes. In addition, decisions about product designs often are made far in advance of consumer acceptance.If the Companywe or itsour customers fail to anticipate and respond to consumer preferences or fail to respond in a timely manner or if the Companywe or itsour customers are unable to
effectively navigate a transforming retail marketplace, the Companywe could suffer reputational damage to itsour products and brands and it may experience lower sales, excess inventories and lower profit margins in current and future periods, any of which could materially adversely affect the Company’sour business, financial condition and results of operations.
Our golf equipment business and its apparel, gear and otherour active lifestyle business haseach have a concentrated customer base. The loss of one or more of the Company’sour top customers could have a significant effect on the Company’sour sales.
On a consolidated basis, no single customer accounted for more than 10% of the Company’sour consolidated revenues in 2021, 20202023, 2022, or 2019. The Company's2021. Our top five customers accounted for approximately 13%12% of the Company'sour consolidated revenues in 2021, 20%both 2023 and 2022, and 13% in 2020, and 18% in 2019.2021.
The Company'sOur top five customers specific to each operating segment represented the following as a percentage of each segment'ssegment’s total net revenues:
•Golf Equipment top five customers accounted for approximately 24%25%, 25%26% and 23%24% of total consolidated Golf Equipment sales in 2021, 2020,2023, 2022, and 2019,2021, respectively; and
•Apparel, Gear and OtherActive Lifestyle top five customers accounted for approximately 17%, 12% and 11%19% of total consolidated Apparel, Gear and OtherActive Lifestyle sales in 2021, 2020,2023, and 2019, respectively.17% in each of 2022 and 2021.
Consolidation of retailers or concentration of retail market share among a few retailers may increase and concentrate the Company’sour credit risk, putting pressure on itsour margins and itsour ability to sell products.products relating to our golf equipment and active lifestyle business segments.
The off‑course golf equipment and active lifestyle retail markets in some countries, including the United States, are dominated by a few large retailers. Certain of these retailers have in the past increased their market share and may continue to do so in the future by expanding through acquisitions and construction of additional stores. Industry consolidation has occurred in recent years, and additional consolidation is possible. These situations may result in a concentration of the Company’sour credit risk with respect to itsour sales to such retailers, and, if any of these retailers were to experience a shortage of liquidity or other financial difficulties, or file for bankruptcy, it would increase the risk that their outstanding payables to the Companyus may not be paid. This consolidation may also result in larger retailers gaining increased leverage, which may impact the Company’sour margins. In addition, increasing market share concentration among one or a few retailers in a particular country or region increases the risk that if any one of them substantially reduces their purchases of the Company’sour products, the Companywe may be unable to find a sufficient number of other retail outlets for the Company’sour products to sustain the same level of sales. Any reduction in sales by the Company’sour retailers could materially adversely affect the Company’sour business, financial condition and results of operations.
Changes in equipment standards under applicable Rules of Golf, including new rules intended to reduce distances through limitations on golf ball specifications, could adversely affect our business.
We seek to have our new golf club and golf ball products satisfy the standards published by the USGA and The Company’sR&A in the Rules of Golf because these standards are generally followed by golfers, both professional and amateur, within their respective jurisdictions. The USGA publishes rules that are generally followed in the United States, Canada and Mexico, and The R&A publishes rules that are generally followed in most other countries throughout the world. However, the Rules of Golf as published by The R&A and the USGA are virtually the same and are intended to be so pursuant to a Joint Statement of Principles issued in 2001.
In the future, existing USGA and/or R&A standards may be altered in ways that adversely affect the sales of our current or future products. If a change in rules were adopted and caused one or more of our current or future products to be nonconforming, our sales of such products would be adversely affected. For example, in December 2023, the USGA and The R&A adopted a rule change intended to reduce distances for all golfers through certain changes to golf ball specifications by revising golf ball testing conditions used to prove golf ball conformance with the applicable rules. The rule changes are to be effective in January 2028 for professional golfers and January 2030 for recreational golfers. This revision to golf ball testing is expected to result in reduced distances for all golfers, which may increase the difficulty of the game, and thereby reduce the enjoyment of golf participants. If, as a result, golf becomes less popular, the number of golf participants and the number of rounds of golf being played may decrease, and sales of our products may be adversely impacted. In addition, we will be required to develop new golf ball products to comply with the new testing conditions. If our new golf ball designs do not achieve market success at least equal to our current golf ball products, our golf ball sales may be adversely affected. Any reduction in our golf ball sales or in golf participation as a result of the golf ball rollback or otherwise may have a material adverse effect on our results of operations, financial condition and cash flows.
Our sales and business could be materially and adversely affected if professional athletes, celebrities and other endorsers do not endorse or use our products, or if the professional athletes, celebrities and other endorsers using our products receive less or negative publicity.
We establish relationships with professional athletes, celebrities and other endorsers in order to evaluate and promote Callaway Golf, Odyssey, OGIO and TravisMathew branded products and our Topgolf business. We have entered into endorsement arrangements with members of various professional tours, including the Champions Tour, the PGA Tour, the LPGA Tour, the PGA European Tour, the Japan Golf Tour and the Korn Ferry Tour, and other celebrities. While most endorsers fulfill their contractual obligations, some have been known to stop using a sponsor’s products despite contractual commitments. If certain of our endorsers were to stop using our products contrary to their endorsement agreements, or if any such endorser is or becomes the subject of negative publicity, our business could be adversely affected in a material way by the negative publicity or lack of endorsement.
We believe that professional usage of our golf clubs and golf balls contributes to retail sales. We therefore spend a significant amount of money to secure professional usage of our products. Many other companies, however, also aggressively seek the patronage of these professionals and offer many inducements, including significant cash incentives and specially designed products. There is a great deal of competition to secure the representation of tour professionals. As a result, it is expensive to attract and retain such tour professionals. The inducements offered by other companies could result in a decrease in usage of our products by professional golfers or limit our ability to attract other tour professionals.
In July 2022, LIV Golf, a competitor to the PGA Tour, launched its inaugural season. Some professional golfers who endorse, and have in the past endorsed, our products elected to compete on the LIV Golf tour. The PGA Tour has prohibited athletes who compete in LIV Golf events from further participation in PGA Tour events. To date, LIV Golf tournament broadcasts have generated substantially lower television viewership than broadcasts of PGA Tour events. Additionally, golfers participating in LIV Golf events are generally required to wear LIV team apparel, rather than apparel bearing our logos. As a result, our products have received substantially less publicity when a golfer who formerly endorsed our products elects to compete in LIV Golf events rather than PGA Tour events. In the future, additional endorsers of our products may elect to compete in LIV Golf rather than the PGA Tour, and there can be no assurance that LIV Golf television viewership will increase. Further, with the professional men’s golf landscape divided between the PGA Tour and LIV Golf, fewer events now showcase all top male professional golfers, which may cause a decrease in professional men’s golf television viewership. A substantial reduction in viewership of professional men’s golf tournaments could result in a reduction of visibility for our products and brands.
A decline in the level of professional usage of our products or the amount of publicity received by our professional endorsers, or a significant increase in the cost to attract or retain endorsers, could have a material adverse effect on our sales and business.
Our business depends on strong brands and related reputations, and if the Company iswe are not able to maintain and enhance the Company’sour brands or preserve itsour strong reputation, including as a result of actions taken by Topgolf franchisees and licensees, itsour sales may be adversely affected.
The Company’sOur brands have worldwide recognition, and the Company’sour success depends in large part on itsour ability to maintain and enhance itsour brand image and reputation. Maintaining, promoting and enhancing the Company’sour brands may require the Companyus to make substantial investments in areas such as product innovation, product quality, intellectual property protection, marketing and employee training, and these investments may not have the desired impact on the Company’sour brand image and reputation. The Company’sOur business could be adversely impacted if the Company failswe fail to achieve any of these objectives or if the reputation or image of any of the Company’sour brands isare tarnished or receives negative publicity. In particular, Topgolf’sour ability to generate customer loyalty and attract and retain additional Topgolf franchisees, licensees and commercial partners depends, to a large extent, on the strength of itsour brand and reputation. Any incident that erodes Topgolf’sour public image or brand integrity, including as a result of actions by Topgolf franchisees and licensees, could significantly impair the value of itsour brand and Topgolf’sour ability to generate revenue.
In addition, adverse publicity about regulatory or legal action against the Companyus could damage itsour reputation and brand image, undermine consumer confidence in the Companyus and reduce long‑term demand for itsour products and services, even if the regulatory or legal action is unfounded or not material to itsour operations. Also, as the Company seekswe seek to grow itsour presence in existing, and expand into new, geographic or product markets, consumers in these markets may not accept the Company’sour brand image and may not be willing to pay a premium to purchase the Company’sour products and services as compared to other brands. The Company anticipatesWe anticipate that as it continueswe continue to grow itsour presence in existing markets and expand into new markets, further developing the Company’sour brands may become increasingly difficult and expensive. If the Company iswe are unable to maintain
or further develop the image of the Company’sour brands, it could materially adversely affect the Company’sour business, financial condition and results of operations.
In addition, there has been a marked increase in the use of social media platforms and other forms of internet-based communications that provide individuals and businesses with access to a broad audience of consumers and other interested persons. The availability of information on social media platforms is virtually immediate, as is itsthe potential impact to affected individuals and businesses. Many social media platforms immediately publish the content posted by their subscribers and participants, often without filters or checks on the accuracy of the content posted. Accordingly, the use of social media vehicles by the Company,us and in particular within the Topgolf business and itsour customers, Associates,Playmakers, franchisees, licensees or other third parties, such as professional athletes, celebrities and other social influencers, could increase costs, lead to litigation or result in negative publicity that could damage the Company’s and Topgolf’sour brand or reputation and have a material adverse effect on itsour business, financial condition and results of operations.
International political instability and terrorist activities may decrease demand for the Company’sour products and services and disrupt itsour business.
Terrorist activities and armed conflicts, including any escalation of hostility arising outthe continuation of the conflictconflicts between Russia and the Ukraine and Israel and Hamas and the ongoing attacks by Houthi groups near the Suez canal, could have an adverse effect on the United States or worldwide economy and could cause decreased demand for the Company’sour products and services as consumers’ attention and interests are diverted from golf and become focused on issues relating to these events. If such events disrupt domestic or international air, ground or sea shipments, or the operation of the Company’sour manufacturing facilities, the Company’sour ability to obtain the materials and components necessary to manufacture itsour products and to deliver customer orders would be harmed, which would have a significant adverse effect on the Company’sour results of operations, financial condition and cash flows. Such events can also negatively impact tourism, which could adversely affect the Company’sour sales to retailers at resorts and other vacation destinations. In addition, the occurrence of political instability, and/or terrorist activities, or both generally restricts travel to and from the affected areas, making it more difficult in general to manage the Company’sour international operations. In particular, escalating tensionsthe conflicts between Russia and Ukraine and any military incursionIsrael and Hamas and the ongoing attacks by Russia into Ukraine couldHouthi groups near the Suez canal have and may continue to adversely impact macroeconomic conditions, give rise to regional instability and result in heightened economic sanctions from the U.S. and the international community in a manner that adversely affects our business.
The Company’sOur business could be harmed by the occurrence of natural disasters, pandemics (including the COVID-19 pandemic) or other emergencies, including the COVID-19 pandemic or other pandemic diseases.emergencies.
The occurrence of a natural disaster, such as an earthquake, tsunami, fire, flood or hurricane, or the further outbreak of a pandemic disease, such as a further outbreak of COVID-19 or a variant thereof, or other emergencies could significantly adversely affect the Company’sour business. A natural disaster or a pandemic disease could significantly adversely affect both the demand for the Company’sour products as well as the supply of the components and materials used to make the Company’sour products. Demand for golf products also could be negatively affected as consumers in the affected regions restrict their recreational activities and as tourism to those areas declines. In addition, during a pandemic, such as the COVID-19 pandemic, domestic and international governmental authorities around the world may issue orders, mandates, decrees and directives, including travel restrictions, “stay-at home” orders and “social distancing” measures and business shutdowns that may negatively impact our customers’ ability to access our entertainment offerings. For example, during the COVID-19 pandemic, certain of our Topgolf venues were required to be closed for a period of time under government orders, mandates, decrees and directives. These measures adversely affected our workforce, customers, consumer sentiment, economies, and financial markets. The COVID-19 pandemic, along with decreased consumer spending, led to an economic downturn in many of our markets. As a result, our business, operating results and financial condition were, and may in the future be, materially and adversely affected. Future outbreaks of other diseases such as avian flu, sudden acute respiratory syndrome (also known as SARS), swine flu or influenza may similarly impact our business.
If the Company’sour suppliers experienced a significant disruption in their business as a result of a natural disaster, or other emergency,pandemic, including the COVID-19 pandemic or a further outbreak, the Company’sor other emergency, our ability to obtain the necessary components to make itsour products could be significantly adversely affected. In addition, theThe occurrence of a natural disaster or the outbreak of a pandemic disease generally restrictsmay also restrict travel to and from the affected areas, making it more difficult in general to manage our operations, including an inability or difficulty in obtaining a supply of components and materials used to make our products. For example, we use various contract manufacturers in Asia for the Company’s operations.production of our non-urethane golf balls, including Launch Technologies, which provided a significant portion of our non-urethane golf ball supply. In September 2023, there was a fire at the caseLaunch Technologies golf ball manufacturing plant in Pintung County, Taiwan. A portion of our value oriented golf balls were manufactured in the facility that was directly impacted by the fire, including the Topgolf range balls. The majority of the COVID-19 pandemic,golf balls supplied to us by Launch Technologies were manufactured in a separate dedicated facility that was not directly impacted by the fire. However, this separate facility was not operational for example, travelnearly six months following the fire, due to both the ongoing investigation and tourism has been restrictedcertain shared resources, and only recently resumed operations. Accordingly, we were required to source golf ball production from alternative manufacturing facilities. If, in a future natural disaster or limited around the world, resulting in various business disruptions.
The Company’sother emergency, we are not able to arrange for alternative sources of supply, our business and operating results areof operations may be adversely affected.
To the extent a natural disaster, pandemic (including the COVID-19 pandemic) or other emergency adversely affects our business, financial condition and results of operations, it may also have the effect of heightening many of the other risks described in this Item 1A and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 7 below, including, without limitation, risks relating to changes in demand for our products and services or the supply of the components and materials used to make our products, level of indebtedness, need to generate sufficient cash flows to service our indebtedness, ability to comply with the obligations and financial covenants contained in our existing credit facilities, availability of adequate capital, the ability to execute our strategic plans, U.S. trade, tax or other policies that restrict imports or increase import tariffs, ability to successfully operate our expanding retail stores and venues, and regulatory restrictions.
Our business is subject to both seasonal and non-seasonal fluctuations, which could result in fluctuations in itsour operating results and stock price.
The Company’sOur business is subject to both seasonal and non-seasonal fluctuations. In the golf equipment businesses, the Company’sbusiness, our first-quarter sales generally represent the Company’sour sell-in to the golf retail channel of itsour golf club products for the new golf season. The Company’sOur second and third-quarter sales generally represent reorder business for golf clubs. Sales of golf clubs during the second and third quarters are significantly affected not only by the sell-through of the Company’sour products that were sold into the channel during the first quarter but also by the sell-through of products by the Company’sour competitors. Retailers are sometimes reluctant to reorder the Company’sour products in significant quantities when they already have excess inventory of products of the Companyfrom us or itsour competitors. The Company’sOur golf ball sales of golf balls are generally associated with the levelnumber of rounds played in the areas where the Company’sour products are sold. Therefore, golf ball sales tend to be greater in the second and third quarters, when the weather is good in most of the Company’sour key
regions and the number of rounds played increase. Golf ball sales are also stimulated by product introductions as the retail channel takes on initial supplies. Like those of golf clubs, reorders of golf balls depend on the rate of sell-through. The Company’sOur golf-related sales during the fourth quarter are generally significantly less than those of the other quarters because in many of the Company’sour key regions fewer people are playing golf during that time of year due to cold weather. Furthermore, the Companywe generally announces itsannounce our new golf product line in the fourth quarter to allow retailers to plan for the new golf season. Such early announcements of new products could cause golfers, and therefore the Company’sour customers, to defer purchasing additional golf equipment until the Company’sour new products are available. Such deferments could have a material adverse effect on sales of the Company’sour current products or result in closeout sales at reduced prices.
Our expanding apparel business is expected to experience stronger revenue during different times of the year than our golf-related business. A portion of the sales of our apparel products are dependent in part on the weather and likely to decline in years in which weather conditions do not stimulate demand for our apparel products. Periods of unseasonably warm weather in the fall or winter or unseasonably cold weather in the spring and summer could have a material adverse effect on our business, financial condition and results of operations. Unintended inventory accumulation by customers resulting from unseasonable weather in one season generally negatively affects orders in future seasons, which could have a material adverse effect on our business, financial condition and results of operations. In particular, our Jack Wolfskin business focuses primarily on outerwear and consequently experiences stronger sales for such products during the cold-weather months and the corresponding prior sell-in periods. A significant portion of the Jack Wolfskin business is highly dependent on cold-weather seasons and patterns to generate consumer demand for cold-weather apparel. Consumer demand for Jack Wolfskin-branded cold-weather products may be negatively affected to the extent global weather patterns trend warmer, reducing typical patterns of cold-weather events or increasing weather volatility, which could materially adversely affect our business, financial condition and results of operations.
Our Topgolf business is similarly expected to experience stronger revenue at different times of the year as a result of both seasonal and non-seasonal fluctuations. Historically, our Topgolf venues experience nominally higher second and third quarter revenue associated with the spring and summer. First and fourth quarters have historically had lower revenue at venues as compared to the other quarters due to cooler temperatures. Seasonality is likely to continue to be a factor in the quarterly results related to the Topgolf segment and, as a result, factors affecting peak seasons at our Topgolf venues, such as adverse weather, could have a disproportionate effect on operating results. Our Topgolf operating results also fluctuate significantly quarter to quarter and year to year due to non-seasonal factors. For example, poor results of operations at one or a limited number of venues could significantly affect overall profitability. Additionally, the timing of new venue openings and the timing of Toptracer Range installations may result in significant fluctuations in quarterly performance. Due to the substantial up-front financial requirements to open new venues, the investment risk related to any single venue is much larger than that associated with many other entertainment venues. We typically incur a majority of pre-opening costs for a new Company-operated venue within three months of the venue opening.
In addition, due to the seasonality of the Company’sour business, the Company’sour business can be significantly adversely affected by unusual or severe weather conditions and by severe weather conditions caused by climate change. Unfavorable weather conditions generally result in fewer golf rounds played, which generally results in reduced demand for all golf products, and in particular, golf balls. Furthermore, catastrophic storms can negatively affect golf rounds played both during the storms and afterward, as storm damaged golf courses are repaired and golfers focus on repairing the damage to their homes, businesses and communities. With respect to the Topgolf business, historically Topgolf venues have increased guest traffic and spending during spring and summer months, as compared to months experiencing adverse weather conditions.Consequently, sustained adverse weather conditions could materially affect the Company’sour sales across itsour different business lines.
The Company’s expanding apparel business is expected to experience stronger revenue during different times of the year than the Company’s golf-related business. A portion of the sales of the Company’s apparel products is dependent in part on the weather and likely to decline in years in which weather conditions do not stimulate demand for the Company’s apparel products.Periods of unseasonably warm weather in the fall or winter or unseasonably cold weather in the spring and summer could have a material adverse effect on the Company’s business, financial condition and results of operations. Unintended inventory accumulation by customers resulting from unseasonable weather in one season generally negatively affects orders in future seasons, which could have a material adverse effect on the Company’s business, financial condition and results of operations. In particular, the Company’s Jack Wolfskin business focuses primarily on outerwear and consequently experiences stronger sales for such products during the cold-weather months and the corresponding prior sell-in periods. A significant portion of the Jack Wolfskin business is highly dependent on cold-weather seasons and patterns to generate consumer demand for cold-weather apparel. Consumer demand for Jack Wolfskin-branded cold-weather products may be negatively affected to the extent global weather patterns trend warmer, reducing typical patterns of cold-weather events or increasing weather volatility, which could materially adversely affect the Company’s business, financial condition and results of operations.
The Company’s Topgolf business is similarly expected to experience stronger revenue at different times of the year as a result of both seasonal and non-seasonal fluctuations.Historically, Topgolf’s venues experience nominally higher second and third quarter revenue associated with the spring and summer. First and fourth quarters have historically had lower revenue at venues as compared to the other quarters due to cooler temperatures. Seasonality is likely to continue to be a factor in the quarterly results related to the Topgolf segment and, as a result, factors affecting peak seasons at Topgolf’s venues, such as adverse weather, could have a disproportionate effect on operating results. Topgolf’s operating results also fluctuate significantly quarter to quarter and year to year due to non-seasonal factors. For example, poor results of operations at one or a limited number of venues could significantly affect overall profitability. Additionally, the timing of new venue openings and the timing of Toptracer Range installations may result in significant fluctuations in quarterly performance. Due to the substantial up-front financial requirements to open new venues, the investment risk related to any single venue is much larger than that associated with many other entertainment venues. Topgolf typically incurs a majority of pre-opening costs for a new Company-operated venue within three months of the venue opening.
Changes in equipment standards under applicable Rules of Golf could adversely affect the Company’s business.
The Company seeks to have its new golf club and golf ball products satisfy the standards published by the USGA and The R&A in the Rules of Golf because these standards are generally followed by golfers, both professional and amateur, within their respective jurisdictions. The USGA publishes rules that are generally followed in the United States, Canada and Mexico, and The R&A publishes rules that are generally followed in most other countries throughout the world. However, the Rules of Golf as published by The R&A and the USGA are virtually the same and are intended to be so pursuant to a Joint Statement of Principles issued in 2001.
In the future, existing USGA and/or R&A standards may be altered in ways that adversely affect the sales of the Company’s current or future products. If a change in rules were adopted and caused one or more of the Company’s current or future products to be nonconforming, the Company’s sales of such products would be adversely affected. For example, the USGA and The R&A published the Distance Insights Project Report discussing the impact of hitting distances on the game of golf. The USGA and The R&A will be exploring this topic further and it is possible that they may ultimately propose new rules that could affect the golf industry and the Company. Additionally, the USGA and The R&A will be gathering input from stakeholders and manufacturers in the golf community through 2021 and the Company is an active participant.Based on the study and the compiled input, it is possible that the USGA and/or The R&A may propose rule changes that could potentially have an adverse impact on the Company’s products.
The Company’s sales and business could be materially and adversely affected if professional athletes, celebrities and other endorsers do not endorse or use the Company’s products.
The Company establishes relationships with professional athletes, celebrities and other endorsers in order to evaluate and promote Callaway Golf, Odyssey, OGIO and TravisMathew branded products and its Topgolf business. The Company has entered into endorsement arrangements with members of the various professional tours, including the Champions Tour, the PGA Tour, the LPGA Tour, the PGA European Tour, the Japan Golf Tour and the Korn Ferry Tour, and other celebrities. While most endorsers fulfill their contractual obligations, some have been known to stop using a sponsor’s products despite contractual commitments. If certain of the Company’s endorsers were to stop using the Company’s products contrary to their endorsement agreements, or if any such endorser is or becomes the subject of negative publicity, the Company’s business could be adversely affected in a material way by the negative publicity or lack of endorsement.
The Company believes that professional usage of its golf clubs and golf balls contributes to retail sales. The Company therefore spends a significant amount of money to secure professional usage of its products. Many other companies, however, also aggressively seek the patronage of these professionals and offer many inducements, including significant cash incentives and specially designed products. There is a great deal of competition to secure the representation of tour professionals. As a result, it is expensive to attract and retain such tour professionals. The inducements offered by other companies could result in a decrease in usage of the Company’s products by professional golfers or limit the Company’s ability to attract other tour professionals. A decline in the level of professional usage of the Company’s products, or a significant increase in the cost to attract or retain endorsers, could have a material adverse effect on the Company’s sales and business.
Any significant changes in U.S. trade or other policies that restrict imports or increase import tariffs could have a material adverse effect on the Company’sour results of operations.
A significant amount of the Company’sour products are manufactured in Mexico, China, Vietnam and Bangladesh and other regions outside of the United States. In recent years, the U.S. government has implemented substantial changes to U.S. trade policies, including import restrictions, increased import tariffs and changes in U.S. participation in multilateral trade agreements, such as the United States-Mexico-Canada Agreement to replace the former North American Free Trade Agreement. The U.S. government has assessed supplemental tariffs on certain goods imported from China, resulting in China'sChina’s assessment of retaliatory tariffs on certain imports of U.S. goods into China. In addition, the United States has assessed or proposed supplemental tariffs and quantitative restrictions on U.S. imports of certain products from other countries as well.U.S. trade policy continues to evolve in this regard. Such changes could prevent or make it difficult or more expensive for the Companyus to obtain the components needed for new products, which could affect the Company’sour sales. The recent increase in import tariffs impacted the Company's business in 2020 and 2021, and it could continue to impact the Company's business in 2022. Further tariff increases could require the Companyus to increase itsour prices, which likely would decrease customer demand for itsour products. Retaliatory tariff and trade measures imposed by other countries could affect the Company’sour ability to export products and therefore adversely affect itsour sales. Any significant changes in current U.S. trade or other policies that restrict imports or increase import tariffs could have a material adverse effect upon the Company’sour results of operations.
The Company'sOur current senior management team and other key executives are critical to the Company'sour success, and the loss of, and failure to adequately replace, any such individual could significantly harm the Company'sour business.
The Company'sOur ability to maintain itsour competitive position is dependent to a large degree on the efforts and skills of the senior officers of the Company. The Company'sofficers. Our executives are experienced and highly qualified with strong reputations in theirour industries, and the Company believeswe believe that itsour management team enables itus to pursue the Company'sour strategic goals. The success of the Company'sour business is dependent upon the management and leadership skills of itsour senior management team and other key personnel. Competition for these individuals'individuals’ talents is intense, and the Companywe may not be able to attract and retain a sufficient number of qualified personnel in the future. The loss of one or more of these senior officers could have a material adverse effect on the Companyus and itsour ability to achieve itsour strategic goals.
Certain of our stockholders, if they choose to act together, have the ability to significantly control or influence all matters submitted to stockholders for approval.
As of December 31, 2023, PEP TG Investments LP (“Providence”), DDFS Partnership LP and Dundon 2009 Gift Trust (together, “Dundon”), TGP Investors, LLC, TGP Investors II, LLC, WestRiver Management, LLC, Anderson Family Investments, LLC and TGP Advisors, LLC (together, “WestRiver”), each of whom acquired shares of our common stock in connection with the merger with Topgolf in 2021, own, in the aggregate, approximately 21.8% of our capital stock. Scott M. Marimow is affiliated with Providence, C. Matthew Turney is affiliated with Dundon and Erik J Anderson is affiliated with WestRiver, each of whom serve on our board of directors. In addition, pursuant to a stockholders agreement entered into with certain former Topgolf stockholders in connection with the merger, Providence and certain former Topgolf stockholders affiliated with Dundon and WestRiver have the right to designate one person (for a total of three persons) to be appointed or nominated, as the case may be, for election to our board of directors for so long as such stockholder maintains beneficial ownership of 50% or more of the shares of our common stock owned by them on the closing date of the merger. Commencing in April 2023, WestRiver no longer held sufficient shares to maintain its right to designate a nominee for director, although Mr. Anderson continues to serve as WestRiver’s previously appointed designee to the Board.
As a result, if these stockholders were to choose to act together, they would be able to significantly influence all matters submitted to our stockholders for approval, as well as our management and affairs. This concentration of ownership may have the effect of delaying, deferring or preventing a change in control, impeding a merger, consolidation, takeover or other business combination involving us or discouraging a potential acquiror from making a tender offer or otherwise attempting to obtain control of our business, even if such a transaction would benefit other stockholders.
Risks Related to Operations, Manufacturing, and Technology
The Company hasWe have significant international operations and istherefore exposed to risks associated with doing business globallyglobally.
The Company sellsWe sell and distributes itsdistribute our products directly in many key international markets in Europe, Asia, North America and elsewhere around the world. The CompanyWe also operatesoperate various international venues through the Topgolf business.These activities have resulted and will continue to result in investments in inventory, accounts receivable, employees, corporate infrastructure and facilities. In addition, there are a limited number of suppliers of golf club components in the United States, and the Company iswe are dependent on suppliers and vendors located outside of the United States. The operation of foreign distribution in the Company’sour international markets, as well as the management of relationships with international suppliers and vendors, will continue to require the dedication of management and other Company resources. The Company manufacturesWe manufacture most of itsour products outside of the United States.
With respect to the Topgolf business, as of December 31, 2021, Topgolf had three company-operated venueswe have both Company-operated and three franchised venues located outside of the United States.In addition, Topgolf had over 300we have Toptracer licensees operating over 7,500 Toptracer Range bays outside of the United States. TopgolfWe also usesuse third-party manufacturers in Taiwan and China to produce the RFID-enabled golf balls and golf clubs used in itsour venues, and sources certain of the components used in the Toptracer business line from third-party suppliers located in Germany, Taiwan and the United Kingdom.
As a result of this international business, the Company iswe are exposed to increased risks inherent in conducting business outside of the United States. These risks include the following:
•Adverseadverse changes in foreign currency exchange rates can have a significant effect upon the Company'sour results of operations, financial condition and cash flows;
•Increasedincreased difficulty in protecting the Company’sour intellectual property rights and trade secrets;
•Unexpectedunexpected government action or changes in legal or regulatory requirements;
•Social,social, economic or political instability;
•Thethe effects of any anti-American sentiments on the Company’sour brands or sales of the Company’s products;our products or services;
•Increasedincreased difficulty in ensuring compliance by employees, agents and contractors with the Company’sour policies as well as with the laws of multiple jurisdictions, including but not limited to the U.S. Foreign Corrupt Practices Act (the “FCPA”), local international environmental, health and safety laws, and increasingly complex regulations relating to the conduct of international commerce, including import/export laws and regulations, economic sanctions laws and regulations and trade controls;
•changes in international labor costs and other costs of doing business internationally;
•Increasedincreased difficulty in controlling and monitoring foreign operations from the United States, including increased difficulty in identifying and recruiting qualified personnel for itsour foreign operations; and
•Increasedincreased exposure to interruptions in air carrier or ship services.services; and
the occurrence of natural disasters or other emergencies, such as the fire in September 2023 at the Launch Technologies golf ball manufacturing plant in Pintung County, Taiwan, where a portion of our value oriented golf balls were manufactured.Any significant adverse change in these and other circumstances or conditions relating to international operations could have a significant adverse effect on the Company’sour operations, financial performance and condition.
The Company hasWe have significant international sales and purchases, and unfavorable changes in foreign currency exchange rates could have a significant negative impact on the Company’sour results of operations.
A significant portion of the Company’sour purchases and sales isare international. In 2021, more than half of the Company's sales occurred outside of the United States. As a result, the Company conductswe conduct transactions in various currencies worldwide. The Company expects itsWe expect our international business, and the number of transactions that it conductsare conducted in foreign currencies, to continue to expand. Conducting business in such currencies exposes the Companyus to fluctuations in foreign currency exchange rates relative to the U.S. dollar.
The Company’sOur financial results are reported in U.S. dollars, and as a result, transactions conducted in foreign currencies must be translated into U.S. dollars for reporting purposes based upon the applicable foreign currency exchange rates. Fluctuations in these foreign currency exchange rates therefore may positively or negatively affect the Company’sour reported financial results and can significantly affect period-over-period comparisons.
The effect of the translation of foreign currencies on the Company’sour financial results can be significant. The CompanyWe therefore engagesengage in certain hedging activities to mitigate the annual impact of the translation of foreign currencies on the Company’sour financial results. The Company’sOur hedging activities can reduce, but will not eliminate, the effects of foreign currency fluctuations. The extent to which the Company’sour hedging activities mitigate the effects of foreign currency translation varies based upon many factors, including the amount of transactions being hedged. Other factors that could affect the effectiveness of the Company’sour hedging activities include accuracy of sales forecasts, volatility of currency markets and the availability of hedging instruments. Since the hedging activities are designed to reduce volatility, they not only reduce the negative impact of a stronger U.S. dollar but also reduce the positive impact of a weaker U.S. dollar. The Company’sOur future financial results could be significantly affected by the value of the U.S. dollar in relation to the foreign currencies in which the Company conductswe conduct business.
Foreign currency fluctuations can also affect the prices at which products are sold in the Company’sour international markets. The CompanyWe therefore adjusts itsadjust our pricing based in part upon fluctuations in foreign currency exchange rates. Significant unanticipated changes in foreign currency exchange rates make it more difficult for the Companyus to manage pricing in itsour international markets. If the Company iswe are unable to adjust itsour pricing in a timely manner to counteract the effects of foreign currency fluctuations, or if we increase our pricing too much to counteract the Company’seffects of foreign currency fluctuations, our pricing may not be competitive in the marketplace and the Company’sour financial results in itsour international markets could be adversely affected.
Any difficulties from strategic acquisitions that
The costs and availability of finished products, product components, raw materials and ingredients could affect our operating results.
The costs and availability of the Company pursues or consummates,finished products, product components and raw materials needed in our products and services can be volatile as a result of numerous factors, including its recent acquisitioninflationary pressures and rising interest rates; general, domestic, and international economic conditions; labor costs; production levels; competition; consumer demand; import duties; tariffs; and currency exchange rates. This volatility can significantly affect the availability and cost of Topgolf,these items for us which could adversely affect itshave a material adverse effect on our business, financial condition and results of operations.
The Companymaterials, components and ingredients used by us and our suppliers involve raw materials, including synthetic rubber, thermoplastics, zinc stearate, zinc oxide and limestone for the manufacturing of our golf balls, titanium alloys, carbon fiber and steel for the assembly of our golf clubs, various fabrics used by suppliers in our apparel business and food and beverage ingredients, venue hardware and other supplies used in the Topgolf business. Significant price fluctuations or shortages in such raw materials, components or ingredients, including the costs to transport such materials, components or ingredients, the uncertainty of currency fluctuations against the U.S. dollar, increases in labor rates, interest rates, trade duties or tariffs, and/or the introduction of new and expensive raw materials, could materially adversely affect our business, financial condition and results of operations. The United States and many areas of the world, including areas in which we and our suppliers operate, have recently experienced historically high levels of inflation. In addition, prolonged periods of inflationary pressure on some or all input costs may result in increased costs to produce our products and provide our services that could have an adverse effect on profits from sales of our products and services, or require us to increase prices for our products and services that could adversely affect consumer demand for our products and services.
Many of our golf equipment and apparel products are manufactured outside of the main sales markets in which we operate, which requires these products to be transported by third parties, sometimes over large geographical distances. Shortages in ocean, land or air shipment capacity and volatile fuel costs can result in rapidly changing transportation costs or an inability to transport products in a timely manner. Similarly, disruption to shipping and transportation channels due to labor disputes could cause us to rely more heavily on alternative modes of transportation to achieve timely delivery to customers, resulting in significantly higher freight costs. Because of the prices of our products prior to shipment, and as changes in transportation and other costs may be difficult to predict, we may not be able to pass all or any portion of these higher costs on to our customers or adjust our pricing structure in a timely manner in order to remain competitive, either of which could have a material adverse effect on our business, financial condition and results of operations.
Any difficulties from strategic acquisitions that we pursue or consummate, including our merger with Topgolf, could adversely affect our business, financial condition and results of operations.
We may acquire companies, businesses and products that complement or augment itsour existing business. For example, in 2021, we completed our merger with Topgolf and in 2023, we acquired certain assets related to the Company completedSwing Suite golf simulation technology from Full Swing Golf Holdings, LLC (“Full Swing”) and certain assets related to the acquisitionBigShots Golf business from affiliates of Topgolf. The CompanyInvited, Inc. We may not be able to integrate this businesssuccessful in the integration with these businesses or any other business that itwe may acquire in the future successfully or operate such acquired businessbusinesses profitably. Integrating any newly acquired business including Topgolf, is typically expensive and time-consuming. Integration efforts often take a significant amount of time, place a significant strain on managerial, operational and financial resources and could prove to be more difficult or expensive than predicted. The diversion of management’s attention and any delay or difficulties encountered in connection with any such acquisitions could result in the disruption of on-going business or inconsistencies in standards and controls that could negatively affect the Company’sour ability to maintain third-party relationships. Moreover, the Companywe may need to raise additional funds through public or private debt or equity financing, or issue additional shares, to continue operating the Topgolf business, which may result in dilution for stockholders or the incurrence of indebtedness.
As part of the Company’sour efforts to acquire companies, businesses or products or to enter into other significant transactions, including Topgolf, the Company conductswe conduct business, legal and financial due diligence with the goal of identifying and evaluating material risks involved in the transaction. Despite the Company’sour efforts, the Companywe ultimately may be unsuccessful in ascertaining or evaluating all such risks and, as a result, might not realize the intended advantages of the transaction. If the Company failswe fail to realize the expected benefits from previous acquisitions or other acquisitions itwe may consummate in the future, whether as a result of unidentified risks, integration difficulties, complexities associated with managing the combined business, performance shortfalls at one or both of the companies as a result of the diversion of management’s attention caused by completing the transaction and integrating the companies’our operations,
COVID-19-related disruptions, litigation with current or former employees and other events, the Company’sour business, financial condition and results of operations could be adversely affected.
If the Companywe inaccurately forecastsforecast demand for itsour products, itwe may manufacture either insufficient or excess quantities, which, in either case, could adversely affect itsour financial performance.
The Company plans itsWe plan our manufacturing capacity based upon the forecasted demand for itsour products. Forecasting the demand for the Company'sour products is very difficult given the manufacturing lead time and the amount of specification involved. For example, the Companywe must forecast well in advance not only how many drivers itwe will sell, but also (1) the quantity of each driver model, (2) the quantity of the different lofts in each driver model, and (3) for each driver model and loft, the number of left handedleft-handed and right handedright-handed versions. Forecasting demand for specific soft goods and apparel products can also be challenging due to changing consumer preferences and competitive pressures and longer supply lead times. The nature of the Company’sour business makes it difficult to adjust quickly itsour manufacturing capacity if actual demand for itsour products exceeds or is less than the forecasted demand. If actual demand for itsour products exceeds the forecasted demand, the Companywe may not be able to produce sufficient quantities of new products in time to fulfill actual demand, which could limit the Company’sour sales and adversely affect itsour financial performance. On the other hand, if actual demand is less than the forecasted demand for itsour products, the Companywe could produce excess quantities, resulting in excess inventories and related obsolescence charges that could adversely affect the Company’sour financial performance.
The Company’sOur expanding international operations could be harmed if it failswe fail to successfully transition itsour business processes on a global scale.
As the Company expands itswe expand our global footprint, itsour business could be harmed if it failswe fail to successfully transition itsour business processes on a global scale.This expansion to a global scale requires significant investment of capital and human resources, the re-engineering of many business processes, and the attention of many managers and other employees who would otherwise be focused on other aspects of our business. If the Company’sour globalization efforts fail to produce planned operational efficiencies, or the transition is not managed effectively, the Companywe may experience excess inventories, inventory shortage, late deliveries, lost sales, or increased costs. Any business disruption arising from the Company’sour expanding international operations, or itsour failure to realize operational efficiencies, could harm itsour business, financial condition and results of operations.
The CompanyWe may not be able to obtain and maintain licenses and permits necessary to operate itsour Topgolf business and itsour venues in compliance with applicable laws, regulations and other requirements, which could adversely affect itsour business, results of operations and financial condition.
The development, construction and operation of Topgolf’sour Topgolf venues depend, to a significant extent, on the selection of suitable sites, which are subject to zoning, land use, environmental, traffic and other regulations and requirements. Topgolf isWe are also subject to licensing and regulation by federal, state, local and foreign authorities relating to, among other things, alcoholic beverage control, amusement, health, sanitation, stormwater and wastewater management, protection of endangered and threatened plant, wildlife and species, wetlands protection, safety and fire standards. Typically, licenses, permits and approvals under such laws and regulations must be renewed annually and may be revoked, suspended or denied renewal for cause at any time if governmental authorities determine that Topgolf’sour conduct violates applicable regulations. In some jurisdictions, the loss of a license for cause with respect to one location may lead to the loss of licenses at all locations in that jurisdiction and could make it more difficult to obtain additional licenses.
With respect to the sale of alcoholic beverages, each of Topgolf’sour Topgolf venues is required to obtain a license to sell alcoholic beverages on the premises from a state authority and, in certain locations, county and municipal authorities. Certain jurisdictions, however, have only a fixed number of liquor licenses available. As a result, in order to obtain a license in one of these jurisdictions, Topgolf iswe are required to purchase that license from another business, which itwe may not be able to do on acceptable terms or at all. Alcoholic beverage control regulations impact numerous aspects of the daily operations of each venue, including the minimum age of patrons and Associates,Playmakers, hours of operation, advertising, wholesale purchasing, other relationships with alcohol manufacturers, wholesalers and distributors, inventory control and the handling, storage and dispensing of alcoholic beverages. Any failure by one of Topgolf’sour venues to comply with these regulations, or any failure of a franchisee or licensee to comply with similar regulations to which itsour business is subject, could result in fines or the loss or suspension of the liquor license for that venue or business, and potentially the loss or suspension of other licenses in that jurisdiction.
Difficulties or failure in obtaining a liquor license or any other licenses, permits or approvals, or in continuing to qualify for, or being able to renew, any existing licenses, permits or approvals, could adversely affect existing venues, or Topgolf’sour ability to develop or construct venues, and delay or result in Topgolf’sour decision to cancel the opening of new venues, which could have a material adverse effect on itsour business, results of operations and financial condition. Similarly, the inability of any franchisee or licensee to maintain or obtain the licenses, permits and approvals required to develop, construct or operate one or more of their locations would also reduce franchise and licensing revenues, impair growth prospects and adversely affect Topgolf’sour business, results of operation and financial condition.
The Company dependsWe depend on single source or a limited number of suppliers for some of the components of itsour products, and the loss of any of these suppliers could harm itsour business.
The Company isWe are dependent on a limited number of suppliers for itsour clubheads and shafts, some of which are single sourced.shafts. Furthermore, some of the Company’sour products require specially developed manufacturing techniques and processes which make it difficult to identify and utilize alternative suppliers quickly. In addition, many of the Company’sour suppliers may not be well capitalized and prolonged unfavorable economic conditions could increase the risk that they will go out of business. If current suppliers are unable to deliver clubheads, shafts or other components, or if the Company iswe are required to transition to other suppliers, the Companywe could experience significant production delays or disruption to itsour business. The CompanyWe also dependsdepend on a single or a limited number of suppliers for the materials it useswe use to make itsour golf balls. Many of these materials are customized for the Company.us. Any delay or interruption in such supplies could have a material adverse impact on the Company’sour golf ball business. If the Company experienceswe experience any such delays or interruptions, the Companywe may not be able to find adequate alternative suppliers at a reasonable cost or without significant disruption to itsour business.
A significant disruption in the operations of the Company’sour golf club assembly and golf ball manufacturing and assembly facilities could have a material adverse effect on the Company’sour sales, profitability and results of operations.
A significant disruption at any of the Company’sour golf club or golf ball manufacturing facilities or distribution centers in the United States or in regions outside the United States could materially and adversely affect the Company’sour sales, profitability and results of operations. The Company’sFor example, in September 2023, there was a fire at the Launch Technologies golf ball manufacturing plant in Pintung County, Taiwan, where a portion of our value oriented golf balls were manufactured. However, we were able to mitigate the impact to our golf ball business by shifting supply to our Chicopee manufacturing facility and other suppliers. If, however, in a future disruption, we are not able to arrange for alternative sources of supply, our business and results of operations may be adversely affected.
In addition, our manufacturing facilities and distribution centers are highly automated, which means that their operations are complicated and may be subject to a number of risks related to computer viruses, the proper operation of software and hardware, electronic or power interruptions, and other system failures. Risks associated with upgrading or expanding these facilities may significantly disrupt or increase the cost of the Company’sour operations, which may have an immediate, or in some cases prolonged, impact on the Company’sour margins. For example, in 2019 the Companywe substantially completed a significant expansion and technical upgrade to itsour golf ball manufacturing facility in Chicopee, Massachusetts.Difficulties in implementing new or upgraded technology or operational systems, including at itsour Chicopee facility, could disrupt the Company’sour operations and could materially and adversely affect the Company’sour financial condition, results of operations or cash flows.
A disruption in the service or a significant increase in the cost of the Company’sour primary delivery and shipping services for itsour products and component parts or a significant disruption at shipping ports could have a material adverse effect on the Company’sour business.
The Company usesWe use United Parcel Service (“UPS”) for substantially all ground shipments of products to itsour U.S. customers. The Company usesWe use air carriers and ocean shipping services for most of itsour international shipments of products. Furthermore, many of the components the Company useswe use to build itsour golf clubs, including clubheads and shafts, are shipped to the Companyus via air carrier and ship services. During the year ended December 31, 2021,For a portion of 2022, international shipping to the United States was disrupted and delayed due to congestion in west coast ports. If there is any continued or additionalsimilar significant interruption in service by such providers or at airports or shipping ports, the Companywe may be unable to engage alternative suppliers or to receive or ship goods through alternate sites in order to deliver itsour products or components in a timely and cost-efficient manner. As a result, the Companywe could experience manufacturing delays, increased manufacturing and shipping costs and lost sales as a result of missed delivery deadlines and product demand cycles. Any significant interruption in UPS services, air carrier services, ship services or at airports or shipping ports could have a material adverse effect on the Company’sour business. Furthermore, if the cost of delivery or shipping services were to increase significantly and the additional costs could not be covered by product pricing, the Company’sour operating results could be materially adversely affected.
Instances of food-borne illness and outbreaks of disease could negatively impact Topgolf’sour Topgolf business.
Incidents or reports of food-borne or water-borne illness or other food safety issues, food contamination or tampering, AssociatePlaymaker hygiene and cleanliness failures or improper AssociatePlaymaker conduct at our Topgolf venues could lead to product liability or other claims or poor health inspection scores. Such incidents or reports could negatively affect Topgolf’sour brand and reputation as well as itsour business, revenues and profits regardless of whether the allegations are valid or whether Topgolf iswe are held to be responsible. Similar incidents or reports occurring at Topgolf franchisees’ or licensees’ businesses, BigShots, or other businesses unrelated to Topgolfus could likewise create negative publicity, which could negatively impact consumer behavior towards Topgolf.us.
There can be no guarantee that Topgolf’sour internal policies and training will be fully effective in preventing all food-borne illnesses at itsour venues. In addition, because Topgolf doeswe do not control the day-to-day operations of Topgolf and BigShots franchisees, and licensees, there can be no guarantee that these franchisees and licensees will implement appropriate internal policies and training intended to prevent food-borne illnesses, that their employees will follow such policies and training or that such policies and training will be effective even if complied with. Furthermore, Topgolf’sour reliance, and the reliance by any Topgolf or BigShots franchisees, or licensees, on third-party food processors, distributors and suppliers makes it difficult to monitor food safety compliance and may increase the risk that food-borne illness would affect multiple locations rather than a single venue. Some food-borne illness incidents could be caused by third-party food suppliers and transporters outside of Topgolf’sour control. New illnesses resistant to Topgolf’sour current precautions may develop in the future, or diseases with long incubation periods could arise, that could give rise to claims or allegations on a retroactive basis. One or more instances of food-borne illness in one of theour Company-operated or franchised venues, or poor health inspection scores, if highly publicized, could negatively affect revenues at all of Topgolf’sour Topgolf venues by changing consumers’ perceptions of Topgolf’sour venues and the food that it offers,we offer, negatively impacting demand for menu offerings and reducing guest visits at venues. This risk is particularly great with respect to franchised venues given Topgolf’sour limited oversight, and exists even if itwe were later determined that the illness was wrongly attributed to a company-Company or a franchisee-operated venue. There is also a risk that instances of food-borne illness at a licensee’s businesses could be improperly attributed to Topgolf.us. Additionally, even if food-borne illnesses were not identified at or otherwise attributed to a Topgolf venue, Topgolf’sour revenue could be adversely affected if instances of food-borne illnesses at other businesses were highly publicized. A number of companies have experienced incidents related to food-borne illnesses that have had material adverse effects on their business, operations and financial condition, and there can be no assurance that Topgolfwe could avoid a similar impact if such an incident were to occur at one or more ofTopgolf venues.
Guest complaints, litigation on behalf of guests or AssociatesPlaymakers or other proceedings may adversely affect Topgolf’sour business, results of operations and financial condition.
TopgolfWe may be adversely affected by legal or governmental proceedings brought by or on behalf of guests, Associates,Playmakers, suppliers, commercial partners, franchisees, licensees or others through private actions, class actions, administrative proceedings, regulatory actions or other litigation. The outcome of such proceedings, particularly class actions and regulatory actions, is difficult to assess or quantify. In recent years, a number of companies in Topgolf’sour industry and adjacent industries have been subject to lawsuits, including class action lawsuits, alleging violations of federal and state law regarding workplace and employment matters, discrimination and similar matters, and a number of these lawsuits have resulted in the payment of substantial damages by the defendants. TopgolfWe could also face potential liability if it iswe are found to have misclassified certain AssociatesPlaymakers as exempt from the overtime requirements of the federal Fair Labor Standards Act and state labor laws, or if it iswe are found to have failed to provide or continue health insurance or benefits to AssociatesPlaymakers in violation of the Employee Retirement Income Security Act or the PPACA of 2010. Lastly, Topgolf facesAdditionally, we face potential liability if it iswe are found to have failed to comply with data privacy laws relating to the collection and processing of datainformation about Associates/Playmakers, employees, and other individuals, such as the collection and use of biometric information under state biometric information statutes. Topgolf hasWe have had, from time to time, such lawsuits pending, and there can be no guarantee that Topgolfwe will not be named in any such lawsuit in the future or that Topgolfwe will not be required to pay substantial expenses and/or damages at the conclusion of such future lawsuits.
In addition, from time to time, guests file complaints or lawsuits against Topgolfus alleging that it iswe are responsible for some illness or injury they suffered at or after a visit to a venue, and Topgolf may face greater risk of such complaints or lawsuits in light of the ongoing COVID-19 pandemic.venue. From time to time, animal activist and other third-party special interest groups may bring claims before government agencies or lawsuits against Topgolfus relating to the impact of itsour venues. Topgolf isWe are also subject to a variety of other claims in the ordinary course of business, including personal injury, lease and contract claims.
Topgolf isWe are also subject to “dram shop” statutes in certain states in which itsour venues are located. These statutes generally provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated individual. Topgolf hasWe have been in the past, and may be in the future, the subject of lawsuits that allege violations of these statutes. Recent litigation under dram shop statutes has resulted in significant judgments and settlements against other businesses and establishments similar to Topgolf’sour Topgolf venues. Because these cases often seek punitive damages, which may not be covered by insurance, such litigation if successful could have an adverse effect on Topgolf’sour business, results of operations and financial condition.
Regardless of whether any claims against Topgolfus are valid or whether Topgolf iswe are liable, claims may be expensive to defend, generate negative publicity, divert time and money away from core operations and hurt financial performance. Similarly, claims brought against Topgolf franchisees and licensees may generate negative publicity that could harm Topgolf’sour brand and reputation. Although Topgolf maintainswe maintain what it believeswe believe to be adequate levels of insurance to cover any liabilities itwe may face, insurance may not be available at all or in sufficient amounts with respect to these or other matters. Any negative publicity concerning such claims, whether involving Topgolfus or franchisees or licensees, or any judgment or other liability significantly in excess of Topgolf’sour insurance coverage or not covered by insurance, could have a material adverse effect on itsour business, results of operations and financial condition.
The costs and availability of finished products, product components and raw materials could affect the Company’s operating results.
The costs and availability of the finished products, product components and raw materials needed in the Company’s products can be volatile as a result of numerous factors, including general, domestic, and international economic conditions; labor costs; production levels; competition; consumer demand; import duties; tariffs; and currency exchange rates. This volatility can significantly affect the availability and cost of these items for us which could have a material adverse effect on the Company’s business, financial condition and results of operations.
The materials and components used by the Company and its suppliers involve raw materials, including synthetic rubber, thermoplastics, zinc stearate, zinc oxide and lime stone for the manufacturing of the Company’s golf balls, titanium alloys carbon fiber and steel for the assembly of the Company’s golf clubs, and various fabrics used by suppliers in the Company’s apparel business. Significant price fluctuations or shortages in such raw materials or components, including the costs to transport such materials or components, the uncertainty of currency fluctuations against the U.S. dollar, increases in labor rates, trade duties or tariffs, and/or the introduction of new and expensive raw materials, could materially adversely affect the Company’s business, financial condition and results of operations.In addition, prolonged periods of inflationary pressure on some or all input costs may result in increased costs to produce the Company’s products that could have an adverse effect on profits from sales of the Company’s products, or require the Company to increase prices for its products that could adversely affect consumer demand for its products.
Many of the Company’s products are manufactured outside of the main sales markets in which the Company operates, which requires these products to be transported by third parties, sometimes over large geographical distances. Shortages in ocean, land or air shipment capacity and volatile fuel costs can result in rapidly changing transportation costs or an inability to transport products in a timely manner. Similarly, disruption to shipping and transportation channels due to labor disputes could cause the Company to rely more heavily on alternative modes of transportation to achieve timely delivery to customers, resulting in significantly higher freight costs. Because the Company prices its products prior to shipment, and as changes in transportation and other costs may be difficult to predict, the Company may not be able to pass all or any portion of these higher costs on to its customers or adjust its pricing structure in a timely manner in order to remain competitive, either of which could have a material adverse effect on the Company’s business, financial condition and results of operations.
The Topgolf venues business is susceptible to the availability and cost of food commodities and other supplies, some of which are available from a limited number of suppliers, which subjects Topgolfus to possible risks of shortages, interruptions and price fluctuations.
The profitability of the venues business line depends in part on Topgolf’sour ability to anticipate and react to changes in product costs. The price and availability of food commodities and other supplies may be affected by a number of factors beyond Topgolf’sour control, including changes in general economic conditions, seasonal economic fluctuations, increased competition, general inflation, shortages or supply interruptions due to weather, disease (including the ongoing COVID-19
pandemic) or other factors, food safety concerns, product recalls, fluctuations in the U.S. dollar and changes in government regulations. These and other events could increase commodity prices or cause shortages that could affect the cost and quality of the items that Topgolf buyswe buy or require Topgolfus to raise prices or limit menu options. The profitability of the venues business line may also be adversely affected by increases in the price of utilities, such as natural gas, electric, and water, whether as a result of inflation, shortages, interruptions in supply or otherwise.
While Topgolf haswe have historically been able to partially offset inflation and other changes in the costs of core operating resources used in the venues business line by gradually increasing menu prices, coupled with more efficient purchasing practices, productivity improvements and greater economies of scale, there can be no assurance that Topgolfwe or franchisees will be able to continue to do so in the future. From time to time, competitive or macroeconomic conditions could limit menu pricing flexibility, and there can be no assurance that increased menu prices will be fully absorbed by guests without any resulting change to their visit frequencies or purchasing patterns that may offset such increases. If Topgolfwe or itsour franchisees are unable to increase prices in response to higher food commodity and other supplies costs, or if such price increases decrease guest traffic or purchasing patterns, Topgolf’sour operating results could be materially and adversely affected. In addition, there can be no assurance that Topgolfwe will generate same venuesame-venue sales growth in an amount sufficient to offset inflationary or other cost pressures.
Topgolf hasWe have entered into a long-term contract with a single distributor, which Topgolf referswe refer to as itsour “broadline” distributor, which provides for the purchasing, warehousing and distributing of a substantial majority of Topgolf’sour food, non-alcoholic beverage and other supplies. TopgolfWe also contractscontract directly with the suppliers of certain food and non-alcoholic beverage products, usually with a single supplier for each such product. These agreements, however, are typically for the purpose of establishing an agreed-upon price for the relevant product and do not require the supplier to provide Topgolf’sour requirements, or any particular quantity, of such product. If Topgolf’sour broadline distributor or any of itsour other suppliers or substitute suppliers do not perform adequately or otherwise fail to deliver products or supplies to venues, if Topgolfwe were to lose itsour relationship with itsour broadline distributor or any single-source suppliers for which itwe has not approved a substitute supplier, or if any substitute suppliers also fail to perform, Topgolfwe may be unable to find satisfactory replacements in a short period of time, on acceptable terms, or at all, which could increase costs, cause shortages of food and other items at venues and cause Topgolfus to remove certain items from itsour menu, any of which could adversely affect itsour business, results of operations and financial condition.
Other than forward purchase contractsorders for certain food items, Topgolfwe currently doesdo not engage in futures contracts or other financial risk management strategies with respect to potential price fluctuations in the cost of food commodities and other supplies. Furthermore, these arrangements generally are relatively short in duration and may provide only limited protection from price changes. In addition, the use of these arrangements may limit Topgolf’sour ability to benefit from favorable price movements.
In addition, the RFID-enabled golf balls and golf clubs that are used in Topgolf’sour venues are produced by third-party manufacturers in Taiwan and China. As a result, natural disasters and other adverse events or conditions affecting these countries (including, without limitation, adverse weather conditions, political instability, war, civil unrest, economic instability, outbreaks of disease, such as the current COVID-19 pandemic, or other public health emergencies and the impact of public fears regarding any of the foregoing) could halt or disrupt production, impair the movement of finished products out of these countries, damage or destroy the tooling and other equipment necessary to manufacture these products and otherwise cause Topgolfus to incur additional costs and expenses, any of which could also have a material adverse effect on itsour results of operations and financial condition. For example, in September 2023, there was a fire at the Launch Technologies golf ball manufacturing plant in Pintung County, Taiwan. Launch Technologies provided a significant portion of our non-urethane golf ball supply. A portion of our value oriented golf balls were manufactured in the facility that was directly impacted by the fire, including the Topgolf range balls. The majority of the golf balls supplied to us by Launch Technologies were manufactured in a separate dedicated facility that was not directly impacted by the fire. However, this separate facility was not operational for nearly six months following the fire, due to both the ongoing investigation and certain shared resources, and only recently resumed operations. Accordingly, we were required to source golf ball production from alternative manufacturing facilities. The location of these manufacturers outside the United States also exposes Topgolfus to the various international risks.
TheWe rely on complex information systems for management of our manufacturing, distribution, sales and other functions. If our information systems fail to perform these functions adequately or if we experience an interruption in our operation, including a cybersecurity incident, our business and results of operations could suffer.
All of our major operations, including manufacturing, distribution, sales and accounting, are dependent upon our complex information systems. Our information systems (and information stored therein) are vulnerable to damage or interruption or other compromise, from events including:
•earthquake, fire, flood, hurricane or other natural disasters;
•power loss, computer systems failure, Internet and telecommunications or data network failure; and
•hackers, computer viruses, software bugs, glitches or other cybersecurity incidents.
Any damage or significant disruption in the operation of such systems, the failure of our or our IT vendors’ information systems to perform as expected, the failure to successfully integrate the IT systems of the businesses that we have recently acquired or any security breach to the information systems (including financial or credit/payment frauds) or other cybersecurity incident would disrupt our business, which may result in decreased sales, increased overhead costs, excess inventory and product shortages and otherwise adversely affect our reputation, operations, financial performance and condition.
Cybersecurity incidents, including cyber-attacks, unauthorized access to, or accidental disclosure of, personal information including payment card information, that we or our vendors collects or stores on our behalf may result in significant expense and negatively impact our reputation and business.
There is heightened concern and awareness over the security of personal information transmitted over the Internet, consumer identity theft and data privacy. While we have implemented security measures, our information systems and those of our third party vendors are nevertheless susceptible to numerous and evolving cybersecurity risks that threaten the confidentiality, integrity and availability of information systems and personal information, proprietary information belonging to our business and other confidential information (together, “Sensitive Information”) used in our business, including through electronic or physical computer break-ins, viruses and malware (e.g., ransomware), social engineering/phishing, malicious code, fraud, malfeasance by insiders, human or technological error, misconfigurations, “bugs” and other vulnerabilities in our and our vendors’ software, and other disruptions and security compromises involving the loss or unauthorized access of Confidential Information. Technologies and techniques used to obtain unauthorized access to or sabotage systems are constantly evolving, change frequently, and generally are not recognized until after they have been launched against a target. Even if identified, we and our vendors may be unable to adequately investigate, remediate or recover from breaches or cybersecurity incidents, or avoid a material adverse impact to our information systems, Sensitive Information or business, including due to threat actors increasingly using tools and techniques—including artificial intelligence—that are designed to circumvent controls, avoid detection, and remove or obfuscate forensic evidence.
There can also be no assurance that our cybersecurity risk management program and processes, including our policies, controls or procedures, will be fully implemented, complied with or effective in protecting our information systems and Sensitive Information, and we and certain of our third party vendors have and expect to continue to experience cyber-attacks and other incidents in varying degrees. For example, in August 2023, a threat actor obtained access to certain Company systems through social engineering. Customers experienced a temporary outage in e-commerce services, and certain personal information of approximately one million customers was affected, though no full payment card numbers or government identification numbers (such as Social Security numbers) were affected. We notified affected individuals, various regulators and law enforcement as a result.
Moreover, we have acquired and continue to acquire companies with cybersecurity vulnerabilities and/or are similarly susceptible to the risks described above, which exposes us to significant cybersecurity, operational, and financial risks.
Any perceived or actual unauthorized or inadvertent disclosure of personal information or adverse impact to the availability, integrity or confidentiality of our information systems or Sensitive Information, whether through a compromise of us or our third party vendors’ information systems by an unauthorized party, employee theft, misuse or error, cyber-attack or otherwise, could harm our reputation, impair our ability to attract or retain customers and Playmakers, require us to notify payment brands if payment card information is accessed or compromised, compel us to comply with federal and/or state breach notification laws and foreign equivalents, subject us to costly mandatory corrective action, or subject us to regulatory investigations and enforcement actions, claims or litigation (including class actions) arising from damages suffered by consumers, fines and penalties, and/or significant incident response, system restoration and future compliance costs, all of which could adversely affect our operations, financial performance and condition. Any losses, costs or liabilities may not be covered by, or may exceed the coverage limits of, any or all applicable insurance policies, and applicable insurance may not be available to us in the future on economically reasonable terms or at all.
We may be subject to productproducts liability, warranty and recall claims, that requireand our insurance coverage may not cover such claims.
Our products expose us to products liability, warranty and recall claims if the replacementproducts we manufacture, sell or repairdesign actually or allegedly fail to perform as expected, or the use of those products sold. Such warranty claims could adversely affect the Company’s results, of operations and relationships with its customers.
The Company manufactures and/or distributes a variety of products and 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.is alleged to result, in personal injury, death or property damage. From time to time, suchour products may contain manufacturing defects or design flaws that are not detected prior to sale, particularly in the case of new product introductions or upon design changes to existing products. The failure to identify and correct manufacturing defects and product design issues prior to the sale of those products could result in product warranty claims that result in costssafety-related issues or products liability claims.If we fail to replaceidentify and correct a manufacturing defect or repair any such defective products. design issue prior to sale, we may have to recall our products to address the defect or compliance- or safety-related issues.Because many of the Company’sour products are sold to retailers for broad consumer distribution and/or to customers who buy in large quantities, there could be significant costs
associated with such product warranty claims,recalls, including the potential for customer dissatisfaction that may adversely affect the Company’sour reputation and relationships with itsour customers, which may result in lost or reduced sales.
The Company’sThere can be no assurance that we can successfully defend or settle any products liability cases arising from any actual or alleged manufacturing defect or design flaw. Our insurance policies provide coverage against claims resulting from alleged injuries arising from our products sustained during the respective policy periods, subject to policy terms and conditions; however, there can be no assurance that this coverage will be renewed or otherwise remain available in the future, that our insurers will be financially viable when payment of a claim is required, that the cost of our insurance will not increase, that insurance coverage will remain economical to maintain, or that our insurance coverage will be adequate. As a result, an adverse outcome in a products liability case could increase our expenses and harm our business, financial condition and results of operations.
Our growth initiatives require significant capital investments and there can be no assurance that the Companywe will realize a positive return on these investments.
Initiatives to upgrade the Company’sour business processes and invest in technological improvements to the Company’sour manufacturing and assembly facilities involve many risks which could result in, among other things, business interruptions and increased costs, any of which may result in the Company’sour inability to realize returns on itsour capital investment.Expansion of business processes or facilities, including the significant expansion and technical upgrade to the Company’sour golf ball manufacturing facility in Chicopee, Massachusetts, requires significant capital investment.If the Company haswe have insufficient sales or isare unable to realize the full potential of itsour capital investment, itwe may not realize a positive return on itsour investment, which could impact the Company’sour margins and have a significant adverse effect on the Company’sour results of operations, financial condition and cash flows.
Some of Topgolf’sour products and services in the Topgolf business contain open source software, which may pose particular risks to itsour proprietary software, technologies, products, and services in a manner that could harm itsour business.
The Topgolf business uses open source software in itsour products and services and anticipates using open source software in the future. Some open source software licenses require those who distribute open source software as part of their own software products to publicly disclose all or part of the source code to such software product or to make available any modifications or derivative works of the open source code on unfavorable terms or at no cost. This could allow competitors to create similar technologies with less development effort and in less time and could lead to a loss of sales of Topgolf’sour products and services. The terms of many open source licenses to which Topgolf iswe are subject have not been interpreted by U.S. or foreign courts, and there is a risk that open source software licenses could be construed in a manner that imposes unanticipated conditions or restrictions on Topgolf’sour ability to provide or distribute products or services. Additionally, Topgolfwe could face claims from third parties claiming ownership of, or demanding release of, works that itwe developed using open source software, which could include Topgolf’sour proprietary source code, or otherwise seeking to enforce the terms of, or alleging breach of, the applicable open source license. These claims could result in litigation and could require Topgolfus to make itsour proprietary software source code freely available, purchase a costly license, or cease offering the implicated products or services unless and until itwe can re-engineer them to avoid infringement. This re-engineering process could require Topgolfus to expend significant additional research and development resources, and there can be no guarantee that itwe will be successful.
Additionally, the use of certain open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or controls on the origin of software. There is typically no support available for open source software, and there can be no assurance that the authors of such open source software will implement or push updates to address security risks or will not abandon further development and maintenance. Many of the risks associated with the use of open source software, such as the lack of warranties or assurances of title or performance, cannot be eliminated, and could, if not properly addressed, negatively affect Topgolf’sour business. Topgolf hasWe have processes to help alleviate these risks, including a review process for screening requests from developers for the use of open source software, but Topgolfwe cannot be sure that all open source software is identified or submitted for approval prior to use in itsour products and services. Any of these risks could be difficult to eliminate or manage, and, if not addressed, could adversely affect Topgolf’sour business, financial condition and results of operations.
Failure to adequately enforce the Company’sour intellectual property rights could adversely affect itsour reputation and sales.
The golf club industry, in general, has been characterized by widespread imitation of popular club designs. The Company hasWe have an active program of monitoring, investigating and enforcing itsour proprietary rights against companies and individuals who market or manufacture counterfeits and “knockoff” products. The Company asserts its rightsWe assert our right against infringers of itsour copyrights, patents, trademarks and trade dress. However, these efforts may not be successful in reducing sales of golf products by these infringers. Additionally, other golf club manufacturers may be able to produce successful golf clubs which imitate the Company’s designswe design without infringing any of the Company’sour copyrights, patents, trademarks or trade dress.
With respect to the Company’sour apparel business, counterfeits are known to exist in the industry, including in the premium outdoor apparel segment within which Jack Wolfskin operates. The failure to prevent or limit such infringers or imitators could adversely affect the Company’sour reputation and sales.
With respect to the Topgolf business, theour ability of the Company to expand the Topgolf business lines and establish and maintain itsour competitive position in new and existing markets depends in part on its our ability to further build brand recognition using itsour trademarks, service marks, proprietary products and technologies and other intellectual property rights, as well as itsour ability to maintain, protect and enforce such rights. Topgolf reliesWe rely upon a combination of intellectual property rights, such as trademarks, trade dress, domain names, copyrights, trade secrets and patents, in addition to technical measures and confidentiality and license agreements with Associates,Playmakers, contractors, consultants and other third parties with whom Topgolf haswe have relationships, to establish, maintain, protect and enforce itsour brand, proprietary information, technologies and processes and other intellectual property rights. The failure to enforce any such intellectual property rights may limit Topgolf’sour ability to achieve and maintain market recognition and itsour competitive position may be harmed, each of which could adversely affect the Company’sour reputation and sales.
The CompanyWe may become subject to intellectual property claims or lawsuits that could cause itus to incur significant costs or pay significant damages or that could prohibit itus from selling itsour products.
The Company’sOur competitors in the golf equipment and apparel industry also seek to obtain patent, trademark, copyright or other protection of their proprietary rights and designs for golf clubs, golf balls and other products. From time to time, third parties have claimed or may claim in the future that the Company’sour products infringe upon their proprietary rights. The Company evaluatesWe evaluate any such claimsclaim and, where appropriate, hashave obtained or sought to obtain licenses or other business arrangements. To date, there have been no significant interruptions in the Company’sour business as a result of any claims of infringement. However, in the future, intellectual property claims could force the Companyus to alter itsour existing products or withdraw them from the market or could delay the introduction of new products.
Various patents have been issued to the Company’sour competitors in the golf industry and theseour competitors may assert that the Company’sour golf products infringe their patent or other proprietary rights. If the Company’sour golf products are found to infringe third-party intellectual property rights, the Companywe may be unable to obtain a license to use such technology, and itwe could incur substantial costs to redesign itsour products, withdraw them from the market, and/or to defend legal actions.
With respect to the Topgolf business, intellectual property laws and procedures and restrictions provide only limited protection and any of Topgolf’s intellectual property rights may be challenged, invalidated, circumvented, infringed or misappropriated. If the Company failswe fail to protect such intellectual property rights adequately, itwe may lose an important advantage in the markets in which Topgolf competes. we compete. However, these efforts may not be successful or may be ineffective, and any of itsour intellectual property rights may be challenged, which could result in them being narrowed in scope or declared invalid or unenforceable. Other parties may also independently develop technologies that are substantially similar or superior to Topgolf’s. Topgolfours. We also may be forced to bring claims against third parties, or defend claims that third parties may bring against Topgolf,us, to determine the ownership of what Topgolf regardswe regard as itsour intellectual property. There can be no assurance that Topgolf’sour intellectual property rights will be sufficient to protect against others offering products, services, or technologies that are substantially similar or superior to Topgolf’sours and that compete with itsour business. If third parties misappropriate, infringe or otherwise violate Topgolf’sour intellectual property, the value of Topgolf’sour technologies, image, brand and the goodwill associated therewith may be diminished, Topgolf’sour brand may fail to achieve and maintain market recognition, and itsour competitive position may be harmed, any of which could have a material adverse effect on itsour business, including revenue.
The Company’sOur brands may be damaged by the actions of itsour Topgolf franchisees and licensees.
The Company licenses itsWe license our trademarks to third-party licensees who produce, market and sell their products bearing the Company’sour trademarks. The Company chooses itsWe choose our licensees carefully and imposesimpose upon such licensees various restrictions on the products, and on the manner, on which such trademarks may be used. In addition, the Company requires itswe require our licensees to abide by certain standards of conduct and the laws and regulations of the jurisdictions in which they do business. However, if a licensee fails to adhere to these requirements, the Company’sour brands could be damaged. The Company’sOur brands could also be damaged if a licensee becomes insolvent or by any negative publicity concerning a licensee or if the licensee does not maintain good relationships with itsour customers or consumers, many of which are also the Company’sour customers and consumers.
In addition, Topgolf’sour Topgolf franchisees and licensees are independent third parties that the Company or Topgolf doeswe do not control. Although franchisees are contractually obligated to operate their venues in accordance with specified standards, the Company doesWe do not oversee their daily operations. Consequently, the quality of franchised venues may be diminished by any number of factors beyond the Company’sour control. For example, franchisees may not hire and train qualified managers and other Associates,Playmakers, and may otherwise fail to operate their venues in a manner consistent with the requisite standards andappropriate requirements. Similarly, though agreements with Toptracer Range licensees generally require licensees to comply with certain operational requirements, the Company exerciseswe exercise even less control and oversight over the operations of these third parties. If Topgolf franchisees and licensees do not operate in accordance with the Company’sour expectations, or if one or more franchisees or licensees were to be the subject of unfavorable publicity, the Company’s and Topgolf’sour image and reputation could suffer materially.
Sales of the Company’sour products by unauthorized retailers or distributors could adversely affect the Company’sour authorized distribution channels and harm the Company’sour reputation.
Some of the Company’sour products find their way to unauthorized outlets or distribution channels. This “gray market” for the Company’sour products can undermine authorized retailers and foreign wholesale distributors who promote and support the Company’sour products, and can injure the Company’sour image in the minds of itsour customers and consumers. On the other hand, stopping such commerce could result in a potential decrease in sales to those customers who are selling the Company’sour products to unauthorized distributors or an increase in sales returns over historical levels. While the Company haswe have taken some lawful steps to limit commerce of itsour products in the “gray market” in both the United States and abroad, it haswe have not stopped such commerce.
The Company reliesWe rely on research and development, technical innovation and high‑high quality products to successfully compete.
Technical innovation and quality control in the design and manufacturing process is essential to the Company’sour commercial success.Research and development plays a key role in the Company’sour technical innovation and competitive advantage. The Company reliesWe rely upon experts in various fields to develop and test cutting edge performance products, including Artificial Intelligence.artificial intelligence. We use artificial intelligence and machine learning algorithms and models for various purposes, including to design and develop portions of our golf clubs. While the Company believes it iswe believe we are at the forefront of golf equipment innovation, if the Company failswe fail to continue to introduce technical innovation in itsour products, or isare unable to effectively utilize new technologies, such as Artificial Intelligence,artificial intelligence, or cannot develop or offer new technological-driven products as effectively, quickly or cost-efficiently as our competitors, consumer demand for itsour products could decline, and if the Company experienceswe experience problems with the quality of itsour products, the Companywe may incur substantial brand damage and expense to remedy the problems, any of which could materially adversely affect itsour business, financial condition and results of operations.
The Company relies on complex information systems for management of its manufacturing, distribution, sales and other functions. If the Company’s information systems fail to perform these functions adequately or if the Company experiences an interruption in their operation, including a breach in cyber security, its business and results of operations could suffer.
All of the Company’s major operations, including manufacturing, distribution, sales and accounting, are dependent upon the Company’s complex information systems. The Company’s information systems are vulnerable to damage or interruption from:
•
Earthquake, fire, flood, hurricane and other natural disasters;
•Power loss, computer systems failure, Internet and telecommunications or data network failure; and
•Hackers, computer viruses, software bugs or glitches.
Any damage or significant disruption in the operation of such systems, the failure of the Company’s or the Company's IT vendors' information systems to perform as expected, the failure to successfully integrate the information technology systems of the businesses that the Company has recently acquired or any security breach to the information systems (including financial or credit/payment frauds) would disrupt the Company’s business, which may result in decreased sales, increased overhead costs, excess inventory and product shortages and otherwise adversely affect the Company’s reputation, operations, financial performance and condition.
Cyber-attacks, unauthorized access to, or accidental disclosure of, consumer personally-identifiable information including payment card information,In addition, as with many technological innovations, there are significant risks involved in developing, maintaining and applying artificial intelligence and similar cutting edge technologies, and there can be no assurance that the Companyusage of such technologies will always enhance our products or services or be beneficial to our business, including our efficiency or profitability. In particular, if these methods are incorrectly designed or implemented and/or are adversely impacted by unforeseen defects, technical challenges, cybersecurity threats or material performance issues, the Company's vendors collects through its websites or stores on its servers may result in significant expenseperformance of our products and negatively impact the Company'sbusiness, as well as our reputation and business.the reputations of our customers, could suffer or we could incur liability through the violation of laws or contracts to which we are a party or civil claims.
There is heightened concern and awareness over the security of personal information transmitted over the Internet, consumer identity theft and user privacy. While the Company has implemented security measures, the Company’s computer systems and those of its third party vendors of IT and data security systems and services, may nevertheless be susceptible to electronic or physical computer break-ins, viruses, fraud, and other disruptions and security compromises involving the loss or unauthorized access of confidential information because technologies used to obtain unauthorized access to or sabotage systems are constantly evolving, change frequently, and generally are not recognized until they are launched against a target. Any perceived or actual unauthorized or inadvertent disclosure of personally-identifiable information, whether through a compromise of the Company’s or its third party vendors’ networks by an unauthorized party, employee theft, misuse or error or otherwise, could harm the Company’s reputation, impair the Company’s ability to attract website visitors, require us to notify payment brands if payment card information is accessed or compromised, compel us to comply with federal and/or state breach notification laws and foreign equivalents, subject us to costly mandatory corrective action, or subject the Company to claims or litigation arising from damages suffered by consumers, all of which could adversely affect the Company’s operations, financial performance and condition.
The Company’s TopgolfOur business is subject to risks associated with leasing property subject to long-term, non-cancelable leases.
TopgolfWe typically doesdo not own any real property.property and generally lease properties associated with the Topgolf venues business and certain active lifestyle businesses. Payments under non-cancelable leases account for a significant portion of operating expenses, and Topgolf expectswe expect to lease new properties, including for new Topgolf venues, to be opened in the future. Historically, Topgolf’sour leases typically provide for escalating rent provisions over the initial term and any extensions. TopgolfWe generally cannot cancel these leases without substantial economic penalty. If an existing or future venue or retail location is not profitable, (including as a result of the ongoing COVID-19 pandemic), and Topgolf decideswe decide to close it, Topgolfwe may nonetheless be committed to perform itsour obligation under the applicable lease, including, among other things, paying all or a portion of the base rent for the remainder of the lease term, unless Topgolf is ablewe are unable to negotiate a termination agreement with the applicable landlord, which itwe cannot guarantee that itwe will be able to do without incurring significant additional payment and other obligations or at all.
Extreme weather conditions, climate change, and natural disasters could negatively impact our results of operations and financial condition.
Extreme weather conditions in the areas in which our Topgolf venues, retail stores, customers, including golf participants, operations and vendors are located could adversely affect our operating results and financial condition. For example, our Topgolf venues may see a decrease in traffic during extremely hot or cold temperatures or during ice or snow storms, which may adversely affect our results of operations and financial condition. Additionally, extreme storms, droughts or other water shortages may negatively impact the number of golf rounds played, as golf courses in affected areas may require repair or have more limited availability. Climate change and natural disasters such as earthquakes, hurricanes and tsunamis, whether occurring in the United States or abroad, and their related consequences and effects, including energy shortages and public health issues, could also disrupt our operations or the operations of our Topgolf franchisees and licensees, the operations of our vendors, which may negatively impact our results of operations and financial condition.
Acts or threats of violence at or near our owned or franchised Topgolf venues, including civil unrest, customer intimidation, interpersonal violence, active shooter situations and terrorism, could adversely impact our sales, which could materially adversely affect our business, operating results, cash flows and financial condition.
Any act or threat of violence at or near our owned or franchised Topgolf venues, including civil unrest, customer intimidation, interpersonal violence, active shooter situations and terrorist activities, may result in personal injury or death, property damage, restricted access to our venues, venue closures, or any combination of the foregoing, in the short-term and, in the long-term, may cause our customers and staff to avoid our venues. Any such situation could adversely impact customer traffic and spending on game play and food and beverages at our venues and make it more difficult to fully staff our venues, any of which could materially adversely affect our business, operating results, cash flows and financial condition.
Risks Related to Regulations
The Company, includingWe, as well as our Topgolf and its franchisees and licensees, are subject to many federal, state, local and foreign laws, as well as other statutory and regulatory requirements, with which compliance is both costly and complex. Failure by the Companyus or Topgolf and itsour franchisees or licensees to comply with, or changes in these laws or requirements, could have an adverse impact on itsour business.
The Company isWe are subject to extensive federal, state, local and foreign laws and regulations, as well as other statutory and regulatory requirements. In particular, the Topgolf business is subject to extensive regulations, including, among others:
•nutritional content labeling and disclosure requirements;
•food safety regulations;
•employment regulations;
•the PPACA;
•the ADA and similar state laws;
•data privacy, direct marketing and cybersecurity laws;
•environmental, health and human safety laws and regulations, including COVID Orders;regulations;
•laws and regulations related to franchising and licensing operations;
•FCPA and other similar anti-bribery and anti-kickback laws; and
•laws regarding sweepstakes and promotional contests.
The Company isWe are also subject to U.S. financial services regulations, a myriad of consumer protection laws, including economic sanctions, laws and regulations, anticorruption laws, escheat regulations and data privacy, direct marketing and securitycybersecurity regulations. We may also become subject to laws relating to our use of artificial intelligence and machine learning technologies in our business. Changes to legal rules and regulations, or interpretation or enforcement of them, could increase the Company’sour cost of doing business, affect itsour competitive abilities, and increase the difficulty of compliance. Failure to comply with regulations may have an adverse effect on the Company’sour business, including the limitation, suspension or termination of services provided to, or by, third parties, and the imposition of penalties or fines.
Many of Topgolf’sour Topgolf franchisees and licensees are also subject to these or similar laws and regulations in the jurisdictions in which they operate. The impact of current laws and regulations, the effect of future changes in laws or regulations that impose additional requirements and the consequences of litigation relating to current or future laws and regulations, uncertainty around future changes in laws made by new regulatory administrations or Topgolf’s, itsour, or our franchisees’ and its licensees’ inability to respond effectively to significant regulatory or public policy issues, could increase compliance and other costs of doing business and, therefore, have an adverse effect on Topgolf’sour results of operations or the results of operations of Topgolf franchisees and licensees. Failure to comply with the laws and regulatory requirements of applicable federal, state, local and foreign authorities could result in, among other things, revocation of required licenses, administrative enforcement actions, fines and civil and criminal liability. In addition, certain laws, including the ADA, could require Topgolfus to expend significant funds to make modifications to itsour venues if it failswe fail to comply with applicable standards. Compliance with all of these laws and regulations, including any future changes in these laws or requirements, can be costly and can increase exposure to litigation or governmental investigations or proceedings.
Compliance with and changes in data privacy laws, regulations, standards and other requirements, and any actual or perceived failure by us to comply with such requirements, may adversely affect our business.
Data privacy is a significant issue in the jurisdictions in which we operate. Global regulatory frameworks for data privacy are rapidly evolving and are likely to continue changing for the foreseeable future. Federal, state and foreign government bodies or agencies have adopted, and may continue to adopt, additional laws, regulations and standards that apply to us and our vendors governing data privacy, direct marketing, cybersecurity, consumer protection and other issues related to the processing of personal information. In the United States, these include rules and regulations promulgated under the authority of federal agencies, such as the Federal Trade Commission (“FTC”), state attorneys general and legislatures and consumer protection agencies.
At the federal level, for example, the FTC Act grants the FTC authority to take enforcement actions against “unfair or deceptive practices.” The FTC has interpreted the FTC Act to require companies to handle personal information in compliance with the commitments posted in their privacy policies and to adequately protect personal information. With respect to the use of personal information for direct marketing, advertising and other activities conducted by telephone, email and the Internet, we are subject to the Controlling the Assault of Non-Solicited Pornography and Marketing Act (“CAN-SPAM Act”), which establishes specific requirements for commercial email messages and the Telephone Consumer Protection Act (“TCPA”), which restricts telemarketing and the use of technologies that enable automatic calling and/or SMS messaging without proper consent, and is a highly litigated issue with numerous class action lawsuits filed in recent years resulting in multi-million dollar settlements to the plaintiffs.
Many U.S. states have enacted statutes and rules governing the ways in which businesses may collect, use, and process personal information. For example, we are subject to the California Consumer Privacy Act (“CCPA”), which came into effect in 2020. Other states have also passed and may continue to pass similar laws whose restrictions and requirements differ from those of California, which could require us to design, implement and maintain different types of state-based, privacy-related compliance controls and programs simultaneously in multiple states. Similar laws have been proposed at the federal level as well. Such laws can be enforced by state regulators (and the CCPA has a limited private right of action) and require, amongst other things, disclosures to individuals regarding our processing of personal information, providing rights to access, delete, correct and opt out of certain uses and disclosures of their personal information (including for advertising purposes). However, these laws have overlapping but conflicting requirements that add additional complexity and potential legal risk, could make compliance even more challenging, require us to expend significant resources to come into compliance, restrict our ability to process certain personal information and could result in changes to business practices and policies.
Internationally, many jurisdictions in which we operate in have established or enhanced their own data security and privacy legal framework with which we or our customers must comply, including the European Union’s General Data Protection Regulation (“EU GDPR”), the United Kingdom General Data Protection Regulation and Data Protection Act (“UK GDPR”) (the EU GDPR and UK GDPR together referred to as the “GDPR”), which imposes stringent operational requirements, including higher standards for obtaining consent to process personal information. Recent legal developments have created complexity and uncertainty regarding cross-border transfers of personal information outside Europe, including the United States. We currently rely on the EU standard contractual clauses, UK Addendum to the EU standard contractual clauses and the UK International Data Transfer Agreement, as relevant, to transfer personal data outside the EEA and the UK with respect to both intragroup and third party transfers. However, reliance on standard contractual clauses alone may not be sufficient in all circumstances. and we expect the existing legal complexity and uncertainty regarding international personal data transfers to continue. In particular, we expect the new EU-US Data Privacy Framework (another mechanism for transfers of data outside Europe) to be challenged and data transfers to the U.S. and other jurisdictions more generally to continue to be subject to enhanced scrutiny by regulators. As regulatory guidance and enforcement landscape in relation to data exports continue to develop, we could experience additional costs, complaints and/or regulatory investigations or fines, and/or if we are otherwise unable to transfer personal data between and among countries and regions in which we operate, it could affect the manner in which we provide our services, the geographical location or segregation of our relevant systems and operations, and could adversely affect our operations and financial results.
In many jurisdictions, enforcement actions and consequences for noncompliance are also rising. In addition to government regulation, privacy advocates and industry groups may propose new and different self-regulatory standards that either legally or contractually apply to us. The changing legal and regulatory landscape could in the future further limit our ability to use and share personal information and require changes to our operating model. Any inability or perceived inability to adequately address data privacy and security concerns, even if unfounded, or comply with applicable data privacy, direct marketing, cybersecurity and consumer protection laws, regulations, standards, and other requirements, could result in additional compliance costs, proceedings (including class actions) and regulatory action, penalties and liability to us, damage to our reputation, an erosion of trust and changes to our business. If any of these events were to occur, our business, results of operations, and financial condition could be materially adversely affected.
Regulations related to “conflict minerals” require the Companyus to incur additional expenses and could limit the supply and increase the cost of certain metals used in manufacturing the Company’sour products.
The Commission'sCommission’s rules require disclosure related to sourcing of specified minerals, known as conflict minerals, that are necessary to the functionality or production of products manufactured or contracted to be manufactured by public companies. The rules require companies to, under specified circumstances, undertake due diligence, disclose and report whether or not such minerals originated from the Democratic Republic of Congo or an adjoining country. The Company’sOur products may contain some of the specified minerals. As a result, the Company incurswe incur additional expenses in connection with complying with the rules, including with respect to any due diligence that is required under the rules. In addition, the Commission'sCommission’s implementation of the rules could adversely affect the sourcing, supply and pricing of materials used in the Company’sour products. There may only be a limited number of suppliers offering “conflict free” conflict minerals, and the Companywe cannot be certain that itwe will be able to obtain necessary “conflict free” minerals from such suppliers in sufficient quantities or at competitive prices. Because the Company’sour supply chain is complex, the Companywe may also not be able to sufficiently verify the origins of the relevant minerals used in the Company’sour products through the due diligence procedures that the Company implements,we implement, which may harm the Company’sour reputation.
We could be adversely affected by any violations of economic sanctions laws and regulations, the FCPA, the U.K. Bribery Act, and other foreign anti-bribery laws.
The FCPA generally prohibits companies and their intermediaries from making improper payments to non-U.S. government officials for the purpose of obtaining or retaining business. Other countries in which the Company operateswe operate also have anti-bribery laws, some of which prohibit improper payments to government and non-government persons and entities, and others (e.g., the FCPA and the U.K. Bribery Act) extend their application to activities outside of their country of origin. Economic and trade sanctions laws and regulations administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control, the U.S. Department of State, and foreign jurisdictions impose requirements on the Company’sour operations and may prohibit or restrict transactions in certain countries and with certain designated persons. The Company’sOur policies mandate compliance with all applicable anti-bribery and sanctions laws.In certain regions of the world, strict compliance with anti-bribery laws may conflict with local customs and practices. In addition, the Companywe may conduct business in certain regions through intermediaries over whom the Company haswe have less direct control, such as subcontractors, agents, and partners (such as joint venture partners). Although the Company haswe have implemented policies, procedures, and, in certain cases, contractual arrangements designed to facilitate compliance with applicable economic and trade sanctions and anti-bribery laws, the Company’sour officers, directors, employees, associates, subcontractors, agents, and
partners may take actions in violation of the Company’sour policies, procedures, contractual arrangements, economic sanctions and anti-bribery laws. Any such violation, even if prohibited by the Company’sour policies, could subject the Companyus and such persons to criminal and/or substantial civil penalties or other sanctions, which could have a material adverse effect on the Company’sour business, financial condition, cash flows, and reputation.
The Company isWe are subject to environmental, health and safety laws and regulations, which could subject the Companyus to liabilities, increase itsour costs or restrict itsour operations in the future.
The Company’sOur properties and operations are subject to a number of environmental, health and safety laws and regulations in each of the jurisdictions in which the Company operates.we operate. These laws and regulations govern, among other things, air emissions, water discharges, handling and disposal of solid and hazardous substances and wastes, soil and groundwater contamination and employee health and safety. The Company’sOur failure to comply with such environmental, health and safety laws and regulations could result in substantial civil or criminal fines or penalties or enforcement actions, including regulatory or judicial orders enjoining or curtailing operations or requiring remedial or corrective measures, installation of pollution control equipment or other actions.The Company, We, and in particular the Topgolf business as an operator, and/owner, or ownerboth of the properties on which the venues are situated, may also be subject to liability for environmental investigations and cleanups, including at properties that the Companywe currently or previously owned or operated, even if we did not cause or know of such contamination, was not caused or known by the Company, and the Companywe may face claims alleging harm to health or property or natural resource damages arising out of contamination or exposure to hazardous substances. Liability under environmental laws has been interpreted to be joint and several unless the harm is divisible and there is a reasonable basis for allocating the responsibility.
We may also be subject to similar liabilities and claims in connection with locations at which hazardous substances, contaminates or wastes the Company haswe have generated have been stored, treated, otherwise managed, or disposed. In addition, Topgolf’sour lease agreements for Topgolf venues typically provide that Topgolfwe will indemnify the landlord for environmental conditions which may be found on or about the leased property. Accordingly, should unknown contamination be discovered at any of the properties Topgolf owns, operateswe own, operate or leases,lease, or should a release of hazardous material occur at one of these properties, Topgolfwe could be required to investigate and clean up the release and could also be held responsible to a governmental entity or third parties for property or natural resource damage, personal injury and investigation and clean-up costs incurred by them in connection with the contamination, and these costs and liabilities could be substantial. TopgolfWe may also be subject to liability under environmental laws as a result of contamination at properties we, or our predecessors in interest, previously owned or operated by Topgolf or its predecessors in interest or for third-party contaminated facilities to which it haswe have sent waste for treatment or disposal. In the past, certain construction activities driven by Topgolf’sour development plans at certain sites (such as the removal of excess soil or the de-watering of shallow groundwater to install targets) have exposed, and any similar construction activities Topgolf undertakeswe undertake at other sites in the future may also expose, soil or water that has been contaminated from historical activities at the site which must be disposed of or otherwise handled or addressed in accordance with applicable environmental laws. With respect to any of the properties Topgolf owns, operateswe own, operate or leases,lease, the presence of contaminants (including as a result of failure to properly dispose of or otherwise handle or address any contaminants exposed by construction activities), or the failure to properly remediate a property, may impair Topgolf’sour ability to use, mortgage or sell that property in the future. As a result, any of these events, and the environmental conditions at or related to the Company’sour other current or former properties or operations, and/or the costs of complying with current or future environmental, health and safety requirements (which have become more stringent and complex over time), could materially adversely affect the Company’sour business, financial condition and results of operations.
ChangesIncreased scrutiny and changing expectations from investors, consumers, employees, regulators, and others regarding our environmental, social and governance practices and reporting could cause us to incur additional costs, devote additional resources and expose us to additional risks, which could adversely impact our reputation, customer attraction and retention, access to capital and employee recruitment and retention.
Companies across all industries are facing increasing scrutiny related to their environmental, social and governance (“ESG”) practices and reporting. Investors, consumers, employees and other stakeholders have focused increasingly on ESG practices and placed increasing importance on the implications and social cost of their investments, purchases and other interactions with companies. With this increased focus, public reporting regarding ESG practices is becoming more broadly expected.
Through our sustainability initiatives, we are committed to improving our ESG practices and have launched projects, and may from time to time set targets, with respect to improving our ESG practices. Our ability to execute on those projects and meet any targets are subject to risks and uncertainties, many of which are beyond our control, including the evolving regulatory requirements affecting ESG standards and disclosures, in the United States, the European Union and other jurisdictions in which we operate; the availability of suppliers that can meet sustainability, diversity and other ESG standards that we may set; our ability to recruit, develop and retain diverse talent; and the availability and cost of sustainable energy and raw materials used in our operations.
If we fail, or are perceived to be failing, to meet the standards included in any ESG disclosure or the expectations of our various stakeholders, it could negatively impact our reputation, customer attraction and retention, access to capital and employee retention. In addition, our failure to comply with data privacy laws,any applicable rules or regulations and standards may adversely affect the Company’s business.
Data privacy and data security have become significant issues in the United States, Europe, and in many other jurisdictions in which the Company operates. The regulatory framework for data privacy and security issues worldwide is rapidly evolving and is likelycould lead to remain uncertain and continue evolving for the foreseeable future. Federal, state, or foreign government bodies or agencies have in the past adopted, and may in the future adopt additional, laws and regulations affecting data privacy. In the United States, these include rules and regulations promulgated under the authority of federal agencies, such as the Federal Trade Commission (FTC), and state attorneys general and legislatures and consumer protection agencies. For example, the FTC Act grants the FTC authority to enforce against unfair or deceptive practices, which the FTC has interpreted to require companies’ practices with respect to personal information comply with the commitments posted in their privacy policies. With respect to the use of personal information for direct marketing
purposes, the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 (CAN-SPAM Act), establishes specific requirements for commercial email messages and specifies penalties for the transmission of commercial email messages that are intended to deceive the recipient as to source or content, and obligates, among other things, the sender of commercial emails to provide recipients with the ability to opt out of receiving future commercial emails from the sender. Further, the Telephone Consumer Protection Act (TCPA) restricts telemarketing and the use of technologies that enable automatic calling and/or messaging without proper customer consent, and is a particularly highly litigated issue. Many states in the United States have recently enacted statutes and rules governing the ways in which businesses may collect, use, and retain personal information. One such example is the California Consumer Privacy Act (“CCPA”), which came into effect in 2020. In addition, the California Privacy Rights Act (“CPRA”) was passed in November 2020 and will take effect in January 2023 (with respect to information collected from and after January 2022), and will significantly modify the CCPA, including by creating a new state agency that will be vested with authority to implement and enforce the CCPA and CPRA. Moreover, other states, including Nevada, Virginia and Colorado, have passed and may continue to pass similar privacy-related laws whose restrictions and requirements differ from those of California, which could require us to design, implement and maintain different types of state-based, privacy-related compliance controls and programs simultaneously in multiple states. Similar laws relating to data privacy and security have been proposed at the federal level as well. Such laws have potentially conflicting requirements that could make compliance even more challenging, require us to expend significant resources to come into compliance, and restrict our ability to process certain personal information. Internationally, many jurisdictions in which the Company operates have established or enhanced their own data security and privacy legal framework with which the Company or its customers must comply, including but not limited to, the European Union's General Data Protection Regulation ("GDPR"), which imposes stringent operational requirements, including, for example, requiring expanded disclosures about how personal information is used, limitations on retention of information, mandatory data breach notification obligations, and higher standards for obtaining consent to process personal information. The GDPR provides that EU member states may make their own additional laws and regulations in relation to certain data processing activities. Recent legal developments in the EU have created complexity and uncertainty regarding transfers of personal information from the EU to “third countries,” especially the United States. For example, in 2020, the Court of Justice of the EU invalidated the EU-U.S. Privacy Shield Framework (a mechanism for the transfer of personal information to the EU from the US) and made clear that reliance on standard contractual clauses (another mechanism for the transfer of personal information outside of the EU) alone may not be sufficient in all circumstances. In addition, after the United Kingdom, or U.K., left the EU, the U.K. enacted the U.K. GDPR, which together with the amended U.K. Data Protection Act 2018 retains the GDPR in U.K. national law, but also creates complexity and uncertainty regarding transfers between the U.K. and the EU, which could further limit our ability to use and share personal data and require localized changes to our operating model. In many jurisdictions, enforcement actions and consequences for noncompliance are also rising. In addition to government regulation, privacy advocates and industry groups may propose new and different self-regulatory standards that either legally or contractually apply to the Company. The changing legal and regulatory landscape could in the future further limit our ability to use and share personal information and require changes to our operating model. Any inability or perceived inability to adequately address data privacy and security concerns, even if unfounded, or comply with applicable data privacy and data security laws, regulations, and policies, could result in additional compliance costs, penalties and liabilityadversely impact our reputation, customer attraction and retention, access to the Company, damage its reputationcapital and adversely affect its business.employee retention.
Risks Related to Tax and Financial Matters
Changes in tax laws and unanticipated tax liabilities could adversely affect the Company'sour effective income tax rate and profitability.
The Company isWe are subject to income taxes in the United States and numerous foreign jurisdictions. The Company'sOur effective income tax rate in the future could be adversely affected by a number of factors, including: changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws, the outcome of income tax audits in various jurisdictions around the world, and any repatriation of non-U.S. earnings for which the Company has not previously provided for U.S. taxes. The Companyworld. We regularly assessesassess all of these matters to determine the adequacy of itsour tax provision.
In addition, new income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time, or interpreted, changed, modified or applied adversely to the Company,us, any of which could adversely affect the Company’sour business operations and financial performance. In particular, the U.S. government may enact significant changes to the taxation of business entities including, among others, a permanent increase in the corporate income tax rate, an increase in the tax rate applicable to the global intangible low-taxed income and elimination of certain exemptions, and
the imposition of minimum taxes or surtaxes on certain types of income. The Company isWe are currently unable to predict whether such changes will occur and, if so,such changes occur, the ultimate impact on itsour business. To the extent that such changes have a negative impact on the Company, or itsus, our suppliers or customers, including as a result of related uncertainty, these changes may materially and adversely impact the Company’sour business, financial condition, results of operations and cash flows.
The Company’sOver the past several years, the Organisation for Economic Co-operation and Development (the “OECD”) has been working on a base erosion and profit shifting (“BEPS”) project that seeks to establish certain international standards for taxing the worldwide income of multinational companies. As part of the OECD’s BEPS project, over 130 member jurisdictions of the OECD Inclusive Framework have joined the Two-Pillar Solution to Address the Tax Challenges of the Digitalisation of the Economy, which includes a reallocation of taxing rights among jurisdictions and a global minimum tax rate of 15%. As a result of these developments, the tax laws of certain countries in which we do business could change on a prospective or retroactive basis, and any such changes could increase our liabilities for taxes, interest and penalties, and therefore could materially adversely affect our business, financial condition, results of operations and cash flows.
Our ability to utilize all or a portion of itsour U.S. deferrednet operating losses and certain other tax assetsattributes may be subject to limitations.
The Company hasWe have a significant amount of U.S. federal and state deferred tax assets, which include net operating loss carryforwards (“NOLs”) and tax credit carryforwards. The Company’sOur ability to utilize itsour NOLs and tax credits to offset future taxable income and income tax liabilities may be deferred or limited significantly if the Companywe were to experience an “ownership change” within the meaning of Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the “Code”). In general, an ownership change will occur if there is a cumulative change in ownership of the Company’sour stock by “5-percent shareholders” (as defined in the Code) that exceeds 50 percentage points over a rolling three-year period. The determination of whether an ownership change has occurred for purposes of Sections 382 and 383 of the Code is complex and requires significant judgment. The extent to which the Company’sour ability to utilize itsour NOLs and tax credits is limited as a result of such an ownership change depends on many variables, including the value of the Company’sour stock at the time of the ownership change. The CompanyWe determined that an ownership change with respect to the Company likely occurred on the date of the Topgolf merger. In addition, Topgolf likely experienced an ownership change subsequent to the Topgolf merger. As such, each of the Company and Topgolf is likelywe are subject under Sections 382 and 383 of the Code to a limitation on the utilization of itsour NOLs and tax credits. However, this limitation isthese limitations are not expected to have any material impact on the Company.us. In addition, Topgolf’swe may experience ownership changes in the future as a result of subsequent shifts in our stock ownership, some of which changes are outside of our control. We continue to monitor changes in our ownership. If any further ownership change were to occur in any three-year period and we were limited in the amount of NOLs and tax credits we could use to offset taxable income or liability for income taxes, our results of operations and cash flows may be adversely impacted.
In addition, our NOLs and tax credits acquired in the Topgolf merger are presently expected to be subject to “separate return limitation year” limitations. Separate return limitation year NOLs and tax credits can only be used in years that both the consolidated group and the entity that created such NOLs and tax credits have taxable income or income tax liabilities, which may significantly limit our ability to utilize Topgolf’s acquiredsuch NOLs and tax credits in the future. The Company continues to monitor changes in ownership. If any further ownership change were to occur in any three-year period and the Company were limited in the amount of NOLs and credits it could use to offset taxable income or liability for income taxes, the Company’s results of operations and cash flows may be adversely impacted. The Company may experience an ownership change in the future as a result of subsequent shifts in the Company’s stock ownership, some of which changes are outside of the Company’s control.
Our obligations and certain financial covenants contained under itsour existing credit facilities expose itus to risks that could materially and adversely affect itsour liquidity, business, operating results, financial condition and limit the Company’sour flexibility in operating itsour business, including the ability to make any dividend or other payments on itsour capital stock.
The Company’sOur primary revolving credit facility is a senior secured asset-based revolving credit facility (as amended, the “ABL“ New ABL Facility”), comprised of a U.S. facility, a German facility, a Canadian facility and a United KingdomKingdom/Dutch facility, in each case subject to borrowing base availability under the applicable facility.The Company We also maintainsmaintain a Japan revolving credit facility, subject to borrowing base availability (as amended, the “2022 Japan ABL Credit Facility”), and a Topgolf revolving credit facility (the “Topgolf Revolving Facility”). The amounts outstanding under the New ABL Facility are secured by a first priority lien on certain assets, including cash (to the extent pledged by the Company)us), certain intellectual property, certain eligible real estate, inventory and accounts receivable of the Company and the Company’sits subsidiaries in the United States, Germany, Canada, the Netherlands and the United Kingdom (other than Topgolf and itscertain excluded subsidiaries) and a second-priority lien on substantially all of theirthe Company’s and its subsidiaries’ other assets.The amounts outstanding under the 2022 Japan ABL Credit Facility are secured by certain assets, including eligible inventory and eligible accounts receivable. The amounts outstanding under the Topgolf Revolving Facility are secured by substantially all of the assets of Topgolf and its subsidiaries.The maximum availability under the New ABL Facility fluctuates with the general seasonality of the business, and increases and decreases with the changes in our and our applicable subsidiaries’ assets that are included in the Company'sapplicable borrowing base, including certain inventory and account receivable balances.balances, pledged cash, certain intellectual property and certain eligible real estate.
In addition to the revolving and ABL facilities described above, the Company iswe are also the borrower under a senior secured term loan B facility (the “Term(as amended, the “2023 Term Loan Facility”B”) that is guaranteed by the Company’sour U.S. subsidiaries (other than Topgolf and itscertain excluded subsidiaries), and Topgolf is the borrower under a senior secured term loan facility (the “Topgolf. The 2023 Term Loan Facility”) that is guaranteed by Topgolf’s US subsidiaries.The Term Loan FacilityB is secured by a first-priority lien on the assets of the obligors thereunder (other than those for which the New ABL Facility has a first-priority lien)lien and certain excluded assets), and a second-priority lien on the assets for which the New ABL Facility has a first-priority lien.The Topgolf Term Loan Facility is secured
by substantially all of the assets of Topgolf and its guarantor subsidiaries. The Company also has a five-year Term Loan facility (the “Japan Term Loan Facility”) between its subsidiary in Japan and Sumitomo Mitsui Banking Corporation.
The New ABL Facility, the 2022 Japan ABL Credit Facility and the 2023 Term Loan Facility, the Topgolf Revolving Facility, the Topgolf Term Loan Facility and the Japan Term Loan FacilityB (collectively, the “Facilities”) include certain restrictions including, among other things, restrictions on the incurrence of additional debt, liens, dividends, stock repurchases and other restricted payments, asset sales, investments, mergers, acquisitions and affiliate transactions. Such limitations include restrictions on the amount the Companywe can pay in annual cash dividends, including meeting certain restrictions on the amount of additional indebtedness and, in the case of the New ABL Facility, requirements to maintain a certain fixed charge coverage ratio under certain circumstances. If the Company experienceswe experience a decline in revenues or adjusted EBITDA, the Companywe may have difficulty paying interest and principal amounts due on itsour Facilities or other indebtedness and meeting certain of the financial covenants contained in the New ABL Facility or the Topgolf Revolving Facility. If the Company iswe are unable to make required payments under any of the Facilities, or if the Company failswe fail to comply with the various covenants and other requirements of any of the Facilities or other indebtedness, the Companywe would be in default thereunder, which would permit the holders of the indebtedness to accelerate the maturity thereof, which may also result in a cross-default under other Facilities or other indebtedness. Any default under any of the Facilities or other indebtedness could have a significant adverse effect on the Company’sour liquidity, business, operating results and financial condition and ability to make any dividend or other payments on the Company’sour capital stock. See Note 7. “Financing Arrangements,”Arrangements” in the Notes to Consolidated Financial Statements in this Form 10-K for further discussion of the terms of the New ABL Facility, the Term Loan Facility, the Topgolf Revolving Facility, the Topgolf Term Loan Facility and the Company's 2022 Japan ABL Credit Facility and Japanthe 2023 Term Loan Facility.B.
The Company’sOur ability to generate sufficient positive cash flows from operations is subject to many risks and uncertainties, including future economic trends and conditions, demand for the Company’sour products and services, foreign currency exchange rates and other risks and uncertainties applicable to the Companyus and itsour business. No assurances can be given that the Companywe will be able to generate sufficient operating cash flows in the future or maintain or grow itsour existing cash balances. If the Company iswe are unable to generate sufficient cash flows to make itsour required payment obligations under the Facilities or to fund itsour business, the Companywe will need to increase itsour reliance on itsour New ABL Facility and the Topgolf Revolving Facility for needed liquidity. If itsour New ABL Facility or Topgolf Revolving Facility is not then available or sufficient and the Company iswe are not able to secure alternative financing arrangements, the Company’sour future operations would be materially, adversely affected.
The CompanyWe may need to raise additional funds from time to time through public or private debt or equity financings in order to execute itsour growth strategy.
The CompanyWe may need to raise additional funds from time to time in order to take advantage of opportunities, including the expansion of itsour business or the acquisition of complementary products, technologies or businesses; develop new products or expand existing lines of business, including the opening of new Topgolf venues; or respond to competitive pressures.
With respect to theour Topgolf business in particular, the Company’sour ability to fund the construction and opening of new Topgolf venues may depend on itsour ability to fund or otherwise secure financing for the associated development costs. Topgolf hasWe have historically financed the construction of venues through third-party developer or real estate financing companies. In these cases, while Topgolf iswe are still required to fund a portion of venue development costs itself, itsourselves, our financing partner will purchase or lease the land and fund a majority of venue development costs during and after construction, which reduces itsour required capital outlay. Should these or similar financing arrangements become less available to Topgolfus in the future, whether due to changes in relationships with financing partners, legal, regulatory or other changes, including the potential impact of the ongoing COVID-19 pandemic on Topgolf’s ability to obtain financing on favorable terms, the availability of sufficient amounts of financing and conditions in the global financing markets and Topgolf’sour prospects and credit ratings, that make these financing arrangements less attractive to them or any other reason, Topgolf’sour growth prospects would be materially and adversely affected. In addition, in cases where Topgolf iswe are not able to finance venue construction through one of itsour financing partners, The Companywe will be required to fund the full amount of venue development costs itself.ourselves. If the Company iswe are unable to finance the construction and development of new venues on acceptable terms or at all, or if the Companywe or itsour financing partners default on itsour or their respective obligations to fund construction, the Companywe could be required to delay, significantly curtail or eliminate planned openings of additional
Topgolf venues, which could have a material adverse effect on the Company’sour business, financial condition and results of operations.
There can be no guarantee that the Companywe will be able to timely secure financing on favorable terms, or at all, for any of the foregoing purposes. Any capital raised through the sale of equity or securities convertible into equity will dilute the percentage ownership of holders of the Company’sour common stock. Capital raised through debt financing would require the Companyus to make periodic interest payments and may impose restrictive covenants on the conduct of itsour business. Furthermore, additional financings may not be available on terms economically favorable to the Company,us, or at all, especially during periods of adverse economic conditions, which could make it more difficult or impossible for the Companyus to obtain funding for the operation of itsour business, for making additional investments in product development and for repaying outstanding indebtedness. A failure to obtain any necessary additional funding could prevent the Companyus from making expenditures that may be required to grow itsour business or maintain itsour operations.
Increases in interest rates could increase the cost of servicing the Company’sour indebtedness and have an adverse effect on the Company’sour results of operations and cash flows.
The Company’sOur indebtedness outstanding under certain of itsour credit facilities, including the New ABL Facility, the 2022 Japan ABL Credit Facility and the Topgolf Facility,2023 Term Loan B, bears interest at variable rates. As a result, increases in interest rates would increase the cost of servicing the Company’sour indebtedness and could materially reduce the Company’sour profitability and cash flows. An increase inIncreased interest rates could also make it difficult for the Companyus to obtain financing at attractive rates, which could adversely impact the Company’sour ability to execute itsour growth strategy or future acquisitions. Additionally, rising interest rates could have a dampening effect on overall economic activity, which could have an adverse effect on the Company’sour business.
Goodwill and intangible assets represent a significant portion of the Company’sour total assets, and any impairment of these assets could negatively impact the Company'sour results of operations and shareholders’ equity.
The Company’sOur goodwill and intangible assets consist of goodwill from acquisitions, trade names, trademarks, service marks, trade dress, patents and other intangible assets.Accounting rules require the evaluation of the Company’sour goodwill and intangible assets with indefinite lives for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Such indicators include a sustained decline in the Company’sour stock price or market capitalization, adverse changes in economic or market conditions or prospects, and changes in the Company’sour operations.
An asset is considered to be impaired when its carrying value exceeds its fair value. The Company determinesWe determine the fair value of an asset based upon the discounted cash flows expected to be realized from the use and ultimate disposition of the asset. If in conducting an impairment evaluation the Company determineswe determine that the carrying value of an asset exceeded its fair value, the Companywe would be required to record a non-cash impairment charge for the difference between the carrying value and the fair value of the asset. If a significant amount of the Company’sour goodwill and intangible assets were deemed to be impaired, the Company’sour results of operations and shareholders’ equity would be significantly adversely affected.
General Risk Factors
Significant developments stemming from the U.K.'s withdrawal from the European Union could have a material adverse effect on the Company.
Following a national referendum and enactment of legislation by the government of the United Kingdom, the United Kingdom formally withdrew from the European Union and ratified a trade and cooperation agreement governing its future relationship with the European Union (commonly referred to as “Brexit”). The agreement, which was ratified by the European Parliament and the Council of the European Union in late April of 2021 and permanently applied from May 1, 2021, addresses trade, transport, economic arrangements, law enforcement, judicial cooperation and a governance framework including procedures for dispute resolution, among other things. Because the agreement merely sets forth a framework in many respects and will require complex additional bilateral negotiations between the United Kingdom and the European Union as both parties continue to work on the rules for implementation, significant political and economic uncertainty remains about how the precise terms of the relationship between the parties will differ from the terms before withdrawal.
These developments, or the perception that any related developments could occur, have had and may continue to have a material adverse effect on global economic conditions and financial markets, and may significantly reduce global market liquidity, restrict the ability of key market participants to operate in certain financial markets or restrict the Company’s
access to capital. The Company's business in the United Kingdom, the European Union, and worldwide could be affected during this continued period of uncertainty, and perhaps longer, by the impact of Brexit. Any of these factors could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects, or result in a further strengthening of the U.S. dollar which would also adversely affect the Company's reported operating results.General Risk Factors
The Company’sOur insurance policies may not provide adequate levels of coverage against all claims and the Companywe may incur losses that are not covered by itsour insurance.
The Company maintainsWe maintain insurance of the type and in amounts that the Company believeswe believe is commercially reasonable and that is available to businesses in itsour industry. The Company carriesWe carry various types of insurance, including general liability, auto liability, business interruption, workers’ compensation and excess umbrella, from highly ratedhighly-rated insurance carriers. Market forces beyond the Company’sour control could limit the scope of the insurance coverage that the Companywe can obtain in the future or restrict itsour ability to buy insurance coverage at reasonable rates. The CompanyWe cannot predict the level of the premiums that the Companywe may be required to pay for subsequent insurance coverage, the level of any deductible and/or self‑insurance retention applicable thereto, the level of aggregate coverage available or the availability of coverage for specific risks.In the event of a substantial loss, the insurance coverage that the Company carrieswe carry may not be sufficient to compensate the Companyus for the losses the Company incurswe incur or any costs the Company is responsible for.for which we are responsible.
If the Company’sour estimates or judgments relating to itsour critical accounting policies prove to be incorrect, itsour financial condition and results of operations could be adversely affected.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP"(“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company bases itsWe base our estimates on historical experience and on various other assumptions that the Company believeswe believe to be reasonable under the circumstances, as discussed below in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contained in Item 7. The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity, and the amount of revenue and expenses that are not readily apparent from other sources. Significant assumptions and estimates used in preparing the Company’sour consolidated financial statements include those related to revenue recognition; allowance for doubtful accounts; inventories; long-lived assets, goodwill and non-amortizing intangible assets; warranty policy; income taxes and provisional estimates due to the Tax Cuts and Jobs Act (the "Tax Act"“Tax Act”) enacted in December 2017; share-based compensation; and foreign currency translation. The Company’sOur financial condition and results of operations may be adversely affected if itsour assumptions change or if actual circumstances differ from those in itsour assumptions, which could cause itsour results of operations to fall below the expectations of securities analysts and investors, resulting in a decline in the price of itsour common stock.
Certain of the Company’s stockholders, if they choose to act together, have the ability to significantly control or influence all matters submitted to stockholders for approval
As of December 31, 2021, PEP TG Investments LP (“Providence”), DDFS Partnership LP and Dundon 2009 Gift Trust (together, “Dundon”), TGP Investors, LLC, TGP Investors II, LLC and TGP Advisors, LLC (together, “WestRiver”), each of whom acquired shares of the Company’s common stock in connection with the acquisition by the Company of Topgolf, own, in the aggregate, approximately 25.3% of the Company’s capital stock.Scott M. Marimow is affiliated with Providence, Thomas G. Dundon is affiliated with Dundon and Erik J Anderson is affiliated with WestRiver, each of whom serve on the Company’s board of directors. In addition, pursuant to a stockholders agreement entered into with certain Topgolf stockholders in connection with the merger, Providence and certain Topgolf stockholders affiliated with Dundon and WestRiver have the right to designate one person (for a total of three persons) to be appointed or nominated, as the case may be, for election to the Company’s board of directors for so long as such stockholder maintains beneficial ownership of 50% or more of the shares of the Company’s common stock owned by them on the closing date of the merger.
As a result, if these stockholders were to choose to act together, they would be able to significantly influence all matters submitted to the Company’s stockholders for approval, as well as the Company’s management and affairs. This concentration of ownership may have the effect of delaying, deferring or preventing a change in control, impeding a merger, consolidation, takeover or other business combination involving the Company, or discouraging a potential acquiror
from making a tender offer or otherwise attempting to obtain control of our business, even if such a transaction would benefit other stockholders.
Item 1B. Unresolved Staff Comments
None.
Item 1C. Cybersecurity
Cybersecurity Risk Management and Strategy
We have developed and implemented a cybersecurity risk management program intended to protect the confidentiality, integrity, and availability of our critical systems and information. Our cybersecurity risk management program includes a global incident response plan.
We design and assess our program based on the National Institute of Standards and Technology Cybersecurity Framework (“NIST CSF”). This does not imply that we meet any particular technical standards, specifications, or requirements, only that we use the NIST CSF as a guide to help us identify, assess, and manage cybersecurity risks relevant to our business.
Our cybersecurity risk management program is integrated into our overall enterprise risk management program, and shares common reporting channels and governance processes that apply across the enterprise risk management program to other legal, compliance, strategic, operational, and financial risk areas. Our cybersecurity risk management program includes:
•risk assessments designed to help identify material cybersecurity risks to our critical systems, information, products, services, and our broader enterprise IT environment;
•a cybersecurity team principally responsible for managing (1) our cybersecurity risk assessment processes, (2) our security controls, and (3) our response to cybersecurity incidents;
•the use of external service providers and software, where appropriate, to monitor, assess, test or otherwise assist with aspects of our security controls;
•cybersecurity awareness training of our employees;
•a global incident response plan that includes procedures for responding to cybersecurity incidents; and
•a third-party risk management process for service providers and suppliers.
We have not identified risks from known cybersecurity threats, including as a result of prior cybersecurity incidents, that have materially affected or are reasonably likely to materially affect us, including our operations, business strategy, results of operations, or financial condition. However, there can be no assurance that our cybersecurity risk management program and processes, including our policies, controls, or procedures, will be fully implemented, complied with or effective in protecting our systems and information. Refer to “Item 1A. Risk Factors”, including “Cybersecurity incidents, including cyber-attacks, unauthorized access to, or accidental disclosure of, personal information including payment card information, that we or our vendors collects or stores on our behalf may result in significant expense and negatively impact our reputation and business,” for additional discussion about our cybersecurity risks.
Cybersecurity Governance
Our Board of Directors considers cybersecurity risk as part of its risk oversight function and has delegated to the Audit Committee oversight of cybersecurity and other information technology risks. The Audit Committee oversees management’s implementation of our cybersecurity risk management program.
The Audit Committee receives reports from management on our cybersecurity risks, typically at least twice per year. In addition, management updates the Audit Committee, as necessary, regarding any material cybersecurity incidents, as well as any incidents with lesser impact potential. The Audit Committee reports to the full Board of Directors regarding its activities, including those related to cybersecurity. The full Board of Directors also receives briefings from management on our cyber risk management program.
Our management team, including the leaders of our Global Information Technology and Information Security and Information Technology Compliance organizations, are responsible for assessing and managing our material risks from cybersecurity threats, including the primary responsibility for our overall cybersecurity risk management program, and supervision of both our internal cybersecurity personnel and our retained external cybersecurity consultants. Our management team has over 90 years of combined experience in cybersecurity, risk, and compliance, and includes members with multiple cybersecurity and compliance certifications such as Certified Information Systems Security Professional (CISSP) from ISC2, Certified Information Systems Manager (CISM) from ISACA, Certified Information Systems Auditor (CISA) from ISACA, Security+ and Network+ from the Computing Technology Industry Association (CompTIA), Certified Ethical Hacker (C|EH) from EC-Council, and other technology certifications.
Our management team supervises efforts to prevent, detect, mitigate, and remediate cybersecurity risks and incidents through various means, which may include briefings from internal security personnel; threat intelligence and other information obtained from governmental, public or private sources, including external consultants we engage; and alerts and reports produced by security tools deployed in the IT environment.
Item 2. Properties
The Company and its subsidiariesWe conduct our business operations in both owned and leased properties. The Company'sOur principal properties include executive offices, golf club assembly, golf ball manufacturing, warehousing and distribution, sales offices, and Topgolf venues due to the recent merger completed in March 2021.venues.
The Company’sOur principal executive offices are located in Carlsbad, California. The Company ownsWe own two buildings that are utilized in itsour Carlsbad operations, which include the Company'sour corporate offices, research and development, and pro-tour club assembly, in addition to the Company’sand our performance center.
In connection with its Topgolf business, the Company leases office space in Dallas, Texas and San Francisco, California, and in the United Kingdom and Sweden.
The Company leasesWe lease a majority of theour primary offices utilized by itsour wholly-owned subsidiaries for the sale of itsour products in the United States and internationally located in the United Kingdom, Germany, Japan, Korea, China, Australia, Canada, and India.
We also leaseslease various retail locations for the sale of itsour products. In the United States, the Company leases 19we lease 45 retail locations for the sale of itsour TravisMathew-branded products. In Germany and throughout Europe as well as in China, and Russia, the Company leaseswe lease over 140157 retail locations for the sale of itsour Jack Wolfskin-branded products. The CompanyWe also leaseslease over 2024 retail locations in Japan for the sale of Callaway-branded products, in addition to threefour locations for the sale of Jack Wolfskin products and one locationfour locations for the sale of TravisMathew products. In total we have 161 Jack Wolfskin retail locations, 49 TravisMathew retail locations, and 24 Callaway retail locations.
As of December 31, 2021, the Company2023, we had 67 Company-operated93 Company-owned and operated venues, including 88 Topgolf venues and one acquired venue throughout the United States, and 3 Company-operatedfour Topgolf venues in the United Kingdom. Of the 7093 Company-operated venues, over 80% are leased properties. We also lease four office spaces in Dallas, Texas, San Francisco, California, Chertsey, United Kingdom, and Stockholm, Sweden and three warehouses in Wood Dale, Illinois, Shepperton, United Kingdom, and New Castle, Australia. See “Part I, Item 1. Business Topgolf” for further details.
The Company leases itsWe lease our golf ball manufacturing plant in Chicopee, Massachusetts and golf club manufacturing facility in Monterrey, Mexico, and itsour distributions centers in Austin, Texas, Fort Worth, Texas, Swindon, England and Hamburg, Germany. The Company's Topgolf business also leases warehouse space in Shepperton, United Kingdom.
Item 3. Legal Proceedings
The information set forth in Note 15. "Commitments13. “Commitments & Contingencies"Contingencies”, in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K is incorporated herein by this reference.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
The Company’sOur common stock is listed, and principally traded, on the New York Stock Exchange (“NYSE”). The Company’s symbol for itsour common stock is “ELY.“MODG.” As of January 31, 2022,2024, the number of holders of record of the Company’sour common stock was 5,056.4,347.
Dividends are subject to liquidity, capital availability and quarterly determinations that cash dividends are in the best interests of itsour shareholders, and may be affected by, among other items, the Company’sour views on potential future capital requirements, projected cash flows and needs, changes to the Company’sour business model, and certain restrictions limiting dividends imposed by theour ABL Facilityfacilities (See Note 7. "Financing Arrangements"“Financing Arrangements” in the Notes to Consolidated Financial Statements in this Form 10-K). In August 2020, as part of the Company'sour effort to manage costs and capital allocation most efficiently, the Companywe announced the cessation of itsour quarterly dividends.dividends and we do not anticipate paying dividends in the foreseeable future.
The following graph presents a comparison of the cumulative total shareholder return of the Company’sour common stock since December 31, 20162018 to two indices: the Standard & Poor’s 500 Index (“S&P 500”) and the Standard & Poor’s 400 Midcap1500 Consumer Discretionary Index (“S&P 400 Midcap”1500 Consumer Discretionary”). The S&P 500 tracks the aggregate price performance of equity securities of 500 large-cap companies that are actively traded in the United States, and is considered to be a leading indicator of U.S. equity securities. The S&P 400 is a market value-weighted index that1500 Consumer Discretionary tracks the aggregate price performance of equity securities from a broad range of mid-cap stocks tradedcompanies included in the United States.S&P 1500 Consumer Discretionary that are classified as members of the GICS® consumer discretionary sector. The graph assumes an initial investment of $100.00 at December 31, 20162018 and reinvestment of all dividends in ELYMODG stock on the dividend payable date.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2016 | | 2017 | | 2018 | | 2019 | | 2020 | | 2021 |
| Callaway Golf (NYSE: ELY) | $ | 100.00 | | | $ | 127.14 | | | $ | 139.68 | | | $ | 193.59 | | | $ | 219.28 | | | $ | 250.61 | |
| S&P 500 | $ | 100.00 | | | $ | 119.42 | | | $ | 111.97 | | | $ | 144.31 | | | $ | 167.77 | | | $ | 212.89 | |
| S&P 400 Midcap | $ | 100.00 | | | $ | 114.45 | | | $ | 100.15 | | | $ | 124.23 | | | $ | 138.90 | | | $ | 171.15 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 |
| Topgolf Callaway Brands (NYSE: MODG) | $ | 100.00 | | | $ | 138.62 | | | $ | 157.06 | | | $ | 179.50 | | | $ | 129.20 | | | $ | 93.81 | |
| S&P 500 | $ | 100.00 | | | $ | 128.88 | | | $ | 149.83 | | | $ | 190.13 | | | $ | 153.16 | | | $ | 190.27 | |
| S&P 1500 Consumer Discretionary | $ | 100.00 | | | $ | 125.69 | | | $ | 165.47 | | | $ | 205.91 | | | $ | 131.20 | | | $ | 182.59 | |
| | | | | | | | | | | |
The Callaway Golf CompanyOur cumulative total shareholder return is based upon the closing prices of Callaway Golf Companyour common stock on December 31, 2016, 2017, 2018, 2019, 2020, 2021, 2022 and 20212023 of $10.96, $13.93, $15.30, $21.20, $24.01, $27.44, $19.75 and $27.44,$14.34, respectively.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
In December 2021, the Company's2022 Repurchase Program
On May 26, 2022, we announced that our Board of Directors authorized a $50.0$100.0 million share repurchase program (the "2021“2022 Repurchase Program"Program”) under which the Company iswe are authorized to repurchase shares of itsour common stock in the open market or in private transactions, subject to the Company'sour assessment of market conditions and buying opportunities. This new repurchase authorization replaces the pre-pandemic 2019 repurchase program (the "2019 Repurchase Program"), which was terminated by the Board of Directors. The Company will assess market conditions, buying opportunities and other factors from time to time and will make strategic repurchases as appropriate. The repurchases will be made in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, subject to market conditions, applicable legal requirements and other factors, and the repurchases will be made consistent with the terms of the Company'sour credit facilities, which define the amount of stock that can be repurchased. The repurchase program does not require the Companyus to acquire a specific number of shares and it will remain in effect until completed or until terminated by the Board of Directors.
The following table summarizes the Company's share repurchases during During the fourth quarter of 2021. The Company's repurchases of2023, we repurchased 859,009 shares of our common stock are recorded at cost and result in a reduction of shareholder's equity.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, 2021 |
| | Total Number of Shares Purchased(2) | | Weighted
Average Price
Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program | | Maximum Dollar Value that May Yet Be Purchased Under the Program |
| (in thousands, except per share data) |
October 1, 2021 - October 31, 2021(1) | | — | | | $ | — | | | — | | | $ | 77,369 | |
November 1, 2021 - November 30, 2021(1) | | — | | | — | | | — | | | 77,369 | |
| December 1, 2021 - December 31, 2021 | | 954 | | | 26.41 | | | 947 | | | 25,000 | |
| Total | | 954 | | | $ | 26.41 | | | 947 | | | $ | 25,000 | |
| | | | | | | | |
____________
(1) The amounts available for repurchase as of October 31, 2021 and November 30, 2021 are under the 20192022 Repurchase Program which was terminatedat a weighted average price per share of $13.93, for a total cost of $11.9 million, excluding commissions.
Payroll Tax Withholding
We may repurchase shares by withholding a portion of employee restricted stock unit awards and performance share unit awards in December 2021 by the Company's Board of Directors and replaced by the 2021 Repurchase Program.
(2) Total number of shares repurchased includes approximately 7,000 shares that the Company withheldorder to satisfy payroll tax withholding obligations in connection with the vesting and settlement of employee restricted stock unitsuch awards. The repurchases of these awards and performance share unit awards.
During the three months ended December 31, 2021, the Company repurchased approximately 954,100 shares of its common stock at an average cost per share of $26.41, for a total cost of $25.2 million, which includes costs related to shares withheldin order to satisfy the payroll tax withholding obligations as described above. are not considered purchases of shares of common stock under any of our publicly announced repurchase programs.
The Company’sfollowing table summarizes our share repurchases during the fourth quarter of 2023. Our repurchases of shares of common stock are recorded at cost and result in a reduction of shareholders’ equity.
As of December 31, 2021, the total amount remaining | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, 2023 |
| | |
| | Total Number
of Shares
Purchased | | Weighted
Average Price
Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program | | Maximum Dollar Value that May Yet Be Purchased Under the Program |
| |
| October 1, 2023 – October 31, 2023 | | 444 | | | $ | 13.06 | | | — | | | $ | 65,608,579 | |
| November 1, 2023 – November 30, 2023 | | 4,245 | | | 11.47 | | | — | | | 65,608,579 | |
| December 1, 2023 – December 31, 2023 | | 859,009 | | | 13.93 | | | 859,009 | | | 53,667,485 | |
| Total | | 863,698 | | | $ | 13.92 | | | 859,009 | | | $ | 53,667,485 | |
| | | | | | | | |
|
Other than shares repurchased under the 20212022 Repurchase Program, was $25.0 million.during the fourth quarter of 2023, we repurchased 4,689 shares of our common stock at an average cost per share of $11.62, for a total cost of $0.1 million, which were related to shares withheld to satisfy payroll tax withholding obligations as described above.
Item 6. Reserved
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Consolidated Financial Statements, the related notes and the section “Important Notice to Investors Regarding Forward-Looking Statements” that appear elsewhere in this report.herein. This section of this Annual Report on Form 10-K generally discusses 20212023 and 20202022 items and year-to-year comparisons between 20212023 and 2020.2022. Discussions of 2019related to 2021 items and year-to-year comparisons between 20202022 and 20192021 that are not included in this Annual Report on Form 10-K can be found in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’sour Annual Report on Form 10-K for the year ended December 31, 2020.2022, which was filed with the SEC on March 1, 2023.
Critical Accounting Estimates
The Company’sOur discussion and analysis of itsour results of operations, financial condition and liquidity are based upon the Company’sour consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires the Companyus to make estimates and judgmentsassumptions that affect the reported amounts of assets, liabilities, shareholders’ equity, revenues and expenses, as well as related disclosures of contingent assets and liabilities. The Company bases itsWe base our estimates and assumptions on historical experience and various other assumptions that management believes to bewe believe are reasonable under the circumstances.circumstances at that time. Actual results may materially differ from these estimates under different assumptions or conditions. Oncircumstances. We review our estimates on an ongoing basis the Company reviews its estimates to ensure that the estimates appropriately reflect changes in itsour business and new information is appropriately reflected as it becomes available.
Management believesWe believe the critical accounting estimates discussed below affect itsour more significant estimates and assumptions used in the preparation of itsour consolidated financial statements. For a complete discussion of all of the Company’sour significant accounting policies, see Note 2. "Summary“Summary of Significant Accounting Policies"Policies” in the Notes to Consolidated Financial Statements in this Form 10-K.
Revenue Recognition
The Company accounts for revenue recognition in accordance with Accounting Standards Codification (“ASC”) Topic 606, "Revenue from Contracts with Customers." See Note 4. "Revenue Recognition" in the Notes to Consolidated Financial Statements in this Form 10-K.Sales Programs
The amount of revenue the Company recognizeswe recognize is based on the amount of consideration it expectswe ultimately expect to receive from customers. The amount of consideration is the sales price adjustedcustomers, which involves certain estimates and assumptions, including estimates for estimates of variable consideration, including sales returns discounts and allowances as well as estimates for our short-term sales programs, sales promotions and price concessions that are offered by the Company as described further below.concessions. These estimates are based on amounts earned or expected to be claimed by customers on the related sales.
We record an estimate for anticipated returns at the time the sale is recognized. This estimate is based on historical returns data as well as current economic trends, changes in customer demands and the sell-through of products. If actual sales andreturns are thereforesignificantly different than the recorded estimated amount, we may be exposed to material losses or gains. Assuming there had been a 10% increase over the respectiverecorded estimated sales returns reserve for the year ended December 31, 2023, pre-tax income would have decreased by approximately $5.6 million, net revenue, trade accounts receivable, and sales program liability accounts.of the cost recovery of inventory.
The Company offers short-term sales program incentives, which include sell-throughSell-through promotions such as price reductions and price concessions or price reductions. Sell-through promotionsare short-term sales programs that are generally offered throughout the product'sproduct’s life cycle, which varies fromis approximately two to three years. Price concessions or price reductionsyears, and are generally offered at the end of the product'sproduct’s life cycle. TheWe calculate an estimated variable considerationrate related to these programs which is based on a rate that includescombination of historical and forecasted data. The Company recordsWe record a reduction to net revenues using this rate at the time of the sale. The Company monitorssale and monitor this rate against actual results and forecasted estimates and adjustsestimates. Adjustments to the rate are made as necessary in order to reflect the amount of consideration it expectswe expect to receive from itsour customers. There were no material changes toIf the rate during the year ended December 31, 2021, and the Company's actual amount of variable consideration related to these sales programs has historically not been materially different from its estimates. However, if the actual variable consideration is significantly different than theour accrued estimates, the Companywe may be exposed to adjustments to revenue that could be material. Assuming there had been a 10% increase overin the accrued estimated variable consideration for 2021rate used to record sales program incentives, pre-tax income for the year ended December 31, 20212023 would have decreased by approximately $2.3$2.2 million.
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. The cost recovery of inventory associated with this reserve is accounted for in other current assets. 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 reserve for anticipated returns related to these sales programs at the time of the sale based on the terms of the sales program. Historically, the Company’s actual sales returns have not been materially different from management’s original estimates. 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 calculate the allowance for sales returns. However, if the actual costs of sales returns are significantly different than the recorded estimated allowance, the Company may be exposed to losses or gains that could be material. Assuming there had been a 10% increase over the recorded estimated allowance for 2021 sales returns less the cost recovery of inventory, pre-tax income for the year ended December 31, 2021 would have decreased by approximately $4.7 million.Excess and Obsolescence Reserves
Inventories
Inventories are valuedrecorded at the lower of cost or net realizable value, which includes a reserve for excess, obsolete and/or unmarketable inventory. The Company estimates theWe estimate this reserve based upon current inventory levels, sales trends and historical experience as well as management’sour estimates of market conditions and forecasts of future product demand, all of which are subject to change. The calculation of the Company’s reserve for excess, obsolete and/or unmarketable inventory requires management to make assumptions and to apply judgment regardingIn addition, we consider inventory aging, forecasted consumer demand and pricing, regulatory (USGA and R&A) rule changes, the promotional environment and technological obsolescence. The Company does not believe there isobsolescence, all of which require a reasonable likelihood that there will be a material change in the futuresignificant amount of assumptions and judgment. If these estimates or assumptions used to calculate the reserve. However, if estimates regarding consumer demand are inaccurate or change, the Companywe may needbe exposed to increase itsadjustments to our inventory allowance,reserve which could significantly adversely affect the Company’smaterially impact our operating results. Assuming there had been a 10% increase in obsolete or unmarketablethe inventory over the 2021 recorded estimated allowance for obsolete or unmarketable inventory, pre-tax incomereserve for the year ended December 31, 20212023, pre-tax income would have decreased by approximately $2.1$2.3 million.
LeasesBusiness Combinations
The Company enters into complex build-to-suit arrangements in connection with its Company-operated venues operations which often resultsWe apply the guidance within Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations, when accounting for our acquisitions to determine whether a transaction is the acquisition of assets, or the acquisition of a business on the date of the acquisition. Asset acquisitions are accounted for by allocating the cost of the acquisition to the individual assets and liabilities assumed on a relative fair value basis; whereas the acquisition of a business requires us to recognize separately from goodwill the assets acquired and the liabilities assumed at the acquisition date fair values. Additionally, the acquisition of a business requires us to make significant estimates and judgements when assigning fair value to any assets and liabilities assumed. We may use, amongst other things, certain estimates related to expected future revenues, growth rates, cash flows, discount rates and uncertain tax positions and valuation allowances to assign a value to certain acquired assets. If we receive new information within the twelve month allowable measurement period about facts and circumstances that existed as of the acquisition date that, if known, would have affected the amounts recognized as of that date, we may adjust the purchase price allocation in the Company controllingreporting period in which the underlying ground thatamounts are determined. Any subsequent adjustments recorded after the venue is built on, the building, or both during the construction period. Under these arrangements, the construction terms, financing and eventual lease are agreed to prior to the construction period. In most cases, the construction is financed by a third-party real estate financing partner (the legal ownerconclusion of the property). Duringallowable twelve month measurement period or final determination of the construction period, when the Company is deemedvalues of assets acquired or liabilities assumed are recorded to our consolidated statements of operations.
Our estimates of fair value are based upon assumptions we believe to be in control of the underlying assets, the Company records the asset as if ownedreasonable at that time, but which are inherently uncertain and unpredictable. As a corresponding construction advance. Once the construction is completed, the Company applies sale-lease back criteria to determine if control of the underlying assets is then transferred to the legal owner or whether the Company remains the accounting owner of the leased assets for accounting purposes. If control does not pass to the legal owner, it is considered a failed sale, and the assets are not derecognized while a deemed landlord liability is recognized. If control passes to the legal owner, it is considered a sale, and the assets are derecognized, and a gain or loss is recognized based on the fair value of the asset. The fair value is determined on the basis of the price that would be received to sell the asset in an orderly transaction between market participants, which is derivedresult, actual results may differ from real estate broker valuations and market comparatives. An operating lease is recognized upon leasing back the assets from the legal owner.
The lease term for the ground lease and / or building lease for those properties controlled by the Company during the construction period depends on multiple factors, including the probability that the Company will exercise any renewal options beyond the initial lease term. When applicable, the Company uses historical practices and market trends to assess whether it is reasonably certain to exercise the renewal option. In certain Company-operated venues, the Company leases the underlying land from an independent third-party, with the Company assessing the lease classification as either an operating lease or finance lease on the basis of the relevant contract assumptions such as lease term and related payments. The Company must reassess the lease term upon the occurrence of certain discrete events that are in the control of the lessee (e.g., installing significant leasehold improvements) or if there is a lease modification. This lease term reassessment may impact the recorded right-of-use assets and lease classification, which could be material.estimates.
Impairment of Goodwill and Intangible Assets
The Company evaluatesIn accordance with FASB ASC 350, Intangibles—Goodwill and Other, we evaluate the recoverability of itsour goodwill and indefinite-lived intangible assets at least annually or more frequently whenever indicators are present that the carrying amounts of these assets may not be fully recoverable. To determine fair value, the Company useswe use discounted cash flow estimates, discounted at an appropriate rate, quoted market prices, royalty rates when available and independent appraisals as appropriate. Any required impairment loss is measured as the amount by which the carrying amount of the asset exceeds its fair valueThese estimates are subjective in nature and is recorded as a reduction in the carrying value of the assetinvolve significant uncertainties and a charge to earnings. The Company uses itsjudgements. We use our best judgment based on current facts and circumstances related to itsour business when making these estimates. However,estimates, however, if actual results are not consistent with the Company’sour estimates and
assumptions used in calculating future cash flows and asset fair values, the Companywe may be exposed to impairment losses that could be material.
Income Taxes
Current income tax expense or benefit An impairment loss is measured as the amountexcess 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 and its reported amount in the financial statements that will result in taxable or deductible amounts in future years when the reportedcarrying amount of the asset or liabilityover its estimated fair value. An impairment loss is recovered or settled, respectively. In accordance withrecorded as a reduction to 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 allcarrying value of the deferredasset and a charge to earnings in the period in which the impairment loss occurred.
We perform our goodwill impairment assessment at the reporting unit level using a combination of an income approach and a market approach. The income approach valuation method requires us to make projections of revenue, gross margin, operating expenses, and working capital over a multi-year period, and also includes weighted average cost of capital estimates, which reflect the relative risk of an investment. The market approach valuation method determines fair value by utilizing earnings multiples of comparable public companies or interests, which reflect the market in which each relative reporting unit operates, as well as recent comparable market transactions.
As a result of our goodwill impairment assessment performed as of December 31, 2023, no goodwill impairments were necessary during 2023, and there was a significant cushion between the fair value of our goodwill and its related carrying value. We will continuously monitor each of our reporting units for any risk of future impairments which may occur if our current expectations of prospective results of operations, which may be influenced by market conditions and other factors, change.
For our indefinite-lived intangible assets, which primarily consist of our trade names, we estimate fair value based on an income approach using the relief-from-royalty method which assumes that, in lieu of ownership, a third-party would be willing to pay a royalty in order to derive a benefit from the trade name. This approach includes reviewing current licensing agreements, market benchmarking and performing branded product profitability assessments, among other factors, to assign an estimated royalty rate. Once a royalty rate is assigned, a discount rate is applied to the estimated future cash flows of the asset in order to determine the fair value of the trade names. As a result of our intangible asset impairment assessment performed as of December 31, 2023, we determined that the fair value of our intangible assets exceeded their relative carrying values, therefore, no intangible asset impairments were necessary during the current year.
Income Taxes
Our income tax provision/benefit and related income 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, andliabilities are based on the Company’s best judgment at the time made based on currenta combination of actual and projected circumstancesexpected future income, U.S. federal and conditions. For further information, see Note 14. "Income Taxes"foreign statutory income tax rates, and tax regulations and planning opportunities in the Notes to Consolidated Financial Statementsjurisdictions in this Form 10-K.
The Company accrues 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 Companywhich we operate. Significant judgement 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 interpretwhen interpreting the applicable tax laws and regulations in effect in such jurisdictions, which could affectevaluating our uncertain tax positions, and assessing the amountlikelihood of realizing tax paid by the Company. The Company accruesbenefits. We accrue an amount for itsour estimate of additional tax liability, including interest and penalties in income tax expense,provision, for any uncertain tax positions taken or expected to be taken in an income tax return. The Company reviewsWe review and updatesupdate the accrual for uncertain tax positions as more definitive information becomes available. Historically, additional taxes paidActual results could differ from those judgements, and changes in judgements could materially affect our consolidated financial statements.
Certain income and expense items are accounted for differently for financial reporting and income tax purposes where tax regulations may require certain items to be included in our tax return at different times than when these items may be reflected in our financial statements. As a result, the income tax provision or benefit reflected in our consolidated statements of operations may differ from our tax returns filed with the applicable taxing authorities. These differences may be permanent or temporary, depending on their nature and the applicable tax regulations related to them, and as such, may create deferred income tax assets and liabilities, which are recognized on our consolidated balance sheet. Deferred income tax assets generally represent items that can be used as a resulttax deduction or credit in future tax returns for which we have already recorded a tax benefit in our consolidated statements of operations. We may record a valuation allowance to reduce our deferred income tax assets if, based on all available evidence, we believe that some portion of the resolution of the Company’s uncertain tax positions havebenefit is not been materially different from the Company’s expectations. The Company recognizes interest and/or penalties relatedexpected to income tax matters in income tax expense. be realized.
For further information, see Note 14. "Income Taxes".
Business Combinations
The Company is required12. “Income Taxes” in the Notes to make significant estimates and assumptions to determine the fair value of tangible and intangible assets acquired and liabilities assumed at the acquisition date, as well as the estimated useful life of those acquired intangible assets. Intangible assets may include the acquired company's trade name, existing customer relationships, developed technology, patents and goodwill. Significant estimates and assumptions used to value intangible assets include, but are not limited to, expected future revenues, growth rates, cash flows and discount rates. In addition, significant estimates and assumptions are usedConsolidated Financial Statements in determining uncertain tax positions and valuation allowances, as well as the fair value of equity awards assumed. The Company’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.this Form 10-K.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is contained in Note 22. “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements in this Form 10-K, which is incorporated herein by this reference.
Discussion of Non-GAAP Measures
In addition to the financial results contained in this report, which have been prepared and presented in accordance with GAAP, the Company haswe have also included supplemental information concerning the Company’sour financial results on a non-GAAP basis. This non-GAAP information includes the following:
•For the years ended December 31, 2021 and 2020, certain of the Company’s financial results were presented on aA constant currency basis, which estimates whatmeasure on net revenues in order to demonstrate the Company’s financial results would have been without changes inimpact of foreign currency exchange rates.fluctuations on our results. This information represents an estimate for comparative purposes and is calculated by taking the current period local currency results and translating them into U.S. dollars based uponon the foreign currency exchange rates for the applicable comparable prior period.
•For the year ended December 31, 2021, certain financial results excludeNet income and diluted earnings per share excluding certain non-cash and non-recurring charges, including a gain to step-up the Company's former investment in Topgolf to its fair value, amortization expense of intangible assets associated with the Jack Wolfskin, OGIO, TravisMathew acquisitions and more recently the merger with Topgolf, the discount amortization of the Convertible Notes issued in May 2020, a valuation allowance on certain deferred tax assets, in addition to other non-recurring expenses.as further detailed below.
•ForSame venue sales, which is defined as sales for the comparable Topgolf venue base, which includes Company-operated venues with at least 24 full fiscal months of operations as of the year ended December 31, 2020, certain financial results exclude certain non-cash charges, including the recognition of an impairment loss to write-off goodwill and a portion of the trade name associated with Jack Wolfskin, amortization expense of intangible assets associated with the Jack Wolfskin, OGIO and TravisMathew acquisitions, amortization expense related to the discount of the Convertible Notes issued in May 2020, costs associated with the pending Topgolf merger, and other non-recurring expenses.comparison.
We have included information in this report information to reconcile this non-GAAP information for the periods presented to the most directly comparable GAAP information. TheWe use such non-GAAP information presentedfor financial and operational decision-making purposes and as a means to evaluate the underlying performance of our business and in forecasting our business. Non-GAAP information in this report should not be considered in isolation or as a substitute for any measure derived in accordance with GAAP, and may also be inconsistent with the manner in which similar measures are derived or used by other companies. Management uses such non-GAAP information for financial and operational decision-making purposes and as a means to evaluate period over period comparisons of the underlying performance of its business and in forecasting the Company’s business going forward. Management believesWe believe that the presentation of such non-GAAP information, when considered in conjunction with the most directly comparable GAAP information, provides additional useful comparative information for investors in their assessment of the underlying performance of the Company’sour business.
Merger with TopgolfCurrent Economic Conditions
On March 8, 2021, the Company completed its merger with Topgolf. The Company’s Topgolf subsidiary operates on a 52- or 53-week fiscal year ending on the Sunday closestMacroeconomic Factors
Our products and services are considered 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.
The venues business line is Topgolf’s primary business, comprised of open-air golf and entertainment venues. Revenues from venues consists primarily of service revenues from food and beverage sales, event deposits, fees charged for gameplay, purchases of game credits and membership fees. Topgolf's other business lines primarily include the Toptracer Range ball tracking technology, which is comprised of proprietary hardware and software that is licensed to driving ranges and hospitality and entertainment venues, and the digital media platform, which is primarily comprised of service revenues from advertising contracts with corporate sponsors and from the WGT digital golf game.
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 include hardware costs with respect to 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.
Other venue expenses consist of salaries and wages, bonuses, commissions, payroll taxes, and other employee costs that directly support venue operations, rent and occupancy costs, property taxes, depreciation associated with venues, supplies, credit card fees and marketing expenses. The Company anticipates that these expenses will increase in the
foreseeable future as the Topgolf business continues to expand its operations. Other venue expenses include both fixed and variable componentsbe non-essential items and are therefore not directly correlated with revenue.
Venue pre-opening costs primarily include costs associated with activities priordiscretionary purchases for consumers. In addition, our Topgolf venues business also depends on corporate discretionary spending relative to its leisure and entertainment-based offerings. As a result, the openingdemand for our products and services is highly sensitive to macroeconomic pressures. Such pressures could result in a decline in general consumer and corporate discretionary spending and as such, demand for our products and services may decline. While we generally try to mitigate the impact of a new Company-operated venue, as well as other costs that are not consideredsuch macroeconomic factors by closely monitoring changes in consumer retail spending behavior and through the evaluationimplementation of ongoing performance. The Company expects to continue incurring pre-opening costs as it executes its growth trajectoryvarious strategic initiatives, the continued fluctuation of adding new Company-operated venues. Pre-opening costs are expected to fluctuate basedthese trends may have an adverse impact on our operating results depending on the timing, sizeseverity and location of new Company-operated venues.
Cost of Products
The Company’s cost of products is comprised primarily of material and component costs, distribution and warehousing costs, and overhead. In addition, cost of products includes retail merchandise costs for products sold in retail shops within Topgolf venue facilities. Historically, over 85%length of the Company's manufacturing costs, primarily material and component costs, are variable in nature and fluctuate with sales volumes. With respect to the Company's Golf Equipment operating segment, variable costs range between 85% to 95% for golf club products and 70% to 80% for golf ball products. Variable costs for soft goods in the Apparel, Gear and Other operating segment are generally greater than 85%. Generally, the relative significance of the components of cost of products do not vary materially from these percentages from period to period.changes.
Foreign Currency
Foreign Currency
A significant portion of the Company’sour business is conducted outside of the United States in currencies other than the U.S. dollar. As a result, changes in foreign currency rates can have a significant effect on the Company’s financial results. The Company entersTherefore, we enter into foreign currency forward contracts to mitigate the effects ofthat changes in foreign currency rates.rates may have on our financial results. While these foreign currency forward contracts can mitigate the effects of changes in foreign currency rates in the short-term, they do not eliminate those effects, which can be significant.significant, and they do not mitigate their effects over the long-term. These effects include (i) the translation of results denominated in foreign currency into U.S. dollars for reporting purposes, (ii) the mark-to-market adjustments of certain intercompany balance sheet accounts denominated in foreign currencies and (iii) the mark-to-market adjustments of the Company’sour foreign currency forward contracts. In general, the Company’sour overall financial results are affected positively by a weaker U.S. dollar and are affected negatively by a stronger U.S. dollar as compared to the foreign currencies in which the Company conducts itswe conduct business.
ResultsFluctuations in foreign currencies had an unfavorable impact on international net revenues of Operations
Executive Summary
Full year 2021 represented a period of significant growth and record results for the Company from both a revenue and operating income perspective, driven by the acquisition of Topgolf, which closed on March 8, 2021, faster-than-expected recovery in the Topgolf venues business, and strong demand across the Company’s golf equipment and apparel businesses.
Total net revenue$25.7 million for the year reached $3,133.4 million, an increase of $1,543.9 million, or 97.1%ended December 31, 2023, compared to full year 2020. From an operating segment perspective, Topgolf performed exceptionally well, as strong walk-in traffic and improved social and corporate events business drove better-than-expected venue sales results. For the ten months of 2021 following the closing of the merger, Topgolf contributed $1,087.6 million in net revenues. The Company continues to believe in the long-term growth opportunity embedded within the Topgolf business and feels it will be a strong contributor to overall growth for the Company, and for the industry as more consumers are introduced to the sport of golf through Topgolf venues. The Company's Golf Equipment and Apparel, Gear and Other operating segments also delivered strong results, as demand increased over 2020, which was more severely impacted by the COVID-19 pandemic. Net revenues for Golf Equipment increased $246.5 million, or 25.1%, to $1,229.2 million for full year 2021, comparedrelative to the same period in 2020. In the Apparel, Gear and Other segment, net revenues for fullprior year, 2021 increased $209.8 million, or 34.6%,on a constant currency basis.
Supply Chain
During most of 2022, we experienced longer than normal lead times on inventory shipments due to $816.6 million, compared to full year 2020.
Total income from operations was a record $204.7 million for full year 2021, an increase of $310.2 million, or 294.0%, compared to full year 2020, which was more severely impacted by temporary retail closures related to the COVID-19 pandemic, and also included a $174.3 million impairment charge related to the Company's Jack Wolfskin business. The increase was due in part to incremental operating income of $58.2 million from the Topgolf segment for the ten months of 2021 following the closing of the merger. The Golf Equipment segment operating income was $203.9 million for full year 2021, an increase of $55.3 million or 37.2% compared to full year 2020, as strong demand
outweighedglobal supply chain constraints duringchallenges. Due to these challenges, we changed the year combined with improved operating leverage. The Apparel, Geartiming and Other segment also contributed substantially to the growth, with segment operating incomemethod of $68.5 million for full year 2021, an increase of $67.8 million compared to $0.7 million for full year 2020, resulting from strong momentum across the TravisMathew, Jack Wolfskin and Callaway brands. These increases were partially offset by an overall increase in operating expenditures in 2021 compared to 2020, as the Company gradually returns to more normal levels of spendingour inventory purchases in order to support a larger overall business.
Looking ahead,meet the Company believes the business is well-positionedheightened demand for both near-term and long-term growth as the Topgolf business continues to expand,our golf equipment maintains its leadership position withinand apparel products, as well as manage capacity at our suppliers. After making these changes, inventory shipment timing and supply chain channels improved globally, leading to the golf industryreceipt of inventory orders for our planned 2023 product launches earlier than anticipated, which resulted in increased inventory levels late in 2022 and the apparel brands continue to gain increased exposure. The Company believes that its unique diversified business portfolio will continue to deliver strong results and is optimistic about the long-term growth prospects for the business.
Years Endedearly in 2023. Since December 31, 2021 and 20202022, our total inventory has decreased by $164.8 million.
RevenuesInflation
The Company's net revenues by operating segment are presented below (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended
December 31, | | Growth | | |
| 2021 | | 2020 | | Dollars | | Percent | | |
| Net revenues: | | | | | | | | | |
| Topgolf | $ | 1,087.6 | | | $ | — | | | $ | 1,087.6 | | | n/m | | |
| Golf Equipment | 1,229.2 | | | 982.7 | | | 246.5 | | | 25.1 | % | | |
| Apparel, Gear and Other | 816.6 | | | 606.8 | | | 209.8 | | | 34.6 | % | | |
| $ | 3,133.4 | | | $ | 1,589.5 | | | $ | 1,543.9 | | | 97.1 | % | | |
Net revenues for 2021 increased $1,543.9 million (97.1%)recent increase in inflation partially contributed to $3,133.4 million compared to $1,589.5 million in 2020. This increase was driven by $1,087.6 million of incremental Topgolf net revenues, which has been included in the Company's consolidated reported net revenues since the completion of the merger on March 8, 2021. In addition, the increase in net revenues reflects the strengthcost of our products as well as operating costs. While we were generally able to offset these inflationary pressures by increasing the Company's legacy Golf Equipmentprice of our products and Apparel, Gearservices, the length and Other businesses, whichseverity of these conditions are unpredictable, and should conditions persist and/or worsen, such inflationary pressures may have an adverse effect on our operating expenses. Further, we may not be able to offset these increased by $246.5 million (25.1%)costs through price increases. As a result, our cash flows and $209.8 million (34.6%), respectively, compared to 2020. Net revenues from the Company's legacy Golf Equipment and Apparel, Gear and Other businesses increased across all product categories and in all major geographic regions. This increase reflects the successresults of the Company's current year product lines and overall brand momentum, and the continued popularity of the game of golf and other outdoor activities. Net revenues during 2020 were more severely impacted by the COVID-19 pandemic including temporary store closures within the retail sector, which impacted the Company's retail locations, and demand from wholesale customers, in addition to the temporary closure of the Company's manufacturing facilities and distribution centers.
For further discussion of each operating segment’s results, see "Operating Segments Results for the Years Ended December 31, 2021 and 2020" below.
Net revenues information by region is summarized as follows (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended
December 31, | | Growth | | Constant Currency
Growth |
| 2021 | | 2020 | | Dollars | | Percent | | Percent |
| Net revenues: | | | | | | | | | |
| United States | $ | 2,067.1 | | | $ | 778.6 | | | $ | 1,288.5 | | | 165.5 | % | | 165.5% |
| Europe | 499.5 | | | 373.0 | | | 126.5 | | | 33.9 | % | | 28.1% |
| Japan | 243.8 | | | 212.1 | | | 31.7 | | | 14.9 | % | | 17.7% |
| Rest of World | 323.0 | | | 225.8 | | 97.2 | | | 43.0 | % | | 35.5% |
| $ | 3,133.4 | | | $ | 1,589.5 | | | $ | 1,543.9 | | | 97.1 | % | | 95.1% |
Net revenues in the United States increased $1,288.5 million (165.5%) to $2,067.1 million in 2021 compared to $778.6 million in 2020. Net revenues in regions outside of the United States increased $255.4 million (31.5%) to $1,066.3 million in 2021 compared to $810.9 million in 2020. The increase in both domestic and international net revenue duringoperations could be adversely affected.
2021 reflectsSegment and Related Information
Our products, services and brands are reported under three operating segments: Topgolf, which includes the additionoperations of theour Topgolf business, as well as the continued strength and brand momentum of the Company'sbusiness; Golf Equipment, which includes the operations of our golf clubs and golf balls business; and Active Lifestyle, which includes the operations of our soft goods business combined withmarketed under the strong rebound of theCallaway, TravisMathew, business in the United States and Jack Wolfskin businessand OGIO brand names. For further detail related to our operating segments, products and seasonality, see “Part I, Item 1. Business – Overview” in Europethis Form 10-K.
Results of Operations
Years Ended December 31, 2023 and China, and an increase in apparel sales in Korea due to the new apparel business in 2021. 2022
Net Revenues
Net revenues across all brands in 2020 were more severely impacted by the COVID-19 pandemic than 2021. Fluctuations in foreign currencies had a favorable impact on international net revenues of $32.9 millionoperating segment for the year ended December 31, 2021 relative2023 as compared to the same period in 2020.year ended December 31, 2022 were as follows (in millions, except percentages):
Costs and Expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended
December 31, | | Increase/(Decrease) | | Non – GAAP Constant Currency Growth | | |
| 2023 | | 2022 | | Amount | | Percent | | Percent | | |
| Net revenues: | | | | | | | | | | | |
| Topgolf | $ | 1,761.0 | | | $ | 1,549.0 | | | $ | 212.0 | | | 13.7 | % | | 13.7% | | |
| Golf Equipment | 1,387.5 | | | 1,406.6 | | | (19.1) | | | (1.4) | % | | 0.1% | | |
| Active Lifestyle | 1,136.3 | | | 1,040.1 | | | 96.2 | | | 9.2 | % | | 9.7% | | |
| Total net revenues | $ | 4,284.8 | | | $ | 3,995.7 | | | $ | 289.1 | | | 7.2 | % | | 7.9% | | |
Cost of products in 2021The $289.1 million increased $204.7 million to $1,136.6 million compared to $931.9 million in 2020. The Company’s cost of products is highly variable in nature and this increase is due to the significant(7.2%) increase in sales volumes for 2021, combined with an increase in freight, labor and overall commodity costs duetotal net revenues was primarily related to inflationary pressures and the supply chain challenges experienced during 2021. During 2020, sales volumes were significantly lower due to the business disruptions caused by the COVID-19 pandemic.
Costs of services of $133.5 million consist primarily of the cost of food and beverage sold in the Company’s Topgolf venues as well as certain costs associated with licensing the Company’s Toptracer ball-flight tracking technology.
Other venue expenses of $731.5 million consistthe addition of new venues in our Topgolf operating segment and marketplace expansion in our Active Lifestyle operating segment, primarily of Topgolf venue related employee costs, rent, depreciation and amortization, utilities, and other costs associated with Topgolf venues.
Selling, general and administrative expenses in 2021 increased $307.2 million to $849.7 million (27.1% of net revenues) compared to $542.5 million (34.1% of net revenues) in 2020. This increase reflects incremental expenses of $134.5 million related to the merger with Topgolf completed on March 8, 2021,our TravisMathew and a $33.3 million increase in non-recurring expenses, which include transaction and transition expenses incurred in connection with the merger with Topgolf, and the investment of new IT systems for Jack Wolfskin in addition to non-cash amortization expense related to acquired intangible assets.businesses. These increases were partially offset by severance expense incurred during 2020a decrease in our Golf Equipment operating segment, which was primarily due to higher sales in 2022 related to a post-pandemic inventory fill-in at retail which did not recur in 2023 combined with the impact from unfavorable foreign currency exchange rates. The decreases in our Golf Equipment operating segment were partially offset by an increase in golf ball sales primarily related to the cost reduction initiatives implemented2023 launch of Supersoft and ERC Soft golf ball product lines.
Net revenues by major geographic region for the year ended December 31, 2023 as compared to the year ended December 31, 2022 were as follows (in millions, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended
December 31, | | Increase/(Decrease) | | Non-GAAP
Constant Currency Growth |
| 2023 | | 2022 | | Amount | | Percent | | Percent |
| Net revenues: | | | | | | | | | |
| United States | $ | 3,081.4 | | | $ | 2,798.0 | | | $ | 283.4 | | | 10.1 | % | | 10.1% |
| Europe | 540.6 | | | 537.4 | | | 3.2 | | | 0.6 | % | | (1.0)% |
| Asia | 531.9 | | | 545.4 | | | (13.5) | | | (2.5) | % | | 2.7% |
| Rest of World | 130.9 | | | 114.9 | | 16.0 | | | 13.9 | % | | 19.0% |
| Total net revenues | $ | 4,284.8 | | | $ | 3,995.7 | | | $ | 289.1 | | | 7.2 | % | | 7.9% |
Net revenues from our Topgolf operations are primarily concentrated in responsethe United States and Europe, with the United States being our principal market. We sell our Golf Equipment products and Callaway Golf and OGIO Active Lifestyle products in the United States and internationally, with our principal international regions being Europe and Asia. Active Lifestyle revenues from our TravisMathew and Jack Wolfskin operations are largely concentrated in the United States and Europe, respectively.
United States
During the year ended December 31, 2023, net revenues in the United States increased $283.4 million (10.1%) compared to COVID-19. Excluding the addition of Topgolf expensesyear ended December 31, 2022. The increase was primarily due to the growth and non-recurring charges, selling, general and administrative expenses increased $139.4 million (26.6%) primarily to support a larger organization and bring spending levels back toward normal pre-pandemic levels during 2021, as well as fund thecontinued expansion of our Topgolf and TravisMathew businesses.
Europe
During the TravisMathew brandyear ended December 31, 2023, net revenues in Europe increased $3.2 million (0.6%) compared to the year ended December 31, 2022. The increase was primarily driven by favorable foreign currency impacts in addition to growth in our Jack Wolfskin business and new apparel business in Korea. Overall, this resulted in a significant increase in salaries and wages due to an increase in headcount as well as employee incentive compensation, advertising and promotional expenses, tour, and professional fees primarily related to IT projects and infrastructure improvements,increased sales at our international Topgolf venues, partially offset by a decrease in legal expenses. golf club sales in our Golf Equipment business.
Asia
During 2020, spending levels were lower the year ended December 31, 2023, net revenues in Asia decreased $13.5 million (2.5%) compared to the year ended December 31, 2022. The decrease was primarily due to certain restrictions imposed by the COVID-19 pandemicunfavorable foreign currency exchange impacts in Japan combined with softer demand in the cost savings initiatives carried outapparel market in various parts of Korea. These decreases were partially offset by increases related to market expansion and direct to consumer growth in the Company.Jack Wolfskin business.
Research and development expensesRest of World
During the year ended December 31, 2023, net revenues in 2021Rest of World increased $21.7$16.0 million to $68.0 million (2.2% of net revenues)(13.9%) compared to $46.3 million (2.9% of net revenues) in 2020. This 46.9%the year ended December 31, 2022. The increase was primarily due to strong performance in Canada for our Golf Equipment and Active Lifestyle products, partially offset by the unfavorable foreign currency impacts.
Costs and Expenses (in millions, except percentages)
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | Increase/(Decrease) |
| 2023 | | 2022 | | Amount | | Percent |
| Costs and expenses: | | | | | | | |
| Cost of products | $ | 1,443.9 | | | $ | 1,400.6 | | | $ | 43.3 | | | 3.1 | % |
| Cost of services, excluding depreciation and amortization | 186.8 | | | 184.0 | | | 2.8 | | | 1.5 | % |
| Other venue expense | 1,252.3 | | | 1,076.9 | | | 175.4 | | | 16.3 | % |
| Selling, general and administrative expense | 1,036.6 | | | 970.6 | | | 66.0 | | | 6.8 | % |
| Research and development expense | 101.6 | | | 76.4 | | | 25.2 | | | 33.0 | % |
| | | | | | | |
| Venue pre-opening costs | 25.9 | | | 30.4 | | | (4.5) | | | (14.8) | % |
| Total costs and expenses | $ | 4,047.1 | | | $ | 3,738.9 | | | $ | 308.2 | | | 8.2 | % |
Cost of Products
Our cost of products is variable in nature and fluctuates relative to sales volumes. Cost of products includes raw materials and component costs, direct labor and manufacturing overhead, inbound freight, duties and shipping charges, and retail merchandise costs for products sold in retail shops within Topgolf venue facilities. During the year ended December 31, 2023, cost of products increased $43.3 million (3.1%) as compared to incremental expensesthe year ended December 31, 2022. The increases were primarily due to increased sales in our Active Lifestyle operating segment, partially offset by a decrease in sales in our Golf Equipment operating segment.
Cost of $13.1 millionServices, Excluding Depreciation and Amortization
Our cost of services primarily consists of costs related to food and beverage sold at Topgolf venues and transaction fees related to in-app purchases within our WGT digital golf game. In addition, cost of services includes costs associated with Topgolf’s Toptracer license agreements that are primarily classified as sales-type leases. Food and beverage costs are variable in nature, fluctuate relative to sales volume, and are impacted by product mix and commodity pricing. Cost of services excludes employee costs as well as depreciation and amortization. The $2.8 million (1.5%) increase in cost of services for the year ended December 31, 2023 as compared to the year ended December 31, 2022 was primarily due to the opening of new Company-operated Topgolf venues.
Other Venue Expense
Other venue expenses consist of employee costs that directly support venue operations, rent and occupancy costs, property taxes, depreciation associated with assets at the venues, supplies, credit card fees and marketing expenses. Other venue expenses include both fixed and variable components and therefore do not directly correlate with revenue. During the year ended December 31, 2023, other venue expense increased $175.4 million (16.3%) as compared to the year ended December 31, 2022. The increase was primarily due to the addition of new Company-operated Topgolf venues, in addition to anhigher wages and planned increases in costs related to new marketing campaigns.
Selling, General and Administrative Expense
Selling, general and administrative (“SG&A”) expenses primarily consist of non-venue employee costs, advertising and promotional expense, legal and professional fees, tour expenses, travel expenses, building and rent expenses, depreciation charges (excluding those related to manufacturing, distribution, and venue operations), amortization, and other miscellaneous expenses.
During the year ended December 31, 2023, SG&A expenses increased by $66.0 million (6.8%) as compared to the year ended December 31, 2022. The increase was primarily to support the continued growth and expansion of the overall business, and primarily included increases of $12.8 millionin employee costs.computer licenses and software costs, $11.4 million in restructuring and reorganization costs,
In 2020,$11.7 million in depreciation and amortization due to the significant business disruption and macro-economic impact of the COVID-19 pandemic on the Company's financial results, the Company recognized an impairment charge of $174.3 million to write-down the goodwill and trade name related to Jack Wolfskin to its fair value. There were no impairment charges recognized in 2021. See Note 9. "Goodwill and Intangible Assets" in the Notes to Consolidated Financial Statements in this Form 10-K.
Venue pre-opening costs ofhigher capital expenditures, $9.4 million in lease-related building expenses, $7.1 million in planned costs related to new marketing campaigns, and $5.4 million in employee costs due to an overall increase in wages and headcount, in addition to marginal increases in travel and entertainment, professional fees, various non-recurring costs, and other miscellaneous expenses.
Research and Development Expense
Research and development expenses are comprised of costs to design, develop, test or improve our products and technology, and primarily include employee costs of personnel engaged in research and development activities, research costs and depreciation expense. During the year ended December 31, 2023, research and development expense increased $25.2 million (33.0%) as compared to the year ended December 31, 2022. The increase was primarily due to an $11.7 million asset impairment charge related to the abandonment of the Shankstars media game, in addition to higher employee costs due to increased headcount, higher professional fees and additional non-recurring period costs related to the abandonment of Shankstars.
Venue Pre-Opening Costs
Venue pre-opening costs consist of costs associated with activities prior to the opening of new Company-operated Topgolf venues, as well as other costs that are not considered in the evaluation of ongoing venue performance. The Company expects to continue to incur pre-opening costs related to the addition of new Company-operated venues. These costs are expected tovariable in nature and fluctuate based on the timing of an anticipated venue opening date, as well as the size and location of newa particular Company-operated venues.venue. During the year ended December 31, 2023, venue pre-opening costs decreased $4.5 million (14.8%) as compared to the year ended December 31, 2022, primarily due to the timing of venue openings combined with cost savings from operational efficiencies.
Other Income and Expense (in millions, except percentages)
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | Increase/(Decrease) |
| 2023 | | 2022 | | Amount | | Percent |
| Other income and expenses: | | | | | | | |
| Interest expense, net | $ | (210.2) | | | $ | (142.8) | | | $ | (67.4) | | | 47.2 | % |
| | | | | | | |
| Other income, net | 7.3 | | | 27.9 | | | (20.6) | | | (73.8) | % |
| Total other expense, net | $ | (202.9) | | | $ | (114.9) | | | $ | (88.0) | | | 76.6 | % |
Interest expense, in 2021net increased $68.8$67.4 million to $116.2 million(47.2%) during the year ended December 31, 2023 as compared to $47.4the year ended December 31, 2022, primarily due to higher outstanding balances and increased interest rates on our term loans and senior secured asset-based revolving credit facilities, as well as an increase in deemed landlord financing (“DLF”) obligations and finance lease obligations for Topgolf.
Other income, net decreased by $20.6 million in 2020,(73.8%) during the year ended December 31, 2023, as compared to the year ended December 31, 2022, primarily due to the interest expenserecognition of a $10.5 million non-cash loss to write-off unamortized deferred debt issuance and original discount costs in connection with our 2023 debt modification, combined with net decreases related to foreign currency transactions and hedging activity.
Income Taxes
Our income tax benefit increased $44.2 million to $60.2 million during the debtyear ended December 31, 2023 as compared to $16.0 million in 2022. As a percentage of pre-tax income, our effective tax rate for the year ended December 31, 2023 decreased to (173.0)% compared to (11.3)% in 2022. Our effective tax rate for the year ended December 31, 2023 and deemed landlord financing lease obligations acquired as part2022 was impacted by the reversal of a significant portion of the Topgolf merger. Seevaluation allowances on our deferred tax assets and other nonrecurring items. Excluding the valuation allowance release and other non-recurring items, our effective tax rate would have been 14.4% and 15.5% for the years ended December 31, 2023 and 2022, respectively. For further discussion on our income taxes, see Note 3. "Leases"12. “Income Taxes” in the Notes to Consolidated Financial Statements in this Form 10-K.
In 2021,Net Income, Diluted Earnings Per Share and Reconciliation of Non-GAAP Measures
The following table presents a reconciliation of our GAAP results for the Company recognized a gain of $252.5 millionyears ended December 31, 2023 and 2022 to step-up its pre-merger investment in Topgolf to its fair value. See Note 10. "Investments" inour non-GAAP results for the Notes to Consolidated Financial Statements in this Form 10-K.same periods (in millions, except per share information):
| | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2023 | Year Ended December 31, 2022 |
| Net Income | | Diluted earnings per share(4) | Net Income | | Diluted earnings per share(4) |
| GAAP | $ | 95.0 | | | $ | 0.50 | | $ | 157.9 | | | $ | 0.82 | |
Less: Non-Cash Acquisition Amortization and Depreciation(1) | (19.4) | | (0.10) | | (21.8) | | (0.11) | |
Less: Non-Recurring Items(2) | (36.9) | | (0.18) | | (12.9) | | (0.06) | |
Less: Tax Valuation Allowance(3) | 58.3 | | 0.29 | | 34.4 | | 0.17 | |
| Non-GAAP | $ | 93.0 | | | $ | 0.49 | | $ | 158.2 | | | $ | 0.82 | |
| Diluted Weighted-Average Shares Outstanding | | | 201.1 | | | | 201.3 | |
| | | | | | |
(1) Includes the amortization and depreciation of acquired intangible assets and purchase accounting adjustments. |
(2) 2023 amounts primarily include $12.7 million in total charges related to the impairment and abandonment of the Shankstars media game in the Topgolf segment, $12.3 million of total reorganization costs in the Topgolf and Active Lifestyle segments, $13.7 million in total charges related to our 2023 debt modification, $4.2 million in IT integration and implementation costs primarily related to the Topgolf merger, and $2.4 million in costs related to a cybersecurity incident. 2022 amounts primarily include $5.7 million in non-cash asset write-downs related to the suspension of our Jack Wolfskin retail operations in Russia and the closure of a pre-merger Topgolf concept location, $5.9 million in IT integration and implementation costs primarily related to the Topgolf merger, $3.6 million in legal and credit agency fees related to a postponed debt refinancing, and $0.9 million for reorganization expenses. |
(3) Related to the release of tax valuation allowances that were recorded in connection with the merger with Topgolf. |
(4) Diluted Earnings per share calculated using the if-converted method, which excludes interest expense related to the Convertible Notes from the calculation of net income. |
OtherNet income net in 2021 decreased $16.0 million to $9.0 million compared to $25.0 million in 2020. This decline was primarily due to the $11.0 million gain recognized in 2020 in connection with the settlement of a cross-currency swap, in addition to a decline in net foreign currency gains.
Income Taxes
The provision for income taxes in 2021 increased $29.2 million to $28.7 million compared to a tax benefit of $0.5 million in 2020. The Company's effective tax rate as a percentage of pre-tax incomeand diluted earnings per share for the year ended December 31, 2021 increased to 8.2%,2023 were $95.0 million and $0.50 per share, respectively, as compared to 0.4% as a percent of pre-tax loss$157.9 million and $0.82 per share, respectively, for the year ended December 31, 2022. The decrease in the comparable period of 2020. The Company's effective tax rate in 2021net income was impacted by the $252.5 million nontaxable gain recognized on the Company's pre-merger investment in Topgolf shares as well as the recognition of a valuation allowance on certain net operating losses and tax credits. The Company's effective tax rate in 2020 was impacted by the recognition of a $174.3 million non-deductible impairment charge to write-down certain goodwill and intangible assets related to Jack Wolfskin. Excluding these non-recurring items from both periods, the Company's effective income tax rate would have been 11.3% in 2021 compared to 15.8% in 2020. This decline is primarily due to a shiftdecrease in mix of earningsincome from operations in addition to regions with loweran increase in other expense, net, partially offset by a higher income tax rates. For further discussion, see Note 14. "Income Taxes"benefit in the Notes to Consolidated Financial Statements in this Form 10-K.
Net Income (Loss)
Net income in 2021 increased $448.9 million to $322.0 million compared to net loss of $126.9 million in 2020. Diluted earnings per share increased $3.17 to $1.82 on 176.9 million diluted shares outstanding in 2021 compared to a loss per share of $1.35 on 94.2 million shares outstanding in 2020. The increased share count is primarily related to the issuance of additional shares in connection with the Topgolf merger.current period.
On a non-GAAP basis, excluding the items described in the table below, the Company'sabove, our net income and diluted earnings per share for the year ended December 31, 2021 would have been $137.9 million and $0.78 per share, respectively, compared to $64.4 million and $0.67 per share, respectively, for the comparative period in 2020. The increase in non-GAAP net income in 2021 was primarily driven by continued strong demand for the Company's golf equipment products resulting from the overall increase in popularity of the game of golf, combined with a strong rebound in revenues of the Company's apparel and soft goods product lines, and the incremental operating income attributable to Topgolf. These increases were partially offset by an increase in operating expenditures to normal pre-pandemic levels in 2021. Additionally, the Company's earnings in 2020 were more negatively impacted by the business disruptions and challenges caused by the COVID-19 pandemic.
The tables below present a reconciliation of the Company's results under GAAP for the years ended December 31, 2021 and 2020 to the Company's non-GAAP results as defined above for the same periods (in millions, except per share information).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 | | |
| GAAP | | Non-Cash Amortization of Intangible Assets and Impairment Charges (1) | | Non-Cash Amortization of Discount on Convertible Notes(2) | | Acquisition and Other Costs(3) | | Tax Valuation Allowance(4) | | Non-GAAP | | | | | | | | |
| Net income (loss) | $ | 322.0 | | | $ | (23.5) | | | $ | (8.0) | | | $ | 233.6 | | | $ | (18.0) | | | $ | 137.9 | | | | | | | | | |
| Diluted earnings (loss) per share | $ | 1.82 | | | $ | (0.13) | | | $ | (0.05) | | | $ | 1.32 | | | $ | (0.10) | | | $ | 0.78 | | | | | | | | | |
| Weighted-average shares outstanding | 176.9 | | | 176.9 | | | 176.9 | | | 176.9 | | | 176.9 | | | 176.9 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 |
| GAAP | | Non-Cash Amortization of Intangible Assets and Impairment Charges (1) | | Non-Cash Amortization of Discount on Convertible Notes(2) | | Acquisition and Other Costs(3) | | Non-GAAP(5) |
| Net (loss) income | $ | (126.9) | | | $ | (170.1) | | | $ | (4.9) | | | $ | (16.3) | | | $ | 64.4 | |
| Diluted (loss) earnings per share | $ | (1.35) | | | $ | (1.81) | | | $ | (0.05) | | | $ | (0.17) | | | $ | 0.67 | |
| Weighted-average shares outstanding | 94.2 | | | 94.2 | | | 94.2 | | | 94.2 | | | 96.3 | |
____________
(1)Includes non-cash amortization expense of intangible assets in connection with the acquisitions of Jack Wolfskin, TravisMathew and OGIO. In addition, the year ended December 31, 2021 includes non-cash amortization expense of the intangible assets acquired in the merger with Topgolf on March 8, 2021, as well as amortization expense related to the market valuation adjustment on leases assumed from Topgolf and depreciation expense from the fair value step-up of Topgolf property, plant and equipment. The year ended December 31, 2020 includes the recognition of a $174.3 million impairment charge to write-down goodwill and a portion of the trade name related to Jack Wolfskin.
(2)Represents the non-cash amortization of the discount on the Convertible Notes issued in May 2020.
(3)Acquisitions and other non-recurring items for the year ended December 31, 2021 include a gain to write-up the Company's pre-merger investment in Topgolf to its fair value, as well as transaction, transition2023 would have been $93.0 million and other non-recurring costs related to the Topgolf merger, and costs related to the implementation of new IT systems for Jack Wolfskin and Topgolf. For the year ended December 31, 2020, acquisitions and other non-recurring costs included costs related to the Topgolf merger announced in October 2020, including legal, professional and SEC filing fees, as well as redundant costs associated with the Company's transition of its North America distribution center to a new facility, IT consulting related to the implementation of new IT systems for Jack Wolfskin, and severance charges associated with workforce reductions due to the COVID-19 pandemic.
(4)As Topgolf's losses exceed Callaway's income in prior years, the Company has recorded a valuation allowance against certain of its deferred tax assets until the Company can demonstrate consolidated earnings.
(5)Non-GAAP diluted earnings$0.49 per share, for the year ended December 31, 2020 was calculated using diluted weighted average outstanding shares, as earnings on a non-GAAP basis resulted in net income after giving effect to pro forma adjustments.
Operating Segments Results for the Years Ended December 31, 2021 and 2020
As a result of the Topgolf merger, the Company has three operating segments, namely Topgolf; Golf Equipment; and Apparel, Gear and Other.
Topgolf
Net revenues for the Topgolf operating segment are summarized as follows (dollars in millions):
| | | | | | | | | |
| Years Ended
December 31, | | | | |
| 2021 | | | | |
Net revenues: | | | | | |
Venues | $ | 1,014.1 | | | | | |
Other business lines | 73.5 | | | | | |
| $ | 1,087.6 | | | | | |
On March 8, 2021 the Company completed its merger with Topgolf. Therefore, the Company’s results of operations include the operations of Topgolf from that date forward. Topgolf contributed $1,087.6 million of incremental net revenues for the year ended December 31, 2021, which includes approximately ten months of revenues since the completion of the merger. Net revenues of $1,014.1 millionfrom the venue business include the opening of seven new venues from the date of the merger through the year ended December 31, 2021. Net revenues of $73.5 million from other business lines were driven by incremental Toptracer bay installations, as well as revenues from digital content creation, sponsorship operations, and the WGT digital golf game.
Golf Equipment
Net revenues for the Golf Equipment operating segment are summarized as follows (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended
December 31, | | Growth | | |
| 2021 | | 2020 | | Dollars | | Percent | | |
| Net revenues: | | | | | | | | | |
| Golf clubs | $ | 994.5 | | | $ | 787.1 | | | $ | 207.4 | | | 26.3 | % | | |
| Golf balls | 234.7 | | | 195.6 | | | 39.1 | | | 20.0 | % | | |
| $ | 1,229.2 | | | $ | 982.7 | | | $ | 246.5 | | | 25.1 | % | | |
The $246.5 million (25.1%) increase in Golf Equipment net revenue to $1,229.2 million for the year ended December 31, 2021respectively, compared to $982.7$158.2 million and $0.82 per share, respectively, for the same period in 2020 was due to increases of $207.4 million (26.3%) in golf club revenue and $39.1 million (20.0%) in golf ball revenue. These increases were driven by the continued growth and high demand for the game of golf and in golf participation, combined with the successful launch of the Company's new EPIC line of woods and APEX line of irons and the continued success of the Chrome Soft and Super Soft lines of golf balls, which resulted in a significant increase in sales volume across all product categories, despite supply chain challenges during the year2022. Net revenues of golf equipment for 2020 were negatively impacted by the temporary closure of retail locations, including the Company's owned retail locations,The decrease in addition to the Company's manufacturing facilities and distributions centersnon-GAAP net income was primarily due to the COVID-19 pandemic.
Apparel, Gear and Other
Net revenues for the Apparel, Gear and Other segment are summarized as follows (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended
December 31, | | Growth | | |
| | 2021 | | 2020 | | Dollars | | Percent | | |
| Net revenues: | | | | | | | | | |
| Apparel | $ | 490.9 | | | $ | 349.3 | | | $ | 141.6 | | | 40.5 | % | | |
| Gear, accessories & other | 325.7 | | | 257.5 | | | 68.2 | | | 26.5 | % | | |
| $ | 816.6 | | | $ | 606.8 | | | $ | 209.8 | | | 34.6 | % | | |
Net revenues of Apparel, Gear and Other increased $209.8 million (34.6%) to $816.6 million during the year ended December 31, 2021 compared to $606.8 million for the same period in 2020, due to a $141.6 million (40.5%) increase in sales of apparel and a $68.2 million (26.5%) increase in sales of gear, accessories and other. These increases were due to a strong rebound across all brands for the year ended December 31, 2021 compared to the same period in 2020, which was severely impacted by the shutdown of distribution centers and many retail stores in all major regions due to the COVID-19 pandemic.
By brand, the increase in TravisMathew products was driven by strong brand momentum and increases across all sales channels. Sales for the Callaway brand increased due to a surge in demand for golf accessories driven by the heightened popularity of the game of golf, combined with the new apparel business in Korea. The increase in Jack Wolfskin sales was driven by an increase in the wholesale business as many Fall/Winter 2020 orders were canceled at the onset of COVID-19other expense, net, primarily due to higher interest expense, partially offset by a decrease in the prior year.income tax provision combined with an increase in income from operations.
Segment Profitability
The Company evaluates the performance of its operating segments based on segment operating income. Management uses total segment operating income as a measure of its operational performance, excluding corporate overhead and certain non-recurring and non-cash charges.
Profitability by operating segment is summarized as follows (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended
December 31, | | Growth/(Decline) | | Non-GAAP Constant Currency Growth vs. 2020(1) |
| 2021 | | 2020 | | Dollars | | Percent | | Percent |
| Net revenues: | | | | | | | | | |
| Topgolf | $ | 1,087.6 | | | $ | — | | | $ | 1,087.6 | | | n/m | | n/m |
| Golf Equipment | 1,229.2 | | | 982.7 | | | 246.5 | | | 25.1% | | 23.2% |
| Apparel, Gear and Other | 816.6 | | | 606.8 | | | 209.8 | | | 34.6% | | 32.8% |
| Total net revenues | $ | 3,133.4 | | | $ | 1,589.5 | | | $ | 1,543.9 | | | 97.1% | | 95.1% |
| | | | | | | | | |
| Segment operating income (loss): | | | | | | | | | |
| Topgolf | $ | 58.2 | | | $ | — | | | $ | 58.2 | | | n/m | | |
| Golf Equipment | 203.9 | | | 148.6 | | | 55.3 | | | 37.2% | | |
| Apparel, Gear and Other | 68.5 | | | 0.7 | | | 67.8 | | | 9685.7% | | |
| Total segment operating income | 330.6 | | | 149.3 | | | 181.3 | | | 121.4% | | |
Corporate G&A and other(2) | (125.9) | | | (80.5) | | | (45.4) | | | 56.4% | | |
Goodwill and tradename impairment(3) | — | | | (174.3) | | | 174.3 | | | (100.0)% | | |
| Total operating income (loss) | 204.7 | | | (105.5) | | | 310.2 | | | 294.0% | | |
Gain on Topgolf investment(4) | 252.5 | | | — | | | 252.5 | | | n/m | | |
| Interest expense, net | (115.6) | | | (46.9) | | | (68.7) | | | 146.5% | | |
| Other income, net | 9.0 | | | 24.9 | | | (15.9) | | | (63.9)% | | |
| Total income (loss) before income taxes | $ | 350.6 | | | $ | (127.5) | | | $ | 478.1 | | | 375.0% | | |
____________
(1)Calculated by applying 2020 exchange rates to 2021 reported sales in regions outside the United States.
(2)Amount includes corporate general and administrative expenses not utilized by management in determining segment profitability, including non-cash amortization expense for intangible assets acquired in connection with the Jack Wolfskin, TravisMathew and OGIO acquisitions. In addition, the amount for 2021 includes (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 2020 also includes certain non-recurring costs, including (i) $8.5 million in transaction and other non-recurring costs associated with the Topgolf merger; (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.
(3)Amount represents the recognition of a $174.3 million impairment charge to write down goodwill and a portion of the trade name related to Jack Wolfskin in 2020. See Note 9. "Goodwill and Intangible Assets" in the Notes to Consolidated Financial Statements included in this Form 10-K.
(4)Amount represents the $252.5 million gain to step-up the Company's former investment in Topgolf to its fair value in connection with the merger. See Note 10. "Investments" in the Notes to Consolidated Financial Statements included in this Form 10-K.
Topgolf contributed an incremental $58.2 million of operating income in 2021, which represents approximately ten months of operating results since the completion of the merger on March 8, 2021 and reflects the opening of seven new domestic locations combined with Toptracer bay installations.
Operating incomeSegment Results for the Golf Equipment operating segment increased $55.3 million (37.2%) to $203.9 million forYears Ended December 31, 2023 and 2022 (in millions,except percentages)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended
December 31, | | Increase/(Decrease) | | Non-GAAP Constant Currency Growth vs. 2022(1) | |
| 2023 | | 2022 | | Dollars | | Percent | | Percent | |
| Net revenues: | | | | | | | | | | |
| Venues | $ | 1,692.6 | | | $ | 1,477.1 | | | $ | 215.5 | | | 14.6 | % | | 14.6% | |
| Other Topgolf business lines | 68.4 | | | 71.9 | | | (3.5) | | | (4.9) | % | | (4.0)% | |
| Topgolf | 1,761.0 | | | 1,549.0 | | | 212.0 | | | 13.7 | % | | 13.7% | |
| Golf clubs | 1,073.5 | | | 1,097.1 | | | (23.6) | | | (2.2) | % | | (0.5)% | |
| Golf balls | 314.0 | | | 309.5 | | | 4.5 | | | 1.5 | % | | 2.2% | |
| Golf Equipment | 1,387.5 | | | 1,406.6 | | | (19.1) | | | (1.4) | % | | 0.1% | |
| Apparel | 713.2 | | | 631.7 | | | 81.5 | | | 12.9 | % | | 13.5% | |
| Gear, accessories, & other | 423.1 | | | 408.4 | | | 14.7 | | | 3.6 | % | | 3.8% | |
| Active Lifestyle | 1,136.3 | | | 1,040.1 | | | 96.2 | | | 9.2 | % | | 9.7% | |
| Total net revenues | $ | 4,284.8 | | | $ | 3,995.7 | | | $ | 289.1 | | | 7.2 | % | | 7.9% | |
| | | | | | | | | | |
| Segment operating income: | | | | | | | | | | |
| Topgolf | $ | 108.8 | | | $ | 76.8 | | | $ | 32.0 | | | 41.7 | % | | | |
| Golf Equipment | 193.3 | | | 251.4 | | | (58.1) | | | (23.1) | % | | | |
| Active Lifestyle | 117.0 | | | 77.4 | | | 39.6 | | | 51.2 | % | | | |
| Total segment operating income | 419.1 | | | 405.6 | | | 13.5 | | | 3.3 | % | | | |
Reconciling Items(2) | (181.4) | | | (148.8) | | | (32.6) | | | 21.9 | % | | | |
| Total operating income | 237.7 | | | 256.8 | | | (19.1) | | | (7.4) | % | | | |
| Interest expense, net | (210.2) | | | (142.8) | | | (67.4) | | | 47.2 | % | | | |
| Other income, net | 7.3 | | | 27.9 | | | (20.6) | | | (73.8) | % | | | |
| Income before income taxes | $ | 34.8 | | | $ | 141.9 | | | $ | (107.1) | | | (75.5) | % | | | |
| | | | | | | | | | |
(1) Calculated by applying 2022 exchange rates to 2023 reported sales in regions outside the U.S. | |
(3) Reconciling items include corporate general and administrative expenses not utilized by management in determining segment profitability, including non-cash amortization expense of intangible assets in connection with the acquisitions and non-recurring costs. | |
Topgolf
During the year ended December 31, 2021 from $148.62023, Topgolf segment operating income increased $32.0 million in(41.7%) as compared to the comparablesame period in the prior year. This2022. The increase was driven by a significant increase in revenue across all product categories as discussed above, combined with the favorable impact of foreign currency exchange rates, favorable absorption of fixed overheadprimarily due to higher sales volumes period over period,revenues from the continued opening of new Company-owned and less promotional activity. In 2020, net revenues were significantly impacted by lower sales volumesoperated venues in addition to gross margin improvements and operational efficiencies at the negative impact of idle facilities due to government mandated shutdowns during the first half of 2020 as a result of the COVID-19 pandemic.venues. The increase in segment operating income was partially offset by increased freight, laborhigher advertising and overall commoditypromotional costs due to inflationary pressures and the supply chain challenges experienced during 2021, and a decrease in sales in the fourth quarter of 2021 due to a planned shift in production to build 2022 new launch product.for national Topgolf marketing campaigns.
Operating income for the Apparel, Gear and Other operating segment increased $67.8 million to $68.5 million forGolf Equipment
During the year ended December 31, 2021 from $0.72023, Golf Equipment segment operating income decreased $58.1 million in(23.1%) as compared to the comparablesame period in the prior year. This increase2022. The decrease was driven by a strong rebound in sales across all brands as discussed above, combined with a decrease in promotional activity and an increase in direct-to-consumer e-commerce sales, which have higher profit margins relative to wholesale, combined with improved cost and operating expense leverage. In 2020, operating income was severely impacted by the negative impact of idle facilitiesprimarily due to government mandated shutdownslower revenues and the temporary closure of retail locations primarily during the first half of 2020production volumes in 2023 as a result of a post-pandemic inventory fill-in at retail in 2022, which did not recur in 2023, and resulted in expected lower production volumes in the COVID-19 pandemic.second half of 2023 and unfavorable cost absorption, combined with a return to a normalized promotional environment in 2023 and the unfavorable impact of changes in foreign currency exchange rates. In addition, Golf Equipment segment operating expenses increased by $16.4 million, primarily related to increases in advertising and promotional expense and other infrastructure and employee related costs.
Active Lifestyle
During the year ended December 31, 2023, Active Lifestyle segment operating income increased $39.6 million (51.2%) as compared to the same period in 2022 primarily driven by an increase in revenues and gross margin improvements due to a higher mix of direct-to-consumer sales and lower freight costs. These increases were partially offset by higher operating expenses to support the growth of the TravisMathew and Jack Wolfskin businesses.
Financial Condition
The Company’sOur cash and cash equivalents decreased $13.9increased $213.3 million to $352.2$393.5 million at December 31, 20212023 from $366.1$180.2 million at December 31, 2020. Cash2022. The increase in cash and cash equivalents as of December 31, 2021 reflects the combined cash positions of the Company and Topgolf as a result of the merger completed on March 8, 2021. During 2021, the Company used itswas primarily related to net cash provided by operationsfinancing activities of $278.3$375.8 million, combined withincluding proceeds of $89.2 million from lease financing, arrangements, $26.2 million from long-term borrowings, $22.3 million from the exercise of stock options and $19.1 million from the sale of a portion of the Company's investment in Full Swing Golf Holdings, Inc., to fund capital expenditures of $322.3 million, repay $200.7 million of amounts outstanding under its long-term debt facilities, repurchase shares of its common stock for $38.1 million, and fund its investment in Five Iron Golf for $30.0 million . Management expects to fund the Company’s future operations from current cash balances and cash provided by its operating activities combined with borrowings under its currentof $364.7 million, partially offset by cash used in investing activities of $542.9 million, primarily for capital expenditures. During the year ended December 31, 2023, we used our cash and future credit facilities as well ascash equivalents in addition to proceeds received from our financing and operating activities to fund our operations and invest in the expansion of the Topgolf business and other availablecapital expenditures. We believe that our existing funds and existing sources of and access to capital and any future financings, as deemed necessary. Seenecessary, are adequate to fund our future operations. For further information related to our financing arrangements, see Note 7. "Financing Arrangements"“Financing Arrangements” in the Notes to Consolidated Financial Statements in Part IV, Item 15 and “Liquidity and Capital Resources” in Part II, Item 7 of this Form 10-K for further information on the Company's credit facilities and the Term Loan Facility.10-K.
The Company’sOur accounts receivable balance fluctuates throughout the year as a result of the general seasonality of the Company’sour business, and is also affected by the timing of new product launches. With respect to the Company’sour Golf Equipment business, the accounts receivable balance willare generally be at itsthe highest during the first and second quarters due toduring the seasonal peak in the golf season,industry, and it will generally decline significantly during the third and fourth quarters as a result of an increase in cash collections andcombined with lower seasonal sales. The Company's Apparel, Gear and OtherOur Active Lifestyle accounts receivable balances are expected to begenerally higher during the second half of the yearthird and fourth quarters, primarily due to the seasonal natureconcentration of sales for the Jack Wolfskin business with a significant portion of its products geared towardduring the fall and winter seasons. On March 8, 2021, the Company completed its merger withOur Topgolf whichvenue business primarily records revenue and collects payment at point-of-sale, for most of its venue business. Therefore, Topgolf'stherefore, Topgolf’s accounts receivable balance is smallerlower than the Company'sour other business segments and primarily consists of media sponsorship receivables.segments. As of December 31, 2021, the Company’s2023, our net accounts receivable decreasedincreased $33.2 million to $105.3200.5 million from $138.5$167.3 million as of December 31, 20202022. The increase is primarily due to an increase in net sales in the earlier timingfourth quarter of product sales, which were skewed more towards the first two months of the quarter2023 compared to the same period in 2022, combined with a shift in the timing of fourth quarter sales in the prior year.fourth quarter of 2023, which were higher in December compared to 2022.
The Company’sOur inventory balance fluctuates throughout the year as a result of the general seasonality of the Company’scertain operating segments within our business, and is also affected by the timing of new product launches. With respect to the Company'sour Golf Equipment business, the buildup of inventory levels generally begins during the fourth quarter and continues heavily into the first quarter as well as into theand beginning of the second quarter in order to meet increased demand during the height of the golf season. Inventory levels are also impacted by the timing of new product launches as well as the success of new products. Apparel, Gear and OtherActive Lifestyle inventory levels start to build inincrease during the second quarter and continuescontinue to increase into the third and fourth quarters
primarily due to the seasonal nature of the Company'sour Jack Wolfskin business, as manywhose products are significantly geared towardtowards the fall/fall and winter season.seasons. Topgolf is primarily a services business with lower inventory balances than the Company'sour other business segments, andwith the inventory balances primarily consistsconsisting of food and beverage as well as retail merchandise and Toptracer inventory. The Company’sOur inventory increasedecreased byd $181.0 $164.8 million to $533.5794.4 million as of December 31, 20212023 compared to $352.5$959.2 million as of December 31, 2020. This increase in inventories2022. The decrease was primarily due to a planned shiftimprovements in production to build new 2022 golf equipment productssupply chain timing in the fourth quarterback half of 2021 and2022 leading to the earlier timing of receipt of 2022 golf bags, combined with incremental inventory from the merger with Topgolf. In addition,orders for our planned 2023 product launches earlier than anticipated, which resulted in increased inventory levels during the fourth quarter of 2020 were lower due to the surgelate in demand for golf products during the second half of 2020.2022 and early in 2023. Since December 31, 2022, our total inventory has decreased by $164.8 million.
Liquidity and Capital Resources
Liquidity
The Company’sOur principal sources of liquidity consist of itsour existing cash balances, funds expected to be generated from operations and funds from itsour credit facilities. Based upon the Company’sour current cash balances, itsour estimates of funds expected to be generated from operations, as well as from current and projected availability under itsour current or future credit facilities, the Company believeswe believe that itwe will be able to finance current and planned operating requirements, capital expenditures, required debt repayments and contractual obligations and commercial commitments for at least the next 12 months from the issuance date of this Form 10-K.
Our ability to generate sufficient positive cash flows from operations is subject to many risks and uncertainties, including future economic trends and conditions, the future economic impact from the COVID-19 pandemic, demand for the Company’sour products, supply chain challenges, price inflation, foreign currency exchange rates, and other risks and uncertainties applicable to the Companyus and itsour business (see “Risk Factors” contained in Part I, Item 1A in this Form 10-K). As of December 31, 2021, the Company2023, we had $752.8$742.6 million in cash and availability under itsour credit facilities, which is an increase of $120.6$327.3 million or 19%78.8% compared to December 31, 2020.2022. Information about the Company'sour credit facilities and long-term borrowings is presented in Note 77. “Financing Arrangements” in the Notes to Consolidated Financial Statements in this Form 10-K and is incorporated herein by this reference.
On March 8, 2021,16, 2023, we completed a comprehensive plan to refinance and modify our capital structure in order to extend our debt maturities, reduce our base borrowing rate and improve our liquidity, as well as simplify our capital structure. As a result, we entered into a new $1,250.0 million senior secured Term Loan B facility which matures on March 16, 2030. We used a portion of the Company completed the merger with Topgolf in an all-stock transaction (see Note 6. "Business Combinations" in the Notesproceeds to Consolidated Financial Statements in this Form 10-K). In connection with the merger with Topgolf, the Company acquired cashpay off our then existing senior secured Term Loan B facility of $171.3$432.0 million and assumed $535.1 million in long-term debt. The Company believes that with its continued strong cash generationTopgolf senior secured credit facilities of $504.1 million. In addition to the entry into our Term Loan B facility, we also extended and increased liquidity, its geographic diversity and the strength of its brands, it will be able to fund Topgolf's growth while meeting its other financial obligations.our then existing $400.0 million senior secured ABL revolving credit facility with a new $525.0 million senior secured ABL revolving credit facility which matures on March 16, 2028.
As of December 31, 2021,2023, approximately 58.8%40% of the Company'sour cash was held in regions outside of the United States. The Company continuesWe continue to maintain itsour indefinite reinvestment assertion with respect to most jurisdictions in which it operateswe operate because of local cash requirements to operate itsour business. If the Companywe were to repatriate cash to the United States outside of settling intercompany balances, itwe may need to pay incremental foreign withholding taxes which, subject to certain limitations, generate foreign tax credits for use against the Company'sour U.S. tax liability, if any. Additionally, the Companywe may need to pay certain state income taxes.
Share Repurchases
Information about the Company's share repurchases during 2021 is presented in Part II, Item 5 in this Form 10-K under the heading "Purchases of Equity Securities by the Issuer and Affiliated Purchasers," which is incorporated herein by this reference.
MaterialSignificant Cash RequirementsObligations
The table below summarizes certain material cash requirements as of December 31, 2021 that will affect the Company’s future liquidity. The Company plansWe plan to utilize itsour liquidity (as described above) and itsour cash flows from business operations to fund itsour material cash requirements.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments Due By Period |
| Total | | 2022 | | 2023 - 2024 | | 2025 - 2026 | | Thereafter |
| (in millions) |
Japan Term Loan Facility (1) | $ | 13.0 | | | $ | 3.5 | | | $ | 6.9 | | | $ | 2.6 | | | $ | — | |
| Interest on Japan Term Loan Facility | 0.2 | | | 0.1 | | | 0.1 | | | — | | | — | |
Term Loan B Facility (2) | 436.8 | | | 4.8 | | | 9.6 | | | 422.4 | | | — | |
| Interest on Term Loan Facility | 98.0 | | | 5.2 | | | 46.3 | | | 46.5 | | | — | |
Topgolf Term Loan (3) | 340.4 | | | 3.5 | | | 7.0 | | | 329.9 | | | — | |
| | | | | | | | | |
Convertible Notes (4) | 258.8 | | | — | | | — | | | 258.8 | | | — | |
Equipment Notes (5) | 31.1 | | | 10.1 | | | 13.6 | | | 6.9 | | | 0.5 | |
| Interest on Equipment Notes | 1.2 | | | 0.6 | | | 0.5 | | | 0.1 | | | — | |
Mortgage Loans (6) | 46.4 | | | 0.5 | | | 1.2 | | | 1.5 | | | 43.2 | |
| Financed Tenant Improvements | 3.7 | | | 0.2 | | | 0.4 | | | 0.4 | | | 2.7 | |
ABL Facility (7) | 9.1 | | | 9.1 | | | — | | | — | | | — | |
Finance leases, including imputed interest (8) | 706.9 | | | 15.0 | | | 31.1 | | | 30.8 | | | 630.0 | |
Operating leases, including imputed interest (9) | 1,895.1 | | | 138.7 | | | 269.5 | | | 256.7 | | | 1,230.2 | |
DLF obligations (10) | 2,100.8 | | | 33.3 | | | 74.0 | | | 76.9 | | | 1,916.6 | |
Minimum lease payments for leases signed but not yet commenced (11) | 1,518.4 | | | 30.0 | | | 59.9 | | | 59.9 | | | 1,368.6 | |
Capital commitments (12) | 66.0 | | | 61.0 | | | 5.0 | | | — | | | — | |
Unconditional purchase obligations (13) | 71.9 | | | 33.9 | | | 37.7 | | | 0.3 | | | — | |
Uncertain tax contingencies (14) | 13.3 | | | 0.8 | | | 8.9 | | | 2.9 | | | 0.7 | |
| Total | $ | 7,611.1 | | | $ | 350.3 | | | $ | 571.7 | | | $ | 1,496.6 | | | $ | 5,192.5 | |
____________
(1)In August 2020, the Company entered into the Japan Term Loan Facility for 2,000 million Yen (or approximately U.S. $18.0 million using the exchange rate in effect The table below summarizes certain significant cash obligations as of December 31, 2021). For further discussion, see Note 7. "Financing Arrangements" in the Notes to Consolidated Financial Statements in this Form 10-K.2023 that will affect our future liquidity (in millions):
(2)In January 2019, to fund the purchase price of the Jack Wolfskin acquisition, the Company entered into a Credit Agreement, which provides for a Term Loan B facility in an aggregate principal of $480.0 million, which was issued less $9.6 million in an original issue discount and other transaction fees. For further discussion, see Note 7. "Financing Arrangements" in the Notes to Consolidated Financial Statements in this Form 10-K. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments Due By Period |
| Total | | 2024 | | 2025 - 2026 | | 2027 - 2028 | | Thereafter |
Long-term debt(1) | $ | 1,566.8 | | | $ | 20.8 | | | $ | 295.0 | | | $ | 29.3 | | | $ | 1,221.7 | |
Interest payments relating to long-term debt(2) | 756.7 | | | 124.4 | | | 240.0 | | | 225.3 | | | 167.0 | |
Finance leases, including imputed interest(3) | 821.8 | | | 14.9 | | | 34.5 | | | 32.7 | | | 739.7 | |
Operating leases, including imputed interest(4) | 2,456.4 | | | 155.6 | | | 319.0 | | | 304.3 | | | 1,677.5 | |
DLF obligations(5) | 4,389.8 | | | 72.9 | | | 164.9 | | | 173.2 | | | 3,978.8 | |
Minimum lease payments for leases signed but not yet commenced(6) | 364.9 | | | 4.2 | | | 19.6 | | | 19.6 | | | 321.5 | |
Capital commitments(7) | 107.0 | | | 58.0 | | | 49.0 | | | — | | | — | |
Unconditional purchase obligations(8) | 176.8 | | | 52.5 | | | 63.0 | | | 29.8 | | | 31.5 | |
Uncertain tax contingencies(9) | 13.6 | | | 2.9 | | | 1.3 | | | 0.6 | | | 8.8 | |
| Total | $ | 10,653.8 | | | $ | 506.2 | | | $ | 1,186.3 | | | $ | 814.8 | | | $ | 8,146.5 | |
| | | | | | | | | |
(1) Excludes unamortized debt discounts, unamortized debt issuance costs, and fair value adjustments. For further details, see Note 7. “Financing Arrangements” in the Notes to Consolidated Financial Statements in this Form 10-K. |
(2) Long-term debt may have fixed or variable interest rates. For further details, see Note 7. “Financing Arrangements” in the Notes to Consolidated Financial Statements in this Form 10-K. |
(3) Represents future minimum payments under financing leases. For further details, see Note 6. “Leases” in the Notes to Consolidated Financial Statements in this Form 10-K. |
(4) Represents commitments for minimum lease payments under non-cancellable operating leases. For further details, see Note 6. “Leases” in the Notes to Consolidated Financial Statements in this Form 10-K. |
(5) Represents DLF obligations, including extension periods, in connection with the construction of Topgolf venues. For further details, see Note 6. “Leases” in the Notes to Consolidated Financial Statements in this Form 10-K. |
(6) Represents future minimum lease payments under lease agreements that have not yet commenced as of December 31, 2023 in relation to future Topgolf facilities. For further discussion, see Note 6. “Leases” in the Notes to Consolidated Financial Statements in this Form 10-K. |
(7) Represents capital expenditure commitments under lease agreements for Topgolf venues under construction that have been signed as of December 31, 2023. |
(8) During the normal course of our business, we enter into agreements to purchase goods and services, including commitments for endorsement agreements with professional athletes and other endorsers, consulting and service agreements, and intellectual property licensing agreements pursuant to which we are required to pay royalty fees. The amounts listed above approximate the minimum purchase obligations we are obligated to pay under these agreements over the next five years and thereafter as of December 31, 2023. The actual amounts paid under some of the agreements may be higher or lower than these amounts. In addition, we also enter into unconditional purchase obligations with various vendors and suppliers of goods and services during the normal course of business through purchase orders or other documentation or that are undocumented except for an invoice. For further details, see Note 13. “Commitments & Contingencies” in the Notes to Consolidated Financial Statements in this Form 10-K. |
(9) Amounts represent current and non-current portions of uncertain income tax positions as recorded on our Consolidated Balance Sheets as of December 31, 2023. Amounts exclude uncertain income tax positions that we would be able to offset against deferred taxes. For further discussion, see Note 12. “Income Taxes” in the Notes to Consolidated Financial Statements in this Form 10-K. |
(3)In connection with the merger with Topgolf on March 8, 2021, the Company assumed a $350.0 million term loan facility (the “Topgolf Term Loan”) with JPMorgan Chase Bank, N.A. For further discussion, see Note 7. "Financing Arrangements" in the Notes to Consolidated Financial Statements in this Form 10-K.
(4)In May 2020, the Company issued $258.8 million of 2.75% Convertible Notes, which mature on May 1, 2026 unless earlier redeemed or repurchased by the Company or converted. For further discussion, see Note 7. "Financing Arrangements" in the Notes to Consolidated Financial Statements in this Form 10-K.
(5)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. For further discussion, see Note 7. "Financing Arrangements" in the Notes to Consolidated Financial Statements in this Form 10-K.
(6)In connection with the merger with Topgolf on March 8, 2021, the Company assumed three mortgage loans related to the construction of three venues. For further discussion, see Note 7. "Financing Arrangements" in the Notes to Consolidated Financial Statements in this Form 10-K.
(7)The Company has a senior secured asset-based revolving credit facility of up to $400.0 million (the "ABL Facility) subject to borrowing base availability. The amounts outstanding under the ABL Facility are secured by certain assets, including cash (to the extent pledged by the Company), certain intellectual property, certain eligible real estate, inventory and accounts receivable of the Company’s subsidiaries in the United States, Germany, Canada and the United Kingdom. For further discussion, see Note 7. "Financing Arrangements" in the Notes to Consolidated Financial Statements in this Form 10-K.
(8)Amounts represent future minimum payments under financing leases. At December 31, 2021, finance lease liabilities of $1.8 million were recorded in accounts payable and accrued expenses and $132.5 million were recorded in other long-term liabilities in the accompanying consolidated balance sheets. For further discussion, see Note 3. "Leases" in the Notes to Consolidated Financial Statements in this Form 10-K.
(9)The Company leases venues, certain manufacturing facilities, distribution centers, warehouses, office facilities, vehicles and office equipment under operating leases. The amounts presented in this line item represent commitments for minimum lease payments under non-cancelable operating leases. At December 31, 2021, short-term and long-term operating lease liabilities of $72.3 million and $1,385.4 million, respectively, were recorded in the accompanying consolidated balance sheets. For further discussion, see Note 3. "Leases" in the Notes to Consolidated Financial Statements in this Form 10-K.
(10)In connection with the merger with Topgolf on March 8, 2021, the Company assumed certain deemed landlord financing obligations in connection with the construction of Topgolf venue facilities. At December 31, 2021, the short-term and long-term obligations were $0.9 million and $460.6 million, respectively. For further discussion, see Note 3. "Leases" in the Notes to Consolidated Financial Statements in this Form 10-K.
(11)Amount represents the future minimum lease payments under lease agreements related to future Topgolf facilities that have not yet commenced as of December 31, 2021. For further discussion, see Note 3. "Leases" in the Notes to Consolidated Financial Statements in this Form 10-K.
(12)Amount represents capital expenditure commitments, net of amounts expected to be reimbursed by third-party real estate financing partners, under lease agreements for Topgolf venues under construction that have been signed as of December 31, 2021.
(13)During the normal course of its business, the Company enters into agreements to purchase goods and services, including purchase commitments for production materials, endorsement agreements with professional golfers and other endorsers, employment and consulting agreements, and intellectual property licensing agreements pursuant to which the Company is required to pay royalty fees. It is not possible to determine the amounts the Company will ultimately be required to pay under these agreements as they are subject to many variables including performance-based bonuses, severance arrangements, the Company’s sales levels, and reductions in payment obligations if designated minimum performance criteria are not achieved. The amounts listed approximate minimum purchase obligations, base compensation, and guaranteed minimum royalty payments the Company is obligated to pay under these agreements. The actual amounts paid under some of these agreements may be higher or lower than the amounts included. In the aggregate, the actual amount paid under these obligations is likely to be higher than the amounts listed as a result of the variable nature of these obligations. In addition, the Company also enters into unconditional purchase obligations with various vendors and suppliers of goods and services in the normal course of operations through purchase orders or other documentation or that are undocumented except for an invoice. Such unconditional purchase obligations are generally outstanding for periods less than a year and are settled by cash payments upon delivery of goods and services and are not reflected in this line item.
(14)Amount represents the current and non-current portions of uncertain income tax positions as recorded on the Company's consolidated balance sheets as of December 31, 2021. Amounts exclude uncertain income tax positions
that the Company would be able to offset against deferred taxes. For further discussion, see Note 14. "Income Taxes" in the Notes to Consolidated Financial Statements in this Form 10-K.
During its normal course of business, the Company haswe have made certain indemnities, commitments and guarantees under which itwe may be required to make payments in relation to certain transactions. These include (i) intellectual property indemnities to the Company’sour customers and licensees in connection with the use, sale and/or license of Companyour products or trademarks, (ii) indemnities to various lessors in connection with facility leases for certain claims arising from such facilities or leases, (iii) indemnities to vendors and service providers pertaining to the goods or services provided to the Companyus 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 haswe have made contractual commitments to each of itsour officers and certain other employees providing for severance payments upon the termination of employment. The Company hasWe have also issued guarantees in the form of a standby letter of credit in the amount of $0.4 million primarily as security for contingent liabilities under certain workers’ compensation insurance policies.
The duration of these indemnities, commitments and guarantees varies, and in certain cases may be indefinite. The majority of these indemnities, commitments and guarantees do not provide for any limitation on the maximum amount of future payments the Companywe could be obligated to make. Historically, costs incurred to settle claims related to indemnities have not been material to the Company’sour financial position, results of operations or cash flows. In addition, the Company believeswe believe the likelihood is remote that payments under the commitments and guarantees described above will have a material effect on the Company’sour financial condition. The fair value of these indemnities, commitments and guarantees that the Companywe issued during the twelve12 months ended December 31, 20212023 was not material to the Company’sour financial position, results of operations or cash flows.
In addition to the contractual obligations listed above, the Company’sour liquidity could also be adversely affected by an unfavorable outcome with respect to claims and litigation that the Company iswe are subject to from time to time. See Note 15. "Commitments13. “Commitments & Contingencies"Contingencies” in the Notes to Consolidated Financial Statements in this Form 10-K.
We have no material off-balance sheet arrangements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company usesWe use derivative financial instruments to mitigate itsour exposure to changes in foreign currency exchange rates and interest rates. Transactions involving these financial instruments are with creditworthy banks, primarily banks that are party to the Company'sour credit facilities (see Note 7. "Financing Arrangements"“Financing Arrangements” and Note 18. “Derivatives and Hedging” in the Notes to Consolidated Financial Statements in this Form 10-K). The use of these instruments exposes the Companyus to market and credit risk which may at times be concentrated with certain counterparties, although counterparty nonperformance is not anticipated.
Foreign Currency Fluctuations
Information about the Company'sour foreign currency hedging activities is set forth in Note 20. "Derivatives18. “Derivatives and Hedging"Hedging” in the Notes to Consolidated Financial Statements in this Form 10-K, which is incorporated herein by this reference.
As part of the Company’sour risk management procedure, a sensitivity analysis model is used to measure the potential loss in future earnings of market-sensitive instruments resulting from one or more selected hypothetical changes in interest rates or foreign currency values. The sensitivity analysis model quantifies the estimated potential effect of unfavorable movements of 10% in foreign currencies to which the Company waswe were exposed at December 31, 20212023 through itsour foreign currency forward contracts.
At December 31, 2021,2023, the estimated maximum loss from the Company’sour foreign currency forward contracts, calculated using the sensitivity analysis model described above, was $7.1$31.6 million. The Company believesWe believe that such a hypothetical loss from itsour foreign currency forward contracts would be partially offset by increases in the value of the underlying transactions being hedged.
The sensitivity analysis model is a risk analysis tool and does not purport to represent actual losses in earnings that we will be incurred by the Company,incur, nor does it consider the potential effect of favorable changes in market rates. It also does not represent the maximum possible loss that may occur. Actual future gains and losses will differ from those estimated because of changes or differences in market rates and interrelationships, hedging instruments and hedge percentages, timing and other factors.
Interest Rate Fluctuations
The Company isWe are exposed to interest rate risk from itsour credit facilities and long-term borrowing commitments. Outstanding borrowings under these credit facilities and long-term borrowing commitments accrue interest as described in Note 7 "Financing Arrangements"7. “Financing Arrangements” in the Notes to Consolidated Financial Statements in this Form 10-K. The Company'sOur long-term borrowing commitments are subject to interest rate fluctuations, which could be material to the Company'sour cash flows and results of operations. In order to mitigate this risk, the Company enterswe enter into interest rate hedges as part of itsour interest rate risk management strategy. Information about the Company'sour interest rate hedges is provided in Note 20. "Derivatives18. “Derivatives and Hedging"Hedging” in the Notes to Consolidated Financial Statements in this Form 10-K. In order to determine the impact of unfavorable changes in interest rates on the Company'sour cash flows and results of operations, the Companywe performed a sensitivity analysis as part of itsour risk management procedures. The sensitivity analysis quantified that the incremental expense incurred by aA hypothetical 10% increase in our interest rates, which represents a change of approximately 50 basis points, would be immaterial overresult in a difference in incremental interest expense of approximately $5.2 million for the 12-month period ending on December 31, 2021.2023.
Inflation
The continued increase in inflation partially contributed to the increase in the cost of our products and services as well as our operating costs. If the cost of the Company’sour products, employee costs, or other costs werecontinue to becomebe subject to significant inflationary pressures, such inflationary pressurepressures may have an adverse effect on the Company’sour ability to maintain current levels of gross margin and selling, general and administrative expenses. Further, the Companywe may not be able to offset these increased costs through price increases. As a result, the Company’sour inability to quickly respond to inflation could harm itsour cash flows and results of operations in the future.
Item 8. Financial Statements and Supplementary Data
The Company’sOur Consolidated Financial Statements as of December 31, 20212023 and 20202022 and for each of the three years in the period ended December 31, 2021,2023, together with the report of the Company'sour independent registered public accounting firm, are included in this Annual Report on Form 10-K beginning on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
The CompanyWe carried out an evaluation, under the supervision and with the participation of the Company’sour management, including the Company’sour Chief Executive Officer and Chief Financial Officer, of the effectiveness, as of December 31, 2021,2023, of the Company’sour disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’sour disclosure controls and procedures were effective as of December 31, 2021.2023.
Management’s Report on Internal Control over Financial Reporting
The Company’sOur management is responsible for establishing and maintaining effective internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). Management assessed the effectiveness of the Company’sour internal control over financial reporting as of December 31, 2021.2023. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in itsour report entitled Internal Control—Integrated Framework (2013). Based on that assessment, management concluded that as of December 31, 2021, the Company’s2023, our internal control over financial reporting was effective based on the COSO criteria.
On March 8, 2021, the Company completed its merger with Topgolf (see Note 6 “Business Combinations” in the Notes to Consolidated Financial Statements in this Form 10-K). Pursuant to Management's Report on Internal Control Over Financial Reporting and CertificationThe effectiveness of Disclosure in Exchange Act Periodic Reports as published by the United States Securities and Exchange Commission, the Company is allowed to exclude acquisitions from its report on internal controls over financial reporting for the first year after the acquisition when it is not possible to conduct an assessment of the acquired company. Due to the size, breadth and complexity of Topgolf's global operations, it was not possible for the Company to include Topgolf in its annual assessment of the effectiveness ofour internal control over financial reporting for the year ended December 31, 2021. In terms of size, Topgolf is significant to the Company when comparing net revenues and total assets. Asas of December 31, 2021, Topgolf net revenues and total assets excluded from the Company's assessment of internal control over financial reporting represented 35% of the Company's net revenues and 37% of the Company's total assets. The Company will include Topgolf2023 has been audited by Deloitte & Touche LLP, our independent registered public accounting firm, as stated in its assessment of internal controls in 2022.report which is included herein.
Changes in Internal Control over Financial Reporting
During the quarter ended December 31, 2021,2023, there were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, the Company'sour internal control over financial reporting.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2021 has been audited by Deloitte & Touche LLP, the Company’s independent registered public accounting firm, as stated in its report which is included herein.
Item 9B. Other Information
None.During the three months ended December 31, 2023, none of our officers or directors adopted or terminated any contract, instruction or written plan for the purchase or sale of our securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non Rule 10b5-1 trading arrangement.”
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors and Shareholders of
Topgolf Callaway Golf Company
Carlsbad, CaliforniaBrands Corp.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Topgolf Callaway Golf CompanyBrands Corp. and its subsidiaries (the “Company”) as of December 31, 2021,2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021,2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2021,2023, of the Company and our report dated March 1, 2022,February 28, 2024, expressed an unqualified opinion on those financial statements.
As described in Management’s Report on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Topgolf, which was merged with the Company on March 8, 2021, and whose financial statements constitute 35% of net revenues and 37% total assets of the consolidated financial statement amounts as of and for the year ended December 31, 2021. Accordingly, our audit did not include the internal control over financial reporting at Topgolf International, Inc.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's reportManagement’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTEDeloitte & TOUCHETouche LLP
Costa Mesa, California
March 1, 2022February 28, 2024
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Certain information concerning the Company’sour executive officers is included under the caption “Information About the Company'sour Executive Officers” following Part I, Item 1 of this Form 10-K. The other information required by Item 10 will be included in the Company’sour definitive Proxy Statement under the captions "Proposal“Proposal No. 1 - Election of Directors,"” “Delinquent Section 16(a) Reports” andand “Board of Directors and Corporate Governance,” to be filed with the Commission within 120 days after the end of calendar year 20212023 pursuant to Regulation 14A, which information is incorporated herein by this reference.
Item 11. Executive Compensation
The Company maintainsWe maintain employee benefit plans and programs in which itsour executive officers are participants. Copies of certain of these plans and programs are set forth or incorporated by reference as Exhibits to this report. Information required by Item 11 will be included in the Company’sour definitive Proxy Statement under the captions “Executive Officer Compensation,” “Executive Officer Compensation - Compensation Committee Report” and “Board of Directors and Corporate Governance,” to be filed with the Commission within 120 days after the end of calendar year 20212023 pursuant to Regulation 14A, which information is incorporated herein by this reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
The information required by Item 12 will be included in the Company’sour definitive Proxy Statement under the caption “Beneficial Ownership of the Company’s Securities,” to be filed with the Commission within 120 days after the end of calendar year 20212023 pursuant to Regulation 14A, which information is incorporated herein by this reference.
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information about the number of stock options and shares underlying restricted stock units and performance share units outstanding and authorized for issuance under all of our equity compensation plans of the Company as of December 31, 2021.2023. See Note 17. "Stock15. “Stock Plans and Share-Based Compensation"Compensation” in the Notes to Consolidated Financial Statements in this Form 10-K for further discussion of theour equity plans of the Company.
Equity Compensation Plan Information
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| Plan Category | Number of Shares to be Issued Upon Exercise of Outstanding Options and Vesting of Restricted Stock Units and Performance Share Units(1) | | Weighted Average Exercise Price of Outstanding Options(2) | | Number of Shares
Remaining
Available for
Future Issuance |
| | (in thousands, except dollar amounts) | |
| Equity Compensation Plans Approved by Shareholders | | 2,824 | | (3) | | | $ | 6.52 | | | | | 5,248 | | (4) |
Equity Compensation Plans Not Approved by Shareholders(5) | | 774 | | (6) | | | $ | — | | | | | 310 | | (7) |
| Total | | 3,598 | | | | | $ | 6.52 | | | | | 5,558 | | |
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(1)Outstanding shares underlying restricted stock units granted under the 2004 Incentive Plan and the Callaway Golf Company 2013 Non-Employee Directors Stock Incentive Plan (the “2013 Directors Plan”) reported in this column include 1,384 shares of accrued incremental stock dividend equivalent rights.
(2)Does not include shares underlying restricted stock units and performance share units, which do not have an exercise price.
(3)Includes 48,245 shares underlying restricted stock units issuable under the 2013 Directors Plan and 54,629 shares underlying stock options, 1,119,362 shares underlying restricted stock units and 1,601,726 shares underlyingplans.
performanceEquity Compensation Plan Information (in millions, except per share units (at “target”) issuable under the Callaway Golf Company Amended and Restated 2004 Incentive Plan (the “2004 Incentive Plan”).amounts)
(4)Consists of 4,736,163 shares remaining available for future issuance under the 2004 Incentive Plan and 512,276 shares remaining available for future issuance under the 2013 Directors Plan. The 2004 Incentive Plan permits the award of stock options, restricted stock awards, restricted stock units, performance share units and various other stock-based awards. The 2013 Directors Plan permits the award of stock options, restricted stock and restricted stock units. For purposes of calculating the shares that remain available for future issuance under the 2004 Incentive Plan, each share subject to an option is counted against the share reserve as 1.0 share and each share subject to a full value award (i.e., restricted stock units and performance share units) under the 2004 Incentive Plan is counted against the share reserve as 2.0 shares under the 2004 Incentive Plan’s fungible share ratio. Awards under the 2013 Directors Plan are counted as 1.0 share for each one share subject to such awards.
(5)In connection with the Company’s merger with Topgolf, the Company assumed the following equity compensation plans: the Topgolf International, Inc. 2015 Stock Incentive Plan (the “TG15 Plan”), the Topgolf International, Inc. 2016 Stock Incentive Plan (the “TG16 Plan”), and that certain Topgolf International, Inc. Nonqualified Stock Option Grant Notice and Stock Option Agreement dated October 18, 2016 between Topgolf International, Inc. and WestRiver Management, LLC (the “WestRiver Option Agreement,”) and the outstanding awards thereunder. No shares remain available for grant under the TG15 Plan, the TG16 Plan or the WestRiver Option Agreement at December 31, 2021 (see Note 16. “Capital Stock” in the Notes to Consolidated Financial Statements in this Form 10-K), and therefore, the outstanding awards under such plans are not reported in the table. The outstanding awards as of December 31, 2021 include 298,963 shares underlying stock options issuable under the TG15 Plan, 1,607,585 shares underlying stock options issuable under the TG16 Plan, and 26,685 shares underlying stock options issuable under the WestRiver Option Agreement, which options have a weighted average exercise price of $27.17.
(6)Includes 414,619 shares underlying restricted stock units and 359,113 shares underlying performance share units (at “target”) issuable under the Callaway Golf Company 2021 Inducement Plan (the “2021 Inducement Plan”).The material features of the 2021 Inducement Plan are more fully described in Note 17 in the Notes to Consolidated Financial Statements in this Form 10-K.
(7)Consists of 309,613 shares remaining available for future issuance under the 2021 Inducement Plan. The 2021 Inducement Plan permits the award of stock options, restricted stock awards, restricted stock units, performance share units and various other stock-based awards. | | | | | | | | | | | | | | | | | | | | | | | |
| Plan Category | Number of Shares to be Issued Upon Exercise of Outstanding Options and Vesting of Restricted Stock Units and Performance Share Units(1) | | | Weighted Average
Exercise Price of
Outstanding
Options | | Number of Shares
Remaining
Available for
Future Issuance | |
| | |
| Equity Compensation Plans Approved by Shareholders | 3.4 | | (2) | | $ | 28.44 | | | 12.0 | | (3) |
Equity Compensation Plans Not Approved by Shareholders(4) | 0.3 | | (5) | | — | | | — | | |
| Total | 3.7 | | | | $ | 28.44 | | | 12.0 | | |
| | | | | | | |
(1) Outstanding shares underlying restricted stock units (“RSUs”) granted under the Callaway Golf Company Amended and Restated 2004 Incentive Plan (the “2004 Plan”) at target reported in this column include 21 shares of accrued incremental stock dividend equivalent rights. |
|
(2) Includes 600,458 shares underlying RSUs and 1,460,861 shares underlying PSUs (at “target”) issuable under the 2004 Plan and 725,883 shares underlying RSUs and 572,091 shares underlying PSUs (at “target”) outstanding under our 2022 Incentive Plan (the “2022 Plan”). |
(3) Consists of 12,048,290 shares remaining available for future issuance under the 2022 Plan. For purposes of calculating the shares that remain available for future issuance under the 2022 Plan, each share subject to an option is counted against the share reserve as 1.0 share and each share subject to a full value award (i.e., RSUs and PSUs) under the 2022 Plan is counted against the share reserve as 2.0 shares under the 2022 Incentive Plan’s fungible share ratio. In addition, shares underlying outstanding awards under the 2004 Plan may again become available for issuance under the 2022 Plan to the extent such awards lapse, expire, terminate or are canceled. |
(4) In connection with our merger with Topgolf, we assumed the following equity compensation plans: the Topgolf 2015 Stock Incentive Plan (the “TG15 Plan”), the Topgolf 2016 Stock Incentive Plan (the “TG16 Plan”), and that certain Topgolf International, Inc. Nonqualified Stock Option Grant Notice and Stock Option Agreement dated October 18, 2016 between Topgolf and WestRiver Management, LLC (the “WestRiver Option Agreement,”) and the outstanding awards thereunder. No shares are available for grant under the TG15 Plan, the TG16 Plan or the WestRiver Option Agreement at December 31, 2023 (see Note 14. “Capital Stock” in the Notes to Consolidated Financial Statements in this Form 10-K), and therefore, the outstanding awards under such plans are not reported in the table. As of December 31, 2023, there remains a total of 183,516 shares underlying stock options outstanding under the TG15 Plan, 860,839 shares underlying stock options outstanding under the TG16 Plan, and 26,685 shares underlying stock options outstanding under the WestRiver Option Agreement, which options have a weighted average exercise price of $28.44. |
(5) Includes 69,734 shares underlying RSUs and 243,405 shares underlying PSUs (at “target”) issuable under our 2021 Inducement Plan which is more fully described in Note 15. “Stock Plans and Share-Based Compensation”. |
Item 13. Certain Relationships, Related Transactions and Director Independence
The information required by Item 13 will be included in the Company’sour definitive Proxy Statement under the captions “Transactions with Related Persons” and “Board of Directors and Corporate Governance,” to be filed with the Commission within 120 days after the end of calendar year 20212023 pursuant to Regulation 14A, which information is incorporated herein by this reference.
Item 14. Principal Accountant Fees and Services
The information included in Item 14 will be included in the Company’sour definitive Proxy Statement under the caption “Information Concerning Independent Registered Public Accounting Firm” to be filed with the Commission within 120 days after the end of calendar year 20212023 pursuant to Regulation 14A, which information is incorporated herein by this reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
Documents filed as part of this report:
1. Financial Statements. The following consolidated financial statements of Topgolf Callaway Golf CompanyBrands and itsour subsidiaries required to be filed pursuant to Part II, Item 8 of this Form 10-K, are included in this Annual Report on Form 10-K beginning on page F-1:
•Report of Independent Registered Public Accounting Firm;
•Consolidated Balance Sheets as of December 31, 20212023 and 2020;2022;
•Consolidated Statements of Operations for the years ended December 31, 2021, 20202023, 2022 and 2019;2021;
•Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2021, 20202023, 2022 and 2019;2021;
•Consolidated Statements of Cash Flows for the years ended December 31, 2021, 20202023, 2022 and 2019;2021;
•Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2021, 20202023, 2022 and 2019;2021; and
•Notes to Consolidated Financial Statements.
2. Financial statement schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or notes thereto.
3. Exhibits.
A copy of any of the following exhibits will be furnished to any beneficial owner of the Company’sour common stock, or any person from whom the Company solicitswe solicit a proxy, upon written request and payment of the Company’sour reasonable expenses in furnishing any such exhibit. All such requests should be directed to the Company’sour Investor Relations Department at Topgolf Callaway Golf Company,Brands Corp., 2180 Rutherford Road, Carlsbad, CA 92008.
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| 4.5 | | | Assignment, Assumption and Amendment Agreement, dated as of October 27, 2020, by and among Callaway Golfthe Company, Topgolf International, Inc. and PEP TG Investments LP, relating to that certain Warrant, issued by Topgolf International, Inc. to PEP TG Investments LP on July 6, 2016.2016, incorporated herein by this reference to Exhibit 4.5 to the Company’s Annual Report on Form 10-K, as filed with the Commission on March 1, 2022 (file no. 1-10962).†
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| 10.9 | | | Officer Employment Agreement, effective as of April 25, 2012,5, 2021, by and between Topgolf International, Inc. and Arthur Starrs, incorporated herein by this reference to Exhibit 10.7 to the Company's Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, as filed with the Commission onMay 10, 2021 (file no. 1-10962). |
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10.41 10.36 | | | CreditIndemnification Agreement, dated as of January 4, 2019, among Callaway GolfMarch 15, 2022, between the Company and Bank of America, N.A. as administrative agent,Varsha R. Rao incorporated herein by this reference to Exhibit 10.1 to the Company'sCompany’s Current Report on Form 8-K, as filed with the Commission on January 4, 2019March 15, 2022 (file no. 1-10962). |
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10.42 10.37 | | | Fourth Amended and Restated Loan and SecurityIndemnification Agreement, dated as of May 17, 2019, among Callaway GolfJune 6, 2023, between the Company Callaway Golf Sales Company, Callaway Golf Ball Operations, Inc., Ogio International, Inc., travisMathew, LLC, Callaway Golf Canada Ltd., Callaway Golf Europe Ltd., JACK WOLFSKIN Ausrüstung für Draussen GmbH & Co. KGaA, Callaway Golf Interactive, Inc., Callaway Golf International Sales Company, Callaway Golf European Holding Company Limited, Callaway Germany Holdco GmbH, JW STARGAZER Holding GmbH, SKYRAGER GmbH, Jack Wolfskin Retail GmbH, Bank of America, N.A., as administrative agent and collateral agent, MUFG Union Bank, as syndication agent, SunTrust Bank, as documentation agent, Bank of America, N.A., as sole lead arranger and sole bookrunner and each of Bank of America, N.A., Bank of America, N.A. (acting through its London branch), Bank of America, N.A. (acting through its Canada branch), SunTrust Bank, MUFG Union Bank N.A., JPMorgan Chase Bank, N.A., JPMorgan Chase Bank, N.A., London Branch and JPMorgan Chase Bank, N.A., Toronto Branch, as lenders,C. Matthew Turney, incorporated herein by this reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, as filed with the Commission on May 22, 2019June 9, 2023 (file no. 1-10962). |
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10.4310.38 | | | First Amendment to Fourth Amended and Restated Loan and Security Agreement, dated as of August 28, 2019, by and among Callaway Golf Company, Callaway Golf Sales Company, Callaway Golf Ball Operations, Inc., Ogio International, Inc., travisMathew, LLC, Callaway Golf Canada Ltd., Callaway Golf Europe Ltd., Jack Wolfskin North America, Inc, and JACK WOLFSKIN Ausrüstung für Draussen GmbH, Bank of America, N.A. as administrative agent and certain financial institutions as lenders, herein by this reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, as filed with the Commission on May 11, 2020(file no. 1-10962). |
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10.44 | | | Second Amendment to Fourth Amended and Restated Loan and SecurityCredit Agreement, dated as of March 20, 2020,16, 2023, among Topgolf Callaway Golf Company, Callaway Golf Sales Company, Callaway Golf Ball Operations, Inc.Brands Corp., Ogio International, Inc., travisMathew, LLC, Callaway Golf Canada Ltd., Callaway Golf Europe Ltd., Jack Wolfskin North America, Inc, and JACK WOLFSKIN Ausrüstung für Draussen GmbH, Bank of America, N.A. as administrative agent and certain financial institutions as lenders, incorporated herein by this reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, as filed with the Commission on March 25, 2020 (file no. 1-10962). |
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10.45 | | | Third Amendment to Fourth Amended and Restated Loan and Security Agreement, dated as of April 28, 2020, among Callaway Golf Company, Callaway Golf Sales Company, Callaway Golf Ball Operations, Inc., Ogio International, Inc., travisMathew, LLC, Callaway Golf Canada Ltd., Callaway Golf Europe Ltd., Jack Wolfskin North America, Inc, and JACK WOLFSKIN Ausrüstung für Draussen GmbH, Bank of America, N.A. as administrative agent and certain financial institutions as lenders, incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, as filed with the Commission on April 29, 2020 (file no. 1-10962). |
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10.46 | | | Fourth Amendment to Fourth Amended and Restated Loan and Security Agreement, dated as of October 27, 2020, by and among Callaway Golf Company, certain subsidiaries of Callaway Golf Company, and Bank of America, N.A., as administrative agent and as security trustee, incorporated herein by this reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K, as filed with the Commission on October 27, 2020 (file no. 1-10962). |
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10.47 | | | Amendment No. 1, dated as of April 28, 2020, to the Credit Agreement, dated as of January 4, 2019, by and among Callaway Golf Company, Bank of America, N.A., as administrative agent, and the financial institutions party thereto incorporated herein by referencefrom time to Exhibit 10.2 to the Company’s Current Report on Form 8-K,time as filed with the Commission on April 29, 2020 (file no. 1-10962). |
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10.48 | | | Amendment No. 2 dated as of November 19, 2020, to the Credit Agreement, dated as of January 4, 2019, among Callaway Golf Companylenders, and Bank of America, N.A. as administrative agent, incorporated herein by this reference to Exhibit 10.110.3 to the Company's CurrentCompany’s Quarterly Report on Form 8-K10-Q as filed with the Commission on November 20, 2020May 10, 2023 (file no. 1-10962). |
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| 10.39 | | | Fifth Amended and Restated Loan and Security Agreement, dated as of March 16, 2023, by and among Topgolf Callaway Brands Corp., certain subsidiaries of Topgolf Callaway Brands Corp., the financial institutions party thereto from time to time as lenders, and Bank of America, N.A., as administrative agent and security trustee, incorporated herein by this reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q, as filed with the Commission on May 10, 2023 (file no. 1-10962). |
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| 101 | | | The following financial statements from the Callaway Golf CompanyCompany’s Annual Report on Form 10-K for the year ended December 31, 2021,2023, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive (Loss) Income, (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statements of Shareholders’ Equity, and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and including detailed tags. |
| 104 | | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
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† Included in this report
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on itsour behalf by the undersigned, thereunto duly authorized.
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| | TOPGOLF CALLAWAY GOLF COMPANYBRANDS CORP. |
| | By: | /s/ OLIVER G. BREWER III |
| | | Oliver G. Brewer III |
| | | President and Chief Executive Officer |
Date: March 1, 2022February 28, 2024
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and as of the dates indicated.
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| Signature | | Title | Dated as of |
| Principal Executive Officer: | | | |
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| /s/ OLIVER G. BREWER III | | President and Chief Executive Officer, Director | March 1, 2022February 28, 2024 |
| Oliver G. Brewer III | | | |
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| Principal Financial Officer: | | | |
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| /s/ BRIAN P. LYNCH | | Executive Vice President, Chief Financial Officer | March 1, 2022February 28, 2024 |
| Brian P. Lynch | | | |
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| Principal Accounting Officer: | | | |
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| /s/ JENNIFER THOMAS | | Sr. Vice President, Chief Accounting Officer | March 1, 2022February 28, 2024 |
| Jennifer Thomas | | | |
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| Non-Management Directors: | | | |
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| * | | Vice Chairman of the Board | March 1, 2022February 28, 2024 |
| Erik J Anderson | | | |
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| * | | Director | March 1, 2022 |
Samuel H. Armacost | | | |
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* | | Director | March 1, 2022 |
Scott H. Baxter | | | |
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* | | Director | March 1, 2022 |
Thomas G. Dundon | | | |
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* | | Director | March 1, 2022February 28, 2024 |
| Laura J. Flanagan | | | |
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| * | | Director | March 1, 2022February 28, 2024 |
| Russell L. Fleischer | | | |
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| * | | Director | March 1, 2022February 28, 2024 |
| Bavan M. Holloway | | | |
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| * | | Chairman of the Board | March 1, 2022February 28, 2024 |
| John F. Lundgren | | | |
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| * | | Director | March 1, 2022February 28, 2024 |
| Scott M. Marimow | | | |
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| * | | Director | March 1, 2022February 28, 2024 |
| Adebayo O. Ogunlesi | | | |
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| * | | Director | March 1, 2022February 28, 2024 |
| Varsha R. Rao | | | |
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| * | | Director | February 28, 2024 |
| Linda B. Segre | | | |
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| * | | Director | March 1, 2022February 28, 2024 |
| Anthony S. Thornley | | | |
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| * | | Director | February 28, 2024 |
| C. Matthew Turney | | | |
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| *By: | /s/ BRIAN P. LYNCH | |
| Brian P. Lynch | |
| Attorney-in-fact | |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholdersshareholders and the Board of Directors of
Topgolf Callaway Golf Company
Carlsbad, CaliforniaBrands Corp.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Topgolf Callaway Golf CompanyBrands Corp. and its subsidiaries (the "Company"“Company”) as of December 31, 20212023 and 2020,2022, the related consolidated statements of operations, comprehensive income, (loss), shareholders'shareholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2021,2023, and the related notes (collectively referred to as the "financial statements"“financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20212023 and 2020,2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021,2023, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company'sCompany’s internal control over financial reporting as of December 31, 2021,2023, based on criteria established in Internal Control — Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2022,February 28, 2024, expressed an unqualified opinion on the Company'sCompany’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 3 to the financial statements, the Company changed its method of accounting for convertible debt effective January 1, 2022, due to the adoption of Accounting Standards Update 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, using the modified retrospective approach.
Basis for Opinion
These financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on the Company'sCompany’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit MattersMatter
The critical audit mattersmatter communicated below are mattersis a matter arising from the current-period audit of the financial statements that werewas communicated or required to be communicated to the audit committee and that (1) relaterelates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit mattersmatter below, providing a separate opinionsopinion on the critical audit mattersmatter or on the accounts or disclosures to which they relate.it relates.
Business CombinationsIncome Tax Provision Including Valuation Allowance – Estimate for valuation of acquired intangible assets – Refer to Note 6 to the Financial Statements
Critical Audit Matter Description
On March 8, 2021, the Company completed its merger with Topgolf International, Inc. ("Topgolf") for approximately $3,049 million. The Company allocated the fair value of the purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The Company estimated the fair value of identifiable intangible assets to be $1,076 million. The excess purchase price over the fair value of net tangible assets and identifiable intangible assets of $1,904 million was recorded as goodwill.
We identified the fair value determination of acquired intangible assets and the resulting goodwill for the business combination as a critical audit matter due to the significant judgment required in determining significant estimates related to the Topgolf merger. Management’s estimates of forecasted discounted cash flows included significant assumptions for revenue growth rates and the selection of appropriate discount rates and appropriate royalty rates. There was a high degree of auditor judgment and subjectivity in applying audit procedures relating to the fair value measurement of intangible assets acquired due to the significant amount of judgment by management when developing its estimates. Significant audit effort was required in performing procedures and evaluating the significant assumptions relating to the estimate and the audit effort involved the use of professionals with specialized skill and knowledge to assist in evaluating the audit evidence obtained from these procedures.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management’s estimates for the fair value of intangible assets included the following, among others:
•We tested the effectiveness of controls over the business combination, including controls over the modeling of future cash flows, the determination of the revenue growth rate, expense, discount rate, and royalty rate assumptions, and ultimately the determination of the fair value of the intangible assets acquired.
•We assessed the reasonableness of management’s revenue growth rate assumptions by inquiring with appropriate individuals within the Company’s operations and finance departments and comparing the projected revenue to Topgolf's historical results as well as those of certain peer companies, including testing the completeness, accuracy, and relevance of underlying historical data.
•We assessed the reasonableness of management’s assumptions related to forecasted debt free net cash flows through inquiring with appropriate individuals within the Company’s operations and finance departments, comparing debt free net cash flows to the cash flows of Topgolf's historical results, and comparing projected cash flows to correlated revenue projection assumptions, including testing the completeness, accuracy, and relevance of underlying historical data.
•With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology, (2) discount rates, and (3) royalty rates, including testing the underlying source information, testing the mathematical accuracy of the calculation, and developing a range of independent estimates and comparing those to the discount rates and royalty rates selected by management.
•Evaluated whether the audit evidence obtained through these procedures was consistent with evidence obtained in other areas of the audit.
Accounting for Leases under ASC 842 — Refer to Notes 2 and 312 to the Financial Statementsfinancial statements
Critical Audit Matter Description
The Company acquired a portfoliois subject to income tax in the U.S. and foreign jurisdictions, and deferred tax assets and liabilities result from temporary differences between the financial reporting and tax bases of leases through its March 8, 2021 merger with Topgolf. In certain Topgolf venue leasing arrangements,assets and liabilities. As described in Note 12 to the financial statements, the Company enters intorecorded an income tax benefit of $60.2 million and has gross deferred tax assets of $1,008.3 million, a valuation allowance of $47.7 million reducing the deferred tax assets to $960.6 million and, overall, net deferred tax liabilities of $21 million as of December 31, 2023. Management uses judgment when recording its tax provision, which includes the interpretation and application of complex build-to-suit arrangements in connection with its company-operated venue operations which often results intax laws across multiple jurisdictions. In addition, the Company controlling the underlying ground that the venue is built on, the building, or both during the construction period. Under these arrangements, the construction terms, financing, and eventual lease are agreed to prior to the construction period. In most cases, the construction is financed by a third-party real estate financing partner (the legal ownervaluation of the property). During the construction period, when the Company is deemed to be in controlCompany’s deferred tax assets requires a significant amount of the underlying assets in accordance with Accounting Standards Codification (ASC) 842-40, the Company records the asset as if owned and a corresponding construction advance. Once the construction is completed, the Company applies sale-lease back criteria to determine if controljudgment, including estimates of the underlying assets is then transferred to the legal owner or whether the Company remains the accounting owner of the leased assets for accounting purposes. If control does not pass to the legal owner, it is considered a failed sale,future taxable income and the assets are not derecognized while a deemed landlord liability is recognized. If control passesability to the legal owner, it is considered a sale,utilize net operating losses (NOLs) and the assets are derecognized, and a gain or loss is recognized based on the fair value of the asset. At December 31, 2021, the deemed landlord financing (“DLF”) obligations were $461.5 million.
Given the inherent complexity of proper lease classification of venue lease agreements, there was a needtax credits to involve professionals in our firm having expertise in lease accounting guidance under ASC 842, Leases, when performing audit procedures to evaluate management’s judgments and conclusions.offset future taxable income.
HowGiven the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the accounting for the DLF obligations included the following, among others:
•We obtained an understanding and evaluated the design effectiveness of internal controls in respect of the Company’s lease accounting evaluation.
•We selected a sample of DLF obligations and performed the following:
•Obtained and inspected the underlying agreements and evaluated the structure and terms of the agreements to determine if sale and leaseback guidance was applicable.
•Based on the terms and structure of the agreement, evaluated whether the transaction resulted in a failed sale.
•For those which were determined to have failed the sale-leaseback test, evaluated whether the rate implicit in the agreement was properly calculated.
•Involved professionals in our firm having expertise in lease accounting guidance under ASC 842.
Deferred Income Taxes – Estimate for valuation of acquired assets – Refer to Notes 6 and 14 to the Financial Statements
Critical Audit Matter Description
In March 2021, the Company completed its merger with Topgolf. 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 based on preliminary estimates of fair value.
Auditing the preliminary income tax account balances recorded in the opening balance sheet and auditing the income tax provision was complex due to thesignificant judgments by management when evaluating theinterpreting and applying complex tax attributes of the legacy business combined with the tax attributes of Topgolf, the completeness of the population of the deferred tax balanceslaws and uncertain tax positions, and the evaluation of the recoverability of deferred tax assets. Given the complexity,regulations, as well as Accounting Standard Codification Topic No. 740, Income Taxes, our audit procedures to assess the tax provision and the valuation allowance recorded against the Company’s deferred tax assets required a high degree of auditor judgment and an increased extent of audit effort, including the need to involve our income tax specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures performed related to deferredthe income taxes performedtax provision including valuation allowance included the following, among others:
•We tested the effectiveness of controls over the income tax provision and deferred tax assets and liabilities, including management’s controls over the estimates of future taxable income and the determination of whether it is more likely than not that deferred tax assets will be realized.
•We tested the completeness and accuracy of the underlying amounts and inputs used to compute the income tax provision.
•We tested the completeness and accuracy of the deferred tax balances based on the historical and purchase accounting information available for book versus income tax basis differences.
•We assessed the reasonableness of the methods, assumptions, and judgments used by management to determine whether athe tax provision and valuation allowance was necessary.allowance.
•We tested the valuation allowances recorded by evaluating management conclusions on the realizability of the deferred tax assets.
•We tested the key assumptions underlying the estimates of uncertain income tax positions.provision by selecting a sample of permanent differences and deferred tax assets and liabilities, evaluating compliance with tax laws and regulations for those samples.
•We involved professionals in our firm having expertise in accounting for U.S. and foreign income taxes.
/s/ DELOITTEDeloitte & TOUCHETouche LLP
Costa Mesa, California
March 1, 2022February 28, 2024
We have served as the Company'sCompany’s auditor since 2002.
TOPGOLF CALLAWAY GOLF COMPANYBRANDS CORP.
CONSOLIDATED BALANCE SHEETS
(In thousands,millions, except share and per share data)
| | December 31, |
| 2021 | | 2020 |
| December 31, | | | December 31, |
| 2023 | | | 2023 | | 2022 |
| ASSETS | ASSETS | | | |
| Current assets: | Current assets: | |
| Current assets: | |
| Current assets: | |
| Cash and cash equivalents | |
| Cash and cash equivalents | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 352,221 | | | $ | 366,119 | |
| Restricted cash | Restricted cash | 1,164 | | | — | |
| Accounts receivable, net | 105,331 | | | 138,482 | |
| Accounts receivable, less allowances of $11.6 million and $10.8 million, respectively | |
| Inventories | Inventories | 533,457 | | | 352,544 | |
| | Prepaid expenses | Prepaid expenses | 54,248 | | | 20,318 | |
| Other current assets | Other current assets | 119,332 | | | 35,164 | Other current assets | 183.1 | | | 136.0 | | 136.0 |
| | Total current assets | Total current assets | 1,165,753 | | | 912,627 | |
| Property, plant and equipment, net | Property, plant and equipment, net | 1,451,402 | | | 146,495 | |
| Operating lease right-of-use assets, net | Operating lease right-of-use assets, net | 1,384,501 | | | 194,776 | |
| Intangible assets, net | 1,528,638 | | | 484,339 | |
| Tradenames and trademarks | |
| Other intangible assets, net | |
| Goodwill | Goodwill | 1,960,070 | | | 56,658 | |
| | Investments in golf-related ventures | 39,250 | | | 111,442 | |
| Other assets | 218,166 | | | 74,263 | |
| Other assets, net | |
| Total assets | Total assets | $ | 7,747,780 | | | $ | 1,980,600 | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY | |
| Current liabilities: | Current liabilities: | |
| Current liabilities: | |
| Current liabilities: | |
| Accounts payable and accrued expenses | Accounts payable and accrued expenses | $ | 491,176 | | | $ | 276,209 | |
| | Accounts payable and accrued expenses | |
| Accounts payable and accrued expenses | |
| Accrued employee compensation and benefits | Accrued employee compensation and benefits | 128,867 | | | 30,937 | |
| Asset-based credit facilities | Asset-based credit facilities | 9,096 | | | 22,130 | |
| | Operating lease liabilities, short-term | Operating lease liabilities, short-term | 72,326 | | | 29,579 | |
| Construction advances | Construction advances | 22,943 | | | — | |
| Deferred revenue | Deferred revenue | 93,873 | | | 2,546 | |
| | Other current liabilities | Other current liabilities | 47,744 | | | 29,871 | |
| Total current liabilities | Total current liabilities | 866,025 | | | 391,272 | |
| Long-term liabilities: | |
| Long-term debt, net (Note 7) | 1,025,278 | | | 650,564 | |
| | Long-term debt, net | |
| Long-term debt, net | |
| Long-term debt, net | |
| Operating lease liabilities, long-term | Operating lease liabilities, long-term | 1,385,364 | | | 177,996 | |
| Deemed landlord financing, long-term | 460,634 | | | — | |
| Deemed landlord financing obligations, long-term | |
| Deferred taxes, net | Deferred taxes, net | 163,591 | | | 58,628 | |
| | Other long-term liabilities | Other long-term liabilities | 163,986 | | | 26,496 | |
| | Commitments and contingencies (Note 13) | | Commitments and contingencies (Note 13) | | | |
| Shareholders’ equity: | Shareholders’ equity: | |
| Preferred stock, $0.01 par value, 3,000,000 shares authorized, none issued and outstanding at December 31, 2021 and 2020 | — | | | — | |
Common stock, $0.01 par value, 360,000,000 shares authorized, 186,171,615 and 95,648,648 shares issued and outstanding at December 31, 2021 and 2020, respectively | 1,862 | | | 956 | |
| Preferred stock, $0.01 par value, 3.0 million shares authorized, none issued and outstanding at December 31, 2023 and December 31, 2022 | |
| Preferred stock, $0.01 par value, 3.0 million shares authorized, none issued and outstanding at December 31, 2023 and December 31, 2022 | |
| Preferred stock, $0.01 par value, 3.0 million shares authorized, none issued and outstanding at December 31, 2023 and December 31, 2022 | |
Common stock, $0.01 par value, 360.0 million shares authorized, 187.0 million shares issued at December 31, 2023 and December 31, 2022 | |
| Additional paid-in capital | Additional paid-in capital | 3,051,604 | | 346,945 | Additional paid-in capital | 3,032.7 | | 3,012.7 |
| Retained earnings | Retained earnings | 682,165 | | 360,228 | Retained earnings | 947.5 | | 852.5 |
| Accumulated other comprehensive loss | Accumulated other comprehensive loss | (27,343) | | | (6,546) | |
| Less: Common stock held in treasury, at cost, 959,709 and 1,446,408 shares at December 31, 2021 and 2020, respectively | (25,386) | | (25,939) |
| | Less: Common stock held in treasury, at cost, 3.3 million shares and 1.3 million shares at December 31, 2023 and December 31, 2022, respectively | | Less: Common stock held in treasury, at cost, 3.3 million shares and 1.3 million shares at December 31, 2023 and December 31, 2022, respectively | (56.4) | | (31.3) |
| Total shareholders’ equity | Total shareholders’ equity | 3,682,902 | | | 675,644 | |
| Total liabilities and shareholders’ equity | Total liabilities and shareholders’ equity | $ | 7,747,780 | | | $ | 1,980,600 | |
|
The accompanying notes are an integral part of these consolidated financial statements.
TOPGOLF CALLAWAY GOLF COMPANYBRANDS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands,millions, except per share data)
| | Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Year Ended December 31, | | | Year Ended December 31, |
| 2023 | | | 2023 | | 2022 | | 2021 |
| Net revenues: | Net revenues: | | | | | |
| Products | |
| Products | |
| Products | Products | $ | 2,058,722 | | | $ | 1,589,460 | | | $ | 1,701,063 | |
| Services | Services | 1,074,725 | | | — | | | — | |
| Total net revenues | Total net revenues | 3,133,447 | | | 1,589,460 | | | 1,701,063 | |
| Costs and expenses: | Costs and expenses: | |
| Cost of products | Cost of products | 1,136,626 | | | 931,875 | | | 934,276 | |
| Cost of products | |
| Cost of products | |
| Cost of services, excluding depreciation and amortization | Cost of services, excluding depreciation and amortization | 133,510 | | | — | | | — | |
| Other venue expenses | Other venue expenses | 731,549 | | | — | | | — | |
| Selling, general and administrative expenses | 849,671 | | | 542,531 | | | 583,540 | |
| Research and development expenses | 68,000 | | | 46,300 | | | 50,579 | |
| Goodwill and trade name impairment | — | | | 174,269 | | | — | |
| Selling, general and administrative expense | |
| Research and development expense | |
| | Venue pre-opening costs | |
| Venue pre-opening costs | |
| Venue pre-opening costs | Venue pre-opening costs | 9,376 | | | — | | | — | |
| Total costs and expenses | Total costs and expenses | 2,928,732 | | | 1,694,975 | | | 1,568,395 | |
| Income (loss) from operations | 204,715 | | | (105,515) | | | 132,668 | |
| Income from operations | |
| Interest expense, net | Interest expense, net | (115,565) | | | (46,932) | | | (38,493) | |
| Gain on Topgolf investment | Gain on Topgolf investment | 252,531 | | | — | | | — | |
| Other income, net | 8,961 | | | 24,969 | | | 1,594 | |
| Income (loss) before income taxes | 350,642 | | | (127,478) | | | 95,769 | |
| Income tax provision (benefit) | 28,654 | | | (544) | | | 16,540 | |
| Net income (loss) | 321,988 | | | (126,934) | | | 79,229 | |
| Less: Net loss attributable to non-controlling interests | — | | | — | | | (179) | |
| Net income (loss) attributable to Callaway Golf Company | $ | 321,988 | | | $ | (126,934) | | | $ | 79,408 | |
| Other income | |
| Income before income taxes | |
| Income tax (benefit) provision | |
| Net income | |
| | Earnings (loss) per common share: | |
| | Earnings per common share: | |
| | Earnings per common share: | |
| | Earnings per common share: | |
| Basic | |
| Basic | |
| Basic | Basic | $ | 1.90 | | | $ | (1.35) | | | $ | 0.84 | |
| Diluted | Diluted | $ | 1.82 | | | $ | (1.35) | | | $ | 0.82 | |
| | Weighted-average common shares outstanding: | Weighted-average common shares outstanding: | |
| Weighted-average common shares outstanding: | |
| Weighted-average common shares outstanding: | |
| Basic | |
| Basic | |
| Basic | Basic | 169,101 | | | 94,201 | | | 94,251 | |
| Diluted | Diluted | 176,925 | | | 94,201 | | | 96,287 | |
|
The accompanying notes are an integral part of these consolidated financial statements.
TOPGOLF CALLAWAY GOLF COMPANYBRANDS CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)millions)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Net income (loss) | $ | 321,988 | | | $ | (126,934) | | | 79,229 | |
| Other comprehensive income (loss): | | | | | |
| Change in derivative instruments | 9,975 | | | (12,730) | | | (5,585) | |
| Foreign currency translation adjustments | (29,215) | | | 25,690 | | | (4,751) | |
| Comprehensive income (loss), before income tax on other comprehensive income (loss) | 302,748 | | | (113,974) | | | 68,893 | |
| Income tax provision (benefit) on derivative instruments | 1,557 | | | (2,916) | | | (1,275) | |
| Comprehensive income (loss) | 301,191 | | | (111,058) | | | 70,168 | |
| Less: Comprehensive loss attributable to non-controlling interests | — | | | — | | | (339) | |
| Comprehensive income (loss) attributable to Callaway Golf Company | $ | 301,191 | | | $ | (111,058) | | | $ | 70,507 | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| Net income | $ | 95.0 | | | $ | 157.9 | | | $ | 322.0 | |
| Other comprehensive income: | | | | | |
| Change in derivative instruments | 1.4 | | | 13.0 | | | 10.0 | |
| Foreign currency translation adjustments | 12.8 | | | (44.7) | | | (29.2) | |
| Comprehensive income, before income tax on other comprehensive income | 109.2 | | | 126.2 | | | 302.8 | |
| Income tax provision on derivative instruments | 0.2 | | | 2.5 | | | 1.6 | |
| Comprehensive income | $ | 109.0 | | | $ | 123.7 | | | $ | 301.2 | |
| | | | | |
| | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
TOPGOLF CALLAWAY GOLF COMPANYBRANDS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)in millions) | | Year Ended December 31, | | | Year Ended December 31, |
| 2023 | | | 2023 | | 2022 | | 2021 |
| Cash flows from operating activities: | |
| Net income | |
| Net income | |
| Net income | |
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: | |
| Depreciation and amortization | |
| Depreciation and amortization | |
| Depreciation and amortization | |
| | Non-cash interest on financing and deemed landlord financed leases | |
| Non-cash interest on financing and deemed landlord financed leases | |
| Non-cash interest on financing and deemed landlord financed leases | |
| Amortization of debt discount and issuance costs | |
| | | Year Ended December 31, |
| Impairment loss | |
| | 2021 | | 2020 | | 2019 |
| Cash flows from operating activities: | | | | | |
| Net income (loss) | $ | 321,988 | | | $ | (126,934) | | | $ | 79,229 | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |
| Depreciation and amortization | 155,822 | | | 39,508 | | | 34,951 | |
| Lease amortization expense | 79,952 | | | 32,730 | | | 30,893 | |
| Interest accretion on deemed landlord financing and financing leases | 11,566 | | | — | | | — | |
| Amortization of debt issuance costs | 5,297 | | | 4,200 | | | 3,262 | |
| Debt discount amortization | 14,049 | | | 6,331 | | | — | |
| Inventory step-up on acquisition | — | | | — | | | 10,885 | |
| Impairment loss | |
| | Impairment loss | Impairment loss | — | | | 174,269 | | | — | |
| Deferred taxes, net | Deferred taxes, net | 8,415 | | | (12,507) | | | (1,381) | |
| Non-cash share-based compensation | 38,685 | | | 10,927 | | | 12,896 | |
| Loss on disposal of long-lived assets | 381 | | | 336 | | | 218 | |
| Share-based compensation | |
| Loss on debt modification | |
| Gain on Topgolf investment | Gain on Topgolf investment | (252,531) | | | — | | | — | |
| Gain on conversion of note receivable | — | | | (1,252) | | | — | |
| | Unrealized net losses on hedging instruments and foreign currency | |
| | Unrealized net losses on hedging instruments and foreign currency | |
| | Unrealized net losses on hedging instruments and foreign currency | Unrealized net losses on hedging instruments and foreign currency | 276 | | | 2,750 | | | 3,642 | |
| Acquisition costs | Acquisition costs | (16,199) | | | — | | | — | |
| | Changes in assets and liabilities, net of effects of acquisitions: | |
| Other | |
| Change in assets and liabilities, net of effect from acquisitions: | |
| Accounts receivable, net | |
| Accounts receivable, net | |
| Accounts receivable, net | Accounts receivable, net | 38,185 | | | 9,950 | | | (44,476) | |
| Inventories | Inventories | (177,467) | | | 116,963 | | | (33,952) | |
| Leasing receivables | Leasing receivables | (22,929) | | | — | | | — | |
| Other assets | Other assets | (51,709) | | | 19,751 | | | (12,124) | |
| Accounts payable and accrued expenses | Accounts payable and accrued expenses | 96,842 | | | (11,484) | | | 34,628 | |
| Deferred revenue | Deferred revenue | 24,916 | | | 1,313 | | | 136 | |
| Accrued employee compensation and benefits | Accrued employee compensation and benefits | 53,819 | | | (16,558) | | | (2,460) | |
| | Payments on operating leases | (57,419) | | | (29,372) | | | (29,874) | |
| Operating lease assets and liabilities, net | |
| Income taxes receivable/payable, net | Income taxes receivable/payable, net | 8,778 | | | 1,979 | | | 1,414 | |
| Other liabilities | Other liabilities | (2,460) | | | 5,338 | | | (1,337) | |
| Net cash provided by (used in) operating activities | |
| Cash flows from investing activities: | |
| Capital expenditures | |
| Capital expenditures | |
| Capital expenditures | |
| Asset acquisitions | |
| Business combinations | |
| Investment in golf-related ventures | |
| Acquisition of intangible assets | |
| Proceeds from government grants | |
| Proceeds from sales of property and equipment | |
| Cash acquired in merger | |
| Proceeds from sale of investment in golf-related ventures | |
| Net cash used in investing activities | |
| Cash flows from financing activities: | |
| Proceeds from borrowings on long-term debt | |
| Proceeds from borrowings on long-term debt | |
| Proceeds from borrowings on long-term debt | |
| Repayments of long-term debt | |
| Proceeds from (repayments of) credit facilities, net | |
| | Net cash provided by operating activities | 278,257 | | | 228,238 | | | 86,550 | |
| Cash flows from investing activities: | | | | | |
| Cash acquired in merger | 171,294 | | | — | | | — | |
| Capital expenditures | (322,274) | | | (39,262) | | | (54,702) | |
| Investments in golf related ventures | (30,000) | | | (19,999) | | | (17,897) | |
| Acquisitions, net of cash acquired | — | | | — | | | (463,105) | |
| Proceeds from sale of investment in golf-related ventures | 19,096 | | | — | | | — | |
| Proceeds from sales of property and equipment | 20 | | | 49 | | | 38 | |
| Debt issuance costs | |
| | Debt issuance costs | |
| | Net cash used in investing activities | (161,864) | | | (59,212) | | | (535,666) | |
| Cash flows from financing activities: | | | | | |
| Repayments of long-term debt | (200,693) | | | (12,437) | | | (36,685) | |
| Proceeds from issuance of long-term debt | 26,175 | | | 37,728 | | | 493,167 | |
| (Repayments of) proceeds from credit facilities, net | (13,034) | | | (122,450) | | | 105,850 | |
| Proceeds from issuance of convertible notes | — | | | 258,750 | | | — | |
| Premium paid for capped call confirmations | — | | | (31,775) | | | — | |
| Debt issuance cost | (5,441) | | | (9,102) | | | (19,091) | |
| Payment on contingent earn-out obligation | (3,577) | | | — | | | — | |
| Debt issuance costs | |
| Repayments of financing leases | Repayments of financing leases | (830) | | | (792) | | | (706) | |
| Proceeds from lease financing | Proceeds from lease financing | 89,198 | | | — | | | — | |
| Exercise of stock options | Exercise of stock options | 22,270 | | | 248 | | | 368 | |
| Dividends paid | (3) | | | (1,891) | | | (3,776) | |
| Acquisition of treasury stock | Acquisition of treasury stock | (38,137) | | | (22,213) | | | (28,073) | |
| Purchase of non-controlling interest | — | | | — | | | (18,538) | |
| Payment on contingent earn-out obligation | |
| | Net cash (used in) provided by financing activities | (124,072) | | | 96,066 | | | 492,516 | |
| Effect of exchange rate changes on cash and cash equivalents | (752) | | | (5,639) | | | (715) | |
| Net (decrease) increase in cash, cash equivalents and restricted cash | (8,431) | | | 259,453 | | | 42,685 | |
| Net cash provided by (used in) financing activities | |
| Net cash provided by (used in) financing activities | |
| Net cash provided by (used in) financing activities | |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | |
| Cash, cash equivalents and restricted cash at beginning of period | Cash, cash equivalents and restricted cash at beginning of period | 366,119 | | | 106,666 | | | 63,981 | |
| Cash, cash equivalents and restricted cash at end of period | Cash, cash equivalents and restricted cash at end of period | $ | 357,688 | | | $ | 366,119 | | | $ | 106,666 | |
| Less: restricted cash | |
| Cash and cash equivalents at end of period | |
| Supplemental disclosures: | Supplemental disclosures: | | | | | |
| Cash paid for income taxes, net | Cash paid for income taxes, net | $ | 9,383 | | | $ | 3,061 | | | $ | 9,520 | |
| Cash paid for income taxes, net | |
| Cash paid for income taxes, net | |
| Cash paid for interest and fees | Cash paid for interest and fees | $ | 88,604 | | | $ | 34,359 | | | $ | 32,875 | |
| Noncash investing and financing activities: | |
| Non-cash investing and financing activities: | |
| Issuance of treasury stock and common stock for compensatory stock awards released from restriction | Issuance of treasury stock and common stock for compensatory stock awards released from restriction | $ | 18,532 | | | $ | 19,762 | | | $ | 20,656 | |
| Accrued capital expenditures at period-end | $ | 50,205 | | | $ | 1,497 | | | $ | 3,128 | |
| Issuance of treasury stock and common stock for compensatory stock awards released from restriction | |
| Issuance of treasury stock and common stock for compensatory stock awards released from restriction | |
| Accrued capital expenditures | |
| Financed additions of capital expenditures | Financed additions of capital expenditures | $ | 107,135 | | | $ | — | | | $ | — | |
| Issuance of common stock in Topgolf Merger | $ | 2,650,201 | | | $ | — | | | $ | — | |
| Issuance of common stock in Topgolf merger | |
| Issuance of common stock related to convertible notes | |
|
statements.statements.
TOPGOLF CALLAWAY GOLF COMPANYBRANDS CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS'SHAREHOLDERS’ EQUITY
(In thousands)millions)
| | | | Callaway Golf Shareholders | | |
| | | Common Stock | | Additional Paid-in
Capital | | Retained
Earnings | | Accumulated
Other
Comprehensive
(Loss) Income | | Treasury Stock | | Total Callaway Golf Company Shareholders' Equity | | Non-controlling
Interest | | Total |
| | | Shares | | Amount | | Shares | | Amount | |
| Balance at December 31, 2018 | 95,649 | | | $ | 956 | | | $ | 341,241 | | | $ | 413,799 | | | $ | (13,700) | | | (1,138) | | | $ | (17,722) | | | $ | 724,574 | | | $ | 9,734 | | | $ | 734,308 | |
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| | | Common Stock | | Additional Paid-in
Capital | | Retained
Earnings | | Accumulated
Other
Comprehensive
(Loss) Income | | Treasury Stock | | Total |
| | |
| December 31, 2020 | |
| December 31, 2020 | |
| December 31, 2020 | |
| Common stock issued in Topgolf merger | |
| Replacement awards converted in Topgolf merger (Note 15) | |
| Common stock issued for replacement awards | |
| Acquisition of treasury stock | Acquisition of treasury stock | — | | | — | | | — | | | — | | | — | | | (1,690) | | | (28,073) | | | (28,073) | | | — | | | (28,073) | |
| Exercise of stock options | Exercise of stock options | — | | | — | | | (560) | | | — | | | — | | | 56 | | | 928 | | | 368 | | | — | | | 368 | |
| Compensatory awards released from restriction | Compensatory awards released from restriction | — | | | — | | | (20,656) | | | — | | | — | | | 1,318 | | | 20,656 | | | — | | | — | | | — | |
| Share-based compensation | Share-based compensation | — | | | — | | | 12,896 | | | — | | | — | | | — | | | — | | | 12,896 | | | — | | | 12,896 | |
| Stock dividends | — | | | — | | | 1 | | | (49) | | | — | | | 3 | | | 48 | | | — | | | — | | | — | |
| Cash dividends ($0.04 per share) | — | | | — | | | — | | | (3,776) | | | — | | | — | | | — | | | (3,776) | | | — | | | (3,776) | |
| Equity adjustment from foreign currency translation | — | | | — | | | — | | | — | | | (4,412) | | | — | | | — | | | (4,412) | | | (339) | | | (4,751) | |
| | Foreign currency translation equity adjustment | |
| | Foreign currency translation equity adjustment | |
| | Foreign currency translation equity adjustment | |
| Change in fair value of derivative instruments, net of tax | Change in fair value of derivative instruments, net of tax | — | | | — | | | — | | | — | | | (4,310) | | | — | | | — | | | (4,310) | | | — | | | (4,310) | |
| Acquisition of non-controlling interests | — | | | — | | | (9,322) | | | — | | | — | | | — | | | — | | | (9,322) | | | (9,216) | | | (18,538) | |
| Net income | — | | | — | | | — | | | 79,408 | | | — | | | — | | | — | | | 79,408 | | | (179) | | | 79,229 | |
| Balance at December 31, 2019 | 95,649 | | | $ | 956 | | | $ | 323,600 | | | $ | 489,382 | | | $ | (22,422) | | | (1,451) | | | $ | (24,163) | | | $ | 767,353 | | | $ | — | | | $ | 767,353 | |
| Adoption of ASC Topic 326 “Financial Instruments - Credit Losses” ("ASC Topic 326") (Note 4) | — | | | — | | | — | | | (289) | | | — | | | — | | | — | | | (289) | | | — | | | (289) | |
| | Net loss | |
| | Net loss | |
| | Net loss | |
| December 31, 2021 | |
Cumulative impact of Accounting Standards Update 2020-06 adoption (Note 3) | |
| | Acquisition of treasury stock | |
| | Acquisition of treasury stock | |
| | Acquisition of treasury stock | Acquisition of treasury stock | — | | | — | | | — | | | — | | | — | | | (1,181) | | | (22,213) | | | (22,213) | | | — | | | (22,213) | |
| Exercise of stock options | Exercise of stock options | — | | | — | | | (390) | | | — | | | — | | | 37 | | | 638 | | | 248 | | | — | | | 248 | |
| Compensatory awards released from restriction | Compensatory awards released from restriction | — | | | — | | | (19,762) | | | — | | | — | | | 1,144 | | | 19,762 | | | — | | | — | | | — | |
| Share-based compensation | Share-based compensation | — | | | — | | | 10,927 | | | — | | | — | | | — | | | — | | | 10,927 | | | — | | | 10,927 | |
| Stock dividends | — | | | — | | | 3 | | | (40) | | | — | | | 5 | | | 37 | | | — | | | — | | | — | |
| Cash dividends ($0.02 per share) | — | | | — | | | — | | | (1,891) | | | — | | | — | | | — | | | (1,891) | | | — | | | (1,891) | |
| Equity adjustment from foreign currency translation | — | | | — | | | — | | | — | | | 25,690 | | | — | | | — | | | 25,690 | | | — | | | 25,690 | |
| | Foreign currency translation equity adjustment | |
| | Foreign currency translation equity adjustment | |
| | Foreign currency translation equity adjustment | |
| Change in fair value of derivative instruments, net of tax | Change in fair value of derivative instruments, net of tax | — | | | — | | | — | | | — | | | (9,814) | | | — | | | — | | | (9,814) | | | — | | | (9,814) | |
| Equity component of convertible notes, net of issuance costs and tax | — | | | — | | | 57,080 | | | — | | | — | | | — | | | — | | | 57,080 | | | — | | | 57,080 | |
| Premiums paid for capped call confirmations, net of tax | — | | | — | | | (24,513) | | | — | | | — | | | — | | | — | | | (24,513) | | | — | | | (24,513) | |
| Net loss | — | | | — | | | — | | | (126,934) | | | — | | | — | | | — | | | (126,934) | | | — | | | (126,934) | |
| Balance at December 31, 2020 | 95,649 | | | $ | 956 | | | $ | 346,945 | | | $ | 360,228 | | | $ | (6,546) | | | (1,446) | | | $ | (25,939) | | | $ | 675,644 | | | $ | — | | | $ | 675,644 | |
| Common stock issued in Topgolf merger | 89,776 | | | 898 | | | 2,649,303 | | | — | | | — | | | — | | | — | | | 2,650,201 | | | — | | | 2,650,201 | |
| Fair value of replacement awards converted in Topgolf merger (Note 17) | — | | | — | | | 33,051 | | | — | | | — | | | — | | | — | | | 33,051 | | | — | | | 33,051 | |
| Common stock issued for replacement restricted stock awards | 188 | | | 2 | | | (2) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Issuance of common stock related to convertible notes | |
| Capped call transaction related to convertible note conversion | |
| Net income | |
| December 31, 2022 | |
| | Acquisition of treasury stock | Acquisition of treasury stock | — | | | — | | | 353 | | | — | | | — | | | (1,380) | | | (38,490) | | | (38,137) | | | — | | | (38,137) | |
| Acquisition of treasury stock | |
| Acquisition of treasury stock | |
| Issuance of common stock | |
| Exercise of stock options | Exercise of stock options | 520 | | | 6 | | | 1,777 | | | — | | | — | | | 916 | | | 20,487 | | | 22,270 | | | — | | | 22,270 | |
| Compensatory awards released from restriction | Compensatory awards released from restriction | 39 | | | — | | | (18,532) | | | — | | | — | | | 949 | | | 18,532 | | | — | | | — | | | — | |
| Share-based compensation | Share-based compensation | — | | | — | | | 38,685 | | | — | | | — | | | — | | | — | | | 38,685 | | | — | | | 38,685 | |
| Stock dividends | — | | | — | | | 24 | | | (48) | | | — | | | 1 | | | 24 | | | — | | | — | | | — | |
| Cash dividends ($0.01 per share) | — | | | — | | | — | | | (3) | | | — | | | — | | | — | | | (3) | | | — | | | (3) | |
| Equity adjustment from foreign currency translation | — | | | — | | | — | | | — | | | (29,215) | | | — | | | — | | | (29,215) | | | — | | | (29,215) | |
| | Foreign currency translation equity adjustment | |
| | Foreign currency translation equity adjustment | |
| | Foreign currency translation equity adjustment | |
| Change in fair value of derivative instruments, net of tax | Change in fair value of derivative instruments, net of tax | — | | | — | | | — | | | — | | | 8,418 | | | — | | | — | | | 8,418 | | | — | | | 8,418 | |
| | Net income | Net income | — | | | — | | | — | | | 321,988 | | | — | | | — | | | — | | | 321,988 | | | — | | | 321,988 | |
| Balance, December 31, 2021 | 186,172 | | | $ | 1,862 | | | $ | 3,051,604 | | | $ | 682,165 | | | $ | (27,343) | | | (960) | | | $ | (25,386) | | | $ | 3,682,902 | | | $ | — | | | $ | 3,682,902 | |
| | Net income | |
| | Net income | |
| December 31, 2023 | |
The accompanying notes are an integral part of these consolidated financial statements.
TOPGOLF CALLAWAY GOLF COMPANYBRANDS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. The Company and Basis of Presentation
The Company
Topgolf Callaway GolfBrands Corp. (together with its wholly-owned subsidiaries, referred to as “we,” “our,” “us,” “the Company, (the “Company,” “Callaway” or “Callaway Golf”)“Topgolf Callaway Brands” unless otherwise specified), a Delaware corporation, together with its wholly-owned subsidiaries, is a leading modern golf and active lifestyle leadercompany that provides world-class golf entertainment experiences, designs and manufactures premium golf equipment, and sells golf and active lifestyle apparel and other accessories through itsour family of brand names, which include Topgolf, International, Inc. ("Topgolf"), Callaway Golf, Odyssey, TravisMathew, Jack Wolfskin, OGIO, TravisMathewToptracer and Jack Wolfskin.World Golf Tour (“WGT”).
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'sOur products and brands are reported under 3three operating segments: Topgolf, which includes the operations of the Company'sour Company-operated and franchised Topgolf business;venues, Toptracer ball-flight tracking technology (“Toptracer”), and WGT digital golf game; Golf Equipment, which includes the operations of the Company'sour golf clubs and golf balls business;business under the Callaway Golf and Apparel, GearOdyssey brand names; and Other,Active Lifestyle, which includes the operations of the Company'sour soft goods business marketed under the Callaway, TravisMathew, and Jack Wolfskin and OGIO brand names.
Basis of Presentation
We have prepared the accompanying consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and accounting principles generally accepted in the United States of America (“GAAP”).
We translate the financial statements of our foreign subsidiaries using end-of-period exchange rates for assets and liabilities and average exchange rates during each reporting period for results of operations. All intercompany balances and transactions have been eliminated during consolidation.
Fiscal Year End
Our annual financial results are reported on a calendar year basis. Our Topgolf operating segment previously operated on a 52- or 53-week retail calendar year, which ended on the Sunday closest to December 31. As of April 4, 2022, Topgolf began operating on a calendar year ending on December 31. Therefore, Topgolf financial information included in our consolidated financial statements for the years ended December 31, 2022 and 2021 are for the period beginning January 3, 2022 and ending December 31, 2022, and the period beginning March 8, 2021 (the date on which we completed our merger with Topgolf) and ending January 2, 2022, respectively. For more information on the merger with Topgolf, see Note 4.
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.Topgolf Callaway Brands. 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")GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses 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 itsrelated disclosures. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Examples of suchcircumstances at that time. We evaluate our 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. Onon an ongoing basis the Company reviews its estimates to ensure that these estimates appropriately reflect changes in itsour 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 Actual results may differ from our estimates.
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.
ProductsProduct Revenue
The Company recognizesProduct revenue is comprised of golf clubs, golf balls, golf apparel, lifestyle and outdoor apparel, and gear and accessories which are sold to on- and off-course golf shops and national retail stores, and directly to consumers through our e-commerce business and at our apparel retail and venue locations. We recognize revenue from the sale of its golf clubs, golf balls, lifestyle and outdoor apparel, gear and accessories and golf apparel and accessoriesproducts when it satisfieswe satisfy a performance obligation to a customer and transferstransfer 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.customers. In addition, the Company recognizeswe recognize revenue at the point of sale on transactions with consumers through our e-commerce business and at itsour retail locations and retail shops within Topgolf locations.venues. 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 toWe 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 itsWe license our trademarks and service marks to third parties for use on products such as golf apparel and footwear, practice aids and other golf accessories.accessories in exchange for a royalty fee. 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.
We sell gift cards for our products which do not have an expiration date. Revenues from gift cards are deferred and recognized when redeemed, which generally occurs within a 12-month period from the cards are redeemed for product purchases. The Company’s gift cards have no expiration date. The Company recognizesdate of purchase. We recognize revenue from unredeemed gift cards otherwise known as breakage,and game credits when the likelihood of redemption becomes remote (“breakage”) and under circumstances that comply with any applicable state escheatment laws. To determine when redemption is remote, the Company analyzeswe perform an aging analysis of unredeemed cards (based on the date the card was last used or the activation date if the card has never been used) and comparesgame credits and compare that information with historical redemption trends. The Company usesWe use this historical redemption rate to recognize breakage on unredeemed gift cards over the redemption period. The Company doesWe do 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 revenue from gift card revenues.cards and game credits.
ServicesService Revenue
The Company recognizesService revenue is primarily comprised of revenue from the operation of itsour Topgolf venues consisting primarilywhich consists of revenues from food and beverage sales, event deposits, fees charged for gameplay purchases of game credits and membership fees.fees, game credit purchases, and gift cards. In addition, we also recognize services revenues are recognized through the redemption ofrelated to gift cards,card redemptions, sponsorship contracts, franchise fees with international development partners, leasing revenue, the Company’s World Golf Tour ("WGT")our WGT digital golf game and non-refundable deposits for venue reservations.
The Company's foodFood and beverage revenue and fees charged for gameplay is recognized at the time of sale. Event deposits received from guests attributable to food and beverage purchases as well as gameplay 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 Premium 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 entersWe enter 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 lengthperiod of timeone to five years and revenue is generally recognized ratably over the contract period unless there is a different predominate pattern of performance.
The Company entersWe enter 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 franchiseFranchise fees for each venue are recognized over the franchise term, for each venue, which generally ranges from 15up to 20 years.a maximum of 40 years, including renewal options, per the respective franchise agreement. Revenue from sales-based royalties is recognized as the related sales occur.
Leasing revenue is recognizedWe recognize licensing and royalty income on non-cancelable sales-type leases and operating lease agreements related to thefor Toptracer installations and Swing Suite licensing agreements at Topgolf. See Note 6 for further discussion of Toptracer software and hardware to driving ranges and golf courses.leasing revenue.
Our WGT digital golf game is a live service that allows players to play for free gameplay via web andand/or mobile gaming platforms. Within the WGT digital golf game, playersPlayers can also purchase virtual currency within the game to obtainuse towards virtual goods, towhich enhance their game-playingthe gameplay 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, which is determined using historichistorical trends and gameplay activity patterns.
We sell gift cards for our services which may be utilized for gameplay and other services at our venues. We recognize service revenue for gift cards sold in a manner consistent with the recognition of gift card revenue for products.
Variable Consideration
The Company offersWe offer certain discounts and promotions on itsour products and services. The amount of revenue the Company recognizeswe recognize is based on the amount of consideration it expectswe expect 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 Companywe offer, as further 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 to the respective net revenue, trade accounts receivable, andand/or sales program liability.
We record a sales return liability accounts.as a reduction of sales and cost of products and accounts receivable in the period when 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. We also offer certain customers sales programs that allow for specific returns. The cost recovery of inventory associated with this reserve is recorded in other current assets on our consolidated balance sheet. Historically, actual sales returns have not been materially different from our estimates.
The Company’sOur primary product sales program, the “Preferred Retailer Program,” offers potential rebates and discounts for participating retailers in exchange for providing certain benefits to the Company,us including the maintenance of agreed upon inventory levels, prime product placement and retailer staff training. UnderAs part of this program, qualifying retailers can earn either discounts or rebates based uponon the amount of product purchased. Discounts are applied and recorded at the time of sale. For rebates, the Company estimateswe estimate 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 qualifying purchases, adjusted for any factors expected to affect the current year purchase levels.purchases. The estimated year-end rebate is adjusted quarterly based on actual purchase levels,qualifying purchases, 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 itsour Preferred Retailer Program has not been materially different from itsour estimates.
The CompanyWe also offersoffer short-term sales program incentives related to product sales, which include sell-through promotions and price concessions or price reductions. Sell-through promotions are generally offered throughout the product'sproduct’s life cycle of approximately two years, and price concessions or price reductions are generally offered at the end of the product'sproduct’s life cycle. The estimated variable consideration related to these programs is based on a rate that includes historical and forecasted data. The Company recordsWe record a reduction to product revenues using this rate at the time of the sale. The Company monitorsWe monitor this rate against actual results and forecasted estimates and adjustsadjust the rate as deemed necessary to reflect the amount of consideration it expectswe expect to receive from itsour customers. There werehave been no material changes to the rate during the years ended December 31, 2023, 2022 and 2021, 2020 and 2019. Historically,historically, the Company's actual amount of variable consideration related to these sales programs has not been materially different from itsour estimates.
The Company records an estimateProduct Warranty
We have a stated two-year warranty policy for anticipated returnsour golf clubs and certain Jack Wolfskin gear, as well as a reductionlimited lifetime warranty for our OGIO line of sales andproducts. We accrue the estimated cost of sales,satisfying future warranty claims at the time the sale is recorded. Our estimates for calculating the warranty reserve are principally based on assumptions regarding the warranty costs of each product line over the expected warranty period. In estimating our future warranty obligations, we consider various relevant factors, including our stated warranty policies and accounts receivable, inpractices, the period thathistorical frequency of claims, and the related sales are recorded. Sales returns are estimated based upon historical returns,replacement or repair costs of products under warranty. Our warranty reserve amounts as of the years ended December 31, 2023 and 2022 were $12.7 million and $10.6 million, respectively.
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 costCost of products is comprised primarily of variable costs that fluctuate with sales volumes, including raw materials for soft good and golf equipment products, golf equipment component costs, and merchandise from third parties, conversion costs includingfor retail product sales at our Topgolf venues. Cost of products also includes direct labor and manufacturing overhead, and inbound freight, duties, shipping charges, 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. Fixed overhead expenses includeare comprised of 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 also 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 costCost of services primarily consists of costs related to food and beverage costssold at Topgolf venues and transaction fees with respectrelated to in-app purchases within the Company’sour WGT digital golf game. In addition, cost of services includes costs associated with Topgolf'sTopgolf’s Toptracer license agreements that are primarily 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 primarily 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 do not directly correlatedcorrelate with revenue.
Venue Pre-Opening Costs
Pre-openingVenue pre-opening costs primarily include costs associated with activities prior to the opening of a new Company-operated Topgolf venue and primarily 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,expense, legal and professional fees, tour expenses, 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.
Advertising Costs
Our primary advertising costs include television, print, internet, and media placement. Our policy is to expense advertising costs, including production costs, as incurred. Advertising costs for the years ended December 31, 2023, 2022 and 2021 were $120.3 million, $116.1 million and $108.4 million, respectively, and are recognized within SG&A expenses on the accompanying consolidated statements of operations.
Research and Development Expenses
Research and development expenses are comprised of costs to design, develop, test or significantly improve the Company'sour products and technology whichand primarily include the salaries and wagesemployee costs 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. RestrictedAs of December 31, 2023, restricted cash iswas primarily comprised of deposits associated with gift cards as required under certain statutory mandates, and lender impound reserve accounts for the developmentmandates. As of oneDecember 31, 2022, restricted cash was primarily comprised of the Company’s venues.escrowed funds related to a land purchase of approximately $18.3 million, which closed in January 2023. Long-term restricted cash is included in other assets on the accompanying consolidated balance sheetsheets as of December 31, 2021. The Company had no restricted cash as of December 31, 2020.2023 and 2022. The following is a summary of our cash, cash equivalents and restricted cash as of December 31, 2021 and December 31, 2020 (in thousands)millions):
| | | | | | | | | | | |
| 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 | |
| | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 |
| Cash and cash equivalents | $ | 393.5 | | | $ | 180.2 | |
| Restricted cash, short-term | 0.8 | | | 19.1 | |
| Restricted cash, long-term | 4.5 | | | 4.1 | |
| Total | $ | 398.8 | | | $ | 203.4 | |
Allowance for Estimated Credit Losses
We record an allowance for estimated credit losses based upon historical bad debts, current customer receivable balances, age of customer receivable balances and the customers’ financial condition, all of which are subject to change. Additionally, we monitor activity and consider future reasonable and supportable forecasts of economic conditions to adjust all general and customer specific reserve percentages as necessary. Amounts recorded for estimated credit losses are written-off when they are determined to be uncollectible.
Inventories
The Company'sWe record 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,trends, as well as management’s estimates of market conditions and forecasts of future product demand, all of which are subject to change. The Company utilizesWe utilize the standard costing method, determined on the first-in, first-out basis, for itsour 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,us, includes finished goods, raw materials, labor and manufacturing overhead costs and work in process. The Company'sInventory for our soft goods product lines, which are manufactured by third-party contractors, primarily include finished good products.goods. Toptracer hardware and software, food and beverage products and Topgolf-specific retail merchandise inventories are stated at weighted averageweighted-average cost.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, lessnet of accumulated depreciation. Depreciation expense is computed usingrecognized on a straight-line basis over the straight-line method over estimated useful lives of the related assets, which generally as follows:
| | | | | |
Buildings and improvements | 10-40range from two 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.
years. Normal repairs and maintenance costs are expensed as incurred. ExpendituresCosts that materially increase values,value, change capacities, or extend the useful lives of property, plant or equipment 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, unfinishedproduction molds, as well asand in-process internal-use software. When property, plant or equipment is retired or disposed, the related costs and accumulated depreciation are removed from the accounts and any resulting gain or loss on disposition is recognized in earnings in the period in which the disposition occurred. See Note 11 for further detail regarding our property, plant and equipment.
In accordance with ASC Topic 350-40, “Internal-UseInternal Use Software” the Company capitalizes and Cloud Computing Arrangements
We capitalize certain costs incurred in connection with developingrelated to computer software obtained or obtainingdeveloped for internal use software. Costs incurred in the preliminary project stage are expensed.use. All direct external costs and internal direct labor costs incurred to develop internal-use software during the application development stage are capitalized and depreciated using theon a straight-line methodbasis over the remaining estimated useful lives.life of the software. Costs suchincurred during the preliminary project stage, as well as maintenance, training, and trainingdata conversion costs are expensed as incurred. In accordance with ASC Topic 985-20, “Costs of Software to Be Sold, Leased, or Marketed,” costsCosts incurred to establish the technological feasibility of software to be sold, leased, or otherwise marketed are expensed as incurred and recorded in research and development expense on the consolidated statements of operations.expense. 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 aslife of the software.
We enter into cloud-based software hosting arrangements to access and use third-party software in support of our operations. As part of these arrangements, we may incur implementation costs related to the integration, configuration, or customization of the hosted third-party software. We assess these arrangements to determine whether the contract meets the definition of a service contract or internal-use software. For hosting arrangements that meet the definition of a service contract, we capitalize eligible implementation costs and amortize these costs on a straight-line basis over the fixed, non-cancellable term of contract, plus any renewal periods that are reasonably certain at that time.
As of December 31, 20212023 and 2020 was $81,616,0002022, we had $18.7 million and $42,082,000, respectively.
The Company recorded depreciation expense$5.2 million, respectively, of $142,781,000, $34,388,000,capitalized implementation costs, net of amortization, related to cloud computing arrangements, which are included in other assets on our consolidated balance sheet. During the year ended December 31, 2023, we amortized $0.7 million related to the implementation costs of these cloud computing arrangements, which are recognized as computer software expenses within selling, general and $30,085,000 foradministrative expenses on our consolidated statements of operations. During the years ended December 31, 2022 and 2021, 2020, and 2019, respectively.there were no costs recognized related to the implementation of these cloud computing arrangements due to the timing of when these projects were placed into service.
Leases
The Company leasesWe lease 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 businessbusinesses in Japan.Japan and Korea. Certain real estate leases include one or more options to extend the lease term, options to purchase the leased property at the Company'sour sole discretion, or escalation clauses that increase the rent payments over the lease term. When deemed reasonably certain of exercise, the renewalextension 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 andand/or any leasehold improvements that are associated with each lease are limited byto the expected lease term unless there is a transfer of title or purchase option which is reasonably certain of exercise. CertainIn some instances, certain leases may require an additional contingent rent payment based on a percentage of total gross sales which are greater than certaina specified threshold amounts. The Company recognizesamount stated in the lease agreement. We recognize these additional contingent payments as rent expense when it is probable that sales thresholds will be reached during the fiscal year. The Company'sreached. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Right-of-use ("ROU"Operating and Financing Leases
We determine if an arrangement is a lease, or contains a lease, at the inception of the arrangement. If we determine that an arrangement is a lease or contains a lease that is for a term of one year or longer, a right-of-use (“ROU”) assets representasset representing the right to use anthe underlying asset during the lease term, and a lease liabilities representliability representing the obligation to make lease payments arisingthat arise from the lease. Operating lease are recognized as either an operating or financing lease on our consolidated balance sheet. ROU assets and liabilities are recognized at the commencement date of the lease and are based on the present value of lease payments over the lease term. When readily determinable, the Company useswe use the rate implicit in the lease agreement in determining the present value of minimum lease payments.payments for the particular lease. If the implicit rate for the lease is not provided, the Company uses itswe use our incremental borrowing rate, which represents a rate we would incur to borrow an amount on a collateralized basis equal to the lease payments over a similar term and under similar economic conditions, and is 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 and any initial direct costs (if any) andand/or prepaid lease payments, (if any) and deducting any lease incentives (if any). Afterincentives. The amortization of operating lease ROU assets and the interest accretion on the operating lease liabilities are recognized as a single straight-line lease expense over the lease commencement date andterm. Financing lease ROU assets are amortized on a straight-line basis over the lease term, and financing lease expense isliabilities are measured using the effective interest rate method, with the interest accretion portion recognized as a single lease cost on a straight-line basis.in interest expense. Lease agreements related to properties are generally comprised of both lease components and non-lease components. Non-lease components, which include items such as common area maintenance charges, property taxes and insurance, are expensed as incurred and are 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 separately 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.
Deemed Landlord Financing (“DLF”) Obligations
We enter into deemed landlord financing (“DLF”) agreements to finance certain Company-operated Topgolf venues. We work with third-party developers or real estate financing partners to acquire rights to land and fund the construction associated with certain venues under build-to-suit arrangements. In certain venue leasing arrangements, due to the Company’s involvement ininstances we fund a portion of the construction ourselves, and in other instances we fund all of leasedthe construction. In certain build-to-suit arrangements, we are deemed to have control of the underlying assets the Company isunder construction and are therefore considered the accounting 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.these assets. At the end of the construction period, the Company applies sale and leaseback guidancewe complete a sale-leaseback assessment to determine whetherif control has transferred to the
underlying asset should be derecognized. When financing partner. If the applicationsale-leaseback criteria are not met and it is determined that control has not been transferred to the financing partner, we reverse the accumulated construction advance recognized during the construction phase and record a DLF obligation, and the costs accumulated in property, plant and equipment associated with the construction of the salebuilding are capitalized and leaseback guidance results inplaced into service. When we acquire land directly or finance the venue construction ourselves, we may enter into arrangements to sell the assets and lease them back from a sale,financing partner. In these cases, if control is not transferred upon the asset and liability on the Company’s balance sheet are derecognized. When the applicationclosing of the saletransaction and the commencement of the subsequent leaseback, guidance resultswe record a DLF obligation associated with the cash proceeds. Buildings or other assets capitalized in a failed sale,conjunction with DLF obligations are depreciated, less their residual value, over the asset remains onshorter period of the Company’s balance sheet and isuseful life of those assets, or the period of the lease term. In general, buildings are depreciated over its respectivea 40-year useful life, orwhich aligns with the lease term whichever is shorter, and the liability is accounted for as aincluding renewal periods we are reasonably certain to exercise. DLF obligation. These DLFlease obligations are measured using the effective interest rate method, with the periodic interest accretion recognized in interest expense. The interest rate used on DLF lease obligations is generally non-cancelable leases with initial terms of 20 years containing various renewal options following the initial term and escalation clausesrate that increaseis implied within the payments over the lease term.lease.
Sales-Type Leases
With respect to the Company’sour Toptracer and Swing Suite operations, the Company enterswe enter 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 a distinct bundle of highly interrelated 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 inceptionWe perform an assessment of the arrangement, lease classification is assessed,upon commencement of the agreement, which generally results in the license agreements being classified as sales-type leases. If the assessment does not result in a sales-type lease classification, the lease will be classified as an operating lease. Upon lease commencement forof these 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 itsterm of the lease. We manage our risk on itsour sales-type leases through the pricing and the terms of the leases. Any equipment returned to the Companyus as a result of a lease cancellation of a lease may be leased or sold to other customers, therefore risk associated with the Company’sour sales-type leases is considered minimal.
Long-Lived AssetsBusiness Combinations
We allocate the purchase consideration to the identifiable assets acquired and Finite-Livedliabilities assumed in a business combination based on their acquisition-date fair values. We use our 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 are reevaluated and adjusted, if needed, during the measurement period of up to one year from the acquisition date, and are recorded as adjustments to goodwill. Any adjustments to the acquired assets and liabilities assumed that are identified subsequent to the measurement period are recorded in earnings.
Goodwill and Intangible Assets
The Company assessesGoodwill and acquired intangible assets are recorded in connection with an acquisition or business combination. Goodwill represents the excess of the total consideration paid over the fair value of the net tangible and identifiable intangible assets acquired and liabilities assumed in connection with the acquisition or business combination. Identifiable intangible assets consist of trade names and trademarks, liquor licenses, patents, customer and distributor relationships, and developed technology. Intangible assets that are determined to have definite lives are amortized over their estimated useful lives and are assessed for impairment when indicators are present. Goodwill and intangible assets with indefinite lives are not amortized and are instead assessed for impairment at least annually or more frequently when events or circumstances occur that indicate an impairment may exist. Except for software costs which are determined to be eligible for capitalization, costs related to the development, maintenance or renewal of internally developed intangible assets that are inherent in our continuing business that were not acquired as a part of a business combination or asset acquisition, are expensed as incurred.
Impairments
We assess potential impairments of itsour 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. AnEvents or changes that may necessitate an impairment chargeassessment include a significant change in the extent or manner in which the asset is used, a significant change in legal or business factors that could affect the value of the asset, or a significant decline in the observable market value of an asset, amongst others. If such events or changes indicate a potential impairment, we would be recognized whenassess the carrying amountrecoverability of a long-livedthe asset or asset group is not recoverable and exceeds its fair value. Theby determining if the carrying amountvalue of a long-livedthe asset or asset group is not recoverable if it exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the asset or asset group. If the carrying amount of a long-lived asset or asset group is determined to not be recoverable and exceeds its fair value, an impairment charge would be recognized in the period in which the impairment was determined.
GoodwillWe perform an impairment assessment on our goodwill and Intangible Assets
The Company'sindefinite-lived 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 during the fourth quarter of the year, or more frequently when events or circumstances occur that indicate that an impairment exists. The Company calculatesmay exist. These events or circumstances may include macroeconomic conditions, significant changes in the industry or business climate, legal factors, or other operating performance indicators, amongst other things. If an event occurs that indicates an impairment asmay exist, we may perform a qualitative assessment to determine whether it is more likely than not that goodwill and/or the excess ofindefinite-lived intangible asset is impaired. If after the carryingqualitative assessment we determine it is more likely than not that goodwill and/or the indefinite-lived intangible asset is not impaired, no quantitative fair value test is necessary. If after performing the qualitative assessment we conclude it is more likely than not that the fair value of goodwill and otherand/or the indefinite-lived intangible assets over their estimated fair value. If theis less than our carrying value exceeds the estimate ofamount, we will perform a quantitative fair value a write-down is recorded.test to determine the fair value of the asset or reporting unit. To determine fair value, the Company useswe use discounted cash flow estimates, quoted market prices, royalty rates when available, and independent appraisals and valuation specialists when appropriate.
During 2020, due to We calculate an impairment as the significant disruptions caused byexcess of 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 recoverabilitycarrying value of goodwill for all of its reporting units, in addition to the recoverability ofand/or other indefinite-lived intangible assets consisting primarilyover the estimated fair value 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 indicaterespective asset. If the carrying value may be impaired. See Note 9 for further discussionexceeds the estimated fair value of the Company’s intangible assets.
asset, an impairment charge is recorded in the period in which the impairment was determined.Investments
The Company determinesWe determine the appropriate classification of itsour investments at the time of acquisition and reevaluatesreevaluate such classification at each balance sheet date. InvestmentsFor investments that do not have readily determinable fair values, we have elected to apply the measurement alternative in which these investments are statedmeasured at cost and are evaluated for changes in fair value if there is an observable price change inas a result of 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 monitorsinvestment. We assess investments for impairment whenever events or changes in circumstances indicate that the investment'sinvestment’s carrying value may not be recoverable. AnIn the event that the carrying value of any of our investments exceeds its respective fair value, an impairment charge would be recognized whenis recorded in the carrying amount exceeds its fair value.period in which the impairment was determined. See Note 10 for further discussion of the Company’sinformation related to our investments.
Foreign Currency Translation and Transactions
A significant portion of the Company’sour 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 effectimpact on the Company’sour financial results. Revenues and expenses that are denominated in foreign currencies are translated using the average exchange rate for the period. Assetsreporting period and assets and liabilities are translated atusing the rate ofend-of-period exchange onrates at 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 currentlyduring the current period in the Company'sour 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 ofWe use foreign currency translation onforward contracts to meet our objectives of minimizing variability in our operating results, including intercompany transactions, andwhich may arise from changes in foreign exchange rates, as well as interest rate swap contracts to minimize our exposure to changes in interest rates, the Company usesrates. We do not enter into hedging contracts for speculative purposes. Foreign currency forward contracts generally mature within 12 months to 15 months from inception and interest rate swap agreements generally mature within 60 months from inception. Both types of contracts are measured at fair value and recorded as hedging receivables and/or payables on our consolidated balance sheet. Certain of our foreign currency forward contracts and our interest rate swap agreements satisfy the criteria for hedge contracts thataccounting treatment and 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 qualifiesclassified as designated cash flow hedge that offsets certain exposures. Certain criteria must be satisfiedhedges. Changes in order for derivative financial instruments to be classified and accounted forthe fair value of these designated cash flow hedges are recorded as a cash flow hedge. Derivativescomponent of accumulated other comprehensive income and are released in earnings 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 recordedrecognized in earnings immediately in earnings.other income/expense.
The CompanyWe 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 estimatesWe estimate the fair value of itsour 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 1917 for further discussion of the Company'sour financial instruments.
Share-Based Compensation
The CompanyWe may grant restricted stock units and(“RSUs”), restricted stock awards performance based(“RSAs”) , performance-based awards, stock options, and stock appreciation rights, and other equity basedequity-based awards to itsour officers, employees, consultants and other non-employees who provide services to the Companyus under itsour stock incentive plans, The Company accounts for itsplans. We measure and recognize 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.values, net of estimated forfeitures. Estimated forfeitures are based on historical data and forfeiture trends. Iftrends and are revised, if necessary, in subsequent periods 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."forfeitures differ materially from our initial estimates.
RSUs and RSAs (“Restricted Stock Awards and Restricted Stock UnitsStock”)
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'sour common stock on the date of grant multiplied by the number of
shares of granted shares. Compensation expense for restricted stock granted. Compensation expense, less an estimate for forfeitures, is recognized on a straight-line basis, net of estimated forfeitures, over a vesting period of three to five years from the date of grant.
Performance Based Restricted Share Unit Awards
The Company grantsWe grant performance based restricted share unit awards ("PRSUs"(“PRSU”) in which the number of shares that may ultimately received dependsbe issued upon vesting is based on the Company'sachievement of specific performance against specified metrics for each award that are measured from the grant date through theduring a specified performance period, end. Performanceand may range from 0% to 200% of the participant’s target award. PRSU performance measures include adjusted earnings before interest, taxes, depreciation, amortization, ("EBITDA"stock compensation, non-cash lease amortization expense and non-recurring costs (“Adjusted EBITDA”), earnings per share ("EPS"(“EPS”), adjusted pre-tax income ("APTI"(“APTI”) and total shareholder return ("rTSR"(“rTSR”). The performance period for these awards ranges from three to five years from the date of grant. Performance based awardsPRSUs based on EBITDA, EPS and APTI are initially valued at the Company's closing price of our 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 fromrTSR performance measures, which are based on market conditions, are initially valued using a Monte Carlo simulation which utilizes the stock volatility, dividend yield and a market correlation of the Company and the Company'sour performance as compared to our peer group, and is based on the probable achievement of 100% of the rTSR performance goals as determined on the date of grant. Compensation expense for all performance based awardsPRSUs is recognized, net of an estimate forestimated forfeitures, on a straight-line basis over a vesting period of three to five years, and is based on the fixed fair value assigned to each of the awards on the date of grant. Over the course of the performance period, compensation expense for PRSUs based on EBITDA, EPS and APTI is adjusted according to the anticipated cumulative performance level of achievement of the specified performance metric over the performance period relative tofor the grant, which ranges from 0% to 200% of the participant's targetrespective award. If the performance goals are not probable of achievement at any time during the performance period, compensation expense related to the respective award is reversed. AwardsCompensation expense for rTSR PRSUs is recognized, net of estimated forfeitures, on a straight-line basis over a vesting period of three years, and is based on the fixed grant date fair value assigned on the date of grant, which is not adjusted over the course of the performance period or reversed if achievement is not probable. All 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 PlanStock options are madegranted at exercise prices no less than the Company’s closing price of our 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 We record 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 forfeituresnet of unvested options and awards.
estimated forfeitures. See Note 1715 for further discussion of the Company's share basedour share-based compensation.
Income Taxes
Current income tax expenseprovision 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 withsettled. The realization of the applicable accounting rules,deferred tax assets, including loss and credit carry forwards, is subject to our ability to generate sufficient taxable income during the Company maintainsperiods in which the temporary differences become realizable. We maintain 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 considerswe consider all available positive and negative evidence, including prior operating results, the nature and reason for any losses, itsour 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 estimatesincome and are based on the Company’sour best judgment at the time made based on current and projected circumstances and conditions. For further information, see Note 14.time.
Pursuant to ASC Topic 740, the Company is required toWe accrue for the estimated additional amount of taxes for uncertain tax positions if it is deemed to be more likely than not that the Companywe would be required to pay such additional taxes. The Company isWe are 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 Companyus 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 accrueswe pay. We accrue an amount for itsour estimate of additional tax liability, including interest and penalties in the income tax expense,provision, for any uncertain tax positions taken or expected to be taken in an income tax return. The Company reviewsreturn and updates thewe review and update our accrual for uncertain tax positions as more definitive information becomes available. Historically,
additional taxes paid as a result of the resolution of the Company’sour uncertain tax positions have not been materially different from the Company’sour expectations. The Company recognizes interest and/or penalties related toSee Note 12 for further discussion of our income tax matters in income tax expense. For further information, see Note 14.taxes.
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)millions):
| | Years Ended December 31, | | | Years Ended December 31, |
| 2023 | | | 2023 | | 2022 | | 2021 |
| Foreign currency forward contract gain, net | |
| Foreign currency transaction loss, net | |
| | 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 | Other | 916 | | | 1,989 | | | 485 | |
| $ | 8,961 | | | $ | 24,969 | | | $ | 1,594 | |
| Other | |
| Other | |
| Other income, net | |
Concentration of Risk
On a consolidated basis, no single customer accounted for more than 10% of the Company’sour consolidated revenues in 2021, 20202023, 2022 or 2019. The Company's2021. Our top five customers accounted for approximately 13%12% of the Company'sour consolidated revenues in 2021, 20%both 2023 and 2022, and 13% in 2020, and 18% in 2019.2021.
The Company'sOur top five customers specific to the Golf Equipment and Apparel, Gear and OtherActive Lifestyle operating segments represented the following as a percentage of each segment'ssegment’s total net revenues:
•Golf Equipment top five customers accounted for approximately 24%25%, 25%26% and 23%24% of total consolidated Golf Equipment sales in 2021, 2020,2023, 2022, and 2019,2021, respectively; and
•Apparel, Gear and OtherActive Lifestyle top five customers accounted for approximately 17%, 12% and 11%19% of total consolidated Apparel, Gear and OtherActive Lifestyle sales in 2021, 2020,2023, and 2019, respectively.17% in both 2022 and 2021.
With respect to the Company'sour trade receivables, the Company performswe perform ongoing credit evaluations of itsour customers’ financial condition and generally requires nodo not require collateral from theseour customers. The Company maintainsWe maintain reserves for estimated credit losses, which it considerswe consider adequate to cover any such losses. At December 31, 20212023 and 2020,2022, one customer represented 11%14% and 16%17%, respectively, of the Company’sour 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 thisour international business, the Company iswe are 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 rightsStates. During 2023, 2022 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, agents2021, approximately 28%, 30% and contractors with the Company’s policies as well as with the laws34% of multiple jurisdictions; (vi) increased difficulty in controlling and monitoring foreign operationsour total consolidated net revenues were derived from sales outside of the United States;States, respectively. See Note 20 for information on net revenues and (vii) increased exposure to interruptions in air carrier or ship services.long-lived assets by geographical location.
The Company isWe are dependent on a limited number of suppliers for itsour clubheads and shafts, some of which are single sourced. Furthermore, some of the Company’sour products require specially developed manufacturing techniques and processes which make it difficult to identify and utilize alternative suppliers quickly. The CompanyWe also dependsdepend on a single or a limited number of suppliers for the materials it usesused to make itsour golf balls. Manyballs, many of these materialswhich are customized for the Company.us.
The Company’sOur 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 hedgeswap contracts. From time to time, the Company invests itswe invest our excess cash in money market accounts and short-term U.S. government securities and hashave established guidelines relative to diversification and maturities in an effort to maintain safety and liquidity. TheseWe periodically review and modify these guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates.
The Company entersWe enter into foreign currency forward contracts for the purpose of hedging foreign exchange rate exposuresexposure on existing or anticipated transactions, and interest rate hedge contracts for the purpose of hedging interest rate exposuresexposure on itsour term loan facility. In the event of a failure to honor one of these contracts by one of the banks with which the Company haswe have contracted, management believeswe believe any loss would be limited to the exchange rate differentialdifference from the time the contract was madeentered into until the time it was settled. The Company'sOur hedging contracts are subject to a master netting agreement with each respective counterparty bank and are therefore net settled.
Note 3. LeasesNew Accounting Standards
Sales-Type LeasesRecent Accounting Standards
With respectIn December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures” (ASU 2023-09), which includes amendments that further enhance income tax disclosures through the standardization and disaggregation of rate reconciliation categories and income taxes paid in both domestic and foreign jurisdictions. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024 and is to be applied prospectively, with early adoption and retrospective application permitted. We are in the process of evaluating the impact that ASU 2023-09 will have on our income tax related disclosures.
In November 2023, the FASB issued ASU No. 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures” (“ASU 2023-07”), which introduces new reportable segment disclosure requirements related to significant segment expenses and also expands reportable segment disclosure requirements for interim reporting. The amendment will require public entities to disclose significant segment expenses that are regularly provided to the Company's Toptracerchief operating decision maker and are included within each reportable segment’s profits and losses. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. We are in the process of evaluating the impact that ASU 2023-07 will have on our segment related disclosures.
Adoption of New Accounting Standards
In June 2022, the FASB issued ASU No. 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions” (“ASU 2022-03”). ASU 2022-03 clarifies the guidance in Topic 820 when measuring the fair value of an equity security that is subject to a contractual sale restriction, and also introduces new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value. ASU 2022-03 is effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years, with early adoption permitted. We early adopted ASU 2022-03 on January 1, 2023. The adoption of this ASU had no impact on our consolidated financial statements or related disclosures.
In August 2020, the 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” (“ASU 2020-06”), which simplifies the accounting for convertible instruments and also requires application of the if-converted method when calculating diluted earnings per share in periods when net income is reported. We adopted this standard as of January 1, 2022 under the modified retrospective method of transition which allows for amounts reported prior to the adoption date to remain unadjusted. Adoption of the standard resulted in a $57.1 million reduction in additional paid-in capital, a $57.9 million increase to long-term debt, net, a $13.2 million decrease in the deferred taxes, net and a $12.4 million increase in retained earnings. Additionally, under the if-converted method, the 14.7 million common shares underlying the Convertible Notes are assumed to have been outstanding as of the beginning of the current reporting period and any interest expense related to the Convertible Notes for the period is excluded from the calculation of diluted earnings per common share. Prior to the adoption of ASU 2020-06, for periods when we recognized net income, we used the treasury stock method to compute dilutive shares of common stock related to the Convertible Notes.
Note 4. Business Combinations
BigShots Acquisition
On November 1, 2023, we completed the acquisition of certain assets from affiliates of Invited, Inc. (“Invited”), the largest owner and operator of private golf and country clubs in the United States, related to its BigShots Golf business (“BigShots”), for a purchase price of approximately $29.7 million, which we funded with existing cash on hand. The acquisition includes certain domestic venue locations of the BigShots brand, which will help expand our leadership position in off-course golf and in the modern-golf ecosystem and is accounted for as a business combination. All of the goodwill arising from the acquisition is assigned to our Topgolf operating segment and consists largely of operational synergies within our Topgolf business. Goodwill recorded in connection with the acquisition is expected to be deductible for income tax purposes.
The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed as of the acquisition date based on the purchase price allocation (in millions):
| | | | | |
| At November 1, 2023 |
| Assets Acquired | |
| Accounts receivable | $ | 0.1 | |
| |
| Other current assets | 0.3 | |
| Property and equipment | 20.2 | |
| Intangibles—trade name | 2.9 | |
| Intangibles—development rights | 2.0 | |
| Goodwill | 4.4 | |
| Total assets acquired | 29.9 | |
| Liabilities Assumed | |
| Accounts payable and accrued liabilities | 0.2 | |
| Net assets acquired | 29.7 | |
| Total purchase price consideration | $ | 29.7 | |
For the year ended December 31, 2023, the results of operations for BigShots and acquisition-related costs were not material to our consolidated statements of operations. Additionally, the Company enters into non-cancelable license agreementspro forma results of operations reflecting the acquisition of BigShots are not presented, as the impact on our consolidated financial results would not have been material.
In conjunction with the acquisition of certain assets from affiliates of Invited in November 2023, during the first quarter of 2024 we completed additional acquisitions from Invited and affiliates of Invited for additional venue-related assets and development rights related to the Bigshots business, for $5.9 million and $16.0 million, respectively. The additional acquisitions were completed in two separate transactions and were funded with existing cash on hand, and will be accounted for as a business combination in connection with the November 2023 acquisition. Due to the timing of the completion of these transactions, the preliminary purchase price allocations for these additional assets and development rights are excluded from the purchase price allocation amounts in the table above. We expect to include the preliminary purchase price allocation estimates related to these additional acquisitions in our Form 10-Q for the period ended March 31, 2024.
Merger with Topgolf International, Inc.
On March 8, 2021, we completed our merger with Topgolf, pursuant to the terms of an Agreement and Plan of Merger, dated as of October 27, 2020 (the “Merger Agreement”) to expand our business platforms and family of brands, as well as our reach across multiple platforms, which now includes Topgolf venues in addition to retail, e-commerce and digital communities. Since the date of the merger, Topgolf has operated as one of our wholly-owned subsidiaries.
Pursuant to the terms of the Merger Agreement, we acquired 100% of the outstanding equity of Topgolf in an all-stock transaction, at an exchange ratio based on an equity value of Topgolf of $1,987.0 million, whereby the stockholders of Topgolf received 89.8 million of our common shares. The actual purchase consideration upon the closing of the merger of $3,014.2 million (or $2,650.2 million excluding Topgolf shares that provide softwarewere held by us) was based on the number of shares of our common stock issued, multiplied by the closing price of $29.52 of our common stock on March 8, 2021. Additionally, we converted certain stock options, stock awards, and hardwarewarrants held by previous Topgolf equity holders. The purchase consideration, together with the fair value of the consideration transferred for outstanding stock awards and warrants totaled $3,048.9 million.
During the year ended December 31, 2021, we recognized $20.4 million of transaction costs which primarily consisted of advisor, legal, valuation and accounting fees. We did not recognize any transaction costs associated with the merger during the years ended December 31, 2023 and December 31, 2022.
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 millions):
| | | | | | | | |
| At March 8, 2021 |
| Assets Acquired | | |
| Cash | | $ | 171.3 | |
| Accounts receivable | | 10.7 | |
| Inventories | | 13.9 | |
| Other current assets | | 52.1 | |
| Property and equipment | | 1,079.6 | |
| Operating lease right-of-use assets | | 1,328.0 | |
| Investments | | 28.8 | |
| Other assets | | 33.7 | |
| Intangibles—trade name | | 994.2 | |
| Intangibles—technology, customer relationships and liquor licenses | | 81.9 | |
| Goodwill | | 1,355.0 | |
| Total assets acquired | | 5,149.2 | |
| Liabilities Assumed | | |
| Accounts payable and accrued liabilities | | $ | 95.8 | |
| Accrued employee costs | | 37.1 | |
| Construction advances | | 40.5 | |
| Deferred revenue | | 66.2 | |
| Other current liabilities | | 7.8 | |
| Long-term debt | | 535.1 | |
| Deemed landlord financing | | 303.0 | |
| Operating lease liabilities | | 1,402.3 | |
| Other long-term liabilities | | 32.2 | |
| Deferred tax liabilities | | 143.7 | |
| Net assets acquired | | 2,485.5 | |
| Goodwill allocated to other business units | | 563.4 | |
| Total purchase price and consideration transferred in the merger | | $ | 3,048.9 | |
Supplemental Pro-Forma Information (Unaudited)
The following table presents supplemental pro-forma information for the twelve months ended December 31, 2021 in order to driving rangesshow what our consolidated net revenues and hospitalitynet income would have been had the merger been completed as of January 1, 2020. These amounts were calculated after applying our accounting policies and entertainment venues, whichwere based upon information available at that time. 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 classifiedpresented for informational purposes only and do not purport to be indicative of actual results of future operations or of the results that would have occurred had the acquisition taken place as sales-type leases.of the date noted below. The pro-forma amounts presented below also consider the effects of the fair value adjustments recorded on the assets acquired and liabilities assumed throughout the measurement period. For the twelve months ended December 31, 2023 and December 31, 2022, our consolidated financial statements reflect the actual results of operations of the merged businesses.
Leasing revenue attributed | | | | | | | |
| Year Ended December 31, | | |
| 2021 | | |
| (in millions) |
| Net revenues | $ | 3,276.4 | | | |
| Net income | $ | 72.3 | | | |
Supplemental Information of Operating Results
The following table presents net revenues and net loss attributable to sales-type leases was $34,116,000Topgolf included in our consolidated statements of operations 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)millions):
| | | | | |
| Year Ended December 31, |
| December 31, 2021 | | |
Sales-type lease selling price(1)
| $ | 29,789 | | | |
Cost of underlying assets | (11,862) | | | |
Operating profitNet revenues | $ | 17,9271,087.6 | | | |
| | | |
Interest incomeNet loss | $ | 4,327 (29.6) | | | |
____________
(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 3 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 5. Revenue Recognition
We primarily recognize revenue from the sale of our products and the operation of our Topgolf venues.
Contracts with customers for the purchase of our products are generally in the form of a purchase order. In certain cases, we enter into sales agreements which may contain specific terms, discounts and allowances. We also enter into licensing agreements with certain distributors and, with respect to our Toptracer operations, driving ranges and hospitality and entertainment venues.
The following table presents our revenue disaggregated by operating and reportable segment and major category (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
Topgolf (1): | | | | | |
| Venues | $ | 1,692.6 | | | $ | 1,477.1 | | | $ | 1,029.0 | |
| Other business lines | 68.4 | | | 71.9 | | | 58.6 | |
| Total Topgolf | $ | 1,761.0 | | | $ | 1,549.0 | | | $ | 1,087.6 | |
| | | | | |
| Golf Equipment: | | | | | |
| Golf clubs | $ | 1,073.5 | | | $ | 1,097.1 | | | $ | 994.5 | |
| Golf balls | 314.0 | | | 309.5 | | | 234.7 | |
| Total Golf Equipment | $ | 1,387.5 | | | $ | 1,406.6 | | | $ | 1,229.2 | |
| | | | | |
| Active Lifestyle: | | | | | |
| Apparel | $ | 713.2 | | | $ | 631.7 | | | $ | 490.9 | |
| Gear, accessories & other | 423.1 | | | 408.4 | | | 325.7 | |
| Total Active Lifestyle | $ | 1,136.3 | | | $ | 1,040.1 | | | $ | 816.6 | |
| | | | | |
| Total Consolidated | $ | 4,284.8 | | | $ | 3,995.7 | | | $ | 3,133.4 | |
| | | | | |
(1) Topgolf revenues for year ended December 31, 2021 are for the period of March 8, 2021 through January 2, 2022, due to the timing of the merger. |
Venue product sales at our Topgolf operating segment include the sale of golf clubs, golf balls, apparel, and gear and accessories. During the years ended December 31, 2023, 2022, and 2021, venue product sales were $16.3 million, $18.7 million, and $12.9 million, respectively.
Product and Service Revenue
We sell our Golf Equipment products and Active Lifestyle products in the United States and internationally, with our principal international regions being Europe and Asia. Golf Equipment product sales are generally higher than Active Lifestyle sales in most regions except for Europe, which has a higher concentration of Active Lifestyle sales due to the Jack Wolfskin business. Venues revenue is higher in the United States due to Topgolf having significantly more domestic venues than international venues. Revenue related to other business lines at Topgolf is predominantly in the United States, in addition to certain regions within Europe.
The following table summarizes revenue by geographical region (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| Revenue by Major Geographic Region: | | | | | |
| United States | $ | 3,081.4 | | | $ | 2,798.0 | | | $ | 2,067.1 | |
| Europe | 540.6 | | | 537.4 | | | 499.5 | |
| Asia | 531.9 | | | 545.4 | | | 465.5 | |
| Rest of World | 130.9 | | | 114.9 | | | 101.3 | |
| Total | $ | 4,284.8 | | | $ | 3,995.7 | | | $ | 3,133.4 | |
| | | | | |
Licensing, Royalty and Other Income
The following table summarizes all licensing, royalty and other income revenues by operating and reportable segment (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| Topgolf | | $ | 49.0 | | | $ | 50.3 | | | $ | 37.3 | |
| Active Lifestyle | | 26.9 | | | 26.6 | | | 30.9 | |
| Total | | $ | 75.9 | | | $ | 76.9 | | | $ | 68.2 | |
Deferred Revenue
Our deferred revenue balance includes short-term and long-term deferred revenue, which consists primarily of revenue from the sale of gift cards, event deposits, loyalty points, memberships and prepaid sponsorships at Topgolf, virtual currency and game credits related to digital golf games, as well as upfront territory fees and upfront franchise fees received from international franchise partners.
The following table provides a reconciliation of activity related to our short-term deferred revenue balance for the periods presented (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
Beginning Balance(1) | | $ | 94.9 | | | $ | 93.9 | | | $ | 2.5 | |
| Deferral of revenue | | 694.1 | | | 646.4 | | | 459.6 | |
| Revenue recognized | | (651.7) | | | (630.2) | | | (360.2) | |
| Breakage | | (26.3) | | | (19.0) | | | (10.3) | |
| Foreign currency translation and other | | (0.1) | | | 3.8 | | | 2.3 | |
| Ending Balance | | $ | 110.9 | | | $ | 94.9 | | | $ | 93.9 | |
| | | | | | |
(1) 2021 Beginning Balance excludes Topgolf due to the timing of the merger. |
As of December 31, 2023 and December 31, 2022, our long-term deferred revenue balance was $3.7 million and $3.2 million, respectively, which is included in other long-term liabilities on our consolidated balance sheet.
The following table summarizes the amount of the deferred revenue recognized during the periods presented which were included in the balance of deferred revenue balances as of the end of the prior year reporting period (in millions):
| | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | |
| 2023 | | 2022 | | 2021 | |
Deferred revenue recognized from prior period ending balance(1) | $ | 63.7 | | | $ | 67.0 | | | $ | 1.5 | | |
(1) 2021 excludes Topgolf due to the timing of the merger. | | | | | | |
Variable Consideration
The following table provides a reconciliation of our short-term sales program incentives activity for the periods presented (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| Beginning Balance | $ | 20.8 | | | $ | 23.3 | | | $ | 26.2 | |
| Additions | 40.0 | | | 35.7 | | | 32.5 | |
| Credits issued | (42.6) | | | (32.9) | | | (32.1) | |
| Foreign currency translation and other | (1.7) | | | (5.3) | | | (3.3) | |
| Ending Balance | $ | 16.5 | | | $ | 20.8 | | | $ | 23.3 | |
Our provision for the sales return liability fluctuates with the seasonality of the business, while actual sales returns are generally more heavily weighted toward the second half of the year as the golf season comes to an end. The following table provides a reconciliation of the activity related to our sales return reserve for the periods presented (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| Beginning Balance | $ | 55.4 | | | $ | 47.4 | | | $ | 44.0 | |
| Provision | 181.9 | | | 128.4 | | | 91.0 | |
| Sales returns | (181.4) | | | (120.4) | | | (87.6) | |
| | | | | |
| Ending Balance | $ | 55.9 | | | $ | 55.4 | | | $ | 47.4 | |
As of December 31, 2023 and December 31, 2022, the cost recovery of inventory associated with our sales return liability was $25.7 million and $25.5 million, respectively.
Note 6. Business CombinationsLeases
MergerSales-Type Leases
We enter into non-cancelable license agreements primarily related to Toptracer and Swing Suite (see Note 10) of which certain of these agreements are classified as sales-type leases. Revenue from sales-type leases (see Note 2) is included in services revenues within our consolidated statements of operations is as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
Sales-type lease selling price(1) | $ | 30.3 | | | $ | 36.3 | | | $ | 29.8 | |
| Cost of underlying assets | (13.8) | | | (17.6) | | | (11.9) | |
| Operating profit | $ | 16.5 | | | $ | 18.7 | | | $ | 17.9 | |
| | | | | |
| Interest income | $ | 6.1 | | | $ | 4.5 | | | $ | 4.3 | |
| | | | | |
| Leasing revenue attributable to sales-type leases | $ | 36.4 | | | $ | 40.8 | | | $ | 34.1 | |
| | | | | |
(1) Selling price is equal to the present value of lease payments over the non-cancelable term of the licensing agreement. |
Leasing receivables related to our net investment in sales-type leases are as follows (in millions):
| | | | | | | | | | | | | | | | | |
| | | December 31, |
| Balance Sheet Location | | 2023 | | 2022 |
| Leasing receivables, net—short-term | Other current assets | | $ | 26.9 | | | $ | 17.5 | |
| Leasing receivables, net—long-term | Other assets, net | | 65.1 | | | 57.5 | |
| Total leasing receivables | | | $ | 92.0 | | | $ | 75.0 | |
Net maturities of sales-type lease receivables for the next five years and thereafter as of December 31, 2023, are as follows (in millions):
| | | | | |
| Sales-Type Leases |
| 2024 | $ | 33.5 | |
| 2025 | 28.2 | |
| 2026 | 21.0 | |
| 2027 | 12.4 | |
| 2028 | 5.7 | |
| Thereafter | 2.8 | |
| Total future lease payments | 103.6 | |
| Less: imputed interest | 11.6 | |
| Total | $ | 92.0 | |
Operating Leases, Financing Leases and DLF Obligations
Supplemental balance sheet information related to our operating and financing ROU assets and lease liabilities and DLF assets and obligations is as follows (in millions):
| | | | | | | | | | | | | | | | | | |
| | | December 31, | |
| Balance Sheet Location | | 2023 | | 2022 | |
| Assets | | | | | | |
| Operating lease ROU assets, net | Operating lease ROU assets, net | | $ | 1,410.1 | | | $ | 1,419.1 | | |
| Financing lease ROU assets, net | Other assets | | $ | 257.4 | | | $ | 215.7 | | |
| DLF assets, net | Property, plant & equipment, net | | $ | 917.3 | | | $ | 813.2 | | |
| | | | | | |
| Liabilities | | | | | | |
| Current | | | | | | |
| Operating lease liabilities, short-term | Operating lease liabilities, short-term | | $ | 86.4 | | | $ | 76.4 | | |
| Financing lease liabilities, short-term | Accounts payable and accrued expenses | | $ | 1.4 | | | $ | 1.7 | | |
| DLF obligations, short-term | Accounts payable and accrued expenses | | $ | 0.1 | | | $ | 2.4 | | |
| | | | | | |
| Non-current | | | | | | |
| Operating lease liabilities, long-term | Operating lease liabilities, long-term | | $ | 1,433.4 | | | $ | 1,437.5 | | |
| Financing lease liabilities, long-term | Other long-term liabilities | | $ | 287.9 | | | $ | 225.9 | | |
| DLF obligations, long-term | Deemed landlord financing obligations | | $ | 980.0 | | | $ | 658.0 | | |
| | | | | | |
Leases Under Construction
Our minimum capital commitment for leases under construction, net of reimbursements from third-party real estate financing partners, was approximately $107.0 million as of December 31, 2023. As we are actively involved in the construction of these properties, we recorded $127.5 million in construction costs within property, plant and equipment and $59.3 million in construction advances from the landlords in connection with Topgolf International, Inc.
On March 8, 2021,these properties as of December 31, 2023. We determine the Company completed its mergerlease classification for these properties at the end of the construction period. Upon lease commencement, the initial base term of these leases is generally 20 years, with Topgolf, pursuantmost having options to theextend for additional terms of an Agreement and Planup to 20 years. As of Merger, dated asDecember 31, 2023, we had $364.9 million of October 27, 2020 (the “Merger Agreement”). Topgolf is a leading technology-enabled golf entertainment business, with an innovative platformfuture lease obligations related to four venues subject to non-cancellable leases 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 tosigned but have not yet commenced.
The components of lease expense included in our consolidated statements of operations for 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 awardsperiods presented below are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| Operating lease costs: | | | | | | |
| Amortization of ROU assets | | $ | 176.1 | | | $ | 172.7 | | | $ | 146.3 | |
| Total operating lease costs | | 176.1 | | | 172.7 | | | 146.3 | |
| Financing lease costs: | | | | | | |
| Amortization of ROU assets | | 7.8 | | | 6.4 | | | 3.2 | |
| Interest on lease liabilities | | 15.4 | | | 9.3 | | | 4.5 | |
| Total financing lease costs | | 23.2 | | | 15.7 | | | 7.7 | |
| DLF obligation costs: | | | | | | |
| Depreciation of DLF assets | | 25.8 | | | 14.5 | | | 5.7 | |
| Interest on DLF obligations | | 70.0 | | | 46.7 | | | 28.0 | |
| Total DLF obligation costs | | 95.8 | | | 61.2 | | | 33.7 | |
| Variable lease costs | | 11.8 | | | 10.2 | | | 6.5 | |
| Total lease costs | | $ | 306.9 | | | $ | 259.8 | | | $ | 194.2 | |
| | | | | | |
Other information 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 preferredleases (in millions): | | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| Supplemental Cash Flows Information | | 2023 | | 2022 | | 2021 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | | |
| Operating cash flows from operating leases | | $ | 156.4 | | | $ | 157.0 | | | $ | 123.6 | |
| Operating cash flows from finance leases | | $ | 8.5 | | | $ | 5.2 | | | $ | 2.8 | |
| Operating cash flows from DLF obligations | | $ | 54.6 | | | $ | 36.9 | | | $ | 17.7 | |
| Financing cash flows from finance leases | | $ | 2.8 | | | $ | 2.7 | | | $ | 0.8 | |
| Financing cash flows from DLF obligations | | $ | 6.9 | | | $ | 4.8 | | | $ | — | |
| | | | | | |
| Lease liabilities arising from new ROU assets: | | | | | | |
| Operating leases | | $ | 83.5 | | | $ | 51.9 | | | $ | 19.6 | |
| Finance leases | | $ | 27.0 | | | $ | 92.0 | | | $ | 52.7 | |
DLF obligations(1) | | $ | 311.3 | | | $ | 193.8 | | | $ | 171.4 | |
| | | | | | |
(1) During the course of the construction of our venues, certain financing partners remit funds directly to our construction vendors on our behalf rather than providing the construction advances directly to us. These funds are presented as non-cash investing and financing activities within our consolidated statement of cash flows. For the year ended December 31, 2023, the amount contributed by these financing partners, in addition to accrued capitalized interest for these contributions was $60.6 million. For the years ended December 31, 2022 and December 31, 2021, the amount contributed by these financing partners, in addition to accrued capitalized interest for these contributions was $30.6 million and $37.7 million, respectively, which were corrected from $163.2 million and $107.1 million, respectively, as previously reported. |
| | | | | | | | | | | |
| December 31, |
| 2023 | | 2022 |
| Weighted average remaining lease term (years): | | | |
| Operating leases | 15.9 | | 16.6 |
| Finance leases | 36.8 | | 36.5 |
| DLF obligations | 38.1 | | 38.5 |
| | | |
| Weighted average discount rate: | | | |
| Operating leases | 5.8 | % | | 5.6 | % |
| Finance leases | 6.3 | % | | 6.1 | % |
| DLF obligations | 10.0 | % | | 8.8 | % |
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 betweenone 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 the2023, our 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 costsminimum lease obligations 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 allocationfollows (in thousands)millions):
| | | | | | | | |
| 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 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Operating Leases | | Finance Leases | | DLF Obligations(1) | | Total |
| 2024 | $ | 155.6 | | | $ | 14.9 | | | $ | 72.9 | | | $ | 243.4 | |
| 2025 | 162.1 | | | 17.1 | | | 80.7 | | | 259.9 | |
| 2026 | 156.9 | | | 17.4 | | | 84.2 | | | 258.5 | |
| 2027 | 154.3 | | | 17.4 | | | 85.5 | | | 257.2 | |
| 2028 | 150.0 | | | 15.3 | | | 87.7 | | | 253.0 | |
| Thereafter | 1,677.5 | | | 739.7 | | | 3,978.8 | | | 6,396.0 | |
| Total future lease payments | 2,456.4 | | | 821.8 | | | 4,389.8 | | | 7,668.0 | |
| Less: imputed interest | 936.6 | | | 532.5 | | | 3,409.7 | | | 4,878.8 | |
| Total | $ | 1,519.8 | | | $ | 289.3 | | | $ | 980.1 | | | $ | 2,789.2 | |
| | | | | | | |
(1) Future lease payments for DLF Obligations include approximately $44.9 million of reimbursements which we expect to receive from third-party financing partners that were not yet received as of December 31, 2023. Imputed interest includes approximately $175.6 million related to these unfunded DLF Obligations as of December 31, 2023. |
Note 7. Financing Arrangements
The Company'sOur credit facilities and long-term debt obligations are summarized as follows (in thousands)millions):
| | December 31, 2021 | | December 31, 2020 |
| Maturity Date | | Interest Rate | | Unamortized Debt Issuance Costs | | Carrying Value | | Carrying Value |
| | Maturity Date | | | | Maturity Date | | Interest Rate | | December 31, 2023 | | December 31, 2022 |
| Short-Term Credit Facilities | Short-Term Credit Facilities | | | | | | | | | | |
| U.S. Asset-Based Revolving Credit Facility | U.S. Asset-Based Revolving Credit Facility | | May 17, 2024 | | 2.00 | % | | $ | 916 | | | $ | 9,096 | | | $ | 22,130 | |
| U.S. Asset-Based Revolving Credit Facility | |
| U.S. Asset-Based Revolving Credit Facility | |
| 2022 Japan ABL Credit Facility | 2022 Japan ABL Credit Facility | | January 21, 2022 | | 1.28 | % | | — | | | — | | | — | |
| Total Principal Amount | |
| Unamortized Debt Issuance Costs | |
| | $ | 916 | | | $ | 9,096 | | | $ | 22,130 | |
| Balance Sheet Location | Balance Sheet Location | | | | | | |
| Balance Sheet Location | |
| Balance Sheet Location | |
| Asset-based credit facilities | |
| Asset-based credit facilities | |
| Asset-based credit facilities | |
| Prepaid expenses | Prepaid expenses | | $ | 916 | | | $ | — | | | $ | — | |
| Other long-term assets | 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 | % | | — | | | — | | | — | |
| | Maturity Date | |
| | Maturity Date | |
| | Maturity Date | | | Interest Rate | | December 31, 2023 | | December 31, 2022 |
| Long-Term Debt and Credit Facilities | |
| 2023 Term Loan B | |
| 2023 Term Loan B | |
| 2023 Term Loan B | |
| Convertible Notes | Convertible Notes | | May 1, 2026 | | 2.75 | % | | 64,280 | | | 194,470 | | | 183,126 | |
| Equipment Notes | Equipment Notes | | December 27, 2022 - March 19, 2027 | | 2.36% - 3.79% | | — | | | 31,137 | | | 31,822 | |
| Mortgage Loans | Mortgage Loans | | July 1, 2033 -
July 29, 2036 | | 9.75% - 11.31% | | — | | | 46,407 | | | — | |
| Financed Tenant Improvements | Financed Tenant Improvements | | February 1, 2035 | | 8.00 | % | | — | | | 3,650 | | | 3,801 | |
| Term Loan B | |
| Topgolf Term Loan | |
| Topgolf Revolving Credit Facility | |
| Total Principal Amount | |
| Less: Unamortized Debt Issuance Costs | |
| Total Debt, net of Unamortized Debt Issuance Costs | |
| | $ | 85,815 | | | $ | 1,044,335 | | | $ | 665,289 | |
| Balance Sheet Location | Balance Sheet Location | | | | | | |
| Balance Sheet Location | |
| Balance Sheet Location | |
| Other current liabilities | Other current liabilities | | $ | 3,815 | | | $ | 19,057 | | | $ | — | |
| Accrued expenses | | — | | | — | | | 14,725 | |
| Other current liabilities | |
| Other current liabilities | |
| Long-term debt | Long-term debt | | 82,000 | | | 1,025,278 | | | 650,564 | |
| Total Debt, net of Unamortized Debt Issuance Costs | |
| | $ | 85,815 | | | $ | 1,044,335 | | | $ | 665,289 | |
|
Total interest and amortization expense related to our credit facilities and long-term debt obligations, which is included in “Interest expense, net” in our consolidated statement of operations, is summarized as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| Short-Term Credit Facilities | | | | | |
| U.S. Asset-Based Revolving Credit Facility | $ | 7.4 | | | $ | 4.3 | | | $ | 1.6 | |
| 2022 Japan ABL Credit Facility | 0.3 | | | 0.3 | | | — | |
| Total | $ | 7.7 | | | $ | 4.6 | | | $ | 1.6 | |
| | | | | |
| Long-Term Debt and Credit Facilities | | | | | |
| 2023 Term Loan B | $ | 90.9 | | | $ | — | | | $ | — | |
| Convertible Notes | 7.1 | | | 7.1 | | | 7.1 | |
| Equipment Notes | 0.8 | | | 0.7 | | | 0.9 | |
| Financed Tenant Improvements | 0.3 | | | — | | | — | |
| Mortgage Loans | 4.7 | | | 4.8 | | | 4.0 | |
| Term Loan B | 8.6 | | | 31.2 | | | 24.1 | |
| Topgolf Term Loan | 7.8 | | | 29.9 | | | 21.4 | |
| Topgolf Revolving Credit Facility | 2.7 | | | 4.4 | | | 6.2 | |
| Japan Term Loan | — | | | — | | | 0.1 | |
| Total | $ | 122.9 | | | $ | 78.1 | | | $ | 63.8 | |
| | | | | |
|
| | | | | |
Revolving Credit Facilities and Available Liquidity
In addition to cash on hand as well asand cash generated from operations, the Company relieswe rely on itsour U.S. Asset-Based Revolving Credit Facility and 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.fluctuations. 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's2023, our available liquidity, which is comprised of cash on hand and amounts available under the Company's revolving creditour U.S. and Japan facilities, afterless outstanding 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 CompanyMarch 2023, we completed a comprehensive debt refinancing plan in order to modify our capital structure, reduce our borrowing costs, and improve our liquidity. As a part of this refinancing plan, we entered into a FourthFifth Amended and Restated Loan and Security Agreement (the “New ABL Agreement”) with Bank of America, N.A. and other lenders, which provides for a senior secured asset-based revolving credit facility in an aggregate principal amount of up to $400,000,000 (the “ABL$525.0 million, consisting of a U.S. facility in an aggregate principal amount of up to $440.0 million, a Canadian facility in an aggregate principal amount of up to $5.0 million, a German facility in an aggregate principal amount of up to $60.0 million, and a U.K./Dutch facility in an aggregate principal amount of up to $20.0 million (collectively, the “New 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. Thefacility and in each case subject to reallocation of such amounts between jurisdictions in accordance with the terms of the New ABL Agreement. Amounts outstanding under the New ABL Facility are secured by a first priority lien on certain assets, including cash (to the extent pledged by the Company)us), certain intellectual property, certain eligible real estate, inventory and accounts receivable of the Company’sus and our subsidiaries in the United States, Germany, Canada, the Netherlands, and the United Kingdom.Kingdom (other than certain excluded subsidiaries) and a second-priority lien on substantially all of our and such subsidiaries’ other assets. The real estate and intellectual property components of the borrowing base under theNew 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 2 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 the incurrence of additional debt, liens, dividends and other restricted payments, asset sales, investments, mergers, acquisitions and affiliate transactions. Eventstransactions, as well as customary events of default permitting accelerationdefault. Amounts borrowed under the CreditNew ABL Facility increase and decrease relative to the changes in certain of the assets with which the facility is secured, and may be repaid and borrowed from time to time subject to the conditions in the New ABL Agreement, include, among others, nonpaymentwith the entire outstanding principal amount due and payable on the maturity date.
Under the New ABL Facility, we are also subject to compliance with a fixed charge coverage ratio of at least 1.0:1.0 during certain specified periods in which our borrowing base availability, as adjusted, falls below 10.0% of the maximum aggregate principal or interest, covenant defaults, material breachesamount of representations and warranties, bankruptcy and insolvency events, certain cross defaults or a change of control.the New ABL Facility, as adjusted. As of December 31, 2021,2023, our borrowing base availability was above 10% of the Company wasmaximum principal amount of the New ABL Facility, as adjusted.
The interest rate applicable to outstanding borrowings under the New ABL Facility may fluctuate as specified in compliance with these covenants.the New ABL Agreement, depending on our “Availability Ratio,” which is further defined in the New ABL Agreement and is expressed as a percentage of (i) the average daily availability under the New ABL Facility to (ii) the sum of the Canadian, German, U.K./Dutch and U.S. borrowing bases, as adjusted. Any unused portions of the New ABL Facility are subject to a monthly fee of 0.25% per annum.
In connectionOur average borrowings, availability, and interest rate under the New ABL Facility were as follows (in millions except interest rates):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| Average borrowings | $ | 104.9 | | | $ | 101.9 | | | $ | 20.3 | |
| Average availability | $ | 354.6 | | | $ | 253.0 | | | $ | 295.3 | |
| Weighted average interest rate | 5.88 | % | | 4.01 | % | | 3.04 | % |
2022 Japan ABL Credit Facility
We have an asset-based revolving credit facility with the merger with Topgolf (see Note 6)Bank of Tokyo-Mitsubishi UFJ (the “2022 Japan ABL Credit Facility”) which provides a line of credit to our Japan subsidiary of up to 6.0 billion Japanese Yen ($42.6 million), is subject to borrowing base availability under the Company amendedfacility, and is secured by certain assets, including eligible inventory and accounts receivable of our Japan subsidiary which are subject to certain restrictions and covenants related to certain pledged assets and financial performance metrics. The interest rate applicable to outstanding borrowings under the 2022 Japan ABL Credit Facility is subject to an effective interest rate equal to the Tokyo Interbank Offered Rate plus 0.80%. As of December 31, 2023, our remaining borrowing base availability under the 2022 Japan ABL Credit Facility was 2.0 billion Yen ($14.2 million).
Long-Term Debt
2023 Term Loan FacilityB
In conjunction with the debt refinancing plan which occurred in March 2023 mentioned above, we entered into a Credit Agreement (the “Credit Agreement”) with Bank of America, N.A. as administrative agent, and the financial institutions party thereto as lenders which provides for a senior secured term loan B facility (the “2023 Term Lenders to, among other things, permit the consummationLoan B”). The 2023 Term Loan B provides for a senior secured term loan B facility in an original aggregate principal amount of $1,250.0 million, which was issued net of an original issuance discount of $12.5 million. We used a portion of the Merger and certain other transactions contemplated innet proceeds from the Merger Agreement, designate Topgolf and its subsidiaries as unrestricted subsidiaries under the2023 Term Loan FacilityB for the repayment of outstanding principal and amend certain covenantsinterest amounts on our prior Term Loan B facility, as well as the repayment of the outstanding principal, interest and other provisions to allow the Company to make certain investments in, and enter into certain transactions with Topgolf.
Topgolf Credit Facilities
In connectionfees associated with the merger withprior Topgolf on March 8, 2021, the Company assumedcredit facilities, which consisted of a $350,000,000senior secured term loan facility (the “Topgolf Term Loan”), and a $175,000,000senior secured revolving credit facility with JPMorgan Chase Bank, N.A (the “Topgolf Revolving Credit Facility”), and, together 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,Topgolf Term Loan, collectively, the “Topgolf Credit Facilities”).
Borrowings under We accounted for the Topgolftransactions associated with the Credit Agreement and repayment and retirement of the prior Term Loan accrueB facility and Topgolf Credit Facilities as a debt modification. As a result, during the three months ended March 31, 2023, we recognized a non-cash loss of $10.5 million within other income/expense in our condensed consolidated statement of operations related to the write-off of the unamortized original issuance discounts and debt issuance costs associated with the prior Term Loan B facility and Topgolf Credit Facilities for lenders who did not participate in the Credit Agreement. Additionally, we recognized $2.3 million of third-party fees and capitalized $11.0 million in debt issuance costs in connection with the Credit Agreement. The $2.3 million of third-party fees were recognized as selling, general and administrative expense in our condensed consolidated statement of operations during the twelve months ended December 31, 2023. The debt issuance costs and original issuance discount are being amortized into interest expense over the term of the Credit Agreement and are included as a reduction to long-term debt in our condensed consolidated balance sheet as of December 31, 2023.
The 2023 Term Loan B amortizes at a rate per annum equal to 1.00% of the initial aggregate principal amount of the loan, payable quarterly, commencing with the quarter ending June 30, 2023, with the remaining outstanding principal amount due and payable at maturity. The 2023 Term Loan B also contains customary affirmative and negative covenants, including, among other things, restrictions related on the Company's option, either (i) an alternate base rate determinedincurrence of additional debt, liens, dividends and other restricted payments, asset sales, investments, mergers, acquisitions, and affiliate transactions, as well as customary events of default. The 2023 Term Loan B is not subject to any financial covenants. The 2023 Term Loan B is guaranteed by reference to the highestcertain 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%our direct and indirect wholly-owned U.S. subsidiaries (other than certain excluded subsidiaries), and (d) 1.75%, or (ii) an adjusted LIBOR rate (for a period equal tois secured by substantially all of our assets and the relevant interest period) (which shall not be less than 0.75%),assets of each subsidiary guarantor, in each case, plus an applicable margin. subject to certain customary exceptions.
The applicable margin for loansinterest rate on outstanding borrowings under the Topgolf2023 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 interestB are, at our option, a rate per annum equal to at the Company's option, either (i)(a) a term SOFR-based rate (“Term SOFR”) plus a 0.10% credit spread adjustment (and subject to a 0% floor), plus an alternateapplicable margin of 3.25% or 3.50%, depending on our applicable debt rating (the “Debt Rating”), which is based on our corporate credit rating determined by S&P, and our corporate family rating determined by Moody’s, or (b) a base rate determined by referenceequal to the highestsum of (a)(i) the greater of (A) the greater of the federal funds rate and the overnight bank funding rate published by the Federal Reserve Bank of New York, plus 0.50%, (B) Term SOFR for a one-month interest period term plus 1.0% (and subject to a 1% floor), (C) the prime rate announced by Bank of JPMorgan Chase Bank, N.A. (the administrative agent)America from time to time, and (D) 1.0%, (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%)applicable margin of 2.25% or 2.50%, in each case plus andepending on our applicable margin. The applicable rate for the Topgolf Revolving Credit Facility loans is 3.00% with respect to alternate base rate borrowings and 4.00% with respect to LIBOR borrowings subject to 2 stepdowns of 0.25% per annum upon achievement of specified first lien leverage ratio levels. In addition, the Company is required to pay a commitment fee under the Topgolf Revolving Credit Facility based upon the first lien leverage ratio (as defined in the Amended Credit Agreement) at a rate of up to 0.50% per annum, subject to 2 stepdowns of 0.13% per annum upon achievement of specified first lien leverage ratio levels. The Company must also pay customary letter of credit fees and agency fees.
The Topgolf Term Loan is payable in quarterly installments of 0.25% of the principal 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 caseunless the Company elects to restore the 5.50:1.00 total leverage ratio test (and eliminate the restrictions in the Amended Credit Agreement that apply during the period of relief) at an earlier date. Until the Company demonstrates compliance with the 5.50:1.00 total leverage ratio test for the period ending on or about September 30, 2022 (or terminate the period of relief at an earlier date after demonstrating compliance with the 5.50:1.00 total leverage ratio test), the Company is required to maintain unrestricted
cash on hand and/or availability under the Topgolf Credit Facilities of not less than $30,000,000. 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.Debt Rating.
Convertible Notes
InOur convertible senior notes issued 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, which is payable semi-annually in arrears on May 1 and November 1 of each year, beginning on November 1, 2020.year.
As of May 6, 2023, we have the option to settle the Convertible Notes through cash settlement, physical settlement, or combination settlement at our election, and may redeem all or part of the Convertible Notes, subject to certain stipulations. The Convertible Notes matureare convertible into shares of our common stock at an initial conversion rate of 56.8 shares per $1,000 principal amount of Convertible Notes, which is equal to an initial conversion price of $17.62 per share. Additionally, all or any portion of the Convertible Notes may be converted at the conversion rate and at the holders’ option on Mayor after February 1, 2026 unless earlier redeemed or repurchased byuntil the Company or converted.close of business on the second trading day immediately prior to the maturity date, and upon the occurrence of certain contingent conversion events. The Convertible Notes are structurally subordinated to all existing and future indebtedness and other liabilities, including trade payables, and (to the extent the Company iswe are not a holder thereof) preferred equity, if any, of the Company’sour subsidiaries.
The Company may settleIn July 2022, in accordance with the Convertible Notes through cash settlement, physical settlement, or combination settlement at its election. Therefore,terms of the indenture under which the Convertible Notes were separated into a liability component and an equity component in a manner that reflects the interest costissued, holders 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 theour Convertible Notes totaling $59,602,000 aselected to convert $0.5 million 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.into 25,602 shares of our common stock. 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 bewere converted at thea 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 56.769856.8 shares of the Company'sour 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.Notes.
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 enterwe entered into privately negotiated capped call transactions with certain counterparties (“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’sour common stock that initially underlie the Convertible Notes, and are generally expected generally to reduce the potential dilution and/or offset any cash payments we are required to the Company’s common stock uponmake related to 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.Notes. The Capped Calls are recorded as a reduction to additional paid-in capital and are not accounted for as derivatives.
The Convertible Notes willeach have an impact on the Company’s diluted earnings per share when the average market price of its common stock exceeds the conversionexercise price of $17.62 per share, assubject to certain adjustments, which correspond to the Company intends to settle the principal amountinitial conversion prices 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 theand a cap price of $27.10$26.96 per share as exercise of the Capped Calls offsets any dilution from the Convertible Notes from the conversion price up to the cap price.date of this filing. Capped Calls are excluded from the calculation of diluted earnings per share, as they would be anti-dilutive under the treasuryif-converted method. The initial cost of the Capped Calls was recognized as a reduction to additional paid-in-capital on our consolidated balance sheet.
In connection with the conversion of $0.5 million of Convertible Notes in July 2022, the Company and the counterparties entered into a partial termination of the Capped Calls with respect to the Convertible Notes converted, which resulted in the Company receiving 3,499 shares of the Company’s common stock method.from the counterparties.
Equipment Notes
Between December 2017 and December 2021, the Company entered into 6We have long-term financing agreements (the “Equipment Notes”) with Bank of America N.A. and othervarious lenders which we use in order to invest in its golf ball manufacturing facility in Chicopee, Massachusetts, its North American Distribution Center in Roanoke, Texas,certain of our facilities and in corporate ITinformation technology equipment. The loans are secured by the relative 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 3We have three mortgage loans related to the construction of 3our Topgolf venues. The mortgage loans are secured by the assets of each respective venue and 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 assetsat maturity.
Aggregate Amount of each respective venue.Long-Term Debt Maturities
The following table presents the Company'sour combined aggregate amount of maturities for the Company'sour long-term debt over the next five years and thereafter as of December 31, 2021.2023. Amounts payable under the ABL Facility are excluded from this table as they are short-term in nature. Amounts payable under the2023 Term Loan Facility includedB below represent the minimum principal repayment obligations. obligations as of December 31, 2023.
| | | | | | | | |
| | (in millions) |
| 2024 | | $ | 20.8 | |
| 2025 | | 18.6 | |
| 2026 | | 276.4 | |
| 2027 | | 15.6 | |
| 2028 | | 13.7 | |
| Thereafter | | 1,221.7 | |
| Total aggregate amount of maturities | | 1,566.8 | |
| Less: Unamortized Debt Issuance Costs | | 31.5 | |
| Total aggregate amount of maturities, net of Unamortized Debt Issuance Costs | | $ | 1,535.3 | |
As of December 31, 2021,2023, we were in compliance with all fixed charge coverage ratios and all other financial covenants and reporting requirements under the Company does not anticipate excess cash flow repaymentsterms of our credit facilities and long-term debt mentioned above, 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, dilutedDiluted earnings per common share (“Diluted EPS”) takes into account the potential dilution that could occur if outstanding securities were exercised.exercised or settled in shares. Dilutive securities that may impact Diluted EPS include shares underlying outstanding stock options, RSUs and PRSUs granted to employees and non-employee directors (see Note 15), as well as common shares underlying the Convertible Notes (see Note 7). Dilutive securities related to shares underlying outstanding stock options, RSUs and PRSUs granted to employees and non-employee directors 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.”method. Dilutive securities include outstanding stock options, restricted stock units and performance share units grantedrelated to employees and non-employee directors (see Note 17), as well as common shares underlying convertible notesthe Convertible Notes are included in the calculation of diluted earnings per common share using the if-converted method (see Note 7)3).
InBasic and diluted weighted-average common shares outstanding are the same 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. occurs.
The following table summarizes the computation of basic and diluted earnings per share (in thousands,millions, 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 | |
____________ | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| Earnings per common share—basic | | | | | |
| Net income | $ | 95.0 | | | $ | 157.9 | | | $ | 322.0 | |
| Weighted-average common shares outstanding—basic | 185.0 | | | 184.9 | | | 169.1 | |
| Earnings per common share—basic | $ | 0.51 | | | $ | 0.85 | | | $ | 1.90 | |
| Earnings per common share—diluted | | | | | |
| Net income | $ | 95.0 | | | $ | 157.9 | | | $ | 322.0 | |
| Interest expense | 6.5 | | | 6.4 | | | — | |
| Net income attributable to earnings per common share—diluted | $ | 101.5 | | | $ | 164.3 | | | $ | 322.0 | |
| | | | | |
| Weighted-average common shares outstanding—basic | 185.0 | | | 184.9 | | | 169.1 | |
Weighted-average shares outstanding - Convertible Notes(1) | 14.7 | | | 14.7 | | | 5.9 | |
| Outstanding options, restricted stock units and performance share units | 1.4 | | | 1.7 | | | 1.9 | |
| Weighted-average common shares outstanding—diluted | 201.1 | | | 201.3 | | | 176.9 | |
| Earnings per common share—diluted | $ | 0.50 | | | $ | 0.82 | | | $ | 1.82 | |
| | | | | |
(1) For 2021, the Dilutive impact of the Convertible Notes was calculated using the Treasury Stock Method. See Note 3 for further detail. |
| | | | | |
|
|
(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,Anti-Dilutive Options 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, 2021,2023, approximately 2.3 million 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 For each of the yearyears ended December 31, 2020, common shares underlying2022 and 2021, approximately 1.3 million securities outstanding, comprised of stock 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.respectively, as they would be anti-dilutive.
Note 9. Goodwill and Intangible Assets
Changes in the carrying amount of goodwill by operating and reportable segment are as follows (in thousands)millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Topgolf | | Golf Equipment | | Active Lifestyle | | | | Total |
| Balance at December 31, 2021 | | $ | 1,340.7 | | | $ | 531.1 | | | $ | 88.3 | | | | | | $ | 1,960.1 | |
| Acquisitions | | 14.3 | | | 0.2 | | | 1.5 | | | | | | 16.0 | |
| Foreign currency translation and other | | 8.6 | | | (1.0) | | | — | | | | | | 7.6 | |
| Balance at December 31, 2022 | | $ | 1,363.6 | | | $ | 530.3 | | | $ | 89.8 | | | | | | $ | 1,983.7 | |
| Acquisitions | | 4.4 | | | — | | | — | | | | | | 4.4 | |
| Foreign currency translation and other | | — | | | 0.4 | | | 0.2 | | | | | | 0.6 | |
| Balance at December 31, 2023 | | $ | 1,368.0 | | | $ | 530.7 | | | $ | 90.0 | | | | | | $ | 1,988.7 | |
The $1,903,412,000 increaseAdditions to goodwill during the twelve monthsyear ended December 31, 2021 was2023 are primarily duerelated to the additionacquisition of $1,903,883,000BigShots, which is further described in Note 4. Additions to goodwill in connectionduring the year ended December 31, 2022 are related to purchase accounting adjustments made during the first quarter of 2022 to finalize the fair value on certain leases assumed and deferred taxes associated with the Topgolf merger with Topgolf. As of December 31, 2023, goodwill is presented net of accumulated impairment losses of $148.4 million, which were recorded prior to December 31, 2021 in March 2021,the Active Lifestyle operating segment.
The estimated fair values of whichour reporting units, trade names and trademarks, exceeded their carrying values for the Company attributed $1,340,663,000 toyears ended December 31, 2023 and 2022. As such, no impairment losses were recognized during these periods.
Intangible assets by major asset class for the Topgolf business, $504,568,000 toperiods presented in 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.table below were (in millions, except useful life years):
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. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Indefinite-lived: | | Amortizing: | | |
| Tradename and Trademarks | | Liquor Licenses | | Patents | | Customer/ Distributor Relationships and Other | | Developed Technology | | Total |
| | | | | | | | | | | |
| Useful Life (Years) | NA | | NA | | 2 - 16 | | 1 - 10 | | 10 | | |
| | | | | | | | | | | |
| Gross as of December 31, 2022 | $ | 1,441.0 | | | $ | 8.9 | | | $ | 32.2 | | | $ | 67.4 | | | $ | 69.7 | | | $ | 1,619.2 | |
| Acquisitions | 2.8 | | | 0.6 | | | 0.1 | | | 4.7 | | | — | | | 8.2 | |
| Gross as of December 31, 2023 | $ | 1,443.8 | | | $ | 9.5 | | | $ | 32.3 | | | $ | 72.1 | | | $ | 69.7 | | | $ | 1,627.4 | |
| Accumulated amortization | — | | | — | | | (31.9) | | | (43.1) | | | (18.9) | | | (93.9) | |
| Foreign currency translation and other | (22.0) | | | — | | | — | | | (3.5) | | | (2.5) | | | (28.0) | |
| Net book value, December 31, 2023 | $ | 1,421.8 | | | $ | 9.5 | | | $ | 0.4 | | | $ | 25.5 | | | $ | 48.3 | | | $ | 1,505.5 | |
| | | | | | | | | | | |
| Gross as of December 31, 2021 | $ | 1,441.0 | | | $ | 7.7 | | | $ | 32.0 | | | $ | 61.7 | | | $ | 69.7 | | | $ | 1,612.1 | |
| Acquisitions | — | | | 1.2 | | | 0.2 | | | 5.7 | | | — | | | 7.1 | |
| Gross as of December 31, 2022 | $ | 1,441.0 | | | $ | 8.9 | | | $ | 32.2 | | | $ | 67.4 | | | $ | 69.7 | | | $ | 1,619.2 | |
| Accumulated amortization | — | | | — | | | (31.8) | | | (35.8) | | | (12.2) | | | (79.8) | |
| Foreign currency translation and other | (28.3) | | | — | | | — | | | (4.2) | | | (3.2) | | | (35.7) | |
| Net book value, December 31, 2022 | $ | 1,412.7 | | | $ | 8.9 | | | $ | 0.4 | | | $ | 27.4 | | | $ | 54.3 | | | $ | 1,503.7 | |
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'sour indefinite-lived intangible assets during the years ended December 31, 20212023 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 | |
____________2022.
(1)We recognized The gross balance of intangible assets as of December 31, 2021 includes additions of$14.1 million, $15.2 million $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.$13.0 million
The Company recognizedof amortization expense related to intangible assets of $13,041,000, $5,120,000, and $4,866,000 for the years ended December 31, 2021, 20202023, 2022 and 2019,2021, respectively, which is recorded in selling, general and administrative expenses in the accompanying consolidated statements of operations. Amortization
As of December 31, 2023, 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)millions):
| | 2022 | $ | 13,263 | |
| 2023 | 11,695 | |
| 2024 | 2024 | 11,606 | |
| 2025 | 2025 | 11,394 | |
| 2026 | 2026 | 11,348 | |
| 2027 | |
| 2028 | |
| Thereafter | Thereafter | 36,393 | |
| $ | 95,699 | |
| Total | |
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 acquiredWe have an ownership interest of less than 20.0% in Full Swing Golf Holdings, LLC (“Full Swing”), owners of anmulti-sport indoor golfvirtualization and simulation technology that delivers golf ball tracking data and measures ball flight indoors.technology. 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, and adjusted for observable changes in fair value. At both December 31, 2023 and December 31, 2022, the carrying value of our investment in Full Swing was $9.3 million, which is included in other assets, net on our consolidated balance sheets.
On August 1, 2023 we completed the acquisition of the assets of Swing Suite, an indoor golf simulation technology that provides golf ball flight measurements and tracking data, from Full Swing for total cash consideration of $12.5 million, consisting of customer relationships, sales-type leases and licensing agreements.
Investment in Five Iron Golf
We have an ownership interest of less than 20.0% in preferred shares of The Range NYC, LLC (“Five Iron Golf”), an urban indoor golf experience company which hosts a golf simulation technology and serves food and beverage. The investment is accounted for at cost less impairments, and is adjusted for observable changes in fair value. During the twelve months ended December 31, 2023, we invested an additional $2.0 million in Five Iron Golf and recognized a $0.4 million fair value step-up in our investment related to an observable market transaction that occurred during the third quarter of 2023. As of December 31, 2021, there has been no change in2023 and December 31, 2022, the faircarrying value of theour 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, manufactureFive Iron Golf was $32.4 million 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$30.0 million, respectively, which is included in other current liabilities in the accompanyingassets, net on our 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 14.11. Selected Financial Data
Selected financial data as of the dates presented below is as follows (in millions, except useful life data):
| | | | | | | | | | | | | | | | | |
| | | December 31, 2023 | | December 31, 2022 |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Inventories: | | | | | |
| Finished goods | | | $ | 623.1 | | | $ | 770.1 | |
| Work in process | | | 1.4 | | | 1.2 | |
| Raw materials | | | 163.7 | | | 181.5 | |
| Food and beverage | | | 6.2 | | | 6.4 | |
| Total inventories | | | $ | 794.4 | | | $ | 959.2 | |
| | | | | |
| | | December 31, 2023 | | December 31, 2022 |
| Other current assets: | | | | | |
| Credit card receivables | | | $ | 76.9 | | | $ | 40.1 | |
| Sales return reserve cost recovery asset | | | 25.7 | | | 25.5 | |
| VAT/Sales tax receivable | | | 6.6 | | | 17.2 | |
| Leasing receivables | | | 26.9 | | | 17.5 | |
| Hedging contract receivables | | | 5.4 | | | 4.6 | |
| Other current assets | | | 41.6 | | | 31.1 | |
| Total other current assets | | | $ | 183.1 | | | $ | 136.0 | |
| | | | | |
| | | December 31, 2023 | | December 31, 2022 |
| Property, plant and equipment, net: | Estimated Useful Life | | | | |
| Land | | | $ | 185.2 | | | $ | 160.4 | |
| Buildings and leasehold improvements | 3 - 40 years | | 1,603.9 | | | 1,196.7 | |
| Machinery and equipment | 2 - 10 years | | 289.8 | | | 248.8 | |
| Furniture, computer hardware and equipment | 3 - 5 years | | 380.0 | | | 299.1 | |
| Internal-use software | 3 - 5 years | | 136.2 | | | 109.9 | |
| Production molds | 2 - 5 years | | 10.0 | | | 9.1 | |
| Construction-in-process | | | 210.3 | | | 271.6 | |
| Total property, plant, and equipment, gross | | | 2,815.4 | | | 2,295.6 | |
| Less: Accumulated depreciation | | | 658.9 | | | 486.0 | |
| Total property, plant, and equipment, net | | | $ | 2,156.5 | | | $ | 1,809.6 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
We recorded $225.6 million, $177.6 million, and $142.8 million of total depreciation expense in our consolidated statements of operations for the years ended December 31, 2023, 2022, and 2021, respectively.
| | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
| Accounts payable and accrued expenses: | |
| Accounts payable | $ | 130.7 | | | $ | 159.1 | |
| Accrued expenses | 202.1 | | | 160.9 | |
| Accrued inventory | 147.7 | | | 260.0 | |
| Total accounts payable and accrued expenses | $ | 480.5 | | | $ | 580.0 | |
Note 12. Income Taxes
The Company’sOur income before income tax provisiontaxes was subject to taxes in the following jurisdictions for the following periods (in thousands)millions):
| | Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Years Ended December 31, | | | Years Ended December 31, |
| 2023 | | | 2023 | | 2022 | | 2021 |
| United States | United States | $ | 295,322 | | | $ | 68,916 | | | $ | 55,352 | |
| Foreign | Foreign | 55,320 | | | (196,394) | | | 40,417 | |
| $ | 350,642 | | | $ | (127,478) | | | $ | 95,769 | |
| Total | |
The expenseprovision (benefit) for income taxes is comprised of (in thousands)millions):
| | Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Years Ended December 31, | | | Years Ended December 31, |
| 2023 | | | 2023 | | 2022 | | 2021 |
| Current tax provision: | Current tax provision: | | | | | |
| Federal | |
| Federal | |
| Federal | Federal | $ | 2,916 | | | $ | 1,665 | | | $ | 1,022 | |
| State | State | 2,267 | | | 1,467 | | | 1,403 | |
| Foreign | Foreign | 14,643 | | | 5,385 | | | 9,933 | |
| 19,826 | | | 8,517 | | | 12,358 | |
| Deferred tax expense (benefit): | | | | | |
| 20.9 | |
| Deferred tax provision (benefit): | |
| Federal | |
| Federal | |
| Federal | Federal | 11,032 | | | 8,579 | | | 10,185 | |
| State | State | 7,146 | | | 5,166 | | | 335 | |
| Foreign | Foreign | (9,350) | | | (22,806) | | | (6,338) | |
| 8,828 | | | (9,061) | | | 4,182 | |
| Income tax provision (benefit) | $ | 28,654 | | | $ | (544) | | | $ | 16,540 | |
| (81.1) | |
| Income tax (benefit) provision | |
On March 8, 2021,As described below, the Company acquired Topgolf through a non-taxable stock acquisitionmost significant item impacting our tax provision in a share exchange. The purchase price2023 is the release of Topgolf at acquisition was $3,014,174,000. The Companyvaluation allowances which were recorded a deferred tax liability of $250,000,000 related to the acquired intangibles, offset by $118,000,000 of other acquiredon our U.S. deferred tax assets after considerationas a result of acquired valuation allowances.
On January 4, 2019, the Company acquired Jack Wolfskin for $521,201,000 (including cash acquired of $58,096,000) inmerger with Topgolf. This created a taxable stock acquisition. The Company recorded alarge 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 deferredto tax liability previously recorded as part of acquisition accounting.provision in 2023.
Significant components of the Company’sour deferred tax assets and liabilities as of December 31, 20212023 and 20202022 are as follows (in thousands)millions):
| | December 31, |
| 2021 | | 2020 |
| December 31, | | | December 31, |
| 2023 | | | 2023 | | 2022 |
| Deferred tax assets: | Deferred tax assets: | | | |
| Operating loss carryforwards | |
| Operating loss carryforwards | |
| Operating loss carryforwards | Operating loss carryforwards | $ | 149,895 | | | $ | 26,919 | |
| Tax credit carryforwards | Tax credit carryforwards | 64,250 | | | 49,525 | |
| ASC Topic 842 lease liability | ASC Topic 842 lease liability | 396,378 | | | 52,785 | |
| Deemed landlord financing | Deemed landlord financing | 115,060 | | | — | |
| Other | Other | 72,768 | | | 53,163 | |
| Total deferred tax assets | Total deferred tax assets | 798,351 | | | 182,392 | |
| Valuation allowance for deferred tax assets | Valuation allowance for deferred tax assets | (120,499) | | | (21,032) | |
| Deferred tax assets, net of valuation allowance | Deferred tax assets, net of valuation allowance | 677,852 | | | 161,360 | |
| | Deferred tax liabilities: | Deferred tax liabilities: | |
| Deferred tax liabilities: | |
| Deferred tax liabilities: | |
| Basis difference related to fixed assets | |
| Basis difference related to fixed assets | |
| Basis difference related to fixed assets | Basis difference related to fixed assets | (105,532) | | | — | |
| Basis difference related to intangible assets with an indefinite life | Basis difference related to intangible assets with an indefinite life | (331,130) | | | (100,062) | |
| ASC Topic 842 ROU assets | ASC Topic 842 ROU assets | (375,697) | | | (49,910) | |
| Other | Other | (7,920) | | | (10,281) | |
| Total deferred tax liabilities | Total deferred tax liabilities | (820,279) | | | (160,253) | |
| Net deferred tax assets (liabilities) are shown on the accompanying consolidated balance sheets as follows: | Net deferred tax assets (liabilities) are shown on the accompanying consolidated balance sheets as follows: | | | |
| Non-current deferred tax assets | Non-current deferred tax assets | 21,164 | | | 59,735 | |
| Non-current deferred tax assets | |
| Non-current deferred tax assets | |
| Non-current deferred tax liabilities | Non-current deferred tax liabilities | (163,591) | | | (58,628) | |
| Net deferred tax (liabilities)/ assets | $ | (142,427) | | | $ | 1,107 | |
| Deferred tax liabilities, net | |
The net change in net deferred taxes in 20212023 of $143,534,000$80.4 million is primarily comprised of netthe release of valuation allowances on our U.S. deferred tax liabilities acquired in the Topgolf transaction.assets.
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 Companyour generating sufficient taxable income during the periods in which the temporary differences become realizable. In accordance with the applicable accounting rules, the Company maintainswe maintain 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 considerswe consider all available positive and negative evidence, including prior operating results, the nature and reason for any losses, itsour 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’sour best judgment at the time made based on current and projected circumstances and conditions.
The Company has evaluatedDuring the first quarter of fiscal year 2021, we established a significant valuation allowance on our U.S. deferred tax assets as we were in a cumulative loss position immediately following the merger with Topgolf. During the second quarter of 2023, pursuant to an analysis of all available positive and negative evidence, and as a result of the Topgolf merger haswe determined that a portionthe majority of itsour U.S. deferred tax assets were not more likely than not to be realized.realized and reversed $50.8 million of the valuation allowance against those deferred tax assets. The remaining valuation allowance on the Company'sour U.S. deferred tax assets as of December 31, 2021 and 2020 relate primarily relates to the definite-lived federal and state net deferred tax assetsoperating loss carryforwards and tax credits the Company estimates itthat we estimate may not be able to utilizebe utilized 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 deferredvaluation allowances have been recorded against certain tax assetsattributes for which management believes it is not more likely than not under applicable accounting rules, and thereforethat they will be realized. It is possible that within the next 12 months sufficient positive evidence may become available to allow us to reach a conclusion that a portion of the valuation allowance attributable to non-US entities will no significant valuation allowances have been established.longer be needed, which would result in a non-cash tax benefit.
As of December 31, 2021, the Company2023, we had federal and state income tax credit carryforwards of $56,134,00046.6 million and $25,786,000$33.7 million, respectively, which will expire if unused at various dates beginning on December 31, 2027.2028. Such credit carryforwards expire as follows (in thousands)millions):
| | | | | | | | | | | |
| U.S. foreign tax credit | $ | 3,1652.2 | | | 2027 - 2031 |
U.S. research tax credit | 26,568 | | | 2031 - 20412028-2033 |
| U.S. business tax credits | 26,401 $ | 44.4 | | | 2031 - 20412030-2043 |
State investment tax credits | 2,028 | | | Do not expire |
State research tax credits - definite lived | 1,563 | | | 2030 - 2034 |
State researchbusiness tax credits - indefinite lived | $ | 22,19529.4 | | | Do not expire |
| State business tax credits - definite lived | $ | 4.3 | | | 2032-2047 |
| | | |
| | | |
The Company has recorded a deferred tax asset, before considerationAs of reflecting the benefitDecember 31, 2023, we had federal, Germany, and United Kingdom net operating losses (“NOLs”) carryforwards of NOL$389.3 million and interest expense carryforwards. The NOLs and interest expensecarryforwards of $49.9 million, respectively. Such carryforwards expire as follows (in thousands)millions):
| | | | | | | | | | | |
| U.S. loss carryforwards - definite lived | $ | 181,54914.7 | | | 2028 - 2037 |
U.S. interest expense carryforwards - indefinite lived | 12,910 | | | Do not expire 2028-2037 |
| U.S. loss carryforwards - indefinite lived | 213,743 $ | 179.2 | | | Do not expire |
| U.S. interest expense carryforwards | $ | 49.9 | | | Do not expire |
| Germany loss carryforwards | $ | 110.8 | | | Do not expire |
StateUnited Kingdom loss carryforwards | $ | 269,93084.6 | | | 2022 - 2041Do not expire |
| | | |
The Company’sOur ability to utilize itsthe NOLs and credits to offset future taxable income and income tax liabilities may be deferred or limited significantly if the Companywe were to experience an “ownership change” as such term is useddefined in SectionsSection 382 and 383 of the Code.Internal Revenue Code of 1986, as amended (the “Code”). In general, an ownership change will occur if there is a cumulative change in ownership of the Company’sour stock by “5-percent shareholders” (as defined in the Code) that exceeds 50 percentage points over a rolling three-year period. The CompanyWe determined that an ownership change with respect to eachhas occurred for purposes of the Company and Topgolf likely occurredSection 382 on the date of the Topgolf merger. Topgolf experienced an ownership change in November 2021. As such, eachall of the Companyour federal NOLs and Topgolf is likely subject under Sectionstax credits are limited to an annual Section 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, itour tax attributes. This change is not expected to have any material impacteffect on the Company.our results of operations or statements of financial position. 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’sour 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 |
| Years Ended December 31, | | | Years Ended December 31, |
| 2023 | | | 2023 | | 2022 | | 2021 |
| Statutory U.S. tax rate | Statutory U.S. tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % | Statutory U.S. tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
| State income taxes, net of U.S. tax benefit | State income taxes, net of U.S. tax benefit | 2.1 | % | | (4.1) | % | | 1.6 | % | State income taxes, net of U.S. tax benefit | (67.7) | % | | 7.1 | % | | 2.1 | % |
| Foreign income taxed at other than U.S. statutory rate | Foreign income taxed at other than U.S. statutory rate | (3.3) | % | | 7.0 | % | | (5.0) | % | Foreign income taxed at other than U.S. statutory rate | (26.0) | % | | (8.9) | % | | (3.3) | % |
| Federal tax credits | Federal tax credits | (2) | % | | 2.8 | % | | (3.5) | % | Federal tax credits | (46.6) | % | | (8.7) | % | | (2.0) | % |
| Goodwill impairment | — | % | | (24.5) | % | | — | % |
| Revaluation of Callaway stock attributable to Topgolf merger | (15.1) | % | | — | % | | — | % |
| | Revaluation of Company stock attributable to Topgolf merger | |
| Revaluation of Company stock attributable to Topgolf merger | |
| Revaluation of Company stock attributable to Topgolf merger | | — | % | | — | % | | (15.1) | % |
| Other non-deductible expenses | Other non-deductible expenses | 0.7 | % | | (1.7) | % | | 1.2 | % | Other non-deductible expenses | 6.0 | % | | 1.0 | % | | 0.7 | % |
| Non-deductible compensation | Non-deductible compensation | 1.4 | % | | (0.7) | % | | 1.5 | % | Non-deductible compensation | 17.9 | % | | 4.5 | % | | 1.4 | % |
| U.S. Foreign tax inclusion | | U.S. Foreign tax inclusion | 0.4 | % | | 1.0 | % | | 0.5 | % |
| Foreign derived intangible income deduction | | Foreign derived intangible income deduction | (7.5) | % | | (3.0) | % | | (2.1) | % |
| Stock compensation excess tax benefits | Stock compensation excess tax benefits | (1.6) | % | | 1.4 | % | | (1.5) | % | Stock compensation excess tax benefits | — | % | | — | % | | (1.6) | % |
| Foreign derived intangible income deduction | (2.1) | % | | 1.1 | % | | (3.2) | % |
| Impact of uncertain tax positions | Impact of uncertain tax positions | (2.2) | % | | (1.6) | % | | 3.7 | % | Impact of uncertain tax positions | 8.5 | % | | (0.8) | % | | (2.2) | % |
| Change in deferred tax valuation allowance | Change in deferred tax valuation allowance | 7.8 | % | | (0.7) | % | | 0.2 | % | Change in deferred tax valuation allowance | (88.5) | % | | (23.0) | % | | 7.8 | % |
| Withholding tax impacts on foreign subsidiaries | | Withholding tax impacts on foreign subsidiaries | 5.5 | % | | — | % | | — | % |
| Other | Other | 1.5 | % | | 0.4 | % | | 1.3 | % | Other | 4.3 | % | | (1.5) | % | | 1.0 | % |
| Effective tax rate | Effective tax rate | 8.2 | % | | 0.4 | % | | 17.3 | % | Effective tax rate | (172.7) | % | | (11.3) | % | | 8.2 | % |
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands)millions):
| | 2021 | | 2020 | | 2019 |
| 2023 | | | 2023 | | 2022 | | 2021 |
| Balance at January 1 | Balance at January 1 | $ | 28,302 | | | $ | 25,993 | | | $ | 11,832 | |
| Additions based on tax positions related to the current year | Additions based on tax positions related to the current year | 1,727 | | | 3,119 | | | 3,224 | |
| Additions for tax positions of prior years | Additions for tax positions of prior years | 526 | | | 474 | | | 593 | |
| Reductions for tax positions of prior years | Reductions for tax positions of prior years | (936) | | | (186) | | | (174) | |
| Settlement of tax audits | Settlement of tax audits | (2,665) | | | — | | | (7) | |
| Current year acquisitions | Current year acquisitions | 6,740 | | | — | | | 11,006 | |
| Reductions due to lapsed statute of limitations | Reductions due to lapsed statute of limitations | (7,046) | | | (1,098) | | | (481) | |
| Balance at December 31 | Balance at December 31 | $ | 26,648 | | | $ | 28,302 | | | $ | 25,993 | |
As of December 31, 2021,2023, the gross liability for income taxes associated with uncertain tax benefits was $26,648,000.$29.3 million. This liability could be reduced by $5,273,000$5.1 million 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$8.1 million of deferred taxes. The net amount of $11,016,000,$16.1 million, if recognized, would affect the Company’sour financial statements and favorably affect the Company’sour effective income tax rate.
The Company does notWe expect changes to the unrecognized tax benefits inbenefit liabilities to decrease approximately $3.6 million during the next 12 months to have a material impact on its results of operations or its financial position.months.
The Company recognizesWe recognize interest and/or penalties related to income tax matters in income tax expense. The Companyprovision. We recognized a tax benefit of $555,000$0.1 million, $0.3 million, and $437,000, and tax expense of $9,000,$0.6 million, for the years ended December 31, 2021, 2020,2023, 2022 and 2019,2021, respectively. As of December 31, 20212023 and 2020,2022, 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.were each $2.9 million.
The CompanyWe or one of itsour subsidiaries files income tax returns in the U.S. federal jurisdiction and various U.S. states and foreign jurisdictions. The Company isWe are generally no longer subject to income tax examinations by tax authorities in itsour 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 | | 20152017 and prior |
| South Korea | | 20152021 and prior |
| United Kingdom | | 20172018 and prior |
As of December 31, 2021, the Company2023, we had $180,218,000$177.2 million of undistributed foreign earnings and profits. Pursuant to the Tax Act, the Company’sour 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 hasWe have 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 investedreinvested earnings on the Company’sour overall tax liability to be insignificant. For jurisdictions in which the Company iswe are not permanently reinvested, the Company haswe have estimated and accrued $2,300,000$3.3 million for the net impact on the Company’sour overall tax liability.
Note 15.13. Commitments & Contingencies
Legal Matters
The Company isWe are subject to routine legal claims, proceedings, and investigations incident to itsassociated with the normal conduct of our business activities, including claims, proceedings, and investigations relating to commercial disputes and employment matters. The CompanyWe also receivesreceive from time to time information claiming that products sold by the Companywe sell 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,us, which also could adversely affect the Company’sour overall ability to protect itsour product designs and ultimately limit itsour future success in the marketplace. In addition, the Company isAdditionally, we are occasionally subject to non-routine claims, proceedings, or investigations.
We regularly assessesassess such matters to determine the degree of probability that the Companywe 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’sour financial statements if it is probable the Companywe 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,us, individually and in the aggregate, have not had a material adverse effect on theour consolidated results of operations, cash flows or financial positionposition. However, it is not possible to predict the outcome of the Company. The Company believespending actions, and, as with any litigation, it is possible that it has valid legal defenses to the matters currently pending against the Company. However, these matters are inherently unpredictable and the resolutionssome of these matters are subject to many uncertainties and the outcomes are not predictable with assurance.actions could be decided unfavorably. 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 Companywe cannot assure that itwe will be able to successfully defend itselfourselves in those matters, or that any amounts accrued in relation to a potential loss 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 itsour business, the Company enterswe enter 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 iswe are required to pay royalty fees. It isfees, and signed lease agreements of which we have not possible to determine the amounts the Company will ultimately be required to pay under these agreementstaken possession 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.of year-end. The amounts listed below approximate the minimum purchase obligations base compensation, and guaranteed minimum royalty payments the Company iswe are obligated to pay under these agreements. The actual amounts paid under some of thesethe agreements may be higher or lower than thethese amounts included. In the aggregate, the actual amount paid under these obligations is likelydue to be higher than the amounts listed as a result of the variable nature of these obligations. The Company has entered into many
As of these contractual agreements with terms ranging from one to five years.
TheDecember 31, 2023, the minimum obligation that the Company iswe are required to pay as of December 31, 2021 under these agreements is $71,853,000 over the next five years as follows (in thousands)millions):
| | | | | |
| 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.
| | | | | |
| 2024 | $ | 52.5 | |
| 2025 | 37.9 | |
| 2026 | 25.1 | |
| 2027 | 18.3 | |
| 2028 | 11.5 | |
| |
| Total minimum obligations | $ | 145.3 | |
The Company’sOur 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 $107.0 million is not reflected in this total. These commitments are generally outstanding for periods less than a year. See Note 36 for further information.
Other Contingent Contractual Obligations
During itsour normal course of business, the Company haswe have 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’sour customers and licensees in connection with the use, sale and/or license of Companyour 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 Companyus or based on theour negligence or willful misconduct of the Company and (iv) indemnities involving the accuracy of representations and warranties in certain contracts. In addition, the Company haswe have consulting agreements that provide for payment of nominal fees upon the issuance of patents and/or the commercialization of research results. WeThe Company has have also issued guarantees in the form of standby letters of credit of $11,484,000$15.6 million as of December 31, 2021.2023.
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 Companywe could be obligated to make. Historically, costs incurred to settle claims related to indemnities have not been material to the Company’sour financial position, results of operations or cash flows. In addition, the Company believeswe believe the likelihood is remote that payments under the commitments and guarantees described above will have a material effect on the Company’sour consolidated financial statements. The fair value of indemnities, commitments and guarantees that the Companywe issued during the year ended and as of December 31, 20212023 was not material to the Company’sour financial position, results of operations or cash flows.
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 16.14. Capital Stock
Common Stock and Preferred Stock
AsHolders 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 ofour common stock are entitled to one vote for each share of common stock on all matters submitted to a vote of our shareholders.
Holders of our preferred stock are not entitled to any voting rights on matters submitted to a vote of our shareholders. Of the Company’s shareholders. Although to date noauthorized shares of our preferred stock, 0.2 million shares are designated as Series A Junior Participating Preferred Stock. Holders of our 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 thereofare entitled to 1,000 votes on all matters submitted to a vote of the shareholders of the Company.our shareholders. 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 our shareholders. To date, no Series A Junior Participation preferred stock has been issued, therefore there are currently no preferences for the Company’s shareholders.
Treasury Stock and Stock Repurchases
In December 2021, the Company'sOn May 26, 2022, our Board of Directors authorized a $50,000,000$100.0 million share repurchase program (the "2021“2022 Repurchase Program"Program”), under which the Company iswe are authorized to repurchase shares of itsour common stock in the open market or in private transactions, subject to the Company'sour assessment of market conditions and buying opportunities. Repurchases under the 2021 Repurchase Program are made consistentrepurchase opportunities, and in accordance with the terms and conditions of the Company'sour New ABL Facility and other long-term debt which limitsfacilities. The 2022 Repurchase Program does not require that a specific number of shares be acquired and will remain in effect until 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 beenis completed or terminated by the Board of Directors.
During the year ended December 31, 2021, the Company2023, we repurchased approximately 946,6002.9 million shares of itsour common stock at an average price per share of $26.41$16.37, for a total cost of $25,000,000,$46.3 million, excluding commissions, under the 2022 Repurchase Program.
Repurchases made under our repurchase programs are made in relationaccordance with the terms and conditions of our New ABL Facility and other long-term debt, which limit the amount of stock that can be repurchased.
In addition to the 2021 Repurchase Program. Asaforementioned repurchase program, we treat shares withheld for tax purposes on behalf 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 obligationsour employees in connection with the vesting and settlement of employee RSUs and PRSUs as common stock repurchases because they reduce the number of shares that would have been issued to the employee upon vesting. These withheld shares of common stock are not considered to be repurchases under the share repurchase program. During the years ended December 31, 2023, 2022, and 2021 we withheld 0.4 million, 0.5 million, and 0.4 million shares of our common stock to satisfy employee payroll tax withholding obligations of $9.3 million, $10.9 million, and $13.5 million, respectively, related to the vesting and settlement of restricted stock unit awards and performance share units, for a total cost of $13,471,000.unit awards.
The Company’s repurchasesRepurchases of shares of our own common stock are recorded at cost and result inare a reduction of shareholders’ equity.
Note 17.15. Stock Plans and Share-Based Compensation
StockEquity Compensation Plans and Replacement Awards
As of December 31, 2021, the Company2023, we had 2two 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“2004 Incentive Plan"Plan”) and the 2013 Non-Employee Directors StockCallaway Golf Company 2022 Incentive Plan (the "2013 Directors Plan"“2022 Incentive Plan”). The CompanyWe also had one non-shareholder approved stock plan, the 2021 Employment Inducement Plan (the "2021“2021 Inducement Plan"Plan”), which was adopted in connection with the Company'sour merger with Topgolf on March 8, 2021. The 2021 Inducement Plan has substantially the same terms as the Company'sour 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,Upon the Company grantseffective date of the 2022 Incentive Plan, we ceased granting awards under the 2004 Incentive Plan and the 2021 Inducement Plan and, except for shares subject to awards under those plans on the effective date of the 2022 Incentive Plan, any shares remaining for future issuance under such Plans were canceled.
The 2004 Incentive Plan permitted the granting of stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance based awards, phantom stockshare units and other equity-based awards to our officers, employees, consultants and certain other non-employees who provide services to us. All grants under these plans.the 2004 Incentive Plan were discretionary, although no participant may receive awards in any one year in excess of 2.0 million shares. No new awards may be granted under the 2004 Incentive Plan.
The 20042021 Inducement Plan was adopted in connection with our merger with Topgolf on March 8, 2021. The plan permitted the granting of stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance share units and other equity-based awards to our officers, employees, consultants and certain other non-employees who provide services to us. No new awards may be granted under the 2021 Inducement Plan.
The 2022 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’sour officers, employees, consultants, eligible directors serving on our Board of Directors and certain other non-employees who provide services to the Company.us. All grants under the 20042022 Incentive Plan are discretionary, although no participantdiscretionary. Directors may receive awards in any one year in excessa one-time grant upon their initial appointment to our Board of 2,000,000 shares.Directors and may receive an annual grant thereafter upon being re-elected at each annual meeting of shareholders. The maximum number of shares issuable over the term of the 2022 Incentive Plan is 16.0 million shares, plus any shares underlying awards made under 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 stockextent such 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 Planslapse, expire, terminate or are canceled.
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 alsowe assumed 2two equity compensation plans and a stock option agreement between Topgolf and a third party (collectively, the “Topgolf Equity Compensation Plans and Option Agreement”) in connection with the merger (collectively, the "Topgolf Equity
Compensation Plans and Option Agreement").merger. No additional awards may be granted by the Company under the assumed Topgolf Equity Compensation 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’sour plans as of December 31, 2021:2023 (in millions):
| | | | | | | | | | | | | | | | | |
| 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)Includes1,384 shares of accrued incremental dividend equivalent rights on outstanding shares underlying restricted stock units granted under the 2004 Incentive Plan and 2013 Directors Plan. | | | | | | | | | | | | | | | | | |
| Authorized | | Available(1) | | Outstanding(2) |
| |
| 2004 Incentive Plan | 33.0 | | | — | | | 2.0 | |
| | | | | |
| 2021 Inducement Plan | 1.3 | | | — | | | 0.3 | |
| 2022 Incentive Plan | 16.0 | | | 12.0 | | | 1.3 | |
| Topgolf Equity Compensation Plans and Option Agreement | 3.4 | | | — | | | 1.1 | |
| Total | 53.7 | | | 12.0 | | | 4.7 | |
| | | | | |
(1) Includes shares subject to a full award value under the 2022 Incentive Plan’s fungible share ratio. |
(2) Excludes 0.8 million of issued restricted stock awards which are not outstanding. |
Stock Options
There were 3,168,000no stock options granted in 2023 or 2022. In 2021, which were constituted ofwe granted 3.2 million stock options related to the replacement awards that were issued in connection with the Company'sour merger with Topgolf on March 8, 2021. No stock options were granted in 2020Topgolf. These awards had a weighted average grant-date fair value of $25.93 per share and 2019. Asa total acquisition date fair value 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’sour stock option activities for the year ended December 31, 20212023 (in thousands,millions, 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Options | | Number of
Shares | | Weighted-
Average
Exercise Price
Per Share | | Weighted-
Average
Remaining
Contractual
Term | | Aggregate
Intrinsic
Value |
| Outstanding at January 1, 2023 | | 1.9 | | | $ | 26.97 | | | | | |
| Granted | | — | | | $ | — | | | | | |
| Exercised | | (0.3) | | | $ | 15.11 | | | | | |
Forfeited(1) | | — | | | $ | 35.14 | | | | | |
| Expired | | (0.5) | | | $ | 29.93 | | | | | |
| Outstanding at December 31, 2023 | | 1.1 | | | $ | 28.44 | | | 3.18 | | $ | 0.1 | |
| Vested and expected to vest in the future at December 31, 2023 | | 1.1 | | | $ | 28.44 | | | 3.18 | | $ | 0.1 | |
| Exercisable at December 31, 2023 | | 1.0 | | | $ | 28.20 | | | 3.07 | | $ | 0.1 | |
| | | | | | | | |
(1) A nominal number of stock options were forfeited during the year ended December 31, 2023. |
The following table summarizes information related to outstanding stock options as of December 31, 2021:2023 (in millions, except option price and remaining life amounts):
| | Weighted Average |
| | | | Weighted Average | | | | | | Weighted Average |
| Range of Option Prices | Range of Option Prices | | Options Outstanding | | Remaining Life (Years) | | Exercise Price | Range of Option Prices | | Options Outstanding | | Remaining Life (Years) | | Exercise Price |
| $6.52 to $35.14 | | 1,988,000 | | 5.22 | | $26.60 |
| $6.91 to $35.14 | | $6.91 to $35.14 | | 1.1 | | 3.18 | | $28.44 |
As of December 31, 2021,2023, there was $2,088,000less than $0.1 million of unamortized compensation expense related to stock options granted to employees under the Company’sour share-based payment plans.
The totalfollowing table summarizes information related to 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. Cashcash received from the exercise of stock optionsrelated to option exercises for the years ended December 31, 2021, 2020 and 2019 was $22,270,000, $248,000 and $368,000, respectively.periods presented below (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| Intrinsic value for options exercised | $ | 1.7 | | | $ | 0.6 | | | $ | 26.3 | |
| Cash received from exercise of options | $ | 4.2 | | | $ | 0.7 | | | $ | 22.3 | |
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 StockRSUs, RSAs, and PRSUs
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.
Thefollowing table below is a roll-forward of therepresents 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 replacementand performance based awards for the year ended December 31, 20212023 (in thousands,millions, 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. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | RSUs | | RSAs | | PRSUs |
| | Units | | Weighted-
Average
Grant-Date
Fair Value | | Units | | Weighted-
Average
Grant-Date
Fair Value | | Units | | Weighted-
Average
Grant-Date
Fair Value |
| Unvested at January 1, 2023 | | 1.4 | | | $ | 25.47 | | | 0.1 | | | $ | 29.52 | | | 2.1 | | | $ | 30.24 | |
| Granted | | 0.8 | | | $ | 22.78 | | | 0.8 | | | $ | 19.60 | | | 0.6 | | | $ | 36.58 | |
| Vested | | (0.7) | | | $ | 25.21 | | | (0.1) | | | $ | 29.52 | | | (0.4) | | | $ | 20.74 | |
Target Award Adjustment(1) | | — | | | $ | — | | | — | | | $ | — | | | 0.1 | | | $ | 19.85 | |
Forfeited(2) | | (0.1) | | | $ | 25.09 | | | — | | | $ | 29.52 | | | (0.1) | | | $ | 32.44 | |
| | | | | | | | | | | | |
| Unvested at December 31, 2023 | | 1.4 | | | $ | 24.13 | | | 0.8 | | | $ | 19.83 | | | 2.3 | | | $ | 32.71 | |
| | | | | | | | | | | | |
(1) Represents incremental shares earned by participants at a performance achievement in excess of 100% for awards previously granted. |
(2) A nominal number of RSAs were forfeited during the year ended December 31, 2023. |
|
During the year ended December 31, 2021, the Company granted 156,000 shares underlying rTSR PRSUs at a weighted average grant-dateThe following table summarizes fair value of $38.23, of which 43,000 were granted in connection withawards vested and the merger with Topgolf, which was completed on March 8, 2021, and had a weighted average grant-dategrant date fair value per share 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 wereawards 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 $15.17periods presented below (in millions, except for per share respectively.amounts):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2023 | | 2022 | | 2021 |
| RSUs: | | | | | |
| Total fair value of RSUs vested | $ | 17.3 | | | $ | 17.2 | | | $ | 6.5 | |
| Per share weighted average grant date fair value of RSU grants | $ | 22.78 | | | $ | 22.81 | | | $ | 29.60 | |
| | | | | |
| RSAs: | | | | | |
| Total fair value of RSAs vested | $ | 1.3 | | | $ | 2.1 | | | $ | 0.8 | |
Per share weighted average grant date fair value of RSA grants(1) | $ | 19.60 | | | $ | — | | | $ | 28.74 | |
| | | | | |
| PRSUs: | | | | | |
| Total fair value of PRSUs vested | $ | 7.8 | | | $ | 6.9 | | | $ | 8.2 | |
| Per share weighted average grant date fair value of PRSU grants | $ | 36.58 | | | $ | 34.68 | | | $ | 30.35 | |
| | | | | |
(1) There were no RSAs granted during the year ended December 31, 2022. |
The total fair value of all performance based awards vested duringfollowing table summarizes 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 recognizedunamortized compensation expense, on all PRSUs, net of estimated forfeitures, of $19,723,000, $4,511,000 and $6,796,000, respectively. Atawards granted under our share-based plans as of December 31, 2021, the combined unamortized compensation expense2023, as well as their related to the EBITDA, APTI, EPS, rTSR, and merger PRSUs was $45,742,000, and is expected to be recognized over a weighted-average remaining recognition period of 1.9 years.
The table below is a roll-forward of the activity(in millions, except for performance based awards during the year ended December 31, 2021 (in thousands, except fair value amounts)periods):
| | | | | | | | | | | | | | |
| 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. | | | | | |
| December 31, 2023 |
| RSUs: | |
| Unamortized compensation expense for RSUs | $ | 16.2 | |
| Weighted-average remaining recognition period (in years) | 1.4 |
| |
| |
| |
| |
| |
| PRSUs: | |
| Unamortized compensation expense for PRSUs | $ | 25.0 | |
| Weighted-average remaining recognition period (in years) | 1.0 |
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 expenseby award-type, net of estimated forfeitures, in our consolidated statement of operations for restricted stock units, performance share units, stock options and cash settled stock appreciation rightsthe periods presented (in thousands)millions):
| | | | | | | | | | | | | | | | | |
| 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 | |
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2023 | | 2022 | | 2021 |
| Stock options | $ | 0.4 | | | $ | 1.4 | | | $ | 2.6 | |
| Restricted stock units | 18.9 | | | 17.6 | | | 14.0 | |
| Restricted stock awards | 0.6 | | | 1.3 | | | 2.4 | |
| Performance based restricted share unit awards | 26.8 | | | 26.7 | | | 19.7 | |
| Total share-based compensation expense, before tax | 46.7 | | | 47.0 | | | 38.7 | |
| Income tax benefit | (11.2) | | | (11.3) | | | (8.9) | |
| Total share-based compensation expense, after tax | $ | 35.5 | | | $ | 35.7 | | | $ | 29.8 | |
The table below summarizes amounts recognized for share-based compensation, net of estimated forfeitures, in our consolidated statement of operations for the periods presented (in millions):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2023 | | 2022 | | 2021 |
| Cost of products | $ | 1.9 | | | $ | 1.6 | | | $ | 1.2 | |
| Selling, general and administrative expenses | 39.8 | | | 44.0 | | | 36.5 | |
| Research and development expenses | 1.6 | | | 1.1 | | | 1.0 | |
| Other venue expenses | 3.4 | | | 0.3 | | | — | |
| Total share-based compensation expense, before tax | 46.7 | | | 47.0 | | | 38.7 | |
| Income tax benefit | (11.2) | | | (11.3) | | | (8.9) | |
| Total share-based compensation expense, after tax | $ | 35.5 | | | $ | 35.7 | | | $ | 29.8 | |
Note 18.16. Employee Benefit PlanPlans
The Company hasWe have two voluntary deferred compensation plans under Section 401(k) of the Internal Revenue Code (the “Callaway Golf“Topgolf Callaway Brands Corp. 401(k) Plan” and the “Topgolf 401(k) Plan”) for employees who satisfy the age and service requirements under each respective plan.
Topgolf Callaway GolfBrands Corp. 401(k) Plan
Under the Topgolf Callaway GolfBrands Corp. 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'sparticipant’s eligible annual compensation, for a maximum annual 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 upon contribution 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, 2023, 2022 and 2021, 2020 and 2019, Companyour matching contributions under the plan were $3,261,000, $1,103,000$4.8 million, $4.1 million and $2,719,000$3.3 million, 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 CompanyTopgolf contributes annually an amount equal to 50% of the participant'sparticipant’s contribution, up to 6% of the employees eligible compensation, for a maximum annual 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 upon contribution 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 Companywe amended the Topgolf 401(k) Plan (as amended, the “2022 Topgolf 401(k) Plan”). Under the 2022 Topgolf 401(k) Plan, the Company contributeswe contribute annually an amount equal to 100% of the participant’s first 3% of contributions, and an amount ofequal to 50% of the participant'sparticipant’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. During the years ended December 31, 2023, 2022 and 2021, our matching contributions under the plan were $9.5 million, $7.2 million, and $2.7 million, respectively.
Note 19.17. 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 andWe measure our 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 classifiedon a recurring basis using a hierarchy that prioritizes the following three-tier hierarchy:inputs to valuation techniques used to measure fair value. Authoritative guidance establishes three levels of the fair value hierarchy as follows:
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 measurescarrying amounts of cash and cash equivalents, accounts receivables, accounts payable and accrued expenses, revolving credit facilities, and other current liabilities approximate fair value using a setdue to their short-term nature, and are therefore categorized within Level 1 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.hierarchy. Our money market funds, which are included in cash and cash equivalents on our consolidated balance sheets, accrue dividends which are reinvested in the fund and are reflected in their carrying value. As of December 31, 2023, the carrying value of our money market fund was $196.5 million. We did not have any money market funds as of December 31, 2022.
Hedging instruments are re-measured on a result, the asset or liability could be classified in eitherrecurring basis using broker quotes, daily market foreign currency rates, and interest rate curves as applicable, and are therefore categorized within 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 aof the 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.hierarchy.
The following table summarizes the valuation of the Company’sour foreign currency forward contracts and interest rate hedge contractsagreements (see Note 18) that are measured at fair value on a recurring basis, and are classified within Level 2 of the fair value hierarchy as of the periods presented (in millions):
| | | | | | | | | | | | | | | |
| Fair Value | | | | Level 2 | | |
| December 31, 2023 | | | | | | | |
| Foreign currency forward contracts—asset position | $ | 0.2 | | | | | $ | 0.2 | | | |
| Foreign currency forward contracts—liability position | (4.5) | | | | | (4.5) | | | |
| Interest rate hedge agreements—asset position | 5.2 | | | | | 5.2 | | | |
| Interest rate hedge agreements—liability position | (2.6) | | | | | (2.6) | | | |
| | | | | | | |
| Total | $ | (1.7) | | | | | $ | (1.7) | | | |
| December 31, 2022 | | | | | | | |
| Foreign currency forward contracts—asset position | $ | 0.2 | | | | | $ | 0.2 | | | |
| Foreign currency forward contracts—liability position | (5.4) | | | | | (5.4) | | | |
| Interest rate hedge agreements—asset position | 7.2 | | | | | 7.2 | | | |
| Total | $ | 2.0 | | | | | $ | 2.0 | | | |
There were no transfers of financial instruments between the levels of the fair value hierarchy during the years ended December 31, 20212023 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).2022.
Disclosures about the Fair Value of Financial Instruments
The table below presents information about the fair value of our financial liabilities whose value were derived using Level 2 inputs of the fair value hierarchy, and is provided for comparative purposes only, relative to 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’sour financial assets and liabilities that areinstruments recognized in the consolidated balance sheets as of December 31, 2021 and December 31, 2020for the periods presented (in thousands)millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | | | $ | — | | | $ | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2023 | | December 31, 2022 |
| Carrying
Value | | Fair
Value | | Carrying
Value | | Fair
Value |
| U.S. Asset-Based Revolving Credit Facility | $ | 26.3 | | | $ | 26.3 | | | $ | 181.1 | | | $ | 181.1 | |
| 2022 Japan ABL Credit Facility | $ | 28.4 | | | $ | 28.4 | | | $ | 38.2 | | | $ | 38.2 | |
| 2023 Term Loan B | $ | 1,240.6 | | | $ | 1,242.2 | | | $ | — | | | $ | — | |
| Convertible Notes | $ | 258.3 | | | $ | 277.0 | | | $ | 258.3 | | | $ | 337.7 | |
| Equipment Notes | $ | 19.2 | | | $ | 17.0 | | | $ | 27.8 | | | $ | 23.6 | |
| Mortgage Loans | $ | 45.4 | | | $ | 54.8 | | | $ | 45.9 | | | $ | 55.3 | |
| Term Loan B | $ | — | | | $ | — | | | $ | 432.0 | | | $ | 431.1 | |
| Topgolf Term Loan | $ | — | | | $ | — | | | $ | 336.9 | | | $ | 337.1 | |
| Topgolf Revolving Credit Facility | $ | — | | | $ | — | | | $ | 110.0 | | | $ | 110.0 | |
____________
(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.
NonrecurringNon-recurring Fair Value Measurements
The Company measuresWe measure certain assets at fair value on a non-recurring basis using significant unobservable inputs (Level 3) at least annually or more frequently if certainit is determined that impairment indicators are present. These assets include long-lived assets, goodwill, non-amortizing intangible assets and investments, thatwhich are written down to fair value when they are classified as held for sale or determined to be impaired. During the second quarter of 2020, the Company considered the macroeconomic conditionsyear ended December 31, 2023, we recognized an $11.7 million impairment loss related to the COVID-19 pandemicabandonment of our Shankstars online digital game, which was included within research and its potential impactdevelopment costs on our consolidated statements of operations. During the year ended December 31, 2022, we recognized $5.5 million of total impairment losses, of which $4.8 million was related to salesthe impairment of property, plant and operating income,equipment at an underperforming premerger Topgolf concept location, and determined that there were indicatorswas included in other venue expenses in our consolidated statements of impairment and proceeded with a quantitative assessment of goodwill for all reporting units. As a resultoperations during the year ended December 31, 2022. The fair value of the assessment,location was determined using the Company determined thatcost approach for similar assets, which considers the highest and best use of these assets, and was categorized within Level 3 of 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 recordedhierarchy. We did not recognize any impairments during the yearsyear ended December 31, 2021 and 2019.2021.
Note 20.18. 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'sour derivative instruments as well as the location of the asset and/or liability on the consolidated balance sheets atas of December 31, 20212023 and 2020December 31, 2022 (in thousands)millions):
| | Fair Value of
Asset Derivatives |
| December 31, |
| Balance Sheet Location | | 2021 | | 2020 |
| | | Fair Value of
Asset Derivatives | | | | | Fair Value of
Asset Derivatives |
| | | December 31, | | | | | December 31, |
| Balance Sheet Location | | | Balance Sheet Location | | 2023 | | 2022 |
| Derivatives designated as cash flow hedging instruments: | Derivatives designated as cash flow hedging instruments: | | | | | |
| Foreign currency forward contracts | Foreign currency forward contracts | Other current assets | | $ | 128 | | | $ | 37 | |
| | | Foreign currency forward contracts | |
| Foreign currency forward contracts | |
| Interest rate swap contracts | |
| Interest rate swap contracts | |
| Total | |
| Derivatives not designated as hedging instruments: | Derivatives not designated as hedging instruments: | |
| Foreign currency forward contracts | |
| Foreign currency forward contracts | |
| Foreign currency forward contracts | Foreign currency forward contracts | Other current assets | | 211 | | | 53 | |
| | Total asset position | Total asset position | | $ | 339 | | | $ | 90 | |
| Total asset position | |
| Total asset position | |
| | Fair Value of
Liability Derivatives |
| December 31, |
| Balance Sheet Location | | 2021 | | 2020 |
| | | Fair Value of
Liability Derivatives | | | | | Fair Value of
Liability Derivatives |
| | | December 31, | | | | | December 31, |
| Balance Sheet Location | | | Balance Sheet Location | | 2023 | | 2022 |
| Derivatives designated as cash flow hedging instruments: | Derivatives designated as cash flow hedging instruments: | | | | | |
| Foreign currency forward contracts | Foreign currency forward contracts | Accounts payable and accrued expenses | | $ | 7 | | | $ | 38 | |
| Foreign currency forward contracts | |
| Foreign currency forward contracts | |
| Interest rate swap contracts | |
| | 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 | |
| | | 2.6 | |
| | | 2.6 | |
| | | 2.6 | |
| Derivatives not designated as hedging instruments: | Derivatives not designated as hedging instruments: | |
| Foreign currency forward contracts | Foreign currency forward contracts | Accounts payable and accrued expenses | | 209 | | | 1,515 | |
| | Foreign currency forward contracts | |
| Foreign currency forward contracts | |
| Total liability position | Total liability position | | $ | 8,895 | | | $ | 19,475 | |
The Company'sOur derivative instruments are subject to a master netting agreement with each respective counterparty bank and are therefore net settled at their respective maturity date. Although the Company haswe have the legal right of offset under the master netting agreements, the Company haswe have 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 atas of December 31, 20212023 and 2020.2022. Gains and losses related to our derivative instruments are presented as an adjustment to reconcile net income to net cash provided by or used in operating activities in the consolidated statements of cash flows.
Cash Flow Hedging Instruments
Foreign Currency Forward Contracts
The Company usesAs of December 31, 2023, there were no notional amounts on our foreign currency derivativescontracts designated as qualifying cash flow hedging instruments, including foreign currency forward contracts to help mitigate the Company's foreign currency exposure on intercompany salesinstruments. As of inventory to its foreign subsidiaries. These contracts generally mature within 12 months to 15 months from their inception. At December 31, 2021 and 2020,2022, the notional amounts of the Company'sour foreign currency forward contracts designated as cash flow hedgehedging instruments werewas approximately $3,335,000 and $756,000, respectively.$100.0 million.
As ofDuring the year ended December 31, 2021, the Company2023, we recorded a net gaingains of $2,440,000$8.6 million in accumulated other comprehensive loss related to foreign currency forward contracts. Of this amount,contracts, and released net gains of $1,700,000$5.9 million in cost of products for the underlying sales that were relievedrecognized. Additionally, for the year ended December 31, 2023, $2.8 million of net gains related to the amortization of forward points were released from accumulated other comprehensive lossincome and recognized in cost of goods sold forsold. Based on the underlying intercompany sales that were recognized, andcurrent valuation, we expect to reclassify net gainslosses of $86,000 were relieved$0.4 million related to foreign currency forward contracts 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.
InFor the years ended December 31, 20202022 and 2019, the Company2021, we recognized net gains of $756,000$2.0 million and $398,000,$2.4 million in accumulated other comprehensive loss related to forward currency forward contracts. For the years ended December 31, 2022 and 2021, we released net gains of $4.8 million and $1.7 million, respectively, ininto cost of goods sold related to foreign currency forward contracts.
Interest Rate Hedge Contract and Cross-Currency Debt Swap Contracts
InWe used interest rate swaps in order to mitigate the risk of changes in interest rates associated with the Company'sour variable-rate Term Loan Facility and EUR denominated intercompany loan, the Company usedB, which was replaced by our 2023 Term Loan B as a cross-currencypart of our debt swap andmodification in March 2023 (see Note 7). As part of this modification, we entered into a termination agreement to unwind our existing interest rate hedge, bothswaps, and as a result, we received proceeds of $5.6 million. As of December 31, 2023, we have a deferred gain of $3.2 million recognized in other comprehensive income related to these proceeds, which will be amortized into interest expense over the remaining term of the contract.
In April 2023, we entered into interest rate swaps 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 mitigatingmitigate the risk of changes in interest rates.rate fluctuations associated with our 2023 Term Loan B. Over the life of the facility, the Company2023 Term Loan B, we will receive variable interest payments from the counterparty lenders in exchange for the Company making fixed interest rate payments, which are made at a weighted average rate of 3.36% across our interest rate swap contracts without exchange of the underlying notional amount. The notional amount, outstanding under the interest rate hedge contractwhich was $194,346,000 and $196,350,000$400.0 million as of December 31, 2021 and 2020, respectively.2023. Our interest rate swap contracts that were unwound as a part of our debt modification discussed above had a combined notional amount of $192.3 million at December 31, 2022.
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 endedperiods presented (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | Gain (Loss) Recognized in Other Comprehensive Income
|
| | Year Ended December 31, |
| Derivatives designated as cash flow hedging instruments | | 2023 | | 2022 | | 2021 |
| Foreign currency forward contracts | | $ | 8.6 | | | $ | 2.0 | | | $ | 2.4 | |
| | | | | | |
| Interest rate swap contracts | | 6.9 | | | 14.2 | | | 4.4 | |
| Total | | $ | 15.5 | | | $ | 16.2 | | | $ | 6.8 | |
| | | | | | | | | | | | | | | | | | | | |
| | Gain (Loss) Reclassified from Other Comprehensive Income into Earnings |
| | Year Ended December 31, |
| Derivatives designated as cash flow hedging instruments | | 2023 | | 2022 | | 2021 |
| Foreign currency forward contracts | | $ | 5.9 | | | $ | 4.8 | | | $ | 1.7 | |
| | | | | | |
| Interest rate swap contracts | | 8.2 | | | (1.6) | | | (4.8) | |
| Total | | $ | 14.1 | | | $ | 3.2 | | | $ | (3.1) | |
Based on the current valuation as of 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 | |
2023, we expect to reclassify a net gain of $5.2 million related to the interest rate swap contracts from accumulated other comprehensive loss into earnings during the next 12 months. Foreign Currency Forward Contracts Not Designated as Hedging Instruments
The Company usesWe use foreign currency forward contracts that are not designated as qualifying cash flow hedging instruments to mitigate our exposure to fluctuations in foreign currency exchange rates due to the remeasurement of certain balance sheet exposures (payablespayables and receivables denominated in foreign currencies),currencies, as well as gains and losses resulting from the translation of the operating results of the Company’sour international subsidiaries into U.S. dollars for financial reporting purposes. These contracts generally mature within 12 months from their inception. AtAs of December 31, 2021, 20202023, 2022 and 2019,2021, the notional amounts of the Company’sour foreign currency forward contracts used to mitigate the exposures discussed above were approximately $67,831,000, $81,627,000,$209.4 million, $162.9 million, and $72,119,000,$67.8 million, respectively. The Company estimatesWe estimate the fair values of foreign currency forward contracts based on pricing models using current market rates, and recordsrecord all derivatives on theour consolidated balance sheet at fair value, with changes in fair value recorded in theour consolidated statements of operations. The foreignForeign currency forward contracts are classified under Level 2 of the fair value hierarchy (see Note 19)17).
The following table summarizes the location of net gains onand losses for each type of our derivative contracts recognized in the consolidated statements of operations that were recognized duringfor the periods presented (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 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, |
| | 2023 | | 2022 | | 2021 |
| Foreign currency forward contracts | | Other income, net | | $ | 19.6 | | | $ | 44.5 | | | $ | 14.4 | |
During the years ended December 31, 2023, 2022 and 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 Companywe recognized net foreign currency transactional losses of $6,368,000$6.4 million, $18.3 million, and $5,838,000,$6.4 million, respectively, and a net foreign currency gainin our consolidated statements of $9,024,000 during the year ended December 31, 2020 related to transactions with foreign subsidiaries.operations.
Note 21.19. Accumulated Other Comprehensive IncomeLoss
The following table details the amounts reclassified from accumulated other comprehensive income to cost of goods sold, as well as changes inloss and foreign currency translation adjustments for the years ended December 31, 2021, 2020 and 2019periods presented below (in thousands)millions):
| | | | | | | | | | | | | | | | | |
| 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) | | | 0 | | (2,756) | |
| Net gains reclassified to interest expense | (4,475) | | | 0 | | (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) | |
| | | | | | | | | | | | | | | | | |
| Derivative Instruments | | Foreign Currency Translation | | Total |
| Accumulated other comprehensive loss, January 1, 2021, after tax | $ | (14.0) | | | $ | 7.5 | | | $ | (6.5) | |
| Change in derivative instruments | 6.9 | | | — | | | 6.9 | |
| Net gains reclassified to cost of goods sold | (1.7) | | | — | | | (1.7) | |
| Net losses reclassified to interest expense | 4.8 | | | — | | | 4.8 | |
| Income tax provision on derivative instruments | (1.6) | | | — | | | (1.6) | |
| Foreign currency translation adjustments | — | | | (29.2) | | | (29.2) | |
| Accumulated other comprehensive loss, December 31, 2021, after tax | (5.6) | | | (21.7) | | | (27.3) | |
| Change in derivative instruments | 16.2 | | | — | | | 16.2 | |
| Net gains reclassified to cost of goods sold | (4.8) | | | — | | | (4.8) | |
| | | | | |
| Net losses reclassified to interest expense | 1.6 | | | — | | | 1.6 | |
| Income tax provision on derivative instruments | (2.5) | | | — | | | (2.5) | |
| Foreign currency translation adjustments | — | | | (44.7) | | | (44.7) | |
| Accumulated other comprehensive loss, December 31, 2022, after tax | 4.9 | | | (66.4) | | | (61.5) | |
| Change in derivative instruments | 15.5 | | | — | | | 15.5 | |
| Net gains reclassified to cost of goods sold | (5.9) | | | — | | | (5.9) | |
| | | | | |
| Net gains reclassified to interest expense | (8.2) | | | — | | | (8.2) | |
| Income tax provision on derivative instruments | (0.2) | | | — | | | (0.2) | |
| Foreign currency translation adjustments | — | | | 12.8 | | | 12.8 | |
| Accumulated other comprehensive loss, December 31, 2023, after tax | $ | 6.1 | | | $ | (53.6) | | | $ | (47.5) | |
Note 22.20. Segment Information
On March 8, 2021, the Company completed its merger with Topgolf. We have three operating and reportable segments:
•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 3 reportable operating segments: Topgolf, Golf Equipment and Apparel, Gear and Other.
The Topgolf operating segment is primarily comprised of service revenues and expenses for itsfrom our 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.game;
The •Golf Equipment, operating segmentwhich 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 brandedStrata-branded golf balls and sales of pre-owned golf clubs.clubs; and
The Apparel, Gear and Other operating segment•Active Lifestyle, which 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 bagsbags), and gloves), storage gear for sport and personal use. This segment also includes royalties from licensing of the Company’sour trademarks and service marks for various soft goods products. During the second quarter of 2022, we changed the name of our Apparel, Gear, and Other operating segment to Active Lifestyle. The segment name change had no impact on the composition of our segments or on previously reported financial position, results of operations, cash flow or segment operating results.
There were no significant intersegment transactions during the years ended December 31, 2023, 2022, or 2021.
The following table below contains information utilized by management to evaluate itsour operating segments.segments for the periods presented below (in millions):
| | | | | | | | | | | | | | | | | |
| 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 | |
| | | | | |
| | | | | |
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2023 | | 2022 | | 2021 |
| Net revenues: | | | | | |
Topgolf(1) | $ | 1,761.0 | | | $ | 1,549.0 | | | $ | 1,087.6 | |
| Golf Equipment | 1,387.5 | | | 1,406.6 | | | 1,229.2 | |
| Active Lifestyle | 1,136.3 | | | 1,040.1 | | | 816.6 | |
| Total net revenues | $ | 4,284.8 | | | $ | 3,995.7 | | | $ | 3,133.4 | |
| | | | | |
| Income before income taxes: | | | | | |
Topgolf(1) | $ | 108.8 | | | $ | 76.8 | | | $ | 58.2 | |
| Golf Equipment | 193.3 | | | 251.4 | | | 203.9 | |
| Active Lifestyle | 117.0 | | | 77.4 | | | 68.5 | |
| Total segment operating income | 419.1 | | | 405.6 | | | 330.6 | |
Reconciling Items(2) | (181.4) | | | (148.8) | | | (125.9) | |
| Total operating income | 237.7 | | | 256.8 | | | 204.7 | |
Gain on Topgolf investment(3) | — | | | — | | | 252.5 | |
| Interest expense, net | (210.2) | | | (142.8) | | | (115.6) | |
| Other income, net | 7.3 | | | 27.9 | | | 9.0 | |
| | | | | |
| Total income before income taxes | $ | 34.8 | | | $ | 141.9 | | | $ | 350.6 | |
| | | | | |
(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 and statements of financial position from that date forward. |
(2) Reconciling items in 2023 include corporate general and administrative expenses not utilized by management in determining segment profitability, including reorganization charges of $12.3 million incurred during the twelve months ended December 31, 2023 to reorganize our IT functions and improve the organizational structure in our Active Lifestyle and Topgolf Segments. As of December 31, 2023, our total liability in accrued employee costs and benefits related to the reorganization was $4.0 million. Reconciling items in 2023 and 2022 also include the amortization and depreciation of acquired intangible assets, purchase accounting adjustments related to acquisitions, non-recurring costs associated with the integration of new IT systems stemming from acquisitions, and costs related to a 2023 cybersecurity incident. In addition, reconciling items in 2022 and 2021 include legal and credit agency fees related to the postponement of our debt refinancing, and charges related to the suspension of our Jack Wolfskin retail business in Russia due to the Russia-Ukraine war and the closure of a pre-merger Topgolf concept location. The amount for 2021 also includes transaction, transition and other non-recurring costs associated with the merger with Topgolf and costs associated with the implementation of new IT systems for Jack Wolfskin. |
(3) The gain on Topgolf investment is related to the fair value step-up on the Company’s investment in Topgolf (see Note 4). |
| | | | | |
| | | | | |
| | | | | | | | | | | |
| 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. | | | | | | | | | | | |
| December 31, |
| 2023 | | 2022 |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Inventory: | | | |
| Topgolf | $ | 50.2 | | | $ | 38.2 | |
| Golf Equipment | 454.2 | | | 567.2 | |
| Active Lifestyle | 290.0 | | | 353.8 | |
| Total inventory | $ | 794.4 | | | $ | 959.2 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Property, Plant, & Equipment, net: | | | |
| Topgolf | $ | 1,963.0 | | | $ | 1,612.4 | |
| Golf Equipment | 102.5 | | | 106.5 | |
| Active Lifestyle | 91.0 | | | 90.7 | |
| Total property, plant, & equipment, net | $ | 2,156.5 | | | $ | 1,809.6 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Goodwill & Intangibles, net: | | | |
| Topgolf | $ | 2,427.6 | | | $ | 2,421.3 | |
| Golf Equipment | 621.5 | | | 620.6 | |
| Active Lifestyle | 445.1 | | | 445.5 | |
| Total goodwill & intangibles, net | $ | 3,494.2 | | | $ | 3,487.4 | |
| | | |
| Additions to long-lived assets: | | | |
| Topgolf | $ | 503.1 | | | $ | 490.4 | |
| Golf Equipment | 8.1 | | | 13.8 | |
| Active Lifestyle | 20.2 | | | 22.4 | |
| Corporate | 57.7 | | | 36.3 | |
| Total additions to long-lived assets | $ | 589.1 | | | $ | 562.9 | |
| | | |
| Depreciation and amortization: | | | |
| Topgolf | $ | 183.9 | | | $ | 143.8 | |
| Golf Equipment | 19.7 | | | 20.7 | |
| Active Lifestyle | 36.1 | | | 28.3 | |
| Total depreciation and amortization | $ | 239.7 | | | $ | 192.8 | |
|
|
|
(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 itsWe market our products in the United States and internationally, with itsour principal international markets being JapanAsia and Europe. The tables below contain information about the geographical areas in which the Company operates.we operate. 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. | | | | | | | | | | | | | | | | | |
| 2023 | | 2022 | | 2021 |
| (in millions) |
| Net Revenues: | | | | | |
| United States | $ | 3,081.4 | | | $ | 2,798.0 | | | $ | 2,067.1 | |
| Europe | 540.6 | | | 537.4 | | | 499.5 | |
| Asia | 531.9 | | | 545.4 | | | 465.5 | |
| Rest of World | 130.9 | | | 114.9 | | | 101.3 | |
| Total Net Revenues | $ | 4,284.8 | | | $ | 3,995.7 | | | $ | 3,133.4 | |
| | | | | |
| Long-Lived Assets | | | | | |
| United States | $ | 2,041.4 | | | $ | 1,729.0 | | | $ | 1,383.6 | |
| Europe | 92.9 | | | 58.8 | | | 48.9 | |
| Asia | 19.2 | | | 18.8 | | | 7.2 | |
| Rest of World | 3.0 | | | 3.0 | | | 11.7 | |
| Total Long-Lived Assets | $ | 2,156.5 | | | $ | 1,809.6 | | | $ | 1,451.4 | |
| | | | | |
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.
