UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form10-Q
☒Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 20202021
OR
☐Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period                     to                     
Commission file number 001-10962  
Callaway Golf Company
(Exact name of registrant as specified in its charter)
Delaware95-3797580
Delaware
95-3797580
(State or other jurisdiction of

incorporation or organization)
(I.R.S. Employer

Identification No.)
2180 Rutherford Road,, Carlsbad,, CA92008
(760) (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:
Title of Each ClassTrading Symbol(s)Name of Each Exchange on which Registered
Common Stock, $0.01 par value per shareELYThe New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  o
Indicate by check mark whether the registrant has submitted electronically 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  ý    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer☒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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ý
As of June 30, 2020,2021, the number of shares outstanding of the Registrant’s common stock was 94,163,544.
185,936,881.




Important Notice to Investors Regarding Forward-Looking Statements: This report contains "forward-looking statements" as defined under the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as: "may," "should," "will," "could," "would," "anticipate," "plan," "believe," "project," "estimate," "expect," "strategy," "future," "likely," 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’sCompany's business, results of operations and financial condition and the impact of any measures taken to mitigate the effect of the COVID-19 pandemic, the benefits of the merger with Topgolf International, Inc. (“Topgolf”), including the anticipated operations, financial position, liquidity, performance, prospects or growth and scale opportunities of Callaway, Topgolf or the combined company, any statements regarding the strength of the Company’sCompany's brands, product lines and e-commerce business, geographic diversity, market recovery, availability of capital under the Company’sCompany's credit facilities, the capital markets or other sources, the Company’sCompany's 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, the future impact of new accounting standards, the integration of the JW Stargazer Holding GmbH ("Jack Wolfskin") acquisition, and the related financial impact of the future business and prospects of the Company, TravisMathew, LLC ("TravisMathew"), OGIO International, Inc. ("OGIO") and, Jack Wolfskin and the impact of the 2017 Tax Cuts and Jobs Act (the "Tax Act"), which includes a broad range of provisions that could have a material impact on the Company's tax provision in future periods.Topgolf. These statements are based upon current information and the Company's current beliefs, expectations and assumptions regarding the future of the Company's business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of the Company's control. As a result of these uncertainties and because the information on which these forward-looking statements is based may ultimately prove to be incorrect, actual results may differ materially from those anticipated. Important factors that could cause actual results to differ include, among others, the following:
•certain risks and uncertainties, including changes in capital marketmarkets or economic conditions, particularly the uncertainty related to the duration and impact of the COVID-19 pandemic, and related decreases in consumer demand and spending;
•the impact of the COVID-19 pandemic 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 and supply chain, and the global economy;
•disruptions to business operations whether from COVID-19-related travel restrictions, mandated 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, and staffing shortages as a result of remote working requirements or otherwise;
a material impact on•costs, expenses or difficulties related to the Company's tax provision as a resultmerger with Topgolf, including the integration of the Tax Act;Topgolf business, or the failure to realize the expected benefits and synergies of the Topgolf merger in the expected timeframes or at all;
•the potential impact of the 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 tax 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's 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;


2


•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 businesses;
•delays, difficulties or increased costs in the supply of components needed to manufacture the Company’s products or in manufacturing the Company’s products, including the Company's dependence on a limited number of suppliers for some of its products;
•adverse weather conditions and seasonality;
•any rule changes or other actions taken by the USGAUnited States Golf Association or other golf association that could have an adverse impact upon demand or supply of the Company’s products;
•the ability of the Company to protect its intellectual property rights;
•a decrease in participation levels in golf;
•the effect of terrorist activity, armed conflict, natural disasters or pandemic diseases, including without limitation the COVID-19 pandemic, on the economy generally, on the level of demand for the Company’s products or on the Company’s ability to manage its supply and delivery logistics in such an environment; and
•the general risks and uncertainties applicable to the Company and its business.
Investors should not place undue reliance on these forward-looking statements, which are based on current information and speak only as of the date hereof. The Company undertakes no obligation to update any forward-looking statements to reflect new information or events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. 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 Company from time to time does communicate with securities analysts, it is against the Company’s policy to disclose to them any material non-public information or other confidential commercial information. Furthermore, the Company has a policy against distributing or confirming financial forecasts or projections issued by analysts and any reports issued by such analysts are not the responsibility of the Company. Investors should not assume that the Company agrees with any report issued by any analyst or with any statements, projections, forecasts or opinions contained in any such report. For details concerning these and other risks and uncertainties, see Part I, Item IA, “Risk Factors” contained in the Company's most recent Annual Report on Form 10-K, as well as the Company’s quarterly reports on Form 10-Q and current reports on Form 8-K subsequently filed with the Securities and Exchange Commission from time to time.



3


Callaway Golf Company Trademarks: The following marks and phrases, among others, are trademarks of the Company:Alpha Convoy, Apex, Apex DCB, Apex TCB, Apex Tour, Apex UW, APW, Aqua Dry, Arm Lock, Backstryke, Big Bertha, Big Bertha B21, Big Bertha REVA, Big T, Bird of Prey, Black Series, Bounty Hunter, 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, Cirrus, Comfort Tech, CUATER, Cuater C logo, Cup 360, CXR, 360 Face Cup, D.A.R.T., Dawn Patrol, Demonstrably Superior And Pleasingly Different, Divine, Double Wide, Eagle, Engage, Epic, Epic Flash, Epic Max, Epic Max LS, Epic Speed, ERC, ERC Soft, Everyone’s Game, Exo, Cage, Fast Tech Mantle, Flash Face Technology, Flash Face SS21, FT Optiforce, FT Performance, FT Tour, Fusion, Fusion Zero, GBB, GBB Epic, Gems, Golf Fusion, Gravity Core, Great Big Bertha, Great Big Bertha Epic, Grom, Groove, In,Groove- In- Groove Technology, Heavenwood, Hersatility,Hex Aerodynamics, Hex Chrome, HX, Hyper Dry, Hyper-Lite, Hyper Speed Face, Innovate or Die,I.D. Ball, Jack Wolfskin, Jailbird, Jailbreak, Jailbreak AI Speed Frame, Jailbreak AI Velocity Blades, JAWS MD5, Jewel Jam, Kings of Distance, Legacy, Life On Tour, Longer From Everywhere, Luxe, Mack Daddy,Magna, Majestic, MarXman, Mavrik, MD3 Milled, MD4 Tactical, MD5, MD 5 Jaws, Metal-X, Microhinge Face Insert, Microhinge Star, Mission:Ambition, Nanuk, NipIt, Number One Putter in Golf, O OGIO, O Works, Odyssey, Odyssey Works, Offset Groove in Groove, Ogio, OGIO ALPHA, OGIO ARORA, OGIO CLUB, OGIO FORGE, OGIO ME, OGIO MY EXPRESSION, OGIO RENEGADE, OGIO SAVAGE, OGIO SHADOW, OGIO XIX, Opti Flex, Opti Grip, Opti Shield, Opti Therm, OptiFit, Opti Vent, ORG 7, ORG 14, ORG 15, Paw Print, PRESTIGE 7, ProType, ∙R∙R, Red Ball, R-Moto, Renegade, Rig 9800, Rossie, RSX, S2H2, Sabertooth, Shredder, Silencer, SLED, SoftFast, Solaire, Speed Regime, Speed Step, Steelhead XR, Steelhead, Strata, Stroke Lab, Stronomic, Sub Zero, Superhot, Supersoft, SureOut, TM, Tank, Tank Cruiser, Tech Series, Teron, Texapore, TMCA, Toe Up, Suite Suite, TopChallenge, TopChip , TopContender, TopDrive, TopGolf, TopGolf Crush, TopGolf Media, TopLife, TopPressure, TopScore, TopScramble, TopShot, TopTracer, TopTracer Range, Toulon, Toulon Garage, Tour Authentic, Tour Tested, Trade In! Trade Up!, TRAVISMATHEW, TravisMathew TM logo, Trionomer Cover, Truvis, Truvis Pattern, Tyro, udesign, Uptown, Versa, VFT, W Grind, Warbird, Weather Series, Wedgeducation, White Hot, White Hot OG, White Hot Tour, White Ice, 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 Tech, XR, XR 16, XSPANN, Xtra Traction Technology, Xtra Width Technology, XTT, 2-Ball.




43



CALLAWAY GOLF COMPANY
INDEX

PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements (Unaudited)
PART I. FINANCIAL INFORMATION5
Item 1.
Financial Statements (Unaudited)
6
Consolidated Condensed Balance Sheets as of June 30, 20202021 and December 31, 20192020
65
Consolidated Condensed Statements of Operations for the three and six months ended June 30, 20202021 and 20192020
76
Consolidated Condensed Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 20202021 and 20192020
87
Consolidated Condensed Statements of Cash Flows for the six months ended June 30, 20202021 and 20192020
98
Consolidated Condensed Statements of Shareholders’ Equity for the three and six months ended June 30, 20202021 and 20192020
109
Notes to Consolidated Condensed Financial Statements
1211
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
3949
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
5569
Item 4.
Controls and Procedures
5670
PART II. OTHER INFORMATION
Item 1.
5772
Item 1A.
5772
Item 2.
5872
Item 3.
5872
Item 4.
5872
Item 5.
5972
Item 6.
6073


54



PART I. FINANCIAL INFORMATION
Item 1.    Financial Statements (Unaudited)
CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
June 30, 2021December 31, 2020
ASSETS
Current assets:
Cash and cash equivalents$415,204 $366,119 
Restricted cash2,469 0 
Accounts receivable, net325,275 138,482 
Inventories335,346 352,544 
Prepaid expenses55,028 20,318 
Other current assets120,728 35,164
Total current assets1,254,050 912,627 
Property, plant and equipment, net1,264,886 146,495 
Operating lease right-of-use assets, net1,057,225 194,776 
Intangible assets, net1,556,637 484,339 
Goodwill2,021,908 56,658 
Investment in golf-related venture27,740 111,442 
Other assets89,388 74,263 
Total assets$7,271,834 $1,980,600 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses$426,577 $276,209 
Accrued employee compensation and benefits95,427 30,937 
Asset-based credit facilities21,438 22,130 
Operating lease liabilities, short-term55,492 29,579 
Construction advances63,636 0 
Deferred revenue83,580 2,546 
Other current liabilities41,482 29,871 
Total current liabilities787,632 391,272 
Long-term liabilities:
Long-term debt (Note 7)1,064,429 650,564 
Operating lease liabilities, long-term1,174,780 177,996 
Deemed landlord financing, long-term263,219 0 
Deferred taxes, net196,233 58,628 
Other long-term liabilities46,078 26,496 
Commitments and contingencies (Note 14)00
Shareholders’ equity:
Preferred stock, $0.01 par value, 3,000,000 shares authorized, NaN issued and outstanding at June 30, 2021 and December 31, 20200 0 
Common stock, $0.01 par value, 360,000,000 shares authorized, 185,939,469 and 95,648,648 shares issued at June 30, 2021 and December 31, 2020, respectively
1,859 956 
Additional paid-in capital3,024,995 346,945 
Retained earnings724,393 360,228 
Accumulated other comprehensive loss(11,694)(6,546)
Less: Common stock held in treasury, at cost, 2,588 and 1,446,408 shares at June 30, 2021 and December 31, 2020, respectively(90)(25,939)
Total shareholders’ equity3,739,463 675,644 
Total liabilities and shareholders’ equity$7,271,834 $1,980,600 
 June 30,
2020		 December 31,
2019
ASSETS   
Current assets:   
Cash and cash equivalents$164,416
 $106,666
Accounts receivable, net214,004
 140,455
Inventories379,169
 456,639
Income taxes receivable16,624
 9,919
Other current assets66,348
 75,671
Total current assets840,561
 789,350
Property, plant and equipment, net149,618
 132,760
Operating lease right-of-use assets, net189,381
 160,098
Intangible assets, net465,696
 493,423
Goodwill55,579
 203,743
Deferred taxes, net48,746
 73,948
Investment in golf-related venture90,134
 90,134
Other assets19,941
 17,092
Total assets$1,859,656
 $1,960,548
LIABILITIES AND SHAREHOLDERS’ EQUITY   
Current liabilities:   
Accounts payable and accrued expenses$204,980
 $276,300
Accrued employee compensation and benefits29,455
 46,891
Asset-based credit facilities55,551
 144,580
Accrued warranty expense9,779
 9,636
Operating lease liabilities, short-term28,772
 26,418
Current portion of long-term debt8,653
 7,317
Income taxes payable6,430
 12,104
Total current liabilities343,620
 523,246
Long-term liabilities:   
Operating lease liabilities, long-term172,093
 137,696
Long-term debt (Note 6)628,851
 443,259
Income tax liability7,104
 7,264
Deferred taxes, net65,712
 73,483
Other long-term liabilities17,728
 8,247
Commitments and contingencies (Note 14)

 

Shareholders’ equity:   
Preferred stock, $0.01 par value, 3,000,000 shares authorized, none issued and outstanding at June 30, 2020 and December 31, 2019—
 —
Common stock, $0.01 par value, 240,000,000 shares authorized, 95,648,648 shares issued at both June 30, 2020 and December 31, 2019, respectively
956
 956
Additional paid-in capital341,615
 323,600
Retained earnings348,376
 489,382
Accumulated other comprehensive loss(39,792) (22,422)
Less: Common stock held in treasury, at cost, 1,485,104 and 1,450,875 shares at June 30, 2020 and December 31, 2019, respectively(26,607) (24,163)
Total shareholders’ equity624,548
 767,353
Total liabilities and shareholders’ equity$1,859,656
 $1,960,548


The accompanying notes are an integral part of these financial statements.


5
6



CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)

 Three Months Ended
June 30,		Six Months Ended
June 30,
 2021202020212020
Net revenues:
Products$591,410 $296,996 $1,151,368 $739,272 
Services322,231 0 413,894 0 
Total net revenues913,641 296,996 1,565,262 739,272 
Costs and expenses:
Cost of products315,008 174,941 625,638 421,543 
Cost of services, excluding depreciation and amortization42,786 0 53,771 0 
Other venue expenses202,339 0 267,776 0 
Selling, general and administrative expenses221,124 115,215 395,004 256,969 
Research and development expense20,271 10,020 33,016 23,260 
Goodwill and trade name impairment0 174,269 0 174,269 
Venue pre-opening costs4,844 0 6,689 0 
Total costs and expenses806,372 474,445 1,381,894 876,041 
Income (loss) from operations107,269 (177,449)183,368 (136,769)
Interest income188 119 242 218 
Interest expense(29,064)(12,282)(46,575)(21,496)
Gain on Topgolf investment0 0 252,531 0 
Other income (expense), net(2,502)13,997 6,529 20,477 
Income (loss) before income taxes75,891 (175,615)396,095 (137,570)
Income tax (benefit) provision(15,853)(7,931)31,890 1,220 
Net income (loss)$91,744 $(167,684)$364,205 $(138,790)
Earnings (loss) per common share:
Basic$0.50 ($1.78)$2.40 ($1.47)
Diluted$0.47 ($1.78)$2.28 ($1.47)
Weighted-average common shares outstanding:
Basic185,22594,141151,541 94,225 
Diluted194,33494,141159,639 94,225 
 Three Months Ended
June 30,		 Six Months Ended
June 30,
 2020 2019 2020 2019
Net sales$296,996
 $446,708
 $739,272
 $962,905
Cost of sales174,941
 239,891
 421,543
 517,655
Gross profit122,055
 206,817
 317,729
 445,250
Operating expenses:       
Selling expense80,166
 113,113
 191,227
 232,434
General and administrative expense35,049
 35,423
 65,742
 72,361
Research and development expense10,020
 13,082
 23,260
 25,620
Goodwill and trade name impairment174,269
 —
 174,269
 —
Total operating expenses299,504
 161,618
 454,498
 330,415
Income (loss) from operations(177,449) 45,199
 (136,769) 114,835
Interest income119
 476
 218
 665
Interest expense(12,282) (10,736) (21,496) (20,564)
Other income (expense), net13,997
 1,167
 20,477
 (773)
Income (loss) before income taxes(175,615) 36,106
 (137,570) 94,163
Income tax provision (benefit)(7,931) 7,208
 1,220
 16,764
Net income (loss)(167,684) 28,898
 (138,790) 77,399
Less: Net loss attributable to non-controlling interest—
 (33) —
 (179)
Net income (loss) attributable to Callaway Golf Company$(167,684) $28,931
 $(138,790) $77,578
        
Earnings (loss) per common share:       
Basic$(1.78) $0.31
 $(1.47) $0.82
Diluted$(1.78) $0.30
 $(1.47) $0.81
Weighted-average common shares outstanding:       
Basic94,141
 94,074
 94,225
 94,377
Diluted94,141
 95,891
 94,225
 96,153

















The accompanying notes are an integral part of these financial statements.


6
7



CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)

 Three Months Ended
June 30,		Six Months Ended
June 30,
 2021202020212020
Net income (loss)$91,744 $(167,684)$364,205 $(138,790)
Other comprehensive income (loss):
Change in derivative instruments403 (13,453)6,717 (14,042)
Foreign currency translation adjustments5,966 8,155 (10,277)(6,781)
Comprehensive income (loss), before income tax on other comprehensive income items98,113 (172,982)360,645 (159,613)
Income tax provision (benefit) on derivative instruments617 (3,023)1,588 (3,453)
Comprehensive income (loss)$97,496 $(169,959)$359,057 $(156,160)




 Three Months Ended
June 30,		 Six Months Ended
June 30,
 2020 2019 2020 2019
Net income (loss)$(167,684) $28,898
 $(138,790) $77,399
Other comprehensive income:       
Change in derivative instruments(13,453) (5,567) (14,042) (8,741)
Foreign currency translation adjustments8,155
 1,321
 (6,781) (1,657)
Comprehensive income (loss), before income tax on other comprehensive income items(172,982) 24,652
 (159,613) 67,001
Income tax benefit on derivative instruments3,023
 1,916
 3,453
 1,488
Comprehensive income (loss)(169,959) 26,568
 (156,160) 68,489
Less: Comprehensive loss attributable to non-controlling interests—
 (231) —
 (339)
Comprehensive income (loss) attributable to Callaway Golf Company$(169,959) $26,799
 $(156,160) $68,828


































The accompanying notes are an integral part of these financial statements.


7
8



CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six months ended June 30,
 20212020
Cash flows from operating activities:
Net income (loss)$364,205 $(138,790)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
   Depreciation and amortization63,542 18,357 
   Lease amortization expense26,896 16,313 
   Amortization of debt issuance costs2,618 1,823 
   Debt discount amortization6,527 1,483 
   Impairment loss0 174,269 
   Deferred taxes, net28,067 8,684 
   Non-cash share-based compensation15,648 4,794 
   Loss on disposal of long-lived assets100 123 
   Gain on Topgolf investment(252,531)0 
   Unrealized net gains on hedging instruments and foreign currency(5,048)(14,059)
   Acquisition costs(16,199)0 
Change in assets and liabilities, net of effect from acquisitions:
   Accounts receivable, net(181,975)(73,177)
   Inventories26,479 73,029 
   Leasing receivables(11,199)0 
   Other assets(50,276)13,984 
   Accounts payable and accrued expenses62,414 (73,087)
   Deferred revenue16,651 595 
   Accrued employee compensation and benefits25,211 (16,876)
   Accrued warranty expense0 143 
   Change in operating leases, net(18,881)(13,438)
   Income taxes receivable/payable, net(3,646)(13,118)
   Other liabilities1,864 8,627 
Net cash provided by (used in) operating activities100,467 (20,321)
Cash flows from investing activities:
Cash acquired in merger171,294 0 
Capital expenditures(120,833)(25,097)
Note receivable, net of discount0 (5,234)
Net cash provided by (used in) investing activities50,461 (30,331)
Cash flows from financing activities:
Repayments of credit facilities, net(110,757)(89,029)
Proceeds from lease financing24,799 0 
Exercise of stock options18,403 130 
Acquisition of treasury stock(12,538)(21,953)
Repayments of long-term debt(12,029)(5,504)
Debt issuance cost(5,441)(9,119)
Payment on contingent earn-out obligation(3,577)0 
Repayments of financing leases(200)(206)
Dividends paid(3)(1,891)
Proceeds from issuance of convertible notes0 258,750 
Proceeds from issuance of long-term debt0 9,766 
Premium paid for capped call confirmations0 (31,775)
Net cash (used in) provided by financing activities(101,343)109,169 
Effect of exchange rate changes on cash, cash equivalents and restricted cash1,969 (767)
Net increase in cash, cash equivalents and restricted cash51,554 57,750 
Cash, cash equivalents and restricted cash at beginning of period366,119 106,666 
Cash, cash equivalents and restricted cash at end of period$417,673 $164,416 
Supplemental disclosures:
Cash paid for income taxes, net$6,566 $1,692 
Cash paid for interest and fees$41,422 $16,489 
Non-cash investing and financing activities:
Issuance of treasury stock and common stock for compensatory stock awards released from restriction$18,315 $19,143 
Accrued capital expenditures at period-end$9,224 $1,861 
Financed additions of capital expenditures$9,256 $0 
Issuance of common stock in Topgolf merger$2,650,201 $0 
 Six Months Ended
June 30,
 2020 2019
Cash flows from operating activities:   
Net income (loss)$(138,790) $77,399
Adjustments to reconcile net income (loss) to net cash used in operating activities:   
   Depreciation and amortization18,357
 16,999
   Lease amortization expense16,313
 15,279
   Amortization of debt issuance costs1,823
 1,295
   Debt discount amortization1,483
 —
   Inventory step-up on acquisition—
 10,703
   Impairment loss174,269
 —
   Deferred taxes, net8,684
 10,514
   Non-cash share-based compensation4,794
 6,964
   Loss on disposal of long-lived assets123
 657
   Unrealized net (gains) losses on hedging instruments(14,059) 2,677
Change in assets and liabilities, net of effect from acquisitions:   
   Accounts receivable, net(73,177) (156,548)
   Inventories73,029
 57,509
   Other assets13,984
 (1,182)
   Accounts payable and accrued expenses(72,492) (51,924)
   Accrued employee compensation and benefits(16,876) (10,331)
   Accrued warranty expense143
 1,159
   Change in operating leases, net(13,438) (14,335)
   Income taxes receivable/payable, net(13,118) (16,224)
   Other liabilities8,627
 (1,370)
Net cash used in operating activities(20,321) (50,759)
Cash flows from investing activities:   
Capital expenditures(25,097) (23,403)
Note receivable, net of discount(5,234) —
Acquisitions, net of cash acquired—
 (463,105)
Proceeds from sales of property and equipment—
 15
Net cash used in investing activities(30,331) (486,493)
Cash flows from financing activities:   
Proceeds from issuance of convertible notes258,750
 —
Proceeds from issuance of long-term debt9,766
 480,000
Premium paid for capped call transactions(31,775) —
Debt issuance cost(9,119) (18,971)
(Repayments of) proceeds from credit facilities, net(89,029) 125,167
Repayments of long-term debt(5,504) (2,325)
Repayments of financing leases(206) (232)
Exercise of stock options130
 —
Dividends paid, net(1,891) (1,893)
Acquisition of treasury stock(21,953) (27,394)
Net cash provided by financing activities109,169
 554,352
Effect of exchange rate changes on cash and cash equivalents(767) 409
Net increase in cash and cash equivalents57,750
 17,509
Cash and cash equivalents at beginning of period106,666
 63,981
Cash and cash equivalents at end of period$164,416
 $81,490
Supplemental disclosures:   
Cash paid for income taxes, net$1,692
 $4,602
Cash paid for interest and fees$16,489
 $17,061
Non-cash investing and financing activities:   
Acquisition of minority interest$—
 $18,538
Issuance of treasury stock and common stock for compensatory stock awards released from restriction$19,143
 $19,304
Accrued capital expenditures at period-end$1,861
 $1,629


The accompanying notes are an integral part of these financial statements.

8

9



CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
(In thousands)

Shareholders' Equity Callaway Golf Company
 Common StockAdditional
Paid-in
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Loss		Treasury StockTotal Shareholders' Equity
 SharesAmountSharesAmount
Balance at March 31, 2021185,613 $1,856 $3,016,902 $632,650 $(17,446)(941)$(21,143)$3,612,819 
Acquisition of treasury stock— — 253 — — (9)(290)(37)
Exercise of stock options327 3 (1,449)— — 869 19,592 18,146 
Compensatory awards released from restriction— — (1,750)— — 78 1,750 0 
Share-based compensation— — 11,039 — — — — 11,039 
Stock dividends— — — (1)— — 1 0 
Equity adjustment from foreign currency translation— — — — 5,966 — — 5,966 
Change in fair value of derivative instruments, net of tax— — — — (214)— — (214)
Net Income— — — 91,744 — — — 91,744 
Balance at June 30, 2021185,940 $1,859 $3,024,995 $724,393 $(11,694)(3)$(90)$3,739,463 
                        
 Shareholders' Equity Callaway Golf Company    
 Common Stock Additional Paid-in
Capital		 Retained
Earnings		 
Accumulated
Other
Comprehensive
Loss
 Treasury Stock Total Callaway Golf Company Shareholders' Equity 
Non-
Controlling Interest
  
 Shares Amount    Shares Amount   Total
Balance, March 31, 201995,649
 $956
 $326,209
 $461,456
  $(20,172)  (1,604) $(26,595)  $741,854
  $9,480
 $751,334
Acquisition of treasury stock—
 —
 —
 —
  —
  (1) (17)  (17)  —
 (17)
Compensatory awards released from restriction—
 —
 (837) —
  —
  50
 837
  —
  —
 —
Share-based compensation—
 —
 3,529
 —
  —
  —
 —
  3,529
  —
 3,529
Stock dividends—
 —
 —
 (2)  —
  —
 2
  —
  —
 —
Cash dividends ($0.01 per share)—
 —
 —
 (940)  —
  —
 —
  (940)  —
 (940)
Equity adjustment from foreign currency translation—
 —
 —
 —
  1,552
  —
 —
  1,552
  (231) 1,321
Change in fair value of derivative instruments—
 —
 —
 —
  (3,651)  —
 —
  (3,651)  —
 (3,651)
Acquisition of non-controlling interest—
 —
 (9,322) —
  —
  —
 —
  (9,322)  (9,216) (18,538)
Net Income—
 —
 —
 28,931
  —
  —
 —
  28,931
  (33) 28,898
Balance, June 30, 201995,649
 $956
 $319,579
 $489,445
  $(22,271)  (1,555) $(25,773)  $761,936
  $—
 $761,936



 Shareholders' Equity Callaway Golf Company    
 Common Stock 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 Treasury Stock Total Callaway Golf Company Shareholders' Equity 
Non-
Controlling Interest
  
 Shares Amount    Shares Amount   Total
Balance, December 31, 201895,649
 $956
 $341,241
 $413,799
  $(13,700)  (1,138) $(17,722)  $724,574
  $9,734
 $734,308
Acquisition of treasury stock—
 —
 —
 —
  —
  (1,655) (27,394)  (27,394)  —
 (27,394)
Compensatory awards released from restriction—
 —
 (19,304) —
  —
  853
 19,304
  —
  —
 —
Share-based compensation—
 —
 6,964
 —
  —
  —
 —
  6,964
  —
 6,964
Stock dividends  —
 —
 (39)  —
  385
 39
  —
  —
 —
Cash dividends—
 —
 —
 (1,893)  —
  —
 —
  (1,893)  —
 (1,893)
Equity adjustment from foreign currency translation—
 —
 —
 —
  (1,318)  

 —
  (1,318)  (339) (1,657)
Change in fair value of derivative instruments—
 —
 —
 —
  (7,253)  —
 —
  (7,253)  —
 (7,253)
Acquisition of non-controlling interest—
 —
 (9,322) —
  —
  —
 —
  (9,322)  (9,216) (18,538)
Net Income—
 —
 —
 77,578
  —
  

 —
  77,578
  (179) 77,399
Balance, June 30, 201995,649
 $956
 $319,579
 $489,445
  $(22,271)  (1,555) $(25,773)  $761,936
  $—
 $761,936


Shareholders' Equity Callaway Golf Company
 Common StockAdditional
Paid-in
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Loss		Treasury StockTotal Shareholders' Equity
 SharesAmountSharesAmount
Balance at December 31, 202095,649 $956 $346,945 $360,228 $(6,546)(1,446)$(25,939)$675,644 
Common stock issued in Topgolf merger89,776 898 2,649,303 — — — — 2,650,201 
Fair value of replacement awards converted in Topgolf merger— — 33,051 — — — — 33,051 
Common stock issued for replacement restricted stock awards188 2 (2)— — — — 0 
Acquisition of treasury stock— — 253 — — (409)(12,791)(12,538)
Exercise of stock options327 3 (1,901)— — 909 20,301 18,403 
Compensatory awards released from restriction— — (18,315)— — 942 18,315 0 
Share-based compensation— — 15,648 — — — — 15,648 
Stock dividends— — 13 (37)— 1 24 0 
Cash dividends ($0.01 per share)— — — (3)— — — (3)
Equity adjustment from foreign currency translation— — — — (10,277)— — (10,277)
Change in fair value of derivative instruments, net of tax— — — — 5,129 — — 5,129 
Net Income— — — 364,205 — — — 364,205 
Balance at June 30, 2021185,940 $1,859 $3,024,995 $724,393 $(11,694)(3)$(90)$3,739,463 













The accompanying notes are an integral part of these financial statements.


9
10


CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
(In thousands)

Shareholders' Equity Callaway Golf Company
 Common StockAdditional Paid-in
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Loss		Treasury StockTotal Shareholders' Equity
 SharesAmountSharesAmount
Balance at March 31, 202095,649 $956 $307,133 $517,004 $(37,517)(1,541)$(27,609)$759,967 
Acquisition of treasury stock— — — — — (1)(15)(15)
Compensatory awards released from restriction— — (1,014)— — 57 1,014 0 
Share-based compensation— — 2,933 — — — — 2,933 
Stock dividends— — (1)(2)— — 3 0 
Cash dividends ($0.01 per share)— — — (942)— — — (942)
Equity adjustment from foreign currency translation— — — — 8,155 — — 8,155 
Change in fair value of derivative instruments— — — — (10,430)— — (10,430)
Equity component of convertible notes, net of issuance costs and tax— — 57,077 — — — — 57,077 
Premiums paid for capped call confirmations, net of tax— — (24,513)— — — — (24,513)
Net loss— — — (167,684)— — — (167,684)
Balance at June 30, 202095,649 $956 $341,615 $348,376 $(39,792)(1,485)$(26,607)$624,548 
                    
 Shareholders' Equity Callaway Golf Company
 Common Stock 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 Treasury Stock Total Callaway Golf Company Shareholders' Equity
 Shares Amount    Shares Amount 
Balance at March 31, 202095,649
 $956
 $307,133
 $517,004
  $(37,517)  (1,541) $(27,609)  $759,967
 
Acquisition of treasury stock—
 —
 —
 —
  —
  (1) (15)  (15) 
Compensatory awards released from restriction—
 —
 (1,014) —
  —
  57
 1,014
  —
 
Share-based compensation—
 —
 2,933
 —
  —
  —
 —
  2,933
 
Stock dividends—
 —
 (1) (2)  —
  —
 3
  —
 
Cash dividends ($0.01 per share)—
 —
 —
 (942)  —
  —
 —
  (942) 
Equity adjustment from foreign currency translation—
 —
 —
 —
  8,155
  —
 —
  8,155
 
Change in fair value of derivative instruments, net of tax—
 —
 —
 —
  (10,430)  —
 —
  (10,430) 
Equity component of convertible notes, net of issuance costs and tax—
 —
 57,077
 —
  —
  —
 —
  57,077
 
Premiums paid for capped call transactions, net of tax—
 —
 (24,513) —
  —
  —
 —
  (24,513) 
Net loss—
 —
 —
 (167,684)  —
  —
 —
  (167,684) 
Balance at June 30, 202095,649
 $956
 $341,615
 $348,376
  $(39,792)  (1,485) $(26,607)  $624,548
 



Shareholders' Equity Callaway Golf Company
 Common StockAdditional
Paid-in
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Loss		Treasury StockTotal Shareholders' Equity
 SharesAmountSharesAmount
Balance, December 31, 201995,649 $956 $323,600 $489,382 $(22,422)(1,451)$(24,163)$767,353 
Adoption of accounting standard— — — (289)— — — (289)
Acquisition of treasury stock— — — — — (1,168)(21,953)(21,953)
Exercise of stock options— — (203)— — 20 333 130 
Compensatory awards released from restriction— — (19,143)— — 1,112 19,143 0 
Share-based compensation— — 4,794 — — — — 4,794 
Stock dividends— — 3 (36)— 2 33 0 
Cash dividends ($0.01 per share)— — — (1,891)— — — (1,891)
Equity adjustment from foreign currency translation— — — — (6,781)— — (6,781)
Change in fair value of derivative instruments, net of tax— — — — (10,589)— — (10,589)
Equity component of convertible notes, net of issuance costs and tax— — 57,077 — — — — 57,077 
Premiums paid for capped call confirmations, net of tax— — (24,513)— — — — (24,513)
Net loss— — — (138,790)— — — (138,790)
Balance, June 30, 202095,649 $956 $341,615 $348,376 $(39,792)(1,485)$(26,607)$624,548 

 Shareholders' Equity Callaway Golf Company
 Common Stock 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 Treasury Stock Total Callaway Golf Company Shareholders' Equity
 Shares Amount    Shares Amount 
Balance at December 31, 201995,649
 $956
 $323,600
 $489,382
  $(22,422)  (1,451) $(24,163)  $767,353
 
Adoption of accounting standard—
 —
 —
 (289)  —
  —
 —
  (289) 
Acquisition of treasury stock—
 —
 —
 —
  —
  (1,168) (21,953)  (21,953) 
Exercise of stock options—
 —
 (203) —
  —
  20
 333
  130
 
Compensatory awards released from restriction—
 —
 (19,143) —
  —
  1,112
 19,143
  —
 
Share-based compensation—
 —
 4,794
 —
  —
  —
 —
  4,794
 
Stock dividends—
 —
 3
 (36)  —
  2
 33
  —
 
Cash dividends ($0.01 per share)—
 —
 —
 (1,891)  —
  —
 —
  (1,891) 
Equity adjustment from foreign currency translation—
 —
 —
 —
  (6,781)  —
 —
  (6,781) 
Change in fair value of derivative instruments, net of tax—
 —
 —
 —
  (10,589)  —
 —
  (10,589) 
Equity component of convertible notes, net of issuance costs and tax—
 —
 57,077
 —
  —
  —
 —
  57,077
 
Premiums paid for capped call transactions, net of tax—
 —
 (24,513) —
  —
  —
 —
  (24,513) 
Net loss—
 —
 —
 (138,790)  —
  —
 —
  (138,790) 
Balance at June 30, 202095,649
 $956
 $341,615
 $348,376
  $(39,792)  (1,485) $(26,607)  $624,548
 













The accompanying notes are an integral part of these financial statements.


10
11



CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited consolidated condensed financial statements have been prepared by Callaway Golf Company (the “Company” or “Callaway Golf”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “Commission”). Accordingly, certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20192020 filed with the Commission. These consolidated condensed financial statements, in the opinion of management, include all the normal and recurring adjustments necessary for the fair presentation of the financial position, results of operations and cash flows for the periods and dates presented. Interim operating results are not necessarily indicative of operating results for the full year.
On March 8, 2021, the Company completed the merger with Topgolf International, Inc. (“Topgolf”) and has included the results of operations of Topgolf in its consolidated condensed statements of operations from that date forward. The Company’s Topgolf subsidiary operates on a 52- or 53-week fiscal year ending on the Sunday closest to December 31. As such, the Topgolf financial information included in the Company's consolidated condensed financial statements for the six months ended June 30, 2021 is from March 8, 2021 through July 4, 2021. Additionally, based on the Company's assessment of the combined business, the Company modified the presentation of its consolidated condensed statements of operations for the three and six months ended June 30, 2021 and 2020, and its consolidated condensed balance sheets as of June 30, 2021 and December 31, 2020. For further information about the merger with Topgolf, see Note 6. In connection with the merger, the Company reassessed its operating segments by evaluating its global business platform, including its management structure after the addition of Topgolf, and determined that as of March 31, 2021, the Company has 3 operating segments, namely, Golf Equipment, Apparel, Gear and Other, and Topgolf. For further information about the Company's operating segments, see Note 19.
Note 2. Summary of Significant Accounting Policies

The following reflects updates to the Company’s significant accounting policies disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Commission.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Examples of such estimates include determining the nature and timing of satisfaction of performance obligations as it relates to revenue recognition, the valuation of share-based awards, recoverability of long-lived assets, assessing intangible assets and goodwill for impairment, determining the incremental borrowing rate for operating leases, in addition to provisions for warranty, uncollectible accounts receivable, inventory obsolescence, sales returns, future price concessions and tax contingencies and estimates related tovaluation allowances as well the Tax Act enacted in December 2017,estimated useful lives of property, plant and estimates on the valuation of share-based awardsequipment and recoverability of long-lived assets and investments.acquired intangible assets. Actual results may materially differ from these estimates. On an ongoing basis, the Company reviews its estimates to ensure that these estimates appropriately reflect changes in its business or as new information becomes available.
Recent Accounting Standards
In December 2019,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

11

direct financing lease in accordance with the classification criteria in ASC 842-10-25-2 through 25-3; and (2) the lessor would have otherwise recognized a day-one loss. The amendments are effective for annual periods beginning after December 15, 2021 with early adoption permitted. The Company is currently assessing the impact of this ASU on its consolidated condensed financial statements.
In August 2020, FASB issued ASU No. 2020-06, "Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity." This ASU simplifies the accounting for convertible instruments by removing the separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature. As a result, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost. These changes will reduce reported interest expense and increase reported net income for entities that have issued a convertible instrument that was bifurcated according to previously existing rules. Also, this ASU requires the application of the if-converted method for calculating diluted earnings per share and the treasury stock method will be no longer available. The new guidance is effective for fiscal years beginning after December 15, 2021, with early adoption permitted no earlier than fiscal years beginning after December 15, 2020. Entities may adopt the guidance through either a modified retrospective method of transition or a fully retrospective method of transition. In applying the modified retrospective method, entities should apply the guidance to transactions outstanding as of the beginning of the fiscal year in which the amendments are adopted. The Company is currently assessing the impact this ASU will have on its consolidated condensed financial statements. The Company anticipates adopting the modified retrospective approach, which may result in a significant increase in its dilutive share-count as the result of calculating the impact of dilution from its convertible notes using the if-converted method. The Company also anticipates a decrease in interest expense resulting from the elimination of the original issuance discount. Under the modified retrospective approach, the Company anticipates recognizing the difference between the removal of the equity component of the convertible notes and the unamortized original issuance discount as an adjustment to beginning retained earnings when it adopts this new standard on January 1, 2022.
Adoption of New Accounting Standards
The Company adopted ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." This ASU provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Inter-bank Offered Rate ("LIBOR") or another reference rate expected to be discontinued. In January 2021, the FASB issued Accounting Standards Update ("ASU") 2021-01, "Reference Rate Reform (Topic 848): Scope." This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. The Company has elected to apply the hedge accounting expedients related to the probability and the assessments of effectiveness of LIBOR-indexed cash flow hedges upon a change in the critical terms of the derivative or the hedged transactions, and upon the end of relief under Topic 848. The Company has elected to continue the method of assessing effectiveness as documented in the original hedge documentation and elects to apply the expedient in ASC 848-50-35-17 (through 35-18) which allows the reference rate on the hypothetical derivative to match the reference rate on the hedging instrument. The adoption of this ASU did not have a material impact on the Company's consolidated financial statements and disclosures.
The Company adopted ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." This ASU removes specific exceptions to the general principles in Accounting Standards Codification ("ASC") Topic 740, "Accounting for Income Taxes" ("Topic 740") and simplifies certain U.S. GAAP requirements. ASU 2019-12 is effective for public filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. The Company is currently evaluating the impact this ASU will have on its consolidated condensed financial statements and disclosures.
Adoption of New Accounting Standards
On January 1, 2020, the Company adopted ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" ("Topic 326") utilizing the modified retrospective approach. This new standard is intended to improve financial reporting by requiring timelier recording of credit losses on the Company's trade account receivable and requires the measurement of all expected credit losses based on historical experience, current conditions, and reasonable and supportable forecasts. Upon the completion of the Company's assessment of Topic 326, the Company concluded that its prior methodology of estimating credit losses on its trade accounts receivable closely aligns with the requirements of the new standard, and therefore, the adoption of this ASU did not have a material impact on the Company consolidated condensed financial statements. For further information, see Note 4. Upon adoption of Topic 326, the Company recorded a cumulative adjustment to beginning retained earnings of $289,000, which reflected an increase to the allowance for doubtful accounts. As the impact to the Company's consolidated condensed financial statements in the first quarter of 2020 was not material, prior period information that is presented for comparative purposes has not been restated and continues to be reported under the accounting standards that were in effect during those periods.
On January 1, 2020, the Company adopted ASU No. 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement." The amendments in this ASU removed, modified or added to the disclosure requirements for fair value measurements in ASC Topic 820, "Fair Value Measurement" ("Topic 820"). The adoption of this ASU did not have a material impact on the Company's consolidated condensed financial statements andor disclosures.

Significant Accounting Policies

12



Note 2. Leases
The Company leases office space, manufacturing plants, warehouses, distribution centers, andCompany-operated Topgolf venues, vehicles, and equipment, as well as retail and/or outlet locations related to the TravisMathew and Jack Wolfskin businesses and the apparel business in Japan. Certain real estate leases include one or more options to extend the lease term, or options to purchase the leased property at the Company's sole discretion.discretion or escalation clauses that increase the

12

rent payments over the lease term. When deemed reasonably certain of exercise, the renewal and purchase options are included in the determination of the lease term and lease payment obligation, respectively. The depreciable life of assetsmachinery and equipment, computer equipment and leasehold improvements are limited by the expected lease term unless there is a transfer of title or purchase option reasonably certain of exercise. Certain leases may require an additional contingent rent payment based on a percentage of total gross sales greater than certain specified threshold amounts. The Company recognizes contingent rent expense when it is probable that sales thresholds will be reached during the fiscal year. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Right-of-use ("ROU") assets represent the right to use an underlying asset during the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. When readily determinable, the Company uses the rate implicit in the lease agreement in determining the present value of minimum lease payments. If the implicit rate is not provided, the Company uses its incremental borrowing rate based on information available at the lease commencement date, including the lease term. At the commencement of a lease, the ROU asset for operating leases is measured by taking the sum of the present value of the lease liability, initial direct costs (if any) and prepaid lease payments (if any), and deducting lease incentives (if any). After the lease commencement date and over the lease term, lease expense is recognized as a single lease cost on a straight-line basis. Lease agreements related to properties are generally comprised of lease components and non-lease components. Non-lease components, such as common area maintenance charges, property taxes and insurance, are expensed as incurred and recognized separately from the straight-line lease expense. Variable lease payments that do not depend on an index or rate, such as rental payments based on a percentage of retail salesrevenue over contractual levels, are expensed separately as incurred, and are not included in the measurement of the ROU asset and lease liability. Variable lease payments that depend on an index or rate, such as paymentsrates that are adjusted periodically for inflation, are included in the initial measurement of the ROU asset and lease liability and are recognized on a straight-line basis over the lease term.
In certain venue leasing arrangements, due to the Company’s involvement in the construction of leased assets, the Company is considered the owner of the leased assets for accounting purposes. In such cases, in addition to capitalizing the Company’s construction costs, the Company capitalizes the construction costs funded by the landlord related to its leased premises and recognizes a corresponding liability for those costs as construction advances during the construction period. At the end of the construction period, the Company applies sale and leaseback guidance to determine whether the underlying asset should be derecognized. When the application of the sale and leaseback guidance results in a sale, the asset and liability on the Company’s balance sheet are derecognized. When the application of the sale and leaseback guidance results in a failed sale, the asset remains on the Company’s balance sheet and is depreciated over its respective useful life or the lease term, whichever is shorter, and the liability is accounted for as a deemed landlord financing obligation. These deemed landlord financing obligations are generally non-cancelable leases with initial terms of 20 years containing various renewal options following the initial term and escalation clauses that increase the payments over the lease term.
With respect to the Company’s Toptracer operations, the Company enters into non-cancelable license agreements that provide software and hardware to driving ranges and hospitality and entertainment venues. These license agreements provide the customer the right to use Company-owned software and hardware products for a specified period generally ranging from three to five years. The software and hardware are a distinct bundle of goods that are highly interrelated. At the inception of the arrangement, lease classification is assessed which generally results in the license agreements being classified as sales-type leases. Upon lease commencement for sales-type leases, revenue is recognized consisting of initial payments received and the present value of payments over the non-cancellable term.
Revenue Recognition
The Company accounts for revenue recognition of products and services in accordance with Accounting Standards Codification (“ASC”) Topic 606, "Revenue from Contracts with Customers." See Note 4.
Product Revenue
The Company recognizes revenue from the sale of its golf clubs, golf balls, lifestyle and outdoor apparel, gear and accessories and golf apparel and accessories when it satisfies the terms of a sales order from a customer, and transfers control of the products ordered to the customer. Control transfers when products are shipped, and in certain cases, when

13

products are received by customers under certain contract terms. In addition, the Company recognizes revenue at the point of sale on transactions with consumers at its retail locations and retail shops at Topgolf locations. Sales taxes, value added taxes and other taxes that are collected in connection with revenue transactions are withheld and remitted to the respective taxing authorities. As such, these taxes are excluded from revenue. The Company elected to account for shipping and handling as activities to fulfill the promise to transfer the good. Therefore, shipping and handling fees that are billed to customers are recognized in revenue and the associated shipping and handling costs are recognized in cost of products as soon as control of the goods transfers to the customer.
The Company, in exchange for a royalty fee, licenses its trademarks and service marks to third parties for use on products such as golf apparel and footwear, practice aids and other golf accessories. Royalty income is recognized over time as underlying product sales occur, subject to certain minimum royalties, in accordance with the related licensing arrangements. Royalty income is included in the Company's Apparel, Gear and Other operating segment.
Revenues from gift cards are deferred and recognized when the cards are redeemed for product purchases. The Company’s gift cards have no expiration date. The Company recognizes revenue from unredeemed gift cards, otherwise known as breakage, when the likelihood of redemption becomes remote and under circumstances that comply with any applicable state escheatment laws. To determine when redemption is remote, the Company analyzes an aging of unredeemed cards (based on the date the card was last used or the activation date if the card has never been used) and compares that information with historical redemption trends. The Company uses this historical redemption rate to recognize breakage on unredeemed gift cards over the redemption period. The Company does not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions used to determine the timing of recognition of gift card revenues.
Services Revenue
The Company recognizes revenue from the operation of its Topgolf venues consisting primarily of revenues from food and beverage sales, event deposits, fees charged for gameplay, purchases of game credits and membership fees. In addition, services revenues are recognized through the redemption of gift cards, sponsorship contracts, franchise fees, leasing revenue, the Company’s World Golf Tour ("WGT") digital golf game and non-refundable deposits for venue reservations.
The Company's food and beverage revenue is recognized at the time of sale. Event deposits received from guests attributable to food and beverage purchases are deferred and recognized as revenue when the event is held. Food and beverage revenues are presented net of discounts. All sales taxes collected from guests are excluded from revenue in the consolidated condensed statements of operations and the obligation is included in accrued expenses on the Company’s consolidated condensed balance sheets until the taxes are remitted to the appropriate taxing authorities.
Fees charged for gameplay are recognized at the time of purchase. Event deposits received from guests attributable to gameplay purchases are deferred and recognized as revenue when the event is held. Purchases of game credits are deferred and recognized as revenue when: (i) the game credits are redeemed by the guest; or (ii) the likelihood of the game credits being redeemed by the guest is remote (“game credit breakage”). The Company uses historic game credit redemption patterns to determine the likelihood of game credit redemption. Game credit breakage is recorded consistent with the historic redemption pattern.
Membership fees received from guests are deferred and recognized as revenue over the estimated life of the associated membership, which is one year.
Revenues from gift cards to purchase for food and beverage or gameplay at Topgolf locations are deferred and recognized when the cards are redeemed, consistent with the gift card policy on product revenues.
The Company enters into sponsorship contracts that provide advertising opportunities to market to Topgolf guests in the form of custom displays, lobby displays, digital and print posters and other advertising at Topgolf venues and on Topgolf websites. Sponsorship contracts are typically for a fixed price over a specified length of time and revenue is generally recognized ratably over the contract period unless there is a different predominate pattern of performance.
The Company enters into international development agreements that grant franchise partners the right to develop, open and operate a certain number of venues within a particular geographic area. The franchise partner may be required to pay a territory fee upon entering into a development agreement and a franchise fee for each developed venue. The franchisee will also pay ongoing royalty fees based upon a percentage of sales. The initial franchise term provided for each

14

venue generally ranges from 15 to 20 years and provides the option for renewal. Revenue from sales-based royalties is recognized as the related sales occur.
Leasing revenue results from non-cancelable sales-type lease agreements that provide Toptracer software and hardware to driving ranges and hospitality and entertainment venues. See discussion above on sales-type leases.
The Company’s WGT digital golf game is a live service that allows players to play for free via web and mobile gaming platforms. Within the WGT digital golf game, players can purchase virtual currency to obtain virtual goods to enhance their game-playing experience. Revenues from purchases of virtual currency are deferred at the point of purchase and recognized as revenue over the average life of a player, determined using historic gameplay activity patterns.
Non-refundable deposits received for venue reservations are recognized at the time of purchase.
Variable Consideration
The Company offers certain discounts and promotions on its products and services. The amount of revenue the Company recognizes is based on the amount of consideration it expects to receive from customers. The amount of consideration is the sales price adjusted for estimates of variable consideration, including sales returns, discounts, and allowances as well as sales programs, sales promotions and price concessions that are offered by the Company as described below. These estimates are based on the amounts earned or to be claimed by customers on the related sales and are therefore recorded as reductions to net revenue and trade accounts receivable.
The Company’s primary sales program, the “Preferred Retailer Program,” offers potential rebates and discounts for participating retailers in exchange for providing certain benefits to the Company, including the maintenance of agreed upon inventory levels, prime product placement and retailer staff training. Under this program, qualifying retailers can earn either discounts or rebates based upon the amount of product purchased. Discounts are applied and recorded at the time of sale. For rebates, the Company estimates the amount of variable consideration related to the rebate at the time of sale based on the customer’s estimated qualifying current year product purchases. The estimate is based on the historical level of purchases, adjusted for any factors expected to affect the current year purchase levels. The estimated year-end rebate is adjusted quarterly based on actual purchase levels, as necessary. The Preferred Retailer Program is generally short-term in nature and the actual amount of rebate to be paid under this program is known as of the end of the year and paid to customers shortly after year-end. Historically, the Company's actual amount of variable consideration related to its Preferred Retailer Program has not been materially different from its estimates.
The Company also offers short-term sales program incentives, which include sell-through promotions and price concessions or price reductions. Sell-through promotions are generally offered throughout the product's life cycle of approximately two years, and price concessions or price reductions are generally offered at the end of the product's life cycle. The estimated variable consideration related to these programs is based on a rate that includes historical and forecasted data. The Company records a reduction to product revenues using this rate at the time of the sale. The Company monitors this rate against actual results and forecasted estimates and adjusts the rate as deemed necessary to reflect the amount of consideration it expects to receive from its customers. There were no material changes to the rate during the three months ended June 30, 2021 and 2020. Historically, the Company's actual amount of variable consideration related to these sales programs has not been materially different from its estimates.
The Company records an estimate for anticipated returns as a reduction of sales and cost of sales, and accounts receivable, in the period that the related sales are recorded. Sales returns are estimated based upon historical returns, current economic trends, changes in customer demands and sell-through of products. The Company also offers certain customers sales programs that allow for specific returns. The Company records a return liability as an offset to accounts receivable for anticipated returns related to these sales programs at the time of the sale based on the terms of the sales program. The cost recovery of inventory associated with this reserve is accounted for in other current assets. Historically, the Company’s actual sales returns have not been materially different from management’s original estimates.
Cost of Products
The Company’s cost of products is comprised primarily of variable costs that fluctuate with sales volumes, including raw materials and component costs, merchandise from third parties, conversion costs including direct labor and manufacturing overhead, and inbound freight, duties, and shipping charges. In addition, cost of products includes retail merchandise costs for products sold in retail shops within Topgolf venue facilities. Fixed overhead expenses include warehousing costs, indirect labor, and supplies, as well as depreciation expense associated with assets used to manufacture

15

and distribute products. In addition, cost of products includes adjustments to reflect inventory at its net realizable value, as well as adjustments for obsolescence and product warranties.
Cost of Services, Excluding Depreciation and Amortization
The Company’s cost of services primarily consists of food and beverage costs and transaction fees with respect to in-app purchases within the Company’s WGT digital golf game. In addition, cost of services includes costs associated with Topgolf's Toptracer license agreements classified as sales-type leases. Food and beverage costs are variable by nature, change with sales volume, and are impacted by product mix and commodity pricing. Cost of services excludes employee costs as well as depreciation and amortization.
Other Venue Expenses
Other venue expenses consists of salaries and wages, bonuses, commissions, payroll taxes, and other employee costs that directly support venue operations, in addition to rent and occupancy costs, property taxes, depreciation associated with venues, supplies, credit card fees and marketing expenses. Other venue expenses include both fixed and variable components and are therefore not directly correlated with revenue.
Venue Pre-Opening Costs
Pre-opening costs primarily include costs associated with activities prior to the opening of a new company-operated venue, as well as other costs that are not considered in the evaluation of ongoing performance. Pre-opening costs fluctuate based on the timing, size and location of new company-operated venues.
Selling, General and Administrative Expenses (SG&A)
SG&A expenses are comprised primarily of employee costs, advertising and promotional costs, tour expenses, legal and professional fees, travel expenses, building and rent expenses, depreciation charges (excluding those related to manufacturing and distribution operations), amortization of intangible assets, and other miscellaneous expenses.
Research and Development
Research and development expenses are comprised of costs to develop or significantly improve the Company's products and technology, which primarily include the salaries and wages of personnel engaged in research and development activities, research costs and depreciation expense. Other than software development costs qualifying for capitalization, research and development costs are expensed as incurred.
Restricted Cash
Restricted cash is primarily comprised of lender impound reserve accounts for development of one of the Company’s venues. The following is a summary of cash, cash equivalents and restricted cash as of June 30, 2021 and December 31, 2020 (in thousands):
June 30, 2021December 31, 2020
Cash and cash equivalents$415,204 $366,119 
Restricted cash2,469 0 
Total cash, cash equivalents and restricted cash$417,673 $366,119 
Inventories
Unless otherwise stated below, the Company's inventory is recorded at the lower of cost or net realizable value, which includes a reserve for excess, obsolete and/or unmarketable inventory. This reserve is regularly assessed based on current inventory levels, sales trends, and historical experience, as well as management’s estimates of market conditions and forecasts of future product demand, all of which are subject to change. The Company utilizes the standard costing method, determined on the first-in, first-out basis, for its golf equipment inventory and soft goods inventory sold under the TravisMathew, OGIO, Callaway and Jack Wolfskin brands. Golf equipment inventory, which is directly manufactured by the Company, includes finished goods, raw materials, labor and manufacturing overhead costs and work in process. The Company's soft goods product lines, which are manufactured by third-party contractors, primarily include finished good products. Toptracer hardware and software, food and beverage products and Topgolf-specific retail merchandise inventories are stated at weighted average cost.

16

Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over estimated useful lives generally as follows:
Buildings and improvements10-40 years
Machinery and equipment5-10 years
Furniture, computer hardware and equipment3-5 years
Internal-use software3-5 years
Production molds2-5 years
Buildings capitalized in conjunction with deemed landlord financing where the Company is deemed to be the accounting owner are depreciated, less residual value, over the shorter of 20 years or the lease term.
Normal repairs and maintenance costs are expensed as incurred. Expenditures that materially increase values, change capacities, or extend useful lives are capitalized. The related costs and accumulated depreciation of disposed assets are eliminated and any resulting gain or loss on disposition is recognized in earnings. Construction in-process consists primarily of costs associated with building improvements, machinery and equipment and venues under construction that have not yet been placed into service, unfinished molds as well as in-process internal-use software.
In accordance with ASC Topic 350-40, “Internal-Use Software,” the Company capitalizes certain costs incurred in connection with developing or obtaining internal use software. Costs incurred in the preliminary project stage are expensed. All direct external costs and internal direct labor costs incurred to develop internal-use software during the development stage are capitalized and depreciated using the straight-line method over the remaining estimated useful lives. Costs such as maintenance and training are expensed as incurred. In accordance with ASC Topic 985-20, “Costs of Software to Be Sold, Leased, or Marketed,” costs incurred to establish the technological feasibility of software to be sold, leased, or otherwise marketed are expensed and recorded in research and development expense on the consolidated condensed statements of operations. Once technological feasibility is established, costs are capitalized until the product is available for general use.
Goodwill and Intangible Assets
The Company's intangible assets, which are comprised of goodwill, trade names, trademarks, service marks, trade dress, customer and distributor relationships, developed technology, non-competes, patents and liquor licenses, were acquired in connection with the acquisitions of Odyssey Sports, Inc., FrogTrader, Inc., OGIO, TravisMathew, Jack Wolfskin, certain foreign distributors and the recently completed merger with Topgolf on March 8, 2021.
In accordance with ASC Topic 350, “Intangibles—Goodwill and Other,” goodwill and intangible assets with indefinite lives are not amortized but instead are measured for impairment at least annually or more frequently when events indicate that an impairment exists. The Company calculates impairment as the excess of the carrying value of goodwill and other indefinite-lived intangible assets over their estimated fair value of the reporting unit. If the carrying value of the reporting unit exceeds the estimate of fair value a write-down is recorded. To determine fair value, the Company uses discounted cash flow estimates, quoted market prices, royalty rates when available and independent appraisals when appropriate.
During the second quarter of 2020, due to the significant disruptions caused by the COVID-19 pandemic on the Company's operations, the Company performed a qualitative assessment considering the macroeconomic conditions caused by the COVID-19 pandemic, and the potential impact on the Company's revenue and operating income for the remainder of fiscal 2020 and potentially beyond. As a result, the Company determined that there were indicators of impairment, and proceeded with a quantitative assessment to test the recoverability of goodwill for all its reporting units, in addition to the recoverability of indefinite-lived intangible assets, consisting primarily of the trade names and trademarks associated with the Company's brands. Based on this assessment, the Company determined that the fair values of the Jack Wolfskin reporting unit and the Jack Wolfskin trade name were less than their carrying values. As a result, during the second quarter of 2020, the Company recognized impairment losses to write-off the goodwill associated with the Jack Wolfskin reporting unit and write-down the trade name associated with the Jack Wolfskin brand name to its new estimated fair value. There were no further impairments recognized over the remainder of 2020. For further discussion, see Note 9.
Intangible assets that are determined to have definite lives are amortized over their estimated useful lives and are measured for impairment in accordance with ASC Topic 360-10-35, “Impairment or Disposal of Long-Lived Assets” as

17

discussed above, only when events or circumstances indicate the carrying value may be impaired. See Note 9 for further discussion of the Company’s intangible assets.
Costs related to the development, maintenance, or renewal of internally developed intangible assets that are inherent in the Company's continuing business and relate to the Company as a whole, that were not acquired as a part of a business combination or asset acquisition, are expensed as incurred.

Note 3. Leases
The Company leases office space, manufacturing plants, warehouses, distribution centers, Company-operated Topgolf venues, vehicles, and equipment, as well as retail and/or outlet locations related to the TravisMathew and Jack Wolfskin businesses and the apparel business in Japan. The Company also enters into non-cancellable agreements with driving ranges and hospitality and entertainment venues to license Toptracer software and hardware, which are classified as sales-type leases.
Sales-Type Leases
Leasing revenue attributed to sales-type leases was $10,986,000 and $14,879,000 for the three and six months ended June 30, 2021, respectively, which is comprised of $13,585,000 in initial licensing payments and $1,294,000 in monthly lease payments. Revenue from sales-type leases are included in services revenues within the consolidated condensed statements of operations. Leasing receivables related to the Company’s net investment in sales-type leases are as follows (in thousands):
Balance Sheet LocationJune 30, 2021
Leasing receivables, net - currentOther current assets$9,983 
Leasing receivables - long-termOther assets36,309 
$46,292 
Operating and Finance Leases
In response to the COVID-19 pandemic, the Company received certain rent concessions in the form of deferments and abatement on a few of its operating leases. The Company opted to not modify these leases in accordance towith the FASB Staff Q&A-Topic 842 and Topic 840: "Accounting For Lease Concessions Related to the Effects of the COVID-19 Pandemic" issued in April 2020. The impact of2020, and account for these concessions as if they were made under the enforceable rights included in the original agreement. Rent deferments were recorded as a payable and paid at a later negotiated date. Rent abatements were recognized as reductions in rent expense over the periods covered by the abatement period. As of June 30, 2021 the Company recorded rent deferments of $10,697,000, of which $1,804,000 was not material torecorded in accrued expenses, and $8,894,000 was recorded in other long-term liabilities in the accompanying Consolidated Condensed Balance Sheetconsolidated condensed balance sheets. Of the rent deferments recorded as of June 30, 2021, $10,309,000 was recorded in connection with the Topgolf merger in March 2021. As of December 31, 2020 and the Consolidated Condensed StatementsCompany recorded rent deferments of Operations$687,000. There were 0 rent abatements recorded for the three and six months ended June 30, 2021 or 2020.
Supplemental balance sheet information related to leases is as follows (in thousands):
Balance Sheet LocationJune 30, 2021December 31, 2020
Operating Leases
ROU assets, netOperating lease ROU assets, net$1,057,225 $194,776 
Lease liabilities, short-termOperating lease liabilities, short-term$55,492 $29,579 
Lease liabilities, long-termOperating lease liabilities, long-term$1,174,780 $177,996 
Finance Leases
ROU assets, net,Other assets$2,077 $1,003 
Lease liabilities, short-termAccrued expenses$1,169 $252 
Lease liabilities, long-termLong-term other$1,672 $447 
 Balance Sheet Location 
June 30,
2020
 December 31, 2019
Operating leases  
  
ROU assets, netOperating lease ROU assets, net $189,381
 $160,098
Lease liabilities, short-termOperating lease liabilities, short-term $28,772
 $26,418
Lease liabilities, long-termOperating lease liabilities, long-term $172,093
 $137,696
      
Finance Leases  
  
ROU assets, net,Other assets $1,065
 $1,263
Lease liabilities, short-termAccounts payable and accrued expenses $527
 $589
Lease liabilities, long-termLong-term other $539
 $558




13


The components of lease expense are as follows (in thousands):

18

Three Months Ended
June 30,		 Six Months Ended
June 30,		Three Months Ended June 30,Six Months Ended June 30,
2020 2019 2020 20192021202020212020
Operating lease costs$10,279
 $10,702
 $21,301
 $19,599
Operating lease costs$40,915 $10,279 $61,412 $21,301 
Financing lease costs:       Financing lease costs:
Amortization of right-of-use assets153
 220
 320
 477
Amortization of right-of-use assets854 153 1,177 320 
Interest on lease liabilities11
 30
 22
 55
Interest on lease liabilities26 11 46 22 
Total financing lease costs164
 250
 342
 532
Total financing lease costs880 164 1,223 342 
Variable lease costs587
 846
 1,883
 2,186
Variable lease costs1,953 587 2,532 1,883 
Total lease costs$11,030
 $11,798
 $23,526
 $22,317
Total lease costs$43,748 $11,030 $65,167 $23,526 

Other information related to leases was as follows (in thousands):
  Six Months Ended
June 30,
Supplemental Cash Flows Information 2020 2019
Cash paid for amounts included in the measurement of lease liabilities:    
Operating cash flows from operating leases $18,227
 $20,100
Operating cash flows from finance leases $22
 $55
Financing cash flows from finance leases $206
 $232
     
Lease liabilities arising from new ROU assets:    
Operating leases $53,417
 $7,679
Finance leases $130
 $81

Six Months Ended June 30,
Supplemental Cash Flows Information20212020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$52,513 $18,227 
Operating cash flows from finance leases$311 $22 
Financing cash flows from finance leases$200 $206 
Lease liabilities arising from new ROU assets:
Operating leases$33,000 $53,417 
Finance leases$188 $130 
 June 30,
2020		 December 31,
2019
Weighted average remaining lease term (years):   
Operating leases10.1
 10.4
Finance leases2.8
 2.8
    
Weighted average discount rate:   
Operating leases5.4% 5.7%
Finance leases4.0% 4.2%

June 30, 2021December 31, 2020
Weighted average remaining lease term (years):
Operating leases14.49.8
Finance leases2.63.0
Weighted average discount rate:
Operating leases8.2 %5.3 %
Finance leases5.4 %3.9 %
Future minimum lease obligations as of June 30, 20202021 were as follows (in thousands):
 Operating LeasesFinance Leases
Remainder of 2021$67,587 $584 
2022149,746 1,261 
2023147,019 771 
2024143,893 367 
2025142,622 24 
Thereafter1,514,983 8 
Total future lease payments2,165,850 3,015 
Less: imputed interest935,578 174 
Total$1,230,272 $2,841 
 Operating Leases Finance Leases
Remainder of 2020$20,417
 $418
202134,965
 270
202230,389
 229
202326,453
 119
202422,963
 46
Thereafter127,756
 32
Total future lease payments262,943
 1,114
Less: imputed interest62,078
 47
Total$200,865
 $1,067
Lease payments exclude $896,854,000 related to 16 non-cancellable leases that have been signed as of June 30, 2021 but have not yet commenced. Of the 16 leases, 3 are scheduled to commence in 2021. The Company's minimum capital commitment related to these leases was approximately $178,000,000 as of June 30, 2021. As the Company is actively involved in the construction of these properties, the Company recorded $124,731,000 in construction costs within property, plant and equipment as of June 30, 2021. Additionally, as of June 30, 2021, the Company recorded $63,636,000 in construction advances from the landlord in connection with properties. The Company will determine the lease classification


19

14

for properties currently under construction at the end of the construction period. The initial base term upon the commencement of these leases is generally 20 years.
Financing Obligations (Deemed Landlord Financing Contracts)
During the six months ended June 30, 2021, the Company accounted for 4 deemed landlord financing (“DLF”) contracts that did not meet the sale-leaseback criteria upon the completion of construction in accordance with ASC Topic 842. As of June 30, 2021, the Company was the accounting owner of a total of 12 buildings under DLF contracts. As of June 30, 2021, the net book value included in property, plant and equipment on the consolidated condensed balance sheets related to these buildings totaled $323,590,000. Buildings capitalized in conjunction with DLF contracts are depreciated, less residual value, over 20 years or over their estimated useful life, whichever is shorter.
Supplemental balance sheet information related to DLF contracts is as follows (in thousands):
Balance Sheet LocationJune 30, 2021
DLF contracts liabilities, short-termAccrued expenses$516 
DLF contracts liabilities, long-termDeemed landlord financing, long-term$263,219 
The components of DLF contracts expenses are as follows (in thousands):
Three Months Ended
June 30, 2021		Six Months Ended
June 30, 2021
Amortization of DLF contracts$1,337 $1,704 
Interest on DLF contracts5,638 7,146 
Total DLF contracts expenses$6,975 $8,850 
Other information related to DLF contracts was as follows (in thousands):
Supplemental Cash Flows InformationSix Months Ended
June 30, 2021
Financing cash flows from DLF contracts$8,789 

June 30, 2021
Weighted average remaining lease term (years)19.4
Weighted average discount rate8.9 %
Future minimum financing obligations related to DLF contracts as of June 30, 2021 were as follows (in thousands):
Remainder of 2021$9,845 
202223,225 
202323,062 
202423,253 
202523,581 
Thereafter412,498 
Total future lease payments515,464 
Less: imputed interest251,729 
Total$263,735 
Note 3.4. Revenue Recognition
The Company primarily recognizes revenue from the sale of its products whichand operation of its venues. Revenue from product sales include golf clubs, golf balls, lifestyle and outdoor apparel, gear and accessories in addition toand 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. In addition, the Company recognizesThe

20

Company's product revenues also includes royalty income from third parties from the licensing of certain soft goods products,products. Revenue from services primarily includes venue sales of food and beverage and fees charged for gameplay, and the sale of game credits to guests. Service revenues also include franchise fees from franchised international venues, as well as revenue from gift cards.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. In addition, theThe Company enters into licensing agreements with certain distributors.distributors and, with respect to the Company's Toptracer operations, driving ranges and hospitality and entertainment venues.
The Company has two3 operating and reportable segments, namely the Golf Equipment operating segment, and the Apparel, Gear and Other operating segment, and the Topgolf operating segment. On March 8, 2021, the Company completed its merger with Topgolf. The Company’s results of operations, therefore, include the operations of Topgolf from that date forward. Topgolf contributed $325,453,000 in net revenues for the three months ended June 30, 2021, and $418,090,000 for the six months ended June 30, 2021, which includes approximately 4 months of revenues since the completion of the merger.
The following table presents the Company's revenue disaggregated by major product category and operating and reportable segment (in thousands):
Operating and Reportable Segments
Three Months Ended June 30, 2021Three Months Ended June 30, 2020
Golf EquipmentApparel, Gear
& Other		TopgolfTotalGolf EquipmentApparel, Gear
& Other		Total
Major revenue categories:
Golf clubs$319,973 $— $— $319,973 $156,040 $— $156,040 
Golf balls81,286 — — 81,286 53,903 — 53,903 
Apparel— 91,413 — 91,413 — 36,302 36,302 
Gear, accessories & other— 95,516 — 95,516 — 50,751 50,751 
Venues— — 303,424 303,424 — — — 
Other business lines— — 22,029 22,029 — — — 
$401,259 $186,929 $325,453 $913,641 $209,943 $87,053 $296,996 
Operating and Reportable Segments
Six Months Ended June 30, 2021Six Months Ended June 30, 2020
Golf EquipmentApparel, Gear
& Other		TopgolfTotalGolf EquipmentApparel, Gear
& Other		Total
Major product category:
Golf Clubs$636,326 $— $— $636,326 $407,264 $— $407,264 
Golf Balls141,815 — — 141,815 94,340 — 94,340 
Apparel— 186,703 — 186,703 — 113,592 113,592 
Gear, Accessories & Other— 182,328 — 182,328 — 124,076 124,076 
Venues— — 388,594 388,594 — — — 
Other business lines— — 29,496 29,496 — — — 
$778,141 $369,031 $418,090 $1,565,262 $501,604 $237,668 $739,272 
The Topgolf segment included $3,221,000 and $4,195,000, respectively, in salesof golf clubs, golf balls, and apparel sales, which are reflected within product sales within the consolidated condensed statements of operations for the three and six months ended June 30, 2021.
The Apparel, Gear and Other and Topgolf segments include royalty income from licensing agreements of $22,240,000 and $33,108,000, respectively, for the three and six months ended June 30, 2021. For the three months and six months ended June 30,2020, the Company recognized royalty income of $3,552,000 and $9,097,000, respectively.

21

 Operating and Reportable Segments
 Three Months Ended June 30, 2020 Three Months Ended June 30, 2019
 Golf Equipment Apparel, Gear & Other Total Golf Equipment Apparel, Gear & Other Total
Major product category:       
Golf Clubs$156,040
 $—
 $156,040
 $223,741
 $—
 $223,741
Golf Balls53,903
 —
 53,903
 68,612
 —
 68,612
Apparel—
 36,302
 36,302
 —
 73,195
 73,195
Gear, Accessories & Other—
 50,751
 50,751
 —
 81,160
 81,160
 $209,943
 $87,053
 $296,996
 $292,353
 $154,355
 $446,708
As of December 31, 2020, the Company's balance for deferred revenue was $2,546,000, which included deferred revenue from gift cards. In connection with the merger with Topgolf completed on March 8, 2021, the Company acquired deferred revenue related to event deposits, lifetime and premium memberships, prepaid sponsorships, virtual currency and game credits related to the WGT digital golf game, and gift cards. As of June 30, 2021, the Company’s deferred revenue balance was $83,580,000.
The Company recognized revenues of $97,232,000 and $125,278,000 related to the redemption and amortization of deferred revenue, including gift card breakage, during the three and six months ended June 30, 2021, respectively. The Company recognized revenues of $454,000 and $1,030,000 related to the redemption and breakage of gift cards during the three and six months ended June 30, 2020, respectively.
 Operating and Reportable Segments
 Six Months Ended June 30, 2020 Six Months Ended June 30, 2019
 Golf Equipment 
Apparel, Gear
& Other
 Total Golf Equipment 
Apparel, Gear
& Other
 Total
Major product category:       
Golf Clubs$407,264
 $—
 $407,264
 $485,526
 $—
 $485,526
Golf Balls94,340
 —
 94,340
 130,446
 —
 130,446
Apparel—
 113,592
 113,592
 —
 169,441
 169,441
Gear, Accessories & Other—
 124,076
 124,076
 —
 177,492
 177,492
 $501,604
 $237,668
 $739,272
 $615,972
 $346,933
 $962,905
The following table summarizes revenue by geographical areas in which the Company operates (in thousands):
Three Months Ended
June 30,		Six Months Ended
June 30,
2021202020212020
Revenue by Major Geographic Region:
United States$642,757 $171,714 $1,030,979 $389,217 
Europe120,999 50,074 229,344 146,793 
Japan61,861 24,640 133,747 101,987 
Rest of World88,024 50,568 171,192 101,275 
$913,641 $296,996 $1,565,262 $739,272 
The Company sells its golf equipment products and apparel, gear and accessories in the United States and internationally, with its principal international regions being Japan and Europe. On a regional basis, sales of golf equipment products are generally higher than sales of apparel gear and other products, with the exceptionin most regions other than Europe, which has a higher concentration of Europeapparel, gear and other sales as a result of the Jack Wolfskin, acquisition completedwhich is headquartered in January 2019.


15


The following table presents information about the geographical areas in which the Company operates. Revenues are attributed to the location to which the product was shipped (in thousands):
        
 Three Months Ended
June 30,		 Six Months Ended
June 30,
 2020 2019 2020 2019
Major Geographic Region:       
United States$171,714
 $247,419
 $389,217
 $496,420
Europe50,074
 81,630
 146,793
 208,243
Japan24,640
 55,676
 101,987
 128,904
Rest of World50,568
 61,983
 101,275
 129,338
 $296,996
 $446,708
 $739,272
 $962,905


Product Sales
The Company recognizesGermany. Venues revenue from the sale of its products when it satisfies the terms of a sales order from a customer, and transfers control of the products ordered to the customer. Control transfers 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.
Royalty Income
Royalty income is recognized over time in net sales as underlying product sales occur, subject to certain minimum royalties, in accordance with the related licensing arrangements. Royalty income is includedhigher in the Company's Apparel, Gear andUnited States, as Topgolf has more domestic venues than international. Other operating segment. Total royalty income for the three months ended June 30, 2020 and 2019 was $3,552,000 and $5,467,000, respectively, and total royalty income for the six months ended June 30, 2020 and 2019 was $9,097,000 and $10,145,000, respectively.
Gift Cards
Revenues from gift cards are deferred and recognized when the cards are redeemed. The Company’s gift cards have no expiration date. The Company recognizesbusiness lines revenue from unredeemed gift cards, otherwise known as breakage, when the likelihood of redemption becomes remote and under circumstances that comply with any applicable state escheatment laws. To determine when redemption is remote, the Company analyzes an aging of unredeemed cards (based on the date the card was last used or the activation date if the card has never been used) and compares that information with historical redemption trends. The Company uses this historical redemption rate to recognize breakage on unredeemed gift cards over the redemption period. The Company does not believe there is a reasonable likelihood that there will be a material changepredominantly in the future estimates or assumptions used to determine the timing of recognition of gift card revenues. As of June 30, 2020United States and December 31, 2019, the Company's deferred revenue liability for gift cards was $1,828,000 and $2,190,000, respectively. During the three months ended June 30, 2020 and 2019, the Company recognized $454,000 and $657,000 of deferred gift card revenue, respectively. During the six months ended June 30, 2020 and 2019, the Company recognized $1,030,000 and $1,090,000 of deferred gift card revenue, respectively.
Variable Consideration
The amount of revenue the Company recognizes is based on the amount of consideration it expects to receive from customers. The amount of consideration is the sales price adjusted for estimates of variable consideration, including sales returns, discounts and allowances as well as sales programs, sales promotions and price concessions that are offered by the Company as described below. These estimates are based on the amounts earned or to be claimed by customers on the related sales, and are therefore recorded as reductions to sales and trade accounts receivable.
The Company’s primary sales program, the “Preferred Retailer Program,” offers potential rebates and discounts for participating retailers in exchange for providing certain benefits to the Company, including the maintenance of agreed upon


16


inventory levels, prime product placement and retailer staff training. Under this program, qualifying retailers can earn either discounts or rebates based upon the amount of product purchased. Discounts are applied and recorded at the time of sale. For rebates, the Company estimates the amount of variable consideration related to the rebate at the time of sale based on the customer’s estimated qualifying current year product purchases. The estimate is based on the historical level of purchases, adjusted for any factors expected to affect the current year purchase levels. The estimated year-end rebate is adjusted quarterly based on actual purchase levels, as necessary. The Preferred Retailer Program is generally short-term in nature and the actual amount of rebate to be paid under this program is known as of the end of the year and paid to customers shortly after year-end. Historically, the Company's actual amount of variable consideration related to its Preferred Retailer Program has not been materially different from its estimates.
The Company also offers short-term sales program incentives, which include sell-through promotions and price concessions or price reductions. Sell-through promotions are generally offered throughout the product's life cycle of approximately two years, and price concessions or price reductions are generally offered at the end of the product's life cycle. The estimated variable consideration related to these programs is based on a rate that includes historical and forecasted data. The Company records a reduction to net sales using this rate at the time of the sale. The Company monitors this rate against actual results and forecasted estimates and adjusts the rate as deemed necessary in order to reflect the amount of consideration it expects to receive from its customers. There were no material changes to the rate during the three and six months ended June 30, 2020 and 2019. Historically, the Company's actual amount of variable consideration related to these sales programs has not been materially different from its estimates.Europe.
The Company records an estimate for anticipated returns as a reduction of salesproduct revenues and cost of sales,products, and accounts receivable, in the period that the related sales are recorded. Sales returns are estimated based upon historical returns, current economic trends, changes in customer demands and sell-through of products. The Company also offers certain customers sales programs that allow for specific returns. The Company records a return liability as an offset to accounts receivable for anticipated returns related to these sales programs at the time of 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. The Company's provision for sales returns will fluctuate with the seasonality of the business, while actual sales returns are generally more heavily weighted toward the back half of the year as the golf season comes to an end. Historically, the Company’s actual sales returns have not been materially different from management’s original estimates.
The following table provides a reconciliation of the activity related to the Company’s sales return reserve (in thousands):
Three Months Ended
June 30,
 Six Months Ended
June 30,
2021202020212020
Beginning balance$60,784 $50,992 $43,986 $34,314 
Provision29,000 26,374 64,890 62,010 
Sales returns(18,192)(20,529)(37,284)(39,487)
Ending balance$71,592 $56,837 $71,592 $56,837 
Note 4.5. 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 3.4. 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 326. Specific allowance amounts

22

are established to record the appropriate provision for customers that have a higher probability of default. An estimate of credit losses for the remaining customers in the aggregate is based upon historical bad debts, current customer receivable balances, age of customer receivable balances, the customers' financial condition, all of which are subject to change. Additionally, the Company’s monitoring activities now consider future reasonable and supportable forecasts of economic conditions to adjust all general reserve percentages as necessary. Balances are written off when determined to be uncollectible. The Company considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic and determined, based on current information, that the estimate of credit losses as of June 30, 20202021 was not significantly impacted.
Actual uncollected amounts have historically been consistent with the Company’s expectations. The Company's payment terms on its receivables from customers are generally 60 days or less.


17


The following table provides a reconciliation of the activity related to the Company’s allowance for estimated credit losses (in thousands):
 Three Months Ended
June 30,		 Six Months Ended
June 30,
 2020 2019 2020 2019
     (in thousands)
Beginning balance as of January 1$6,140
 $5,474
 $5,992
 $5,610
Adjustment due to the adoption of Topic 326—
 —
 289
 —
Provision for credit losses3,619
 265
 3,632
 142
Write-off of uncollectible amounts, net of recoveries(815) (240) (969) (253)
Ending balance as of June 30$8,944
 $5,499
 $8,944
 $5,499

Three Months Ended
June 30,		Six Months Ended
June 30,
2021202020212020
Beginning balance$6,801 $6,140 $8,841 $5,992 
Adjustment due to the adoption of Topic 3260 0 0 289 
(Recovery)/provision for credit losses152 3,619 (226)3,632 
Write-off of uncollectible amounts, net of recoveries(252)(815)(1,914)(969)
Ending balance$6,701 $8,944 $6,701 $8,944 
Note 5.6. Business Combinations
Acquisition of JW Stargazer Holding GmbHMerger with Topgolf International, Inc.
In January 2019,On March 8, 2021, the Company completed its previously announced merger with Topgolf, pursuant to the acquisitionterms of JW Stargazer Holding GmbH,an Agreement and Plan of Merger, dated as of October 27, 2020 (the “Merger Agreement”). Topgolf is a leading tech-enabled golf entertainment business, with an innovative platform that comprises its state-of-the-art open-air golf and entertainment venues, revolutionary Toptracer ball-tracking technology and innovative media platform with a differentiated position in eSports. The combined company will benefit from a compelling family of brands with reach across multiple channels including retail, venues, e-commerce and digital communities.
Pursuant to the ownerterms of the international, premium outdoor apparel, gearMerger Agreement, at the closing of the merger, the Company issued approximately 89,776,450 unrestricted and accessories brand, Jack Wolfskin, for €457,394,000 (including cash acquiredfully vested shares of €50,984,000) orits common stock to the stockholders of Topgolf (excluding approximately $521,201,000 (including cash acquired12,329,721 shares of $58,096,000) (using the exchange rateCompany’s common stock that would have been allocated to the Company in effectthe merger based on the acquisition date), subjectshares 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 working capital adjustments.purchase a number of shares of Callaway common stock, and certain outstanding restricted stock awards of Topgolf, into 187,568 shares of Callaway common stock (together, the "replacement awards"). The Company financed the acquisition with a Term Loan B facilityincluded $33,051,000 in the aggregate principal amount of $480,000,000 (see Note 6). Jack Wolfskin designs premium outdoor apparel, gear and accessories targeted at the active outdoor and urban outdoor customer categories. This acquisition further enhanced the Company's lifestyle category and provides a platform for future growthconsideration transferred in the active outdoor and urban outdoor categories,merger for these replacement awards, which represents the Company believes are complementaryfair value of the vested portion the replacement awards. The unvested portion of these replacement awards related to its portfolio of brands and product capabilities.future services that will be rendered in the post-combination period will be recognized as compensation expense over the remaining vesting period. In addition, the Company anticipates it will realize synergiesconverted issued and outstanding warrants to purchase certain preferred shares of Topgolf into a warrant to purchase a number of shares of Callaway common stock. The fair value of the consideration transferred in the merger related to these warrants totaled $1,625,000. The purchase consideration, together with respectthe 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 supply chain operations as well as warehousingthe merger, owned approximately 51.3% of

23

the outstanding shares of the combined company, and distribution activities.former Topgolf stockholders, other than Callaway, owned approximately 48.7% of the outstanding shares of the combined company.
The Company allocated the purchase price to the net identifiable tangible and intangible assets acquired and liabilities assumed based on their preliminary estimated fair values as of the date of acquisition. Identifiable intangible assets include the Topgolf trade name, developed technology, Topgolf's investment in Swing Suite golf and multi-sport simulator, customer relationships and liquor licenses. The excess of the purchase price over the estimated fair value of the net assets and liabilities was allocated to goodwill. The Company determined the preliminary estimated fair values after review and consideration of relevant information as of the acquisition date, including discounted cash flows, quoted market prices and estimates made by management. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are preliminary based on management's estimates and assumptions and may be subject to change as additional information is received and certain tax returns are finalized. We expect to finalize the valuation as soon as practicable, but not later than one year from the acquisition date.
The allocation of the purchase price presented below was based on management's preliminary estimate of the fair values of the acquired assets and assumed liabilities using valuation techniques including income, cost and market approaches. These valuation techniques incorporate the use of expected future revenues, cash flows and growth rates as well as estimated discount rates. Current and noncurrent assets and liabilities are valued at historical carrying values, which approximates fair value. Inventory was valued using the net realizable value, approach, which was based on the estimated selling price in the ordinary course of business less reasonable disposal costs and a profit on the disposal efforts. The customer and distributor relationships were valued under the income approach based on the present value of future earnings. The Company amortizes the fair value of these relationships over a 10-year period.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 5.0%2.5%, which is reflective of royalty rates paid in market transactions, and a discount rate of 10.0%7.0% to 8.5% on the future cash flows generated by the net after-tax savings. The goodwill of $150,180,000 arising from the acquisition consists largelyfair value of the synergies thatTopgolf hitting bays, Toptracer ball-tracking technology and the WGT digital game was based on a combination of valuation methodologies, including the residual net income approach, royalty savings income approach and the cost approach. Customer relationships and liquor licenses were expected from combiningvalued using the operationsreplacement cost method. The Company amortizes the fair value of the Companyfinite-lived intangibles, which include technology and Jack Wolfskin. Due to the recent significant business disruptionscustomer relationships, over a period ranging between one and challenges caused by the COVID-19 pandemic, the Company performed a quantitative assessment of goodwill and determined that the goodwill associated with its Jack Wolfskin reporting unit was impaired. As a result, the Company recorded an impairment charge of $148,375,000 in the second quarter of 2020, in addition to an impairment charge of $25,894,000 related to the Jack Wolfskin trade name (see Note 9).
As of December 31, 2019,ten years. Additionally, the Company completed its evaluation of information that existed as of the acquisition date and finalized the purchase price allocation of the underlying acquired assets and liabilities. The resulting adjustments were offset against goodwill. The final assessment included the completion of thea market analysis of the assumed operating and deemed landlord financed leases to determine if the terms of these leases are favorable or unfavorable relative to market terms. The analysis resulted in a net unfavorable adjustment in the underlying value of the right-of-use asset of each lease. The Company also completed a replacement cost analysis of property, plant and equipment, which resulted in an overall step-up in value. The Company based the estimated fair value of the debt assumed on a market credit rating, current interest rates and repayment terms, which resulted in an overall decrease in value. As of June 30, 2021, the completionCompany did not complete its assessment of the fair value assessment of the right-of-use assets of operating and deemed landlord financed leases, and deferred taxes acquired.taxes. Additionally, the Company is still in the process of reviewing and evaluating fair value estimates as included herein. Upon the completion of these assessments, the Company will adjust the preliminary purchase price allocation accordingly. After assessing the preliminary fair value of the net assets acquired and liabilities assumed, the Company recorded goodwill of $1,965,321,000, of which the Company attributed $1,402,101,000 to the future revenues and growth potential of the Topgolf business, and $563,220,000 to the synergies the Company anticipates from leveraging the Topgolf business to expand its golf equipment and apparel businesses. For the operating segment allocation of goodwill, see Note 9. As a non-taxable stock acquisition, the Company does not expect the value attributable to the acquired intangible assetsintangibles and goodwill are notto be tax deductible, accordingly, the Company recognized a net


18


deferred tax liability of $77,079,000, including a valuation reserve of $8,281,000 on certain deferred tax assets. In addition, the Company recognized certain adjustments on income taxes receivable and long-term income taxes payable. The Company's final assessment also included adjustments related to certain sales returns reserves and inventory obsolescence reserves, and adjustments to the useful lives of certain property, plant and equipment. All of the goodwill was assigned to the Apparel, Gear and Other operating segment.deductible.
In connection with the acquisition,merger, during the yearsix months ended December 31, 2019,June 30, 2021, the Company recognized transaction costs of approximately $9,987,000,$16,199,000, consisting primarily of which $1,603,000advisor, legal, valuation and $4,723,000 was recognizedaccounting fees. These transaction costs were recorded in selling, general and& administrative expenses duringexpenses. During the three and six months ended June 30, 2019. There were 02020, the Company recognized $444,000 in transaction costs incurred duringassociated with the three and six months ended June 30, 2020. 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).merger.

24

The following table summarizes the fair values of the assets acquired and liabilities assumed as of the acquisition date based on the preliminary purchase price allocation (in thousands):
 At 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(1)
 239,295
Intangibles - retail partners & distributor relationships 38,743
Goodwill(1)
 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
(1)In the second quarter of 2020, the Company wrote down goodwillAt March 8, 2021
Assets Acquired
Cash$171,294 
Accounts receivable11,277 
Inventories13,828 
Other current assets52,233 
Property and the Jack Wolfskinequipment1,018,647 
Operating lease right-of-use assets833,812 
Investments28,162 
Other assets33,664 
Intangibles - trade name994,200 
Intangibles - technology & customer relationships91,929 
Goodwill1,402,101 
Total assets acquired4,651,147 
Liabilities Assumed
Accounts Payable and accrued liabilities90,140 
Accrued employee costs36,992 
Construction advances60,333 
Deferred revenue64,359 
Other current liabilities7,821 
Long-term debt535,096 
Deemed landlord financing179,718 
Operating lease liabilities1,023,338 
Other long-term liabilities23,539 
Deferred tax liabilities144,181 
Net assets acquired$2,485,630 
Goodwill allocated to their fair values, which resultedother business units563,220 
Total purchase price and consideration transferred in impairment charges of $148,375,000 and $25,894,000, respectively (see Note 9).the merger$3,048,850 

Supplemental Pro-Forma Information (Unaudited)
The following table presents supplemental pro-forma information for the three and six months ended June 30, 2021 and 2020 as if the merger with Topgolf had occurred on January 1, 2020. These amounts have been calculated after applying the Company's accounting policies and are based upon currently available information. For this analysis, the Company assumed that gains and costs associated with the merger, including a gain of $252,531,000 recognized on the Company's pre-acquisition investment in Topgolf, acquisition costs of $16,199,000, the amortization of estimated intangible assets and other fair value adjustments, as well as the tax effect on those costs, and a valuation allowance on certain acquired net operating losses and tax credit carryforwards (see Note 6), were recognized as of January 1, 2020. Pre-acquisition net sales and net income amounts for Topgolf were derived from the books and records of Topgolf prepared prior to the acquisition and are presented for informational purposes only and do not purport to be indicative of the results of future operations or of the results that would have occurred had the acquisition taken place as of the dates noted below.
Three Months Ended
June 30,		Six Months Ended
June 30,
2021202020212020
(in thousands)(in thousands)
Net revenues$913,641 $342,767 $1,708,206 $1,008,901 
Net income (loss)$59,552 $(272,089)$103,767 $(106,340)


25

Supplemental Information of Operating Results
For the three months ended June 30, 2021, the Company's consolidated condensed statements of operations included net revenues of $325,453,000 and net income of $620,000 attributable to Topgolf. For the six months ended June 30, 2021, the Company's consolidated condensed statements of operations included net revenues of $418,090,000 and a net loss of $2,437,000 for the period beginning April 5, 2021 through July 4, 2021. The Topgolf results of operations for three months ended June 30, 2021 include depreciation and amortization of $33,531,000, interest expense of $1,459,000 related to the accretion of the fair value adjustment on long-term debt, and transaction, transition and other non-recurring charges of $2,503,000. For the six months ended June 30, 2021, Topgolf results include depreciation and amortization of $44,362,000, interest expense of $1,752,000 related to the accretion of the fair value adjustment on long-term debt, and transaction, transition and non-recurring costs of $18,731,000.

26

Note 6.7. Financing Arrangements
The Company's debt obligations are summarized as follows (in thousands):
June 30, 2021December 31, 2020
Maturity DateInterest RateUnamortized Debt Issuance CostsCarrying ValueCarrying Value
Short-Term Credit Facilities
U.S. Asset-Based Revolving Credit FacilityMay 17, 20243.00 %$1,391 $21,438 $22,130 
Japan ABL FacilityJanuary 21, 20221.28 %0 0 0 
$1,391 $21,438 $22,130 
Balance Sheet Location
Prepaid expenses$1,043 $0 $0 
Other long-term assets348 0 0 
Asset-based credit facilities0 21,438 22,130 
$1,391 $21,438 $22,130 
June 30, 2021December 31, 2020
Maturity DateInterest RateUnamortized Original Issuance Discount and Debt Issuance CostsCarrying Value, netCarrying Value, net
Long-Term Debt and Credit Facility
Japan Term Loan FacilityJuly 31, 20250.86 %$0 $15,300 $18,390 
Term Loan B FacilityJanuary 4, 20264.59 %17,171 422,029 428,150 
Topgolf Term Loan February 8, 20267.00 %7,037 335,088 0 
Topgolf Revolving Credit FacilityFebruary 8, 20244.75 %7,127 42,873 0 
Convertible NotesMay 1, 20262.75 %70,087 188,663 183,126 
Equipment NotesDecember 27, 2022 - March 19, 20272.36% - 3.79%0 27,655 31,822 
Mortgage LoansJuly 1, 2033 -
July 29, 2036		9.75% - 11.31%0 46,634 0 
Financed Tenant ImprovementsFebruary 1, 20358.00 %0 3,727 3,801 
$101,422 $1,081,969 $665,289 
Balance Sheet Location
Other current liabilities$3,816 $17,540 $0 
Accrued expenses0 0 14,725 
Long-term debt97,606 1,064,429 650,564 
$101,422 $1,081,969 $665,289 
Revolving Credit Facilities and Available Liquidity
In addition to cash on hand, as well as cash generated from operations, the Company relies on its primaryU.S. and Japan asset-based revolving credit facilities and the Topgolf revolving credit facility to manage seasonal fluctuations in liquidity and to provide additional liquidity when the Company’s operating cash flows are not sufficient to fund the Company’s requirements. As of June 30, 2021, the Company had $71,438,000 outstanding under these facilities and $415,204,000 in cash and cash equivalents. As of June 30, 2021, the Company's available liquidity, which is comprised of cash on hand and amounts available under the Company's revolving credit facilities, after letters of credit and outstanding borrowings, was $876,786,000. As of June 30, 2020, the Company had $55,551,000 outstanding under theseits U.S. and Japan facilities, and $164,416,000 in cash and cash equivalents. As of June 30, 2020, the Company's available liquidity, which is comprised of cash on hand and amounts available under bothits U.S. and Japan facilities, after letters of credit and outstanding borrowings, was $483,110,000. As of June 30, 2019, the Company had $165,467,000 outstanding under these facilities, $1,177,000 in outstanding letters of credit, and $81,490,000 in cash and cash equivalents. As of June 30, 2019, the Company's available liquidity, which is comprised of cash on hand and amounts available under both facilities, after letters of credit and outstanding borrowings, was $273,387,000.


19


PrimaryU.S. Asset-Based Revolving Credit Facility
In May 2019, the Company amended and restated its primary credit facility (theentered into a Fourth Amended and Restated Loan and Security Agreement as amended in August 2019, March 2020 and April 2020) with Bank of America N.A. and other lenders, (the “ABL Facility”), which provides a senior secured asset-based revolving credit facility of up to $400,000,000 (the “ABL Facility”), comprised of a $260,000,000 U.S. facility, a $70,000,000 German facility, a $25,000,000 Canadian facility and a $45,000,000 United Kingdom facility, in each case subject to borrowing base availability under the applicable facility. The amounts outstanding under the ABL Facility are secured by certain assets, including cash (to the extent pledged by the Company), certain intellectual property, certain eligible real estate, inventory and accounts receivable of the Company’s subsidiaries in the United States, Germany, Canada and the United Kingdom. The real estate and intellectual property components of the borrowing base under the ABL Facility are both amortizing. The amount available for the real estate portion is reduced quarterly over a 15-year period, and the amount available for the intellectual property portion is reduced quarterly over a 3-year period.
In March 2020, the Company amended the ABL Facility to add a stretch loan sub-facility of up to $30,000,000 and the loans thereunder, which may be borrowed pursuant to one borrowing at any time prior to September 30, 2020. As of June 30, 2020, the Company did not utilize the stretch loan sub-facility and terminated it with the lenders.
As of June 30, 2020, the Company had $27,756,000 in borrowings outstanding under the ABL Facility. Amounts available under the ABL Facility fluctuate with the general seasonality of the business and increase and decrease with changes in the Company’s inventory and accounts receivable balances. With respect to the Company's Golf Equipment business, inventory balances are generally higher in the fourth and first quarters, primarily to meet demand during the height of the golf season, and accounts receivable are generally higher during the first half of the year when sales are higher. Average outstanding borrowings during the six months ended June 30, 2020 were $188,559,000, and average amounts available under the ABL Facility during the six months ended June 30, 2020, after outstanding borrowings and letters of credit, was approximately $160,432,000. Amounts borrowed under the ABL Facility may be repaid and borrowed as needed. The entire outstanding principal amount (if any) is due and payable in May 2024.
Theon the maturity date. Amounts available under the ABL Facility includes certain restrictions including, among other things, restrictions onincrease and decrease with changes in the incurrenceCompany’s inventory and accounts receivable balances. During the six months ended June 30, 2021, average outstanding borrowings were $19,008,000 and average amount available, after outstanding borrowings and letters of additional debt, liens, stock repurchases and other restricted payments, asset sales, investments, mergers, acquisitions and affiliate transactions. credit, was approximately $296,027,000.
In April 2020, the Company amended the ABL Facility to permit a customary capped call transaction (see "Convertible“Convertible Senior Notes"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$50,000,000 pursuant to governmental programs enacted due to the COVID-19 outbreak.pandemic. As of June 30, 2021, the Company had not drawn on these funds. In addition, the ABL Facility imposes restrictions on the amount the Company could pay in annual cash dividends, including certain restrictions on the amount of additional indebtedness and requirements to maintain a certain fixed charge coverage ratio under certain circumstances.
As of June 30, 2020, In addition, in connection with the merger with Topgolf (see Note 6), the Company wasamended 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, complianceand enter into certain transactions with all financial covenantsTopgolf. Fees in connection with this amendment will be combined with existing debt origination and amendment fees and amortized over the remaining term of the ABL Facility.
The ABL Facility includes certain restrictions including, among other things, restrictions on the incurrence of additional debt, liens, stock repurchases and other restricted payments, asset sales, investments, mergers, acquisitions and affiliate transactions. Additionally, the Company is subject to compliance with a fixed charge coverage ratio covenant of at least 1.0 to 1.0 during, and continuing 30 days after, any period in which the Company’s borrowing base availability, as amended, falls below 10% of the maximum facility amount or $40,000,000. The Company’s borrowing base availability was above $40,000,000 during the six months ended June 30, 2020,2021, and the Company was in compliance with the fixed charge coverage ratio as of June 30, 2020.2021. Had the Company not been in compliance with the fixed charge coverage ratio as of June 30, 2020,2021, the maximum amount of additional indebtedness that could have been outstanding on June 30, 20202021 would have been reduced by $40,000,000. As of June 30, 2021, in addition to the fixed charge coverage ratio covenant, the Company was in compliance with all other financial covenants of the ABL Facility.
The interest rate applicable to outstanding loans under the ABL Facility fluctuates depending on the Company’s “availability ratio,"ratio” which is expressed as a percentage of (i) the average daily availability under the ABL Facility to (ii) the sum of the Canadian, the German, the U.K. and the U.S. borrowing bases, as adjusted. At June 30, 20202021 the Company’s trailing 12 month12-month average interest rate applicable to its outstanding loans under the ABL Facility was 3.93%3.11%. Additionally, the ABL Facility provides for monthly fees of 0.25% of the unused portion of the ABL Facility.
The fees incurredFees in connection with the origination and amendment of the ABL Facility totaled $3,526,000, whichand prior amendments are amortized intoin interest expense over the term of the ABL Facility agreement. Unamortized origination fees at June 30, 2020 and December 31, 2019 were $1,957,000 and $2,115,000, respectively, of which $824,000 and $746,000, respectively, were included in other current assets and $1,134,000 and $1,369,000, respectively, were included in other long-term assets in the accompanying consolidated condensed balance sheets.


20


facility.
Japan ABL FacilitiesFacility
In January 2018,2021, the Company refinanced the asset-based loan agreement between its subsidiary in Japan and The Bank of Tokyo-Mitsubishi UFJ, Ltd (the "2018 Japan“Japan ABL Facility"Facility”), which provides a credit facility of up to 4,000,000,000 Yen (or U.S. $37,060,000,$36,000,000, using the exchange rate in effect as of June 30, 2020)2021) over a three-yearone-year term, subject to borrowing base availability under the 2018 Japan ABL Facility. The amounts outstanding are secured by certain assets, including eligible inventory and eligible accounts receivable. The Company had3,000,000,000 Yen (or U.S. $27,795,000, using the exchange rate in effect as of June 30, 2020) in borrowings outstanding under the 2018 Japan ABL Facility as of June 30, 2020. The 2018 Japan ABL Facility also includes certain restrictions including covenants
related to certain pledged assets and financial performance metrics. As of June 30, 2020,2021, the Company was in compliance with these covenants.
The 2018 Japan ABL Facility is subject to an effective interest rate equal to the Tokyo Interbank Offered Rate (TIBOR)(“TIBOR”) plus 0.80%1.20%. The average interest rate under the 2018
Long-Term Debt
Japan ABLTerm Loan Facility during
In August 2020, was 0.87%. The 2018 Japan ABL Facility expires in January 2021.
On July 31, 2019, the Company entered into a new one-year asset-based loanfive-year Term Loan facility ("2019 Japan ABL Facility" and collectively with the 2018 Japan ABL Facility, the "Japan ABL Facility"(the “Japan Term Loan Facility”) between its subsidiary in Japan and MUFG Bank, Ltd.Sumitomo Mitsui Banking Corporation (“SMBC”) for 2,000,000,000 Yen (or approximately U.S. $18,530,000$18,000,000 using the exchange rate in effect as of June 30, 2020)2021). The
As of June 30, 2021, the Company had 0 borrowings outstanding under1,700,000,000 Yen (or approximately U.S. $15,300,000 using the 2019 Japan ABL Facilityexchange rate in effect as of June 30, 2020. The amounts2021) outstanding, are secured by certain assets, including eligible inventory and eligible accounts receivable. The 2019 Japan ABL Facility is subject to an effective interestof which 400,000,000 Yen (or approximately U.S. $3,600,000 using the exchange rate equal to the TIBOR plus 1.0%, and is subject to certain restrictions including covenants related to certain pledged assets and financial performance metrics. The average interest rate under the 2019 Japan ABL Facility during 2020 was 1.07%.
Long-Term Debt
Equipment Notes
In connection with the Company's investment initiatives to improve its manufacturing capabilities at its golf ball manufacturing facility in Chicopee, Massachusetts, the Company entered into a series of long-term financing agreements (the "Equipment Notes") with Bank of America N.A. and other lenders between December 2017 and March 2020, that are secured by certain equipment at this facility. Aseffect as of June 30, 2020 and December 31, 2019, the Company had a combined $26,754,000 and $19,715,000 outstanding under these Equipment Notes, respectively, of which $6,550,000 and $5,107,000 was included2021) is reflected in other current liabilities respectively, and $20,204,000 and $14,608,000 was included in long-term debt, respectively, in the accompanying Consolidated Condensed Balance Sheets. The Equipment Notes accrue interest in the range of 3.21% and 3.79%, and have maturity dates between December 2022 and March 2027.
During the three and six months ended June 30, 2020, the Company recognizedconsolidated condensed balance sheets. Total interest expense of $212,000 and $377,000, respectively, andrecognized during the three and six months ended June 30, 2019,2021 was 3,721,000 Yen (or approximately U.S. $34,000) and 7,612,000 Yen (or approximately U.S. $71,000), respectively.
Loans under the Company recognized interest expense of $84,000 and $173,000, respectively.
The Equipment NotesJapan Term Loan Facility are subject to compliance witha rate per annum of either, at the Company’s option, SMBC TIBOR or TIBOR plus 80 basis points. Principal payments of 100,000,000 Yen (or approximately U.S. $900,000 using the exchange rate in effect as of June 30, 2021) are due quarterly, and the facility imposes certain restrictions including covenants to certain financial covenants in the Company's ABL Facility.performance obligations. As of June 30, 2020,2021, 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"“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. The Term Loan Facility is due in January 2026.
As of June 30, 2020 and December 31, 2019, the Company had $444,000,000 and $446,400,000, respectively, outstanding under the Term Loan Facility, of which $4,800,000 is reflected in current liabilities. The amount outstanding as of June 30, 2020 was offset by unamortized debt issuance costs of $14,835,000, of which $2,697,000 was reflected in the short-term portion of the facility, and $12,138,000 was reflected in the long-term portion of the facility in the accompanying consolidated condensed balance sheet. Total interest and amortization expense recognized during the three months ended June 30, 2020


21


2021 and 20192020 was $6,320,000$6,077,000 and $9,062,000,$6,320,000, respectively. Total interest and amortization expense recognized during the six months ended June 30, 2021 and 2020 was $11,924,000 and 2019 was $13,770,000, and $17,842,000, respectively.
Loans under the Term Loan Facility are subject to interest at a rate per annum equal to either, at the Company's option, the LIBOR rate or the base rate, plus 4.50% or 3.50%, respectively. The Company utilizes an interest rate hedge in order to mitigate the risk of interest rate fluctuations on this facility. See Note 16 for further information on this hedging contract. Principal payments of $1,200,000 are due quarterly, however the Company has the option to prepay any outstanding loan balance in whole or in part without premium or penalty. In addition, as of December 31, 2019, the Term Loan Facility requires excess cash flow payments beginning after December 31, 2019.
In order to mitigate the risk of interest rate fluctuations under the Term Loan Facility and foreign exchange fluctuations on a EUR denominated intercompany loan, the Company converted $200,357,000 of principal into €176,200,000, and entered into a cross-currency swap combined with an interest rate hedge with the lenders party to the Credit Agreement to swap the floating rate of LIBOR plus 4.50% to a fixed rate of 4.60%. During the six months ended June 30, 2020, in response to the adverse effects of the COVID-19 pandemic on global markets, the Company decided to unwind the cross-currency swap associated with the EUR denominated intercompany loan. As of June 30, 2020, the Company decided to maintain the interest rate hedge associated with the USD denominated Term Loan Facility. For further information on these hedging contracts, see Note 17.payments.
Loans outstanding under this facility are guaranteed by the Company's domestic subsidiaries. The loans and guaranties are secured by substantially all the assets of the Company and guarantors.
The Credit Agreement contains a cross-default provision with respect to any indebtedness of the Company as defined in the Credit Agreement, as well as customary representations and warranties and customary affirmative and negative covenants, including, among other things, restrictions on incurrence of additional debt, liens, dividends and other restricted payments, asset sales, investments, mergers, acquisitions and affiliate transactions. Events of default permitting acceleration under the Credit Agreement include, among others, nonpayment of principal or interest, covenant defaults, material breaches of representations and warranties, bankruptcy and insolvency events, certain cross defaults or a change of control. As of June 30, 2020,2021, the Company was in compliance with these covenants.
In connection with the merger with Topgolf (see Note 6), the Company amended the Term Loan Facility with Bank of America, N.A. and the Term Lenders to, among other things, permit the consummation of the Merger and certain other transactions contemplated in the Merger Agreement, designate Topgolf and its subsidiaries as unrestricted subsidiaries
under the Term Loan Facility and amend certain covenants and other provisions to allow the Company to make certain investments in, and enter into certain transactions with Topgolf.
Topgolf Credit Facilities
In connection with the merger with Topgolf on March 8, 2021, the Company assumed a $350,000,000 term loan facility (the “Topgolf Term Loan”), and a $175,000,000 revolving credit facility with JPMorgan Chase Bank, N.A (the “Topgolf Revolving Credit Facility”), with JPMorgan Chase Bank, N.A., as Administrative Agent, Swingline Lender and Issuing Bank, RBC Capital Markets, as Syndication Agent, and the other agents, arrangers and lenders party thereto (together, the “Topgolf Credit Facilities”). Subsequent to June 30, 2021, the Company paid $10,000,000 on the outstanding principal of the Topgolf Revolving Credit Facility.
Borrowings under the Topgolf Term Loan accrue interest at a rate per annum equal to, at the Company's option, either (i) an alternate base rate determined by reference to the highest of (a) the prime rate of JPMorgan Chase Bank, N.A. (the administrative agent), (b) the federal funds effective rate plus 0.50%, (c) the adjusted one-month LIBOR rate plus 1.00%, and (d) 1.75%, or (ii) an adjusted LIBOR rate (for a period equal to the relevant interest period) (which shall not be less than 0.75%), in each case plus an applicable margin. The applicable margin for loans under the Topgolf Term Loan is 5.25% with respect to alternate base rate borrowings and 6.25% with respect to LIBOR borrowings.
Borrowings under the Topgolf Revolving Credit Facility accrue interest at a rate per annum equal to, at the Company's option, either (i) an alternate base rate determined by reference to the highest of (a) the prime rate of JPMorgan Chase Bank, N.A. (the administrative agent), (b) the federal funds effective rate plus 0.50%, (c) the adjusted one-month LIBOR rate plus 1.00%, and (d) 1.75%, or (ii) an adjusted LIBOR rate (for a period equal to the relevant interest period) (which shall not be less than 0.75%), in each case plus an applicable margin. The applicable rate for the Topgolf Revolving Credit Facility loans is 3.00% with respect to alternate base rate borrowings and 4.00% with respect to LIBOR borrowings subject to 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 the Company to maintain on a quarterly basis a total leverage ratio (measured on a trailing four-quarter basis) less than or equal to 5.50:1.00. On September 17, 2020, prior to the completion of the merger, Topgolf entered into an amendment to the Credit Agreement (the “Amended Credit Agreement”) to modify the financial covenants and make certain other changes. The Amended Credit Agreement (i) suspends the total leverage ratio financial covenant through and including the fiscal quarter ending on or about March 31, 2022 and (ii) provides for an increased level of 7.75:1.00 for the fiscal quarter ending on or about June 30, 2022, in each 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 June 30, 2021, the Company was in compliance with these covenants.
The Topgolf Credit Facilities also contains certain customary representations and warranties and affirmative covenants, and certain reporting obligations. The Topgolf Term Loan also contains certain customary representations and warranties and affirmative covenants, and certain reporting obligations.
Convertible Senior Notes
On May 4, 2020, the Company issued $258,750,000 of 2.75% Convertible Senior Notes (the “Convertible Notes”). The Convertible Notes bear interest at a rate of 2.75% per annum on the principal amount, payable semi-annually in arrears on May 1 and November 1 of each year, beginning on November 1, 2020. The Convertible Notes will mature on May 1, 2026,
unless earlier redeemed or repurchased by the Company or converted. The Convertible Notes are structurally subordinated to all existing and future indebtedness and other liabilities, including trade payables, and (to the extent the Company is not a holder thereof) preferred equity, if any, of the Company’s subsidiaries. As
The Company may settle the Convertible Notes through cash settlement, physical settlement, or combination settlement at its election. Therefore, the Convertible Notes were separated into a liability component and an equity component in a manner that reflects the interest cost of a similar nonconvertible debt instrument. At inception, the fair value of the liability component was determined by measuring the fair value of a similar liability that does not have an associated equity component. The carrying amount of the liability component was $188,663,000 as of June 30, 2020,2021. The carrying amount of the equity component (the conversion feature) and discount on the Convertible Notes, totaling $64,986,000 as of June 30, 2021, is amortized over the remaining term of approximately 4.9 years. The conversion feature of $76,508,000 was determined by deducting the fair value of the liability component from the initial proceeds ascribed to the Convertible Notes.
The Company incurred $8,537,000$8,527,000 of cost associated with the issuance of the Convertible Notes,Notes. These debt issuance costs were allocated between the debt and equity components in proportion to the allocation of which $6,013,000the proceeds to those components. As such, $6,005,000 was allocated to the liability component of the Convertible Notes, and $2,524,000$2,522,000 was allocated to the equity conversion feature.
As of June 30, 2020, The discount on the net carrying amount ofConvertible Notes as well as the debt issuance costs allocated to the liability component are amortized over the term of the Convertible Notes was $177,847,000, netusing the effective interest rate method.
All or any portion of unamortized debt issuance coststhe Convertible Notes may be converted at the conversion rate and at the holders' option on or after February 1, 2026 until the close of $5,895,000 and debt discountbusiness on the second trading day immediately prior to the maturity date. Additionally, all or any portion of $75,008,000, which willthe Convertible Notes may be amortized overconverted at the remaining termconversion rate at the holders' option upon the occurrence of approximately 5.8 years. Thecertain contingent conversion featureevents, including (i) if the price of $76,508,000 and the allocated debt issuance costsCompany’s common stock is more than 130% of $2,524,000 were recordedthe 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 components of shareholders' equity as of June 30, 2020. described in the Indenture; or (iv) if the Company calls the Convertible Notes for redemption.
Upon conversion, the Company has the option to settle the conversion obligation in any combination of cash and shares. The initial conversion rate is 56.7698 shares of the Company's common stock per $1,000 principal amount of Convertible Notes, which is equal to an initial conversion price of $17.62 per share. At June 30, 2020,2021, the price of the Company's common stock was higher than the initial conversion price. Therefore, the if-converted value of the Convertible Notes did 0t exceedexceeded the principal amount.
The Company may redeem all or part of the Convertible Notes (i) on or after May 6, 2023, but before the 40th trading day prior to the maturity date if the last reported sale price of the Company’s common stock exceeds 130% of the conversion price for any 20 of 30 consecutive trading days; (ii) upon a Fundamental Change (where holders can require settlement entirely in cash); or (iii) upon an Event of Default. The Company will also be required to pay additional interest upon (i) failure to timely file with the Commission, (ii) failure to allow the Convertible Notes to be freely tradable, or (iii) upon an Event of Default solely related to failure to timely file with the trustee.
In connection with the pricing of the Convertible Notes on April 29, 2020, the Company paid $31,775,000 to enter into privately negotiated capped call transactions ("(“Capped Calls"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.option counterparties. The Capped Calls cover the aggregate number of shares of the Company’s common stock that initially underlie the Convertible Notes, and are expected generally to reduce the potential dilution to the Company’s common stock upon any conversion of the Convertible Notes, and/or offset any cash payments the Company is required to make in excess of the principal amount of converted Convertible Notes, with such reduction and/or offset subject to a cap based on the cap price. The cap price of the Capped Calls is initially $27.10. The Capped Calls are recorded as a reduction to additional paid-in capital and are not accounted for as derivatives.
The Convertible Notes will not have an impact on the Company’s diluted earnings per share untilwhen 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


22


amount of the Convertible Notes in cash upon conversion. TheFor the six months ended June 30, 2021, the average market
price of the Company's common stock was $31.11, which exceeded the conversion price. As such, the Company is required underused the treasury stock method to compute the potentially dilutive shares of common stock related to the Convertible Notes for periods the Company reportsreported net income. However, uponUpon conversion, there will be no economic dilution from the Convertible Notes until the average market price of the Company’s common stock exceeds the cap price of $27.10 per share, as exercise of the Capped Calls offsets any dilution from the Convertible Notes from the conversion price up to the cap price. Capped Calls are excluded from the calculation of diluted earnings per share, as they would be anti-dilutive under the treasury stock method.
Equipment Notes
Between December 2017 and August 2020, the Company entered into 4 long-term financing agreements (the “Equipment Notes”) with Bank of America N.A. and other lenders to invest in its golf ball manufacturing facility in Chicopee, Massachusetts, its North American Distribution Center in Roanoke, Texas, and in corporate IT equipment. The loans are secured by the underlying equipment at each facility and the IT equipment.
Interest expense recognized during the three months ended June 30, 2021 and 2020 was $221,000 and $212,000, respectively. Interest expense recognized during the six months ended June 30, 2021 and 2020 was $460,000 and $377,000, respectively.
The Equipment Notes are subject to compliance with the financial covenants in the Company's ABL Facility. As of June 30, 2021, the Company was in compliance with these covenants.
Mortgage Loans
In connection with the merger with Topgolf on March 8, 2021, the Company assumed 3 mortgage loans related to the construction of 3 venues. The loans require either monthly (i) principal and interest payments or (ii) interest-only payments until their maturity dates. For loans requiring monthly interest-only payments, the entire unpaid principal balance and any unpaid accrued interest is due on the maturity date. The mortgage loans are secured by the assets of each respective venue.
The following table presents the Company's combined aggregate amount of maturities for its Equipment Notes, Term Loan Facility and the Convertible NotesCompany's long-term debt over the next five years and thereafter as of June 30, 2020.2021. Amounts payable under the ABL Facility are excluded from this table as they are short-term in nature. Amounts payable under the Term Loan Facility included below represent the minimum principal repayment obligations. As of June 30, 2020,2021, the Company does not anticipate excess cash flow repayments as defined by the Term Loan Facility.
  (in thousands)
Remainder of 2020 $7,132
2021 11,297
2022 11,519
2023 9,107
2024 8,290
Thereafter 687,585
  $734,930

(in thousands)
Remainder of 2021$10,489 
202221,237 
202318,581 
202467,357 
202514,159 
Thereafter1,051,568 
$1,183,391 
Note 7.8. Earnings per Common Share
Basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding for the period.
Diluted earnings per common share takes into account the potential dilution that could occur if outstanding securities were exercised. Dilutive securities are included in the calculation of diluted earnings per common share using the treasury stock method in accordance with ASC Topic 260, “Earnings per Share.” Dilutive securities include outstanding stock options, restricted stock units and performance share units granted to employees and non-employee directors (see Note 15), as well as common shares underlying convertible notes (see Note 7).
Weighted-average common shares outstanding—diluted is the same as weighted-average common shares outstanding—basic in periods when a net loss is reported or in periods when anti-dilution occurs.  

27

The following table summarizes the computation of basic and diluted earnings per share (in thousands, except per share data):
 Three Months Ended
June 30,		 Six Months Ended
June 30,
 2020 2019 2020 2019
Earnings (loss) per common share—basic       
Net income (loss) attributable to Callaway Golf Company$(167,684) $28,931
 $(138,790) $77,578
Weighted-average common shares outstanding—basic94,141
 94,074
 94,225
 94,377
Basic earnings (loss) per common share$(1.78) $0.31
 $(1.47) $0.82
Earnings (loss) per common share—diluted       
Net income (loss) attributable to Callaway Golf Company$(167,684) $28,931
 $(138,790) $77,578
Weighted-average common shares outstanding—basic94,141
 94,074
 94,225
 94,377
Outstanding options, restricted stock units and performance share units—
 1,817
 —
 1,776
Weighted-average common shares outstanding—diluted94,141
 95,891
 94,225
 96,153
Diluted earnings (loss) per common share$(1.78) $0.30
 $(1.47) $0.81

 Three Months Ended
June 30,		Six Months Ended
June 30,
 2021202020212020
Earnings per common share—basic
Net income (loss)$91,744 $(167,684)$364,205 $(138,790)
Weighted-average common shares outstanding—basic(1)
185,225 94,141 151,541 94,225 
Basic earnings (loss) per common share$0.50 $(1.78)$2.40 $(1.47)
Earnings per common share—diluted
Net income (loss)$91,744 $(167,684)$364,205 $(138,790)
Weighted-average common shares outstanding—basic(1)
185,225 94,141 151,541 94,225 
Convertible notes weighted-average shares outstanding6,850 0 6,105 0 
Outstanding options, restricted stock units and performance share units2,259 0 1,993 0 
Weighted-average common shares outstanding—diluted194,334 94,141 159,639 94,225 
Diluted earnings (loss) per common share$0.47 $(1.78)$2.28 $(1.47)
For
(1)In connection with the Topgolf merger, on March 8, 2021, the Company issued 89,776,450 of its common stock to the stockholders of Topgolf, and 187,568 of its common stock for restricted stock awards converted in the merger (see Note 15), of which 89,964,018 and 56,662,420 weighted average shares for the three and six months ended June 30, 2020 securities outstanding totaling approximately 1,153,0002021, respectively, were included in the basic and 1,260,000 shares, respectively, comprised of stock options, restricted stock units and performancediluted share units, were excluded fromcalculations based on the calculation of earnings (loss) per common share—diluted as they would be anti-dilutive. For the three and six months ended


23


June 30, 2019, the Company had a nominal number of securities that had an anti-dilutive effect ondays the calculation of diluted earnings per common share. Such securitiesshares were excluded fromoutstanding during the calculation.periods.
In May 2020, the Company issued $258,750,000 of 2.75% Convertible Senior Notes ("Convertible Notes").Notes. The Convertible Notes will not have an impact on the Company’s diluted earnings per share untilwhen the average market price of its common stock exceeds the conversion price of $17.62 per share, as the Company intends to settle the principal amount of the Convertible Notes in cash upon conversion. The Company is required under the treasury stock method to compute the potentially dilutive shares of common stock related to the Convertible Notes for periods the Company reports net income. As of June 30, 2020,2021, the Convertible Notesaverage market price of its common stock exceeded this conversion price per share and as such, the common shares underlying convertible notes were anti-dilutiveincluded in the diluted calculation for the three and thereforesix months ended June 30, 2021 (see Note 7).
For the three and six months ended June 30, 2021, securities outstanding totaling approximately 1,200,000 and 1,042,000 shares, respectively, comprised of stock options and restricted stock units were excluded from the calculation of earnings per common share—diluted calculation. See Note 6.
Note 8. Inventories
Inventories are summarized below (in thousands):as they would be anti-dilutive. For the three and six months ended June 30, 2020, securities outstanding totaling approximately 1,153,000 and 1,260,000 shares, respectively, comprised of stock options, restricted stock units and performance share units were excluded from the calculation of loss per common share—diluted as they would be anti-dilutive.
 June 30,
2020		 December 31, 2019
Inventories:   
Raw materials$69,959
 $76,140
Work-in-process997
 860
Finished goods308,213
 379,639
 $379,169
 $456,639

28

Note 9. Goodwill and Intangible Assets
Changes in the carrying amount of goodwill by operating and reportable segment are as follows (in thousands):
 Golf EquipmentApparel, Gear and OtherTopgolfTotal
Balance at December 31, 2020$27,025 $29,633 $0 $56,658 
Acquisitions504,568 58,652 1,402,101 1,965,321 
Impairments0 0 0 0 
Foreign currency translation(71)0 0 (71)
Balance at June 30, 2021$531,522 $88,285 $1,402,101 $2,021,908 
Goodwill at June 30, 2020 decreased2021 increased to $55,579,000$2,021,908,000 from $203,743,000$56,658,000 at December 31, 2019.2020. This $148,164,000 decrease$1,965,250,000 increase was primarily due to an impairment chargethe addition of $148,375,000 recognized$1,965,321,000 in goodwill in connection with the second quarterTopgolf merger in March 2021, of 2020,which the Company attributed $1,402,101,000 to the Topgolf business, and $504,568,000 and $58,652,000 to the golf equipment and apparel businesses, respectively (see Note 6). This increase was partially offset by changes in foreign currency rates period over period. The Company's goodwill is reported in both the Golf Equipment and Apparel, Gear and Other operating segments (see Note 19).
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. During the second quarterAs of June 30, 2021 and December 31, 2020 the Company performed a qualitative assessmentrecognized accumulated impairment losses on goodwill of goodwill$148,375,000. There were 0 impairment indicators, considering macroeconomic conditions related to the COVID-19 pandemic and its potential impact to sales and operating income for the remainder of fiscal 2020. The Company expects the duration of the COVID-19 pandemic and the continued impact of global travel restrictions, government shutdowns of non-essential businesses and disruptions to its supply chain and distribution channels to result in lower revenue and operating income for the remainder of fiscal 2020 and potentially beyond. As a result, the Company determined that there were indicators of impairment, and proceeded with a quantitative assessment of goodwill for all reporting unitslosses recognized during the second quarter.
In performing the second quarter quantitative goodwill impairment testing, the Company prepared valuations of 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 recovery period. As a result of the second quarter assessment, the Company determined that the fair value for one reporting unit was less than its carrying value, and therefore recognized a goodwill impairment loss of $148,375,000 in the second quarter of 2020. The expected decline in revenue due to the impact of COVID-19 contributed to the lower fair value of the Jack Wolfskin reporting unit, which is included in the Apparel, Gear and Other operating segment. The Company determined that the goodwill relating to its other reporting units was not impaired as the fair value significantly exceeded the carrying value atthree or six months ended June 30, 2020.


24


In addition, the Company determined that the trade name intangible asset related to Jack Wolfskin was also impaired and recognized an impairment loss of $25,894,000 in the second quarter of 2020. The carrying value of intangible assets after the impairment was $428,439,000 at June 30, 2020.2021.
The following sets forth the intangible assets by major asset class (dollars in thousands):
 
Useful
Life
(Years)
 June 30, 2020 December 31, 2019
 
Gross(1)
 Accumulated Amortization 
Net Book
Value
 Gross Accumulated Amortization 
Net Book
Value
Indefinite-lived:                 
Trade name, trademark, trade dress and otherNA $428,439
  $—
  $428,439
 $453,837
  $—
  $453,837
Amortizing:                 
Patents2-16 31,581
  31,581
  —
 31,581
  31,581
  —
Customer and distributor relationships and other1-10 54,304
  17,047
  37,257
 53,904
  14,318
  39,586
Total intangible assets  $514,324
  $48,628
  $465,696
 $539,322
  $45,899
  $493,423

 Useful
Life
(Years)		June 30, 2021
 
Gross(1)
Accumulated AmortizationTranslation AdjustmentNet Book
Value
Indefinite-lived:
Trade name, trademark, trade dress and otherNA$1,441,003 $— $6,695 $1,434,308 
Liquor licensesNA7,452 — 0 7,452 
Amortizing:
Patents2-1632,041 31,617 0 424 
Customer and distributor relationships and other1-1061,377 23,278 1,021 37,078 
Developed technology1079,994 2,496 123 77,375 
Total intangible assets$1,621,867 $57,391 $7,839 $1,556,637 
 Useful
Life
(Years)		December 31, 2020
 GrossAccumulated AmortizationNet Book
Value
Indefinite-lived:
Trade name, trademark, trade dress and otherNA$446,803 $— $446,803 
Amortizing:
Patents2-1631,581 31,581 0 
Customer and distributor relationships and other1-1057,309 19,773 37,536 
Total intangible assets$535,693 $51,354 $484,339 
(1) The gross balance of intangible assets as of June 30, 20202021 includes an increase dueadditions of $1,001,600,000 and $84,528,000 in indefinite-lived and amortizing intangible assets, respectively, related to the impact of foreign exchange rates of $496,000Topgolf merger that was completed on the Jack Wolfskin non-amortizing intangible asset, as well as $64,000 on the amortizing customer and distributor relationships.March 8, 2021.
AggregateThe Company recognized amortization expense onrelated to intangible assets was approximatelyof $3,736,000 and $1,213,000 and $1,246,000 for the three months ended June 30, 20202021 and 2019,2020, respectively, and $2,393,000$6,037,000 and $2,466,000$2,393,000 for the six months ended June 30, 2021 and 2020, respectively, in selling, general and 2019, respectively.administrative expenses in the accompanying consolidated condensed statements of operations.

29

Amortization expense related to intangible assets at June 30, 20202021 in each of the next five fiscal years and beyond is expected to be incurred as follows (in thousands):
Remainder of 2020$2,391
20214,724
20224,548
20234,409
20244,409
Thereafter16,776
 $37,257

Remainder of 2021$10,522 
202214,348 
202312,675 
202412,532 
202512,454 
Thereafter52,346 
$114,877 
Note 10. Joint Venture
The Company had a joint venture in Japan, Callaway Apparel K.K., with its long-time apparel licensee, TSI Groove & Sports Co, Ltd., ("TSI") for the design, manufacture and distribution of Callaway-branded apparel, footwear and headwear in Japan. In July 2016, the Company contributed $10,556,000, primarily in cash, for a 52% ownership of the joint venture, and TSI contributed $9,744,000, primarily in inventory, for the remaining 48%. In May 2019, the Company entered into a stock purchase agreement with TSI to acquire the remaining shares comprising the 48% ownership in Callaway Apparel K.K. for 2 billion Yen, or approximately $18,538,000 (using the exchange rate in effect on the acquisition date). The purchase was completed as of May 31, 2019 and, pursuant to the stock purchase agreement, the purchase price was paid in August 2019. As of June 30, 2020, the Company owned 100% of this entity and controlled all matters pertaining to its business operations and significant management decisions. Callaway Apparel K.K. is consolidated one month in arrears.
During the three and six months ended June 30, 2019, the Company recorded a net loss attributable to the non-controlling interest of $33,000 and $179,000, respectively, in its consolidated condensed statements of operations. As a result of the acquisition, the Company did not recognize net income attributable to non-controlling interests during the three and six months ended June 30, 2020.


25


Note 11. Investments
Investment in Topgolf International, Inc.
ThePrior to the completion of the merger with Topgolf, the Company ownsowned a minority interest of approximately 14.0%14.3% in Topgolf, International, Inc. doing business as the Topgolf Entertainment Group ("Topgolf"), the owner and operator of Topgolf entertainment centers,centers. On March 8, 2021, the Company completed its previously announced merger with Topgolf, in which ownership consiststhe 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. In connection with this investment,stock were stepped up to their fair value and applied toward the Company hastotal purchase consideration in the merger. The fair value adjustment resulted in a preferred partner agreement with Topgolf ingain of $252,531,000, which the Company has preferred signage rights, rights asrecognized in other income in the preferred supplierfirst quarter of golf products used or offered for use2021.
Immediately prior to the merger and at Topgolf facilities at prices no less than those paid byDecember 31, 2020, the Company’s customers, preferred retail positioning in Topgolf retail stores, and other rights incidental to those listed above.
Topgolf is a privately held company, and as such, the common and preferred shares comprising the Company’s investment are illiquid and their fair value is not readily determinable. The Company accounts for changes in fair value in accordance with ASU No. 2016-01, which requires equity securities without a readily determinable fair value to be measured at cost, less impairments if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer.
There were 0 additional investments by the Company in Topgolf in each of the three and six months ended June 30, 2020 and 2019. The Company's total investment in Topgolf as of both June 30, 2020 and December 31, 2019 was $90,134,000. Since the adoption of ASU 2016-01, there were no observable transactions which would provide an estimate of fair value. As such, at June 30, 2020 and December 31, 2019, the Company's$111,442,000. The Company accounted for this investment in Topgolf is reflected at cost less impairments in accordance with ASU No.ASC 2016-01.
In May 2020, due Prior to the business disruptions caused by the COVID-19 pandemic, which resulted in the temporary closure of Topgolf facilities worldwide,merger, the Company in combination with other shareholders of Topgolf, issued Topgolf a note receivable to assist with working capital requirements. The Company's pro rata share of the note receivable was $6,542,000, which was issued net of a 20% discount and reimbursable legal fees, accrues interest at 5.87% and matures in February 2026. The note receivable was recorded in other assets in the Consolidated Condensed Balance Sheet as of June 30, 2020.
As of June 30, 2020, the Company hasdid not recordedrecord any impairments with respect to this investment. If
Investment in Full Swing Golf Holdings, Inc.
In connection with the future there is an observable price changemerger with Topgolf, the Company acquired a minority interest of 17.7% in Full Swing Golf Holdings, Inc. (“Full Swing”), owners of indoor golf simulation technology that delivers golf ball tracking data and measures ball flight indoors. The fair value of this investment as of the merger date was $27,740,000. The Company accounts for this investment at cost less impairments in accordance with ASC 2016-01. As of June 30, 2021, the Company believed its cost investment in Full Swing approximated its fair value. Subsequent to June 30, 2021, the Company sold a portion of its investment in Full Swing for cash proceeds of approximately $18,591,000. As a result of an orderlythe transaction, for the identical or similar investment in Topgolf, the Company would be required to assess the fair value impact, if any, on each identified or similar classnow owns a minority interest of Topgolf stock held by the Company, and write such stock up or down to its estimated fair value, which could have a material effect on the Company's financial position and results of operations.7.3% in Full Swing.
Note 12.11. Product Warranty
The Company has a stated two-year warranty policy for its golf clubs and certain Jack Wolfskin gear, as well as a limited lifetime warranty for its OGIO line of products. The Company’s policy is to accrue the estimated cost of satisfying future warranty claims at the time the sale is recorded. In estimating its future warranty obligations, the Company considers various relevant factors, including the Company’s stated warranty policies and practices, the historical frequency of claims, and the cost to replace or repair its products under warranty.
The Company’s estimates for calculating the warranty reserve are principally based on assumptions regarding the warranty costs of each product line over the expected warranty period. Where little or no claims experience may exist, the Company’s warranty obligation calculation is based upon long-term historical warranty rates of similar products until sufficient data is available. As actual model-specific rates become available, the Company’s estimates are modified to reflect the range of likely outcomes.
The warranty provision for the three and six months ended June 30, 2020 and June 30, 2019 includes the warranty reserves assumed in connection with the Jack Wolfskin acquisition (see Note 5).


30

26


The following table provides a reconciliation of the activity related to the Company’s reserve for warranty expense. The warranty reserve is included in other current liabilities in the accompanying consolidated condensed balance sheets as of June 30, 2021 and December 31, 2020. Amount in the table below are in thousands.
 Three Months Ended June 30,Six Months Ended
June 30,
 2021202020212020
Beginning balance$10,700 $9,791 $9,364 $9,636 
Provision3,477 1,562 5,933 3,370 
Claims paid/costs incurred(2,644)(1,574)(3,764)(3,227)
Ending balance$11,533 $9,779 $11,533 $9,779 
Note 12. Selected Financial Statement Information
June 30, 2021December 31, 2020
(In thousands)
Inventories:
Raw materials$70,900 $69,932 
Work-in-process1,098 1,010 
Finished goods258,760 281,602 
Food and beverage4,588 0 
$335,346 $352,544 
Property, plant and equipment, net:
Land$90,232 $7,308 
Buildings and leasehold improvements798,078 100,653 
Machinery and equipment196,819 137,026 
Furniture, computer hardware and equipment176,141 100,558 
Internal-use software77,566 42,082 
Production molds7,163 6,809 
Construction-in-process181,044 13,299 
1,527,043 407,735 
Accumulated depreciation(262,157)(261,240)
$1,264,886 $146,495 
Accounts payable and accrued expenses:
Accounts payable$111,255 $66,282 
Accrued expenses207,149 136,277 
Accrued inventory108,173 73,650 
$426,577 $276,209 
Accrued employee compensation and benefits:
Accrued payroll and taxes$68,173 $17,009 
Accrued vacation and sick pay22,355 12,887 
Accrued commissions4,899 1,041 
$95,427 $30,937 
During the three months ended June 30, 2021 and 2020, the Company recorded depreciation expense (in thousands):
 Three Months Ended June 30, Six Months Ended
June 30,
 2020 2019 2020 2019
Beginning balance$9,791
 $10,783
 $9,636
 $7,610
Provision1,562
 2,127
 3,370
 4,606
Provision liability assumed from acquisition—
 273
 —
 2,600
Claims paid/costs incurred(1,574) (2,207) (3,227) (3,840)
Ending balance$9,779
 $10,976
 $9,779
 $10,976
of
$39,534,000 and $8,147,000, respectively, and $57,505,000 and $15,964,000 for the six months ended June 30, 2021 and 2020, respectively, on the accompanying consolidated condensed statements of operations.
Note 13. Income Taxes
The Company calculates its interim income tax provision in accordance with ASC Topic 270, “Interim Reporting,” and ASC Topic 740, “Accounting for Income Taxes.” At the end of each interim period,Historically, the Company estimates itscalculated the provision for income taxes during the interim reporting periods by applying an estimate of the annual effective tax rate for the full fiscal year to “ordinary” income or loss (pretax income or loss excluding unusual or infrequently occurring discrete items) for the

31

reporting period. The Company determined that since small changes in estimated “ordinary” income would result in significant changes in the estimated annual effective tax rate, the historical method would not provide a reliable estimate for the three and applies thatsix months ended June 30, 2021. Therefore, a discrete effective tax rate to its ordinary quarterly earningsmethod was used to calculate taxes for the three and six months ended June 30, 2021.
In March 2021, the Company acquired Topgolf through a non-taxable stock acquisition in a share exchange. The purchase price of Topgolf at acquisition was approximately $3,014,174,000. The Company recorded a deferred tax liability of approximately $293,000,000 related to ordinary income. Thethe acquired intangibles, offset by approximately $154,000,000 of other acquired deferred tax effects for other items that are excluded from ordinary income are discretely calculated and recognized in the period in which they occur.assets, after consideration of acquired valuation allowances.
In January 2019, the Company acquired Jack Wolfskin for approximately $521,201,000 (including cash acquired of $58,096,000). The Company recorded a deferred tax liability of $88,392,000 related to the intangibles upon acquisition in addition to $11,384,000 deferred tax assets acquired (see Note 5).acquired. In the second quarter of 2020, due to a decline in projected revenues caused by the COVID-19 pandemic, the Company recognized an impairment charge of $174,269,000 to write down the goodwill and trade name associated with Jack Wolfskin to its fair value (see Note 9). This impairment was excluded from ordinary income and discretely calculated in the income tax provision in the second quarter of 2020. The impaired goodwill was comprised of book basis over tax basis with no corresponding deferred tax liability. The brand value impairment resulted in the reduction of approximately $7,900,000 of the deferred tax liability previously recorded as part of acquisition accounting.
The realization of deferred tax assets, including loss and credit carryforwards, is subject to the Company generating sufficient taxable income during the periods in which the deferred tax assets become realizable. DueAs a result of the Topgolf merger and the fact that Topgolf’s losses exceed Callaway’s income in recent years, the Company recorded a valuation allowance in its income tax provision of approximately $38,927,000 against certain of its net operating losses and tax credit carryforwards during the three months ended March 31, 2021. In connection with the purchase accounting related to the Company’s historical profitability, combinedmerger with future projections of profitability,Topgolf, the Company has determined that the majorityalso recorded a valuation allowance in goodwill of its U.S.approximately $80,566,000 against certain Topgolf deferred tax assets are more likely than not to be realized. The valuation allowance onacquired in the Company’s U.S. deferred tax assets as ofmerger. For the three months ended June 30, 2020 primarily relates to state net operating loss carryforwards and credits that2021, the Company estimates it may not be ablereleased acquired Topgolf valuation allowances of approximately $32,743,000 due to utilizesignificant earnings in future periods.the period and as a consequence of using the discrete effective tax rate method described above. The Company will continue to assess this amount through the measurement period. With respect to Jack Wolfskin and previously existing non-U.S. entities, there continues to be sufficient positive evidence to conclude that realization of its deferred tax assets is more likely than not under applicable accounting rules, and therefore no significant valuation allowances have been established. The Company has considered the business disruption impacts from the COVID-19 pandemic and determined that this hasn’t impacted the realization of its deferred tax assets. As this is a dynamically evolving business disruption, the Company will continue to evaluate the COVID-19-related impacts on the realization of its deferred tax assets as new information becomes available.
The Company recorded an income tax benefit of $7,931,000$15,853,000 and an incomea tax provision of $7,208,000$31,890,000 for the three months ended June 30, 2020 and 2019, respectively, and an income tax provision of $1,220,000 and $16,764,000 for the six months ended June 30, 2020 and 2019,2021, respectively. The decrease in the provision was primarily due to the reduction of earnings caused by the COVID-19 pandemic and the impairment of the Jack Wolfskin goodwill and trade name in June 2020. As a percentage of pre-tax income, the Company's effective tax rate decreased to 4.5% inwas (20.9)% and 8.1% for the second quarter of 2020 compared to 20.0% inthree and six months ended June 30, 2021, respectively. In the second quarter of 2019, primarily duethree months ended June 30, 2021 the primary difference between the statutory rate and the effective rate relates to the reductiontax effect of earnings causedthe valuation allowance release described above. In the six months ended June 30, 2021 the primary difference between the statutory rate and the effective rate relates to excluding the book gain on pre-merger Topgolf shares for tax purposes offset by the COVID-19 pandemic andvaluation allowances on the impairment of the Jack Wolfskin goodwill and trade name in the second quarter of 2020.Company’s deferred tax assets discussed above.
At June 30, 2020,2021, the gross liability for income taxes associated with uncertain tax positions was $27,117,000.$27,028,000. Of this amount, $11,424,000$5,267,000 would benefit the Company’s consolidated condensed financial statements and effective income tax rate if favorably settled. The unrecognized tax liabilities are expected to decrease by approximately $404,000$470,000 during the next 12 months. The gross liability for uncertain tax positions increaseddecreased by $737,000 and $1,124,000$1,392,000 for the three andmonths ended June 30, 2021. The decrease was primarily due to an increase in effectively settled tax positions taken in the current quarter. The gross liability for uncertain tax positions decreased by $1,274,000 for the six months ended June 30, 2020, respectively,2021. The decrease was primarily due to increasesan increase in effectively settled tax positions taken duringin the current quarter.


27


year.
The Company recognizes interest and penalties related to income tax matters in income tax expense. For the three months ended June 30, 20202021 and 2019,2020, the Company's provision for income taxes includes a benefit of $49,000 and an expense of $25,000, and a benefitrespectively, related to the recognition of $221,000, respectively, and an expense of $54,000 and a benefit of $189,000, forinterest and/or penalties. For the six months ended June 30, 2021 and 2020, the Company's provision for income taxes includes a benefit of $282,000 and 2019,an expense of $54,000, respectively, related to the recognition of interest and/or penalties. As of June 30, 20202021 and December 31, 2019,2020, the gross amount of accrued interest and penalties included in income taxes payable in the accompanying consolidated condensed balance sheets was $1,723,000$950,000 and $1,669,000,$1,232,000, respectively.

32

The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is generally no longer subject to income tax examinations by tax authorities in the following major jurisdictions:
Tax JurisdictionYears No Longer Subject to Audit
U.S. federal2010 and prior
California (U.S.)2008 and prior
Germany2014 and prior
Japan2013 and prior
South KoreaJapan2014 and prior
United Kingdom2015 and prior
South Korea2015 and prior
United Kingdom2016 and prior

Pursuant to Section 382 of the Internal Revenue Code, use of the Company's net operating losses and credit carry-forwards may be limited significantly if the Company were to experience a cumulative change in ownership of the Company's stock by “5-percent shareholders” that exceeds 50% over a rolling three-year period. The Company does not believe there has beenbelieves a cumulative change in ownership in excessoccurred as a result of 50% during any rolling three-year period, andthe merger with Topgolf, for the Company continuesand Topgolf. The resulting limitations are not expected to monitor changes in its ownership. If such a cumulative change did occur in any three-year period andhave an adverse impact on future combined earnings of the Company were limited in the amount ofCompany. The limitation on losses and credits it could use to offset its tax liabilities, the Company's results of operations andimpact future cash flows couldbut those impacts are not expected to be adversely impacted.significant.
Note 14. Commitments & Contingencies
Legal Matters
The Company is subject to routine legal claims, proceedings, and investigations incident to its business activities, including claims, proceedings, and investigations relating to commercial disputes and employment matters. The Company also receives from time to time information claiming that products sold by the Company infringe or may infringe patent, trademark, or other intellectual property rights of third parties. One or more such claims of potential infringement could lead to litigation, the need to obtain licenses, the need to alter a product to avoid infringement, a settlement or judgment, or some other action or material loss by the Company, which also could adversely affect the Company’s overall ability to protect its product designs and ultimately limit its future success in the marketplace. In addition, the Company is occasionally subject to non-routine claims, proceedings, or investigations.
The Company regularly assesses such matters to determine the degree of probability that the Company will incur a material loss as a result of such matters, as well as the range of possible loss. An estimated loss contingency is accrued in the Company’s financial statements if it is probable the Company will incur a loss and the amount of the loss can be reasonably estimated. The Company reviews all claims, proceedings, and investigations at least quarterly and establishes or adjusts any accruals for such matters to reflect the impact of negotiations, settlements, advice of legal counsel, and other information and events pertaining to a particular matter. All legal costs associated with such matters are expensed as incurred.
Historically, the claims, proceedings, and investigations brought against the Company, individually and in the aggregate, have not had a material adverse effect on the consolidated results of operations, cash flows or financial position of the Company. The Company believes that it has valid legal defenses to the matters currently pending against the Company. These matters are inherently unpredictable and the resolutions of these matters are subject to many uncertainties and the outcomes are not predictable with assurance. Consequently, management is unable to estimate the ultimate aggregate amount of monetary loss, amounts covered by insurance, or the financial impact that will result from such matters. In addition, the Company cannot assure that it will be able to successfully defend itself in those matters, or that any amounts accrued are sufficient. 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.


28


Unconditional Purchase Obligations
During the normal course of its business, the Company enters into agreements to purchase goods and services, including purchase commitments for production materials, as well as endorsement agreements with professional athletes and other endorsers, employment and consulting agreements, and intellectual property licensing agreements pursuant to which the Company is required to pay royalty fees. It is not possible to determine the amounts the Company will ultimately be required to pay under these agreements as they are subject to many variables including performance-based bonuses, severance arrangements, the Company’s sales levels, and reductions in payment obligations if designated minimum

33

performance criteria are not achieved. The amounts listed approximate minimum purchase obligations, base compensation, and guaranteed minimum royalty payments the Company is obligated to pay under these agreements. The actual amounts paid under some of these agreements may be higher or lower than the amounts included. In the aggregate, the actual amount paid under these obligations is likely to be higher than the amounts listed as a result of the variable nature of these obligations. The Company has entered into many of these contractual agreements with terms ranging from one to four years.
The minimum obligation that the Company is required to pay as of June 30, 20202021 under these agreements is $77,138,000$96,214,000 over the next fourfive years and thereafter as follows (in thousands):
Remainder of 2020$45,202
202120,252
20229,119
20232,440
2024125
 $77,138

Remainder of 2021$40,895 
202233,472 
202320,969 
2024753 
2025125 
$96,214 
In addition, the Company also enters into unconditional purchase obligations with various vendors and suppliers of goods and services in the normal course of operations through purchase orders or other documentation or that are undocumented except for an invoice. Such unconditional purchase obligations are generally outstanding for periods less than a year and are settled by cash payments upon delivery of goods and services and are not reflected in this total.
Other Contingent Contractual Obligations
During its normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These include (i) intellectual property indemnities to the Company’s customers and licensees in connection with the use, sale and/or license of Company product or trademarks, (ii) indemnities to various lessors in connection with facility leases for certain claims arising from such facilities or leases, (iii) indemnities to vendors and service providers pertaining to the goods and services provided to the Company or based on the negligence or willful misconduct of the Company and (iv) indemnities involving the accuracy of representations and warranties in certain contracts. In addition, the Company has consulting agreements that provide for payment of nominal fees upon the issuance of patents and/or the commercialization of research results. The Company has also issued guarantees in the form of standby letters of credit.
The duration of these indemnities, commitments and guarantees varies, and in certain cases, may be indefinite. The majority of these indemnities, commitments and guarantees do not provide for any limitation on the maximum amount of future payments the Company could be obligated to make. Historically, costs incurred to settle claims related to indemnities have not been material to the Company’s financial position, results of operations or cash flows. In addition, the Company believes the likelihood is remote that payments under the commitments and guarantees described above will have a material effect on the Company’s consolidated financial statements. The fair value of indemnities, commitments and guarantees that the Company issued during and as of June 30, 20202021 was not material to the Company’s financial position, results of operations or cash flows.
Employment Contracts
In addition, the Company has made contractual commitments to each of its officers and certain other employees providing for severance payments, including salary continuation, upon the termination of employment by the Company without substantial cause or by the officer for good reason or non-renewal. In addition, in order to assure that the officers would continue to provide independent leadership consistent with the Company’s best interest, the contracts also generally provide


29


for certain protections in the event of a change in control of the Company. These protections include the payment of certain severance benefits, such as salary continuation, upon the termination of employment following a change in control.
Note 15. Share-Based Employee Compensation
As of June 30, 2020,2021, the Company had 23 shareholder approved stock plans under which shares were available for equity-based awards: the Callaway Golf Company Amended and Restated 2004 Incentive Plan, (the "2004 Incentive Plan") and the 2013 Non-Employee

34

Directors Stock Incentive Plan (the "2013 Directors Plan"). From time to time,and the 2021 Employment Inducement Plan. The Company grants stock options, restricted stock units, performance share units, phantom stock units, stock appreciation rights and other awards under these plans.
The Company accounts for its share-based compensation arrangements in accordance with ASC Topic 718, which requires the measurement and recognition of compensation expense for all share-based payment awards to employees and directors based on estimated fair values, and ASU No. 2014-12 for stock awards that are subject to performance measures. ASC Topic 718 further requires a reduction in share-based compensation expense by an estimated forfeiture rate. The forfeiture rate used by the Company is based on historical forfeiture trends. If actual forfeiture rates are not consistent with the Company’s estimates, the Company may be required to increase or decrease compensation expenses in future periods.
In connection with the merger with Topgolf, on March 8, 2021, the Company granted restricted stock units and performance share units to certain employees of the Company and Topgolf under the 2021 Employment Inducement Plan that was adopted by the Company as of the merger date. This inducement plan has substantially the same terms as the Company’s other stock plans.
Replacement Awards
In connection with the merger with Topgolf, the Company converted certain stock options previously held by former equity holders of Topgolf into options to purchase a number of shares of Callaway common stock, and certain outstanding restricted stock awards of Topgolf, to the extent unvested, into shares of Callaway common stock (together, the "replacement awards"). On March 8, 2021, the Company converted approximately 3,168,000 shares underlying stock options with a fair value of $5,343,000, and approximately 188,000 restricted stock awards with a fair value of $4,794,000. The Company's stock price on the conversion date was $29.52. The Company used the Black-Scholes option-pricing model to determine the fair value of the stock options. The average fair value assumptions used in the Black-Scholes model on March 8, 2021 were a risk-free interest rate of 0.6%, an expected term of 3.7 years and an expected stock price volatility of 55.1%.
Compensation expense will be recognized over the remaining vesting terms of each award ranging between 1 to 3 years. During the three and six months ended June 30, 2021, the Company recognized $1,572,000 and $1,978,000, respectively, in compensation expense related to these awards, net of estimated forfeitures. At June 30, 2021, unamortized compensation expense related to stock options and restricted stock awards was $4,061,000 and $3,792,000, respectively, which will recognized over a weighted average period of 1.5 years and 1.7 years, respectively.
Restricted Stock Units
Restricted stock units awarded under the 2004 Incentive Plan and the 2013 Directors Plan are valued at the Company’s closing stock price on the date of grant. Restricted stock unitsgrant, and generally vest over a one-one- to five-year period. Compensation expense for restricted stock units is recognized on a straight-line basis over the vesting period and is reduced by an estimate for forfeitures.
During the three months ended June 30, 20202021 and 2019,2020, the Company granted134,000 122,000 and 53,000 underlying restricted stock units, respectively, at a weighted average grant-date fair value of $14.15 and $16.73 per share, respectively. During the six months ended June 30, 2020 and 2019, the Company granted 402,000 and 452,000134,000 shares underlying restricted stock units, respectively, at a weighted average grant-date fair value of $17.83$29.66 and $15.35$14.15 per share, respectively. During the six months ended June 30, 2021 and 2020, the Company granted 1,109,000 shares underlying restricted stock units, including inducement awards of 774,000, and 402,000 shares underlying restricted stock units, respectively, at a weighted average grant-date fair value of $29.61 and $17.83 per share, respectively.
Total compensation expense, net of estimated forfeitures, recognized for restricted stock units was $1,362,000$3,775,000 and $1,683,000$1,362,000 for the three months ended June 30, 20202021 and 2019,2020, respectively, and $2,977,000$5,950,000 and $3,319,000,$2,977,000, for the six months ended June 30, 2021 and 2020, and 2019, respectively.
At June 30, 2020,2021, the Company had $12,349,000$45,873,000 of total unamortized compensation expense related to non-vested restricted stock units. That cost is expected to be recognized over a weighted-average period of 2.12.3 years.
Performance Based Awards
Performance based awards are stock-based awards in which the number of shares ultimately received depends on the Company's performance against specified metrics, over a one- to five-yearincluding earnings before interest, taxes, depreciation, amortization and stock compensation, earnings per share, adjusted pre-tax income and total shareholder return. The performance period ranges over one- to five years from the date of grant. These performance metrics are established by the Company at the beginning of the performance period. At the end of the performance period, the number of shares of stock that could be issued is fixed based upon the degree of achievement of the performance goals. The number of shares that could be issued can range from 0% to 200% of the participant's target award. The Company grants two types of performance based awards: performance share units and awards subject to total shareholder return metrics under the 2004 Incentive Plan.
Performance share units are initially valued at the Company's closing

35

stock price on the date of grant. Stock compensation expense, net of estimated forfeitures, is recognized on a straight-line basis over the vesting period. The expense recognized over the vesting period is adjusted up or down based on the anticipated performance level during the performance period. If the performance metrics are not probable of achievement during the performance period, compensation expense would be reversed. The awards are forfeited if the threshold performance metrics are not achieved as of the end of the performance period. The performance share units cliff-vest in full over a period of three to five years from the date of grant.
Performance share units with total shareholder return requirements are awards that compareDuring the performance of the Company's common stock over a three-year period to that of the Company's peer group. The fair value of these awards is derived using the Monte Carlo simulation which utilizes the stock volatility, dividend yield and market correlation ofthree months ended June 30, 2021, the Company and the Company's peer group. The Monte Carlo fair value is expensed on a straight-line basis over the vesting


30


period, net of estimated forfeitures. The awards are forfeited if the threshold performance metrics are not achieved as of the end of the performance period. The performance share units cliff-vest in full over a three-year vesting period.
The Company granted 125,000 and 265,00095,000 shares underlying performance share units duringat a weighted average grant-date fair value of $27.11. During the six months ended June 30, 2021 and 2020, the Company granted 1,440,000 shares underlying performance share units, including inducement awards of 1,149,000, and 2019,125,000, respectively, at a weighted average grant-date fair value of $19.66$29.42 and $15.17 per share,$19.66, respectively. There were no0 performance share units granted during three months ended June 30, 2020 and 2019. The awards granted during 2020 and 2019 are subject to a three- to five-year performance period provided that (i) if certain first year performance goals are achieved, the participant could earn up to 50% of the three-year target award shares, subject to continued service through the vesting date, and (ii) if certain cumulative first- and second-year performance goals are achieved, the participant could earn up to an aggregate of 80% of the three-year target award shares (which includes any shares earned during the first year), subject to continued service through the vesting date. Based on the Company’s performance, participants earned a minimum of 50% of the target award shares granted in 2019, and 80% of the target award shares granted in 2018, in each case subject to continued service through the vesting date.2020.
During the six months ended June 30, 2020 and 2019, the Company granted 125,000 and 149,000 shares underlying performance share units subject to total shareholder return requirements, respectively, at a weighted average grant-date fair value of $23.22 and $16.96, respectively. There were no performance share units granted during three months ended June 30, 2020 and 2019.
During the six months ended June 30, 2020, the Company performed a remeasurement of these awards based on the Company’s most recent financial targets resulting in a reduction to expense. During the three months ended June 30, 20202021 and 2019,2020, the Company recognized total compensation expense, for performance-based awards of $5,692,000 and $1,572,000, respectively, net of estimated forfeitures, for performance based awards of $1,572,000 and $1,847,000, respectively$7,720,000 and $1,817,000 and $3,646,000 for the six months ended June 30, 2021 and 2020, and 2019, respectively. The decrease in expense reflects a decrease in the anticipated degree of achievement against the performance metrics established on performance-based awards as a result of the uncertain future economic impact on the Company's business due to the COVID-19 pandemic.

At June 30, 2020,2021, unamortized compensation expense related to these awards was $8,170,000,$70,749,000, which is expected to be recognized over a weighted-average period of 1.72.4 years.

Share-Based Compensation Expense
The table below summarizes the amounts recognized in the financial statements for the three and six months ended June 30, 20202021 and 20192020 for share-based compensation, including expense for restricted stock units, and performance share units, restricted stock awards and stock options (in thousands).
 Three Months Ended June 30, Six Months Ended
June 30,
 2020 2019 2020 2019
    
Cost of sales$239
 $247
 $395
 $502
Operating expenses2,694
 3,283
 4,399
 6,463
Total cost of share-based compensation included in income, before income tax$2,933
 $3,530
 $4,794
 $6,965

 Three Months Ended June 30,Six Months Ended
June 30,
2021202020212020
Cost of products$321 $239 $547 $395 
Selling, general and administrative expenses10,471 2,526 14,681 4,114 
Research and development expenses244 168 420 285 
Total cost of share-based compensation included in income, before income tax11,036 2,933 15,648 4,794 
Income tax benefit2,649 704 3,756 1,151 
Total cost of employee share-based compensation, after tax$8,387 $2,229 $11,892 $3,643 
Note 16. Fair Value of Financial Instruments
Certain of the Company’s financial assets and liabilities are measured at fair value on a recurring and nonrecurring basis. Fair value is defined as the price that would be received to sell an asset or the price paid to transfer a liability (the exit price) in the principal and most advantageous market for the asset or liability in an orderly transaction between market participants. Assets and liabilities carried at fair value are classified using the following three-tier hierarchy:
Level 1: Quoted market prices in active markets for identical assets or liabilities;
Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and
Level 3: Fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.


36
31


The following table summarizes the valuation of the Company’s foreign currency forward contracts (see Note 17) that are measured at fair value on a recurring basis by the above pricing levels at June 30, 20202021 and December 31, 20192020 (in thousands):
 
Fair
Value
 Level 1 Level 2 Level 3
June 30, 2020       
Foreign currency forward contracts—asset position$3,378
 $—
 $3,378
 $—
Foreign currency forward contracts—liability position(825) —
 (825) —
        
Interest rate hedge agreements—liability position(20,602) —
 (20,602) —
 $(18,049) $—
 $(18,049) $—
December 31, 2019       
Foreign currency forward contracts—asset position$61
 $—
 $61
 $—
Foreign currency forward contracts—liability position(766) —
 (766) —
        
Cross-currency debt swap agreements—asset position6,163
 —
 6,163
 —
Cross-currency debt swap agreements—liability position(25) —
 (25) —
        
Interest rate hedge agreements—asset position(8,894) —
 (8,894) —
 $(3,461) $—
 $(3,461) $—

Fair
Value		Level 1Level 2Level 3
June 30, 2021
Foreign currency forward contracts—asset position(1)
$6,552 $0 $6,552 $0 
Foreign currency forward contracts—liability position(1)
(378)0 (378)0 
Interest rate hedge agreements—liability position(2)
(13,303)0 (13,303)0 
$(7,129)$0 $(7,129)$0 
December 31, 2020
Foreign currency forward contracts—asset position(1)
$90 $0 $90 $0 
Foreign currency forward contracts—liability position(1)
(1,553)0 (1,553)0 
Interest rate hedge agreements—liability position(2)
(17,922)0 (17,922)0 
$(19,385)$0 $(19,385)$0 
(1)The fair value of the Company’s foreign currency forward contracts and cross-currency debt swap contracts areis 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 and cross-currency debt swap 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. place (see Note 17).
(2)The fair value of interest rate hedge contracts areis based on observable inputs that are corroborated by market data. Observable inputs include daily market foreign currency rates and interest rate curves. Remeasurement gains and losses are recorded in accumulated other comprehensive income (loss) until recognized in earnings as interest payments are made or received on the Company’s variable-rate debt. Remeasurement gains and losses on foreign currency forward contracts that are not-designated as cash flow hedges are recorded in other income (expense) (see Note 17).
Disclosures about the Fair Value of Financial Instruments
The carrying values of cash and cash equivalents at June 30, 20202021 and December 31, 20192020 are categorized within Level 1 of the fair value hierarchy. The table below summarizesillustrates information about fair value relating to the Company’s financial assets and liabilities that are recognized in the accompanying consolidated condensed balance sheets as of June 30, 20202021 and December 31, 2020 (in thousands).
 June 30, 2021December 31, 2020
 Carrying
Value		Fair
Value		Carrying
Value		Fair 
Value
Term Loan Facility(1)
$439,200 $441,515 $441,600 $443,243 
Japan Term Loan Facility(2)
$15,300 $15,356 $18,390 $16,083 
Convertible Notes(3)
$258,750 $526,802 $258,750 $414,191 
U.S. Asset-Based Revolving Credit Facility(4)
$21,438 $21,438 $22,130 $22,130 
Equipment Notes(5)
$27,655 $29,380 $31,822 $29,385 
Topgolf Revolving Credit Facility(6)
$42,873 $42,873 $0 $0 
Mortgage Loans(7)
$46,634 $52,739 $0 $0 
Topgolf Term Loan(8)
$335,088 $331,835 $0 $0 
(1)In January 2019, as well asthe Company entered into a Term Loan Facility. The fair value of this debt is based on quoted prices for similar instruments in active markets combined with quantitative pricing models, and is therefore categorized within Level 2 of the fair value of contingent contracts that represent financial instruments (in thousands).hierarchy. See Note 7 for further information.
 June 30, 2020 December 31, 2019
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair 
Value
Term Loan Facility(1)
$444,000
 $440,168
 $446,400
 $450,864
Convertible Notes(2)
$258,750
 $319,952
 $—
 $—
Primary Asset-Based Revolving Credit Facility(3)
$27,756
 $27,756
 $114,480
 $114,480
Japan ABL Facility(3)
$27,795
 $27,795
 $30,100
 $30,100
Equipment notes(4)
$26,754
 $26,754
 $19,715
 $19,715

(1)In January 2019, the Company entered into a Term Loan Facility. The fair value of this debt is categorized within Level 2 of the fair value hierarchy. See Note 6 for further information.
(2)In May 2020, the Company issued $258,750,000 of 2.75% Convertibles Notes due in 2026. The fair value of this debt is categorized within Level 2 of the fair value hierarchy. For further discussion, see Note 6.

37

32


(2)In August 2020, the Company entered into the Japan Term Loan Facility. The fair value is categorized within Level 2 of the fair value hierarchy. The Company used discounted cash flows and market-based expectations for interest rates, credit risk, and the contractual terms of the debt to derive the fair value. See Note 7 for further information.
(3)The carrying value of the amounts outstanding under the Company's ABL Facility and Japan ABL Facility approximates the fair value due to the short-term nature of these obligations. The fair value of this debt is categorized within Level 2 of the fair value hierarchy based on the observable market borrowing rates. See Note 6 for information on the Company's credit facilities, including certain risks and uncertainties related thereto.
(4)In December 2017, August 2019 and March 2020, the Company entered into equipment notes that are both secured by certain equipment at the Company's golf ball manufacturing facility. The fair value of this debt is categorized within Level 2 of the fair value hierarchy. See Note 6 for further information.
(3)In May 2020, the Company issued $258,750,000 of 2.75% Convertible Notes due in 2026. The fair value of this debt is based on quoted prices in secondary markets combined with quantitative pricing models, and is therefore categorized within Level 2 of the fair value hierarchy. For further discussion, see Note 7.
(4)The carrying value of the amounts outstanding under the Company's ABL Facility approximates the fair value due to the short-term nature of these obligations. The fair value of this debt is categorized within Level 2 of the fair value hierarchy based on the observable market borrowing rates. See Note 7 for information on the Company's credit facilities, including certain risks and uncertainties related thereto.
(5)The Company entered into equipment notes in 2017, 2019 and 2020 that are secured by certain equipment at the Company's golf ball manufacturing facility. The fair value of this debt is categorized within Level 2 of the fair value hierarchy. The Company used discounted cash flows and market-based expectations for interest rates, credit risk, and the contractual terms of the debt to derive the fair value. See Note 7 for further information.
(6)The carrying amount of the Topgolf Revolving Credit Facility approximates its fair value because the applicable interest rate is adjusted regularly based on current market conditions. See Note 7 for further information.
(7)The fair value of the mortgage loans is calculated based on the future payments under the mortgage agreement discounted at the incremental borrowing rate. See Note 7 for further information.
(8)The fair value of the Topgolf Term Loan is based on quoted market rate from the lender. See Note 7 for further information.
Nonrecurring Fair Value Measurements
The Company measures certain assets at fair value on a nonrecurring basis at least annually or more frequently if certain indicators are present. These assets include long-lived assets, goodwill, non-amortizing intangible assets and investments that are written down to fair value when they are held for sale or determined to be impaired. During the second quarter of 2020, the Company considered the macroeconomic conditions related to the COVID-19 pandemic and its potential impact to sales and operating income for the remainder of fiscal 2020, and determined that there were indicators of impairment and proceeded with a quantitative assessment of goodwill for all reporting units. As a result of the second quarter assessment, the Company determined that the fair value of one of its reporting units was less than its carrying value, and therefore recognized a goodwill impairment loss of $148,375,000 in the second quarter of 2020. In addition, the Company recognized an impairment loss of $25,894,000 on one of its trade names (see Note 9). There were no0 impairment losses recorded during the three and six months ended June 30, 2019.2021.
Note 17. Derivatives and Hedging
In the normal course of business, the Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to transactions of its international subsidiaries as well as fluctuations in foreign currency exchange rates and changes in interest rates relating to its long-term debt. The Company uses designated cash flow hedges and non-designated hedges in the form of foreign currency forward contracts as part of its strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates and to mitigate the impact of foreign currency translation on transactions that are denominated primarily in Japanese Yen, British Pounds, Euros, Canadian Dollars, Australian Dollars and Korean Won. The Company also uses cross-currency debt swap contracts and interest rate hedge contracts to mitigate the impact of variable rates on its long-term debt as well as changes in foreign currencies.
The Company accounts for its foreign currency forward contracts, cross-currency debt swap contracts and interest rate hedge contracts in accordance with ASC Topic 815. ASC Topic 815 requires the recognition of all derivative instruments as either assets or liabilities on the balance sheet, the measurement of those instruments at fair value and the recognition of changes in the fair value of derivatives in earnings in the period of change, unless the derivative qualifies as a designated cash flow hedge that offsets certain exposures. Certain criteria must be satisfied in order for derivative financial instruments to be classified and accounted for as a cash flow hedge. Gains and losses from the remeasurement of qualifying cash flow hedges are recorded as a component of accumulated other comprehensive income (loss) and released into earnings as a component of cost of goods soldproducts or net sales,revenue, other income (expense) and interest expense during the

38

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.


33


The following table summarizes the fair value of the Company's derivative instruments as well as the location of the asset and/or liability on the consolidated condensed balance sheets at June 30, 20202021 and December 31, 20192020 (in thousands):
Balance Sheet LocationFair Value of
Asset Derivatives
June 30, 2021December 31, 2020
Derivatives designated as cash flow hedging instruments:
Foreign currency forward contractsOther current assets$1,874 $37 
Derivatives not designated as hedging instruments:
Foreign currency forward contractsOther current assets4,678 53 
Total asset position$6,552 $90 
 Balance Sheet Location 
Fair Value of
Asset Derivatives
 June 30, 2020 December 31, 2019
Derivatives designated as cash flow hedging instruments:     
Foreign currency forward contractsOther current assets $999
 $53
Derivatives not designated as hedging instruments:     
Foreign currency forward contractsOther current assets $2,379
 $8
 Balance Sheet Location 
Fair Value of
Liability Derivatives
 June 30, 2020 December 31, 2019
Derivatives designated as cash flow hedging instruments:     
Foreign currency forward contractsAccounts payable and accrued expenses $31
 $24
      
Cross-currency debt swap agreementsAccounts payable and accrued expenses —
 25
      
Interest rate hedge agreementsAccounts payable and accrued expenses 4,756
 1,865
 Other long-term liabilities 15,846
 7,030
Total  $20,633
 $8,944
Derivatives not designated as hedging instruments:     
Foreign currency forward contractsAccounts payable and accrued expenses $794
 $741

Balance Sheet LocationFair Value of
Liability Derivatives
June 30, 2021December 31, 2020
Derivatives designated as cash flow hedging instruments:
Foreign currency forward contractsAccrued AP and expenses$116 $38 
Interest rate hedge contractsAccrued AP and expenses4,752 4,780 
Interest rate hedge contractsOther long-term liabilities8,551 13,142 
13,419 17,960 
Derivatives not designated as hedging instruments:
Foreign currency forward contractsAccrued AP and expenses262 1,515 
Total liability position$13,681 $19,475 
The Company's derivative instruments are subject to a master netting agreement with each respective counterparty bank and are therefore net settled at their maturity date. Although the Company has the legal right of offset under the master netting agreements, the Company has elected not to present these contracts on a net settlement amount basis, and therefore present these contracts on a gross basis on the accompanying consolidated condensed balance sheets at June 30, 20202021 and December 31, 2019.2020.
Cash Flow Hedging Instruments
Foreign Currency Forward Contracts
The Company uses foreign currency derivatives designated as qualifying cash flow hedging instruments, including foreign currency forward contracts to help mitigate the Company's foreign currency exposure on intercompany sales of inventory to its foreign subsidiaries. These contracts generally mature within 12 to 15 months from their inception. At June 30, 2021 and December 31, 2020, the notional amounts of the Company's foreign currency forward contracts designated as cash flow hedge instruments were approximately $40,745,000. At December 31, 2019, the Company had 0 outstanding foreign currency forward contracts designated as cash flow hedge instruments.$34,075,000, and $756,000, respectively.
As of June 30, 2020,2021, the Company recorded a net gain of $1,974,000$2,065,000 in accumulated other comprehensive income (loss)loss related to foreign currency forward contracts. Of this amount, net gains of $407,000$192,000 for the three months ended June 30, 20202021 and $408,000net losses of $78,000 for the six months ended June 30, 20202021, were relievedremoved from accumulated other comprehensive income (loss)loss and recognized in cost of goods soldproducts for the underlying intercompany sales that were recognized, and net gains of $232,000$22,000 and $44,000 for the three months ended June 30, 2020 and $464,000 for the six months ended June 30, 2020, were relieved from accumulated other comprehensive income (loss)2021, respectively, related to the amortization of forward points.

39

points were removed from accumulated other comprehensive loss and recognized in cost of products. There were 0 ineffective hedge gains or losses recognized during the three and six months ended June 30, 2020.2021. Based on the current valuation, the Company expects to reclassify net gains of $1,103,000$1,829,000 from accumulated other comprehensive income (loss)loss into net earnings during the next 12 months.
The Company recognized net gains of $242,000$407,000 and $565,000$408,000 in cost of goods sold forproducts in the three and six months ended June 30, 2019,2020, respectively.


34


Cross-Currency Debt Swap and Interest Rate Hedge Contract and Cross-Currency Debt Swap
In order to mitigate the risk of changes in interest rates associated with the Company's variable-rate Term Loan Facility and EUR denominated intercompany loan, the Company used a cross-currency debt swap and interest rate hedge, both designated as cash flow hedges (see Note 6)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. AsDuring the first quarter of 2020, the Company unwound the cross-currency swap, and as of June 30, 2020 the Company unwound the cross currency swap, and determined that the forecasted transaction in connection with the underlying EUR denominated intercompany loan was no longer probable of occurring. As such, the Company discontinued the hedge and released net gains of $11,046,000 from accumulated other comprehensive income to other income (expense), net during the three months ended June 30,second quarter of 2020. The Company maintained the interest rate hedge related to the USD denominated Term Loan Facility in order to continue mitigating the risk of changes in interest rates. Over the life of the facility, the Company will receive variable interest payments from the counterparty lenders in exchange for the Company making fixed rate payments, without exchange of the underlying notional amount. As of June 30, 2020, theThe notional amount outstanding under the interest rate hedge contract was $197,352,000. As$195,348,000 and $196,350,000 as of June 30, 2021 and December 31, 2019,2020, respectively.
During the notional amount outstanding underthree and six months ended June 30, 2021, the cross-currency debt swapCompany recorded net gains of $462,000 and $2,228,000 related to the remeasurement of the interest rate hedge contract was $198,353,000.in accumulated other comprehensive loss. Of these amounts, net losses of $1,206,000 and $2,391,000 were relieved from accumulated other comprehensive loss and recognized in interest expense during the three and six months ended June 30, 2021, respectively. Based on the current valuation, the Company expects to reclassify a net loss of $4,757,000 related to the interest rate hedge contract from accumulated other comprehensive loss into earnings during the next 12 months. The Company recognized net losses of $1,017,000 and $1,451,000 in interest expense during the three and six months ended June 30, 2020, respectively.
In connection with the cross-currency swap contract, during the six months ended June 30, 2020, the Company recorded a remeasurement net gain of $15,081,000 in accumulated other comprehensive income (loss).loss. There were no0 remeasurement gains or losses recorded during the three months ended June 30, 2020. During the three and six months ended June 30, 2020, net gains of $11,463,000 and $18,510,000, respectively, were relieved from accumulated other comprehensive income (loss).loss. The recognition of these net gains into earnings is summarized as follows:
•Net gains of $11,046,000 related to the discontinuation of the cross-currency swap contract were recognized in other income (expense) in the three and six months ended June 30, 2020.
•Net gains related to foreign currency of $5,735,000 were recognized in other income (expense) in the six months ended June 30, 2020. There were no0 net foreign currency gains or losses recognized in the threesix months ended June 30, 2020.2021.
•Net gains of $417,000 and $1,730,000 were recognized in interest income during the three and six months ended June 30, 2020.
During the three and six months ended June 30, 2019, net losses of $553,000 and net gains of $2,251,000 were relieved from accumulated other comprehensive income (loss) in connection with the cross currency swap. The recognition of these net gains and losses into earnings is summarized as follows:
Net gains of $2,178,000 and $2,287,000 were recognized in interest income in the three and six months ended June 30, 2019.
Net losses related to foreign currency of $2,731,000 and $35,000 were recognized in other income (expense) in the three and six months ended June 30, 2019.
During the three and six months ended June 30, 2020, the Company recorded net losses of $1,928,000 and $13,161,000, respectively, related to the remeasurement of the interest rate hedge contract in accumulated other comprehensive income (loss). Of these amounts, net losses of $1,017,000 and $1,451,000 were relieved from accumulated other comprehensive income (loss) and recognized in interest expense during the three and six months ended June 30, 2020, respectively. Based on the current valuation, the Company expects to reclassify aThere were 0 net loss of $4,756,000 related to thegains or losses recognized in interest rate hedge contract from accumulated other comprehensive income (loss) into earnings during the next 12 months.

three and six months ended June 30, 2021.

3540


The following tables summarize the net effect of all cash flow hedges on the consolidated condensed financial statements for the three and six months ended June 30, 20202021 and 20192020 (in thousands):
Gain/(Loss) Recognized in Other Comprehensive Income
(Effective Portion)
Three Months Ended
June 30,		Six Months Ended
June 30,
Derivatives designated as cash flow hedging instruments2021202020212020
Foreign currency forward contracts$(126)$(436)$2,065 $1,974 
Cross-currency debt swap agreements0 0 0 15,081 
Interest rate hedge agreements(462)(1,928)2,228 (13,161)
$(588)$(2,364)$4,293 $3,894 
 Gain/(Loss) Recognized in Other Comprehensive Income
(Effective Portion)		Gain/(Loss) Reclassified from Other Comprehensive Income into Earnings
(Effective Portion)
 Three Months Ended
June 30,		 Six Months Ended
June 30,		Three Months Ended
June 30,		Six Months Ended
June 30,
Derivatives designated as cash flow hedging instruments 2020 2019 2020 2019Derivatives designated as cash flow hedging instruments2021202020212020
Foreign currency forward contracts $(436) $27
 $1,974
 $573
Foreign currency forward contracts$215 $638 $(33)$872 
Cross-currency debt swap agreements —
 (2,907) 15,081
 1,164
Cross-currency debt swap agreements0 11,463 0 18,510 
Interest rate hedge agreements (1,928) (3,956) (13,161) (7,897)Interest rate hedge agreements(1,206)(1,017)(2,391)(1,447)
 $(2,364) $(6,836) $3,894
 $(6,160)$(991)$11,084 $(2,424)$17,935 
  
Gain/(Loss) Reclassified from Other Comprehensive Income into Earnings
(Effective Portion)
  Three Months Ended
June 30,		 Six Months Ended
June 30,
Derivatives designated as cash flow hedging instruments 2020 2019 2020 2019
Foreign currency forward contracts $638
 $228
 $872
 $374
Cross-currency debt swap agreements 11,463
 (1,463) 18,510
 2,251
Interest rate hedge agreements (1,017) (34) (1,447) (44)
  $11,084
 $(1,269) $17,935
 $2,581

Foreign Currency Forward Contracts Not Designated as Hedging Instruments
The Company uses foreign currency forward contracts that are not designated as qualifying cash flow hedging instruments to mitigate certain balance sheet exposures (payables and receivables denominated in foreign currencies), as well as gains and losses resulting from the translation of the operating results of the Company’s international subsidiaries into U.S. dollars for financial reporting purposes. These contracts generally mature within 12 months from their inception. At June 30, 20202021 and December 31, 2019,2020, the notional amounts of the Company’s foreign currency forward contracts used to mitigate the exposures discussed above were approximately $125,108,000$177,509,000 and $72,119,000,$81,627,000, respectively. The Company estimates the fair values of foreign currency forward contracts based on pricing models using current market rates, and records all derivatives on the balance sheet at fair value with changes in fair value recorded in the consolidated condensed statements of operations. The foreign currency contracts are classified under Level 2 of the fair value hierarchy (see Note 16).
The following table summarizes the location of net gains and losses in the consolidated condensed statements of operations that were recognized during the three and six months ended June 30, 20202021 and 2019,2020, respectively, in addition to the derivative contract type (in thousands):
  
 Location of Net Gain Recognized in Income on Derivative Instruments Amount of Net Gain/(Loss) Recognized in Income on 
Derivative Instruments
Derivatives not designated as hedging instruments Three Months Ended
June 30,		 Six Months Ended
June 30,
 2020 2019 2020 2019
Foreign currency forward contracts Other expense, net $(595) $691
 $5,261
 $1,441

  
Location of Net Gain (Loss) Recognized in Income on Derivative InstrumentsAmount of Net Gain (Loss) Recognized in Income on 
Derivative Instruments
Derivatives not designated as hedging instrumentsThree Months Ended
June 30,		Six Months Ended
June 30,
2021202020212020
Foreign currency forward contractsOther expense, net$(1,610)$(595)$9,030 $5,261 
In addition, for the three months ended June 30, 20202021 and 2019,2020, the Company recognized a net foreign currency gainstransaction loss of $2,906,000$1,604,000 and $2,729,000,a gain of $2,906,000, respectively, and net foreign currency losses of $2,241,000$3,067,000 and $2,609,000,$2,241,000, respectively for the six months ended June 30, 20202021 and 2019,2020, related to transactions with its foreign subsidiaries, respectively.

subsidiaries.

3641


Note 18. Accumulated Other Comprehensive Loss
The following table details the amounts reclassified from accumulated other comprehensive loss to cost of goods sold,products, as well as changes in foreign currency translation for the three and six months ended June 30, 2020.2021. Amounts are in thousands.
       
  Derivative Instruments Foreign Currency Translation Total
Accumulated other comprehensive loss, March 31, 2020, after tax $(4,362) $(33,155) $(37,517)
Change in derivative instruments (2,364) —
 (2,364)
Net gains reclassified to cost of goods sold (639) —
 (639)
Net gains reclassified to other income (expense) (11,046) —
 (11,046)
Net gains reclassified to interest expense 596
 —
 596
Income tax benefit on derivative instruments 3,023
 —
 3,023
Foreign currency translation adjustments��—
 8,155
 8,155
Accumulated other comprehensive loss, June 30, 2020, after tax $(14,792) $(25,000) $(39,792)
Derivative InstrumentsForeign Currency TranslationTotal
Accumulated other comprehensive loss, March 31, 2021, after tax$(8,674)$(8,772)$(17,446)
Change in derivative instruments(588)0 (588)
Net gains reclassified to cost of goods sold(215)0 (215)
Net losses reclassified to interest expense1,206 0 1,206 
Income tax provision on derivative instruments(617)0 (617)
Foreign currency translation adjustments0 5,966 5,966 
Accumulated other comprehensive loss, June 30, 2021, after tax$(8,888)$(2,806)$(11,694)
Derivative InstrumentsForeign Currency TranslationTotal
Accumulated other comprehensive loss, December 31, 2020, after tax$(14,017)$7,471 $(6,546)
Change in derivative instruments4,293 0 4,293 
Net gains reclassified to cost of products33 0 33 
Net losses reclassified to interest expense2,391 0 2,391 
Income tax provision on derivative instruments(1,588)0 (1,588)
Foreign currency translation adjustments0 (10,277)(10,277)
Accumulated other comprehensive loss, June 30, 2021, after tax$(8,888)$(2,806)$(11,694)
  Derivative Instruments Foreign Currency Translation Total
Accumulated other comprehensive loss, December 31, 2019, after tax $(4,203) $(18,219) $(22,422)
Change in derivative instruments 3,894
 —
 3,894
Net gains reclassified to cost of goods sold (872) —
 (872)
Net gains reclassified to other income (expense) (16,781) —
 (16,781)
Net gains reclassified to interest expense (283) —
 (283)
Income tax benefit on derivative instruments 3,453
 —
 3,453
Foreign currency translation adjustments —
 (6,781) (6,781)
Accumulated other comprehensive loss, June 30, 2020, after tax $(14,792) $(25,000) $(39,792)

Note 19. Segment Information
TheOn March 8, 2021 the Company has 2completed its merger with Topgolf. Topgolf is primarily a services-based business that provides hospitality offerings and golf entertainment experiences, which is uniquely different compared to the Company's Golf Equipment and Apparel, Gear and Other businesses, which produce, distribute and sell goods through various sales channels. Accordingly, based on the Company's re-assessment of its operating segments, the Company added a third operating segment for its Topgolf business. Therefore, as of June 30, 2021, the Company had 3 reportable operating segments: Golf Equipment, operating segment and Apparel, Gear and Other operating segment. and Topgolf.
The Golf Equipment operating segment which is comprised of product revenues and expenses that encompass golf club and golf ball products, includesincluding Callaway Golf brandedGolf-branded woods, hybrids, irons, wedges, Odyssey putters, including Toulon Design putters by Odyssey, packaged sets, Callaway Golf and Strata branded golf balls and sales of pre-owned golf clubs.
The Apparel, Gear and Other operating segment includesis comprised of product revenues and expenses for the Jack Wolfskin outdoor apparel, gear and accessories business, the TravisMathew golf and lifestyle apparel and accessories andbusiness, the Callaway and Ogio 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, anduse. This segment also includes royalties from licensing of the Company’s trademarks and service marks for various soft goods products.
The Topgolf operating segment is primarily comprised of service revenues and expenses for its Company-operated Topgolf venues equipped with technology-enabled hitting bays, multiple bars, dining areas and event spaces, as well as Toptracer ball-flight tracking technology used by independent driving ranges and broadcast television, and the Company's WGT digital golf game.
There are no significant intersegment transactions during the three and six months ended June 30, 2021 or 2020.


42
37


The tables below contain information utilized by management to evaluate its operating segments for the interim periods presented (in thousands).
 Three Months Ended
June 30,		Six Months Ended
June 30,
 2021202020212020
Net revenues:
Golf Equipment$401,259 $209,943 $778,141 $501,604 
Apparel, Gear and Other186,929 87,053 369,031 237,668 
Topgolf(1)
325,453 0 418,090 0 
Total net revenues$913,641 $296,996 $1,565,262 $739,272 
Income before income taxes:
Golf Equipment$98,089 $29,181 $183,010 $87,801 
Apparel, Gear and Other15,668 (11,711)36,158 (15,510)
Topgolf(1)
24,204 0 28,158 0 
Total segment operating income137,961 17,470 247,326 72,291 
Reconciling items(2)
(62,070)(193,085)148,769 (209,861)
Total income before income taxes$75,891 $(175,615)$396,095 $(137,570)
Additions to long-lived assets:(3)
Golf Equipment$9,359 $2,778 $15,784 $19,740 
Apparel, Gear and Other7,507 3,142 12,574 13,266 
Topgolf114,009 0 140,127 0 
Total additions to long-lived assets$130,875 $5,920 $168,485 $33,006 
 Three Months Ended
June 30,		 Six Months Ended
June 30,
 2020 2019 2020 2019
Net sales:       
Golf Equipment$209,943
 $292,353
 $501,604
 $615,972
Apparel, Gear and Other87,053
 154,355
 237,668
 346,933
 $296,996
 $446,708
 $739,272
 $962,905
Income (loss) before income taxes:       
Golf Equipment$29,181
 $55,665
 $87,801
 $125,658
Apparel, Gear and Other(11,711) 11,314
 (15,510) 34,033
Reconciling items(1)
(193,085) (30,873) (209,861) (65,528)
 $(175,615) $36,106
 $(137,570) $94,163
Additions to long-lived assets:(2)
       
Golf Equipment$2,778
 $7,924
 $19,740
 $13,341
Apparel, Gear and Other3,142
 4,289
 13,266
 8,682
 $5,920
 $12,213
 $33,006
 $22,023

(1)On March 8, 2021, the Company completed the merger with Topgolf and has included the results of operations of Topgolf in its consolidated condensed statements of operations from that date forward.
(2)Reconciling items represent the deduction of corporate general and administration expenses and other income (expenses), which are not utilized by management in determining segment profitability. Reconciling items for the three and six months ended June 30, 2021 also include (i) transaction, transition and other non-recurring expenses in connection with the merger with Topgolf of $2,503,000 and $18,731,000, respectively, (ii) amortization and depreciation expense of $6,184,000 and $8,431,000, respectively, on the acquired intangible assets and fair value step-up of leases and property, plant and equipment (see Note 6), and (iii) $771,000 and $1,480,000, respectively, of costs related to the implementation of new IT systems for Jack Wolfskin. The six months ended June 30, 2021 also includes a gain of $252,531,000 related to the fair value step-up on the Company's pre-acquisition investment in Topgolf (see Note 10).
Reconciling items for the three and six months ended June 30, 2020 included an impairment charge of $174,269,000 related to Jack Wolfskin (see Note 9), in addition to severance related to the Company's cost reduction initiatives in response to the COVID-19 pandemic, non-recurring costs associated with the Company's transition to its new North America Distribution Center and costs related to the integration of Jack Wolfskin. These increases were partially offset by the recognition of a net gain of $11,046,000 related to a cash flow hedge that was discontinued during the second quarter of 2020.
(3)Additions to long-lived assets are comprised of purchases of property, plant and equipment.
(1)Reconciling items represent the deduction of corporate general and administration expenses and other income (expenses), which are not utilized by management in determining segment profitability. The increase in reconciling items for the three and six months ended June 30, 2020 compared to June 30, 2019 was primarily due to the recognition of a $174,269,000 impairment loss related to the Jack Wolfskin trade name and goodwill (see Note 9). This increase was partially offset by the recognition of a net gain of $11,046,000 related to a cash flow hedge that was discontinued during the second quarter of 2020. Reconciling items also include net gains of $1,622,000 and $9,947,000 recognized on hedging contracts for the three and six months ended June 30, 2020, respectively. These increases were partially offset by a decrease in non-recurring charges primarily related to the acquisition of Jack Wolfskin in January 2019 (see Note 5).
(2)Additions to long-lived assets are comprised of purchases of property, plant and equipment.



43
38


Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Consolidated Condensed Financial Statements and the related notes that appear elsewhere in this report. See also “Important Notice to Investors Regarding Forward-Looking Statements” on page 2 of this report.
Discussion of Non-GAAP Measures
In addition to the financial results contained in this report, which have been prepared and presented in accordance with the accounting principles generally accepted in the United States ("GAAP"), the Company has also included supplemental information concerning the Company’s financial results on a non-GAAP basis. This non-GAAP information includes certain of the Company’s financial results on a constant currency basis. This constant currency information estimates what the Company’s financial results would have been without changes in foreign currency exchange rates. This information is calculated by taking the current period local currency results and translating them into U.S. dollars based upon the foreign currency exchange rates for the applicable comparable prior period. In addition, this non-GAAP information includes certain of the Company's financial results without certain non-cash charges recognized in the three and six months ended June 30, 2020,2021, including a gain to step-up the recognition of an impairment loss on Jack Wolfskin goodwill and other intangible assets,Company's former investment in Topgolf to its fair value, amortization expense of intangible assets associated with the Jack Wolfskin, OGIO, and 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. For the three and six months ended June 30, 2019,2020, non-GAAP financial results exclude certain non-cash charges, including purchase accounting amortization expense associated with the Jack Wolfskin acquisition and amortization expense of intangible assets associated with the Jack Wolfskin, OGIO and TravisMathew acquisitions, in addition to transaction and transitionnon-recurring costs in connectionassociated with the Company's transition to the new North America Distribution Center, in addition to other integration costs associated with Jack Wolfskin acquisition.Wolfskin.
The Company has included in this report information to reconcile this non-GAAP information to the most directly comparable GAAP information. The non-GAAP information presented in this report should not be considered in isolation or as a substitute for any measure derived in accordance with GAAP. The non-GAAP information 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 believes 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’s business.
Results of Operations
Overview of Business, Seasonality and Foreign Currency
Business and Products
The Company designs, manufactures and sells a full line of high quality golf equipment, including golf clubs and golf balls, and apparel, gear and other products. The Company designs its golf products to be technologically advanced and in this regard invests a considerable amount in research and development each year. The Company designs its golf products for golfers of all skill levels, both amateur and professional. In addition, the Company designs and developssells a full line of high quality soft goods, including golf bags, apparel, footwear and other golf accessories. In 2017, the Company expanded its soft goods lines with the acquisitions of OGIO and TravisMathew. Under the OGIO brand, the Company offers a full line of premium personal storage gear for sport and personal use and accessories. TravisMathew offers a full line of premium golf and lifestyle apparel as well as footwear and accessories. 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. This acquisition to further enhanced the Company's lifestyle category and provides a platform for future growth in the active outdoor and urban outdoor categories. The Company's soft goods under the Callaway, OGIO, TravisMathew and Jack Wolfskin brands are largely designed and developed internally.
On March 8, 2021, the Company completed its previously announced merger with Topgolf. Topgolf is a leading tech-enabled golf entertainment business, with an innovative platform that comprises its state-of-the-art open-air golf and entertainment venues, revolutionary Toptracer ball-tracking technology and innovative media platform. The combined

44

company will benefit from a compelling family of brands with reach across multiple channels including retail, venues, e-commerce and digital communities. The Company's results of operations below therefore present the consolidated results of the Company and Topgolf for the three and six months ended ended June 30, 2021.
The Company’s Topgolf subsidiary operates on a 52- or 53-week fiscal year ending on the Sunday closest to December 31. As such, the Topgolf financial information included in the Company’s consolidated condensed financial statements for the six months ended June 30, 2021 is from March 8, 2021 through July 4, 2021. Additionally, based on the Company's assessment of the combined business, the Company modified the presentation of its consolidated condensed statements of operations for the three and six months ended June 30, 2021 and 2020. For further information about the merger with Topgolf see Note 6 "Business Combinations" to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q.
The Company’s Topgolf operating segment is comprised of Topgolf venues, Toptracer and media that leverage its brand, proprietary technology, and hospitality offerings to create entertainment experiences for its guests.
The Venues business consists of Company-operated venues within the United States and company-operated and franchised venues outside the United States. Topgolf’s venues offer state-of-the-art entertainment facilities with multiple forms of entertainment and are equipped with technology-enabled hitting bays, multiple bars, dining areas and exclusive event spaces. Revenue from Company-operated venues is primarily derived from food and beverage, gameplay, and events. Topgolf receives a royalty from its franchised locations. As of June 30, 2021, Topgolf had 64 venues and one lounge operating in the United States, with an additional eight venues under construction, three Company-operated venues in the United Kingdom, with an additional one under construction, and three franchised venues (in Australia, Mexico and the United Arab Emirates), with an additional two franchised venues under construction in (in Germany and Thailand).
Topgolf has other lines of business, including the Toptracer ball-flight tracking technology, which is licensed to independent driving ranges and used in golf broadcasts, the World Golf Tour ("WGT") digital golf game, digital content creation and sponsorship operations. As of June 30, 2021, Topgolf had 11,055 Toptracer bays installed.
Operating and Reportable Segments
The Company has twothree operating and reportable segments, namely Golf Equipment, and Apparel, Gear and Other.


39


Other and Topgolf.
The Golf Equipment operating segment, which is comprised of golf club and golf ball products, includes Callaway Golf branded woods, hybrids, irons, wedges, Odyssey putters, including Toulon Design putters by Odyssey, packaged sets, Callaway Golf and Strata branded golf balls and sales of pre-owned golf clubs.
The Apparel, Gear and Other operating segment includes the newly acquired Jack Wolfskin outdoor apparel, gear and accessories business, the TravisMathew golf and lifestyle apparel and accessories business, and the Callaway and OGIO businesses, which consist of golf apparel and accessories, 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 Topgolf operating segment includes Company-operated Topgolf venues equipped with technology-enabled hitting bays, multiple bars, dining areas and event spaces, franchised venues outside of the United States, Toptracer ball-flight tracking technology used by independent driving ranges and broadcast television and the Company's WGT digital golf game.
For further information about the Company's segments, see Note 19 “Segment Information” to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q.
Cost of SalesProducts and Services
The Company’s cost of salesproducts 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% 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 as a percentage of cost of sales 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% as fewer fixed costs are used in the manufacturing of soft goods products. Generally, the

45

relative significance of the components of cost of sales does not vary materially from these percentages from period to period. See
The Company’s cost of services primarily consists of food and beverage costs and transaction fees with respect to in-app purchases within the Company’s WGT digital golf game. In addition, cost of services 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
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 expenses associated with labor and benefits will increase in the foreseeable future as the Topgolf business continues to expand its operations. Other venue expenses include both fixed and variable components and are therefore not directly correlated with revenue.
Venue Pre-Opening Costs
Venue pre-opening costs primarily include costs associated with activities prior to the opening of a new company-operated venue, as well as other costs that are not considered in the evaluation of ongoing performance. The Company expects to continue incurring pre-opening costs as it executes its growth trajectory of adding new company-operated venues. Pre-opening costs are expected to fluctuate based on the timing, size and location of new company-operated venues.
For a further discussion of revenue and costs on the Company's segments, see "Operating Segment Results for the Three Months Ended June 30, 2020 and 2019—Segment Profitability" and "Operating Segment Results for the Six Months Ended June 30, 20202021 and 2019—2020—Segment Profitability" below for further discussion of gross margins.Profitability."
Seasonality
Golf Equipment
In most of the regions where the Company conducts business, the game of golf is played primarily on a seasonal basis. Weather conditions generally restrict golf from being played year-round, except in a few markets, with many of the Company’s on-course customers closing for the cold weather months. The Company’s golf equipment business is therefore subject to seasonal fluctuations. In general, during the first quarter, the Company begins selling its 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-quarter sales are significantly affected by the amount of reorder business of the products sold during the first quarter. Third-quarter sales are generally dependent on reorder business but can also include smaller new product launches, typically resulting in lower sales than the second quarter as many retailers begin decreasing their inventory levels in anticipation of the end of the golf season. Fourth-quarter sales are generally less than the other quarters due to the end of the golf season in many of the Company’s key regions. However, third-quarter sales can be affected by a mid-year product launch, and fourth-quarter sales can 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’s sales from its Golf Equipment operating segment and most, if not all, of its profitability from this segment generally occurs during the first half of the year.
Apparel, Gear and Other
Sales of the Company's golf and lifestyle apparel, gear and accessories generally follow the same seasonality as golf equipment, and are therefore generally higher during the first half of the year when the game of golf is mostly played. Sales of outdoor apparel, footwear and equipment related to the Company's newly acquired 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 products are generally greater during the second half of the year.
Topgolf
Operating results fluctuate from quarter to quarter due to seasonal factors. Historically, venues experience nominally higher second and third quarter revenues associated with the spring and summer. Topgolf’s first and fourth quarters have historically had lower revenues at its venues as compared to the other quarters due to cooler temperatures. Seasonality is

46

expected to be a factor in Topgolf's results of operations. As a result, factors affecting peak seasons at venues, such as adverse weather, could have a disproportionate effect on its operating results.
Foreign Currency
A significant portion of the Company’s business is conducted outside of the United States in currencies other than the U.S. dollar. As a result, changes in foreign currency rates can have a significant effect on the Company’s financial results. The Company enters into foreign currency forward contracts to mitigate the effects of changes in foreign currency rates. While these foreign currency forward contracts can mitigate the effects of changes in foreign currency rates, they do not eliminate those effects, which can be significant. These effects include (i) the translation of results denominated in foreign currency into


40


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’s foreign currency forward contracts. In general, the Company’s 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 its business.

47

Executive Summary to the Results of Operations and Financial Condition
During theThe second quarter and first six months of 2020, the Company's golf equipment2021 were marked by record results for both revenue and soft goods businesses were significantly adversely impacted by the COVID-19 pandemicoperating income resulting from more consumers actively participating in all markets and regions. The second quarter continued to be a challenging environment as worldwide regulatory restrictions were at their height, which included the temporary closure of the Company’s retail locations, manufacturing facilities and distribution centers at varying times, resulting in disruptions in product production and the Company’s ability to ship the products to its customers. As a result of these disruptions, net sales decreased $149.7 million (33.5%) to $297.0 million in the second quarter of 2020 as compared to $446.7 million for the same period in 2019, and decreased $223.6 million (23.2%) to $739.3 million in the first six months of 2020 as compared to $962.9 million for the same period in 2019. Despite these decreases, the Company’s golf equipment and soft goods businesses recovered more quickly than expected at the end of the second quarter and into the third quarter of 2020. Although golf courses remained closed during the earlier part of the second quarter in some major markets, particularly the United States and Europe, the Company started to see signs of recovery in the latter part of the second quarter as golf courses started to reopen, prompting an increase in participation from new and returning golfers, as the game of golf, supports an active and healthy way of life that is compatible with social distancing. Direct-to-consumer sales of soft goods during the second quarter of 2020 were also better than expected dueleading to a significant surge of on-line sales compared to the second quarter of 2019, as consumers turned to e-commerce to purchase items they would have otherwise purchased in person.
While the Company is encouraged by these signs of recovery, the Company expects the duration of the COVID-19 pandemic and the continued negative impact on the Company’s business to result in lower projected revenue, gross margin and operating incomedemand for the remainder of fiscal 2020Company's products 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 units during the second quarter of 2020, which resulted in an impairment charge of $174.3 million related to the Jack Wolfskin goodwill and trade name. While the Company remains optimistic of the revenues and cost synergies that the Jack Wolfskin business will provide in the long-term, the realization of these opportunities have been delayed due to the uncertain economic impacts created by the COVID-19 pandemic.
In response to the adverse effects of COVID-19 on the Company’s business, the Company has taken proactive actions to protect its employees, reduce costs, maximize liquidity, and conserve cash. Reductions in discretionary spending and infrastructure costs, including a reduction in workforce, temporary reduction in salaries and certain benefits for all employees, and voluntary reductions in compensation by the Board of Directors, the Chief Executive Officer and other members of senior management, have resulted in a significant reduction in planned operating expenses and capital expenditures. As a result of these cost reduction initiatives, in the second quarter and the first six months of 2020, the Company realized savings in operating expenses of $36.4 million (22.5%) and $50.2 million (15.2%), respectively, as compared to the comparative periods in 2019. The Company also implemented other programs to maximize cash and liquidity, including proactive programs to reduce inventory combined with the suspension of open market stock repurchases and the Company’s quarterly dividend. In addition, in May 2020, the Company successfully issued $258.8 million of convertible senior notes, with net proceeds to the Company of approximately $218 million after deducting the cost of capped call transactions and other transaction costs.
services. The Company’s earnings per share for the second quarternet revenue and first six months of 2020 resulted in losses per share of $1.78 and $1.47, respectively, compared to diluted earnings per share of $0.30 and $0.81 in the comparative respective periods of 2019. Excluding the impairment loss and the impact of other one-time charges discussed in more detail below, on a non-GAAP basis, the Company’s earnings per share were $0.06 and $0.38results from operations in the second quarter and first six months of 2020 respectively, compared to non-GAAP earnings per sharewere adversely impacted in all markets and regions as much of $0.37 and $0.99 in the respective comparative periods of 2019. The Company is pleased that it was able to achieve positive non-GAAP earnings despite the global challenges caused by COVID-19.
Looking ahead, the impact of the COVID-19 pandemic on the Company’s business in the short-termsecond quarter was shut down due to the pandemic. Following the second quarter of 2020, the Company experienced an unprecedented demand for golf equipment and long-term remains unclear.accessories, and the Company’s soft goods business rebounded faster than anticipated and exceeded expectations. As a result, second quarter net revenue increased $616.6 million, or 207.6%, to $913.7 million, while revenue for the first six months of the year increased $825.9 million, or 111.7%, to $1,565.2 million. This significant growth was driven by improved operating performance across all the Company's business segments. The Company's Golf Equipment and Apparel, Gear & Other segments delivered strong results as demand remained high for golf clubs and balls in addition to the Company's soft goods brands, namely TravisMathew and Jack Wolfskin, which grew despite retail pressures from COVID-19 shutdowns. The increase in net revenues also reflect incremental revenues of $325.5 million and $418.1 million in the second quarter and first half of 2021, respectively, due to the Topgolf merger, which was completed on March 8, 2021, and was included in the Company's results for the entire second quarter along with four weeks in first quarter 2021.
Operating income increased $284.7 million in the second quarter of 2021 to $107.3 million, compared to an operating loss of $177.4 million in the second quarter of the prior year period. Golf Equipment makes up the largest portion of operating income and was positively impacted by very strong top-line growth, operating expense leverage and favorable foreign currency exchange rates.
The Apparel, Gear and Other segment was a strong contributor to the Company’s growth in the second quarter of 2021 and year-to-date as well, as TravisMathew’s brand awareness and momentum accelerated and Jack Wolfskin delivered improved results, despite significant shutdowns in Europe through much of the first half of 2021.
As the United States economy reopened in the second quarter of 2021, following pandemic-related dining and entertainment venue closures, Topgolf’s business exceeded expectations with both new and experienced golfers utilizing the unique venues to practice and learn the game of golf. Topgolf contributed $325.5 million of net revenue and $24.2 million of segment operating income in the second quarter of 2021, both incremental to the comparative period in 2020. The Company believescontinues to be excited by the growth opportunity embedded within the Topgolf business and feels it has takenwill be a strong contributor to overall growth for the necessary stepsCompany and for the industry as more consumers are introduced to mitigategolf through Topgolf venues.
Looking forward, the impacts from the pandemic onCompany is pleased that all of its business and to sustain its business through this crisis by reducing costs and enhancing its liquidity in order to be well positioned, both operationally and financially, in the short and long-term. The Company remains hopeful for an end to the pandemic and


41


is encouraged that its golf and outdoor lifestyle businessessegments support an active and healthy way of lifeoutdoor lifestyle that is compatible with a world of social distancing. The Company is optimistic that its unique portfolio of businesses with the recent addition of Topgolf, as well as its continued brand momentum and increased demand for golf equipment, combined with the better than anticipated recovery in its soft goods business, will continue throughout the balance of 2021. There are some continuing challenges from the pandemic that will have a significant effect on the Company’s business in the short-term, including supply chain constraints, increased freight costs, staffing challenges and inflationary pressures. However, the Company believes that current demand levels, along with certain actions it can take, will mitigate the impact of these factors. The Company anticipates having strong financial results for the year, and it is energized by the opportunities ahead, and believes it is well situated to handle the prolonged pandemic.
Three-Month Periods Ended June 30, 20202021 and 20192020
Net salesRevenues
Net revenues for the second quarter of 2020 decreased $149.72021 increased $616.6 million (33.5%(207.6%) to $297.0$913.6 million compared to $446.7$297.0 million in the second quarter of 2019.2020. This declineincrease was driven by incremental net revenues of $325.5 million due to the continued negativemerger with Topgolf, which represents a full quarter impact on net revenues since the completion of the COVID-19 pandemicmerger on March 8, 2021. In addition, the increase in net revenues reflects the strength of the Company's golf equipmentGolf Equipment and soft goodsApparel, Gear and Other businesses, during the second quarter of 2020, resulting from the temporary closure of all non-essential businesses as mandated by government authorities. Net sales decreased in all product categories and across all major geographic regions. By sales channel, the Company's wholesale and retail businesses had the largest decline in sales, despite the reopening of the retail sector in certain regions during the second quarter. This decline was partially offset by an improvement in the Company's e-commerce business, which increased significantly$291.2 million or 98.0% compared to the second quarter of 2019. By operating segment, net sales of2020. Net revenues from the Company's Golf Equipment decreased $82.4 million or 28.2% to $209.9 million, and net sales of Apparel, Gear and Other decreased $67.3 million or 43.6%, both comparedbusinesses experienced significant increases across all product categories and in all major geographic regions, resulting from high demand of the Company'g golf and lifestyle products amid increased popularity for the game of golf as it continues to be a safe outdoor activity compatible

48

with the norms of social distancing. Net revenues in the second quarter in 2019.of 2020 were negatively impacted by thetemporary closure of the Company's retail locations, manufacturing facilities and distributions centers, as well as its customers' retail locations, due to the COVID-19 pandemic. Fluctuations in foreign currencies had an unfavorablea favorable impact on net salesrevenues of $2.3$18.3 million in the second quarter of 2020.2021.
The Company’s net salesrevenues by operating segment are presented below (dollars in millions):
 Three Months Ended June 30,Growth
 20212020DollarsPercent
Net revenues:
Golf Equipment$401.3 $209.9 $191.4 91.2 %
Apparel, Gear and Other186.9 87.1 99.8 114.6 %
Topgolf325.4 — 325.4 — 
$913.6 $297.0 $616.6 207.6 %
 Three Months Ended June 30, Decline
 2020 2019 Dollars Percent
Net sales:       
Golf Equipment$209.9
 $292.3
 $(82.4) -28.2 %
Apparel, Gear and Other87.1
 154.4
 (67.3) -43.6 %
 $297.0
 $446.7
 $(149.7) -33.5%
For further discussion of each operating segment’s results, see "Operating Segment Results for the Three Months Ended
June 30, 20202021 and 20192020" below.
Net salesrevenues information by region is summarized as follows (dollars in millions):
 Three Months Ended June 30,GrowthConstant Currency Growth vs. 2020
 20212020DollarsPercentPercent
Net revenues:
United States$642.8 $171.7 $471.1 274.4 %274.4%
Europe121.0 50.1 70.9 141.5 %118.7%
Japan61.9 24.6 37.3 151.6 %155.3%
Rest of World87.9 50.6 37.3 73.7 %58.5%
$913.6 $297.0 $616.6 207.6 %201.5%
 Three Months Ended June 30, Decline Constant Currency Decline vs. 2019
 2020 2019 Dollars Percent Percent
Net sales:         
United States$171.7
 $247.4
 $(75.7) -30.5% -30.5%
Europe50.1
 81.6
 (31.5) -38.6% -37.5%
Japan24.6
 55.7
 (31.1) -55.8% -56.8%
Rest of World50.6
 62.0
 (11.4) -18.4% -15.3%
 $297.0
 $446.7
 $(149.7) -33.5% -33.0%
Net salesrevenues in the United States decreased $75.7increased $471.1 million (30.5%(274.4%) to $171.7$642.8 million during the second quarter of 20202021 compared to $247.4$171.7 million in the second quarter of 2019.2020. The Company’s sales in regions outside of the United States decreased $74.0increased $145.5 million (37.1%(116.1%) to $125.3$270.8 million during the second quarter of 20202021 compared to $199.3$125.3 million in the second quarter of 2019.2020. The increase in both domestic and international net revenue in the second quarter of 2021 reflects the addition of the Topgolf business, as well as the continued strength and brand momentum of the Company's Golf Equipment business, combined with a strong rebound in the TravisMathew and Jack Wolfskin businesses in the United States and Europe, respectively. Net revenues across all brands in the second quarter of 2020 were severely impacted by the temporary shutdown of many of the Company's and it's customer's retail locations and facilities in all major regions due to the COVID-19 pandemic. Foreign currency fluctuations had an unfavorablea favorable impact of $2.3$18.3 million on net salesrevenues during the second quarter of 20202021 relative to the same period in the prior year.
Costs and Expenses
Cost of products increased $140.1 million to $315.0 million for the second quarter of 2021 compared to $174.9 million for the same period in 2020. The general decreaseCompany’s cost of products are highly variable in net sales by region was primarilynature and this increase is due to the continuedsignificant increase in sales volumes in the second quarter of 2021, combined with an increase in freight and overall commodity costs. In the second quarter of 2020, sales volumes were significantly lower due to the business disruptiondisruptions caused by the COVID-19 pandemic.
Costs of services of $42.8 million primarily consist 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 $202.3 million primarily consist of Topgolf venue related depreciation and amortization, employee costs, rent, utilities, and other costs associated with Topgolf venues.
Selling, general and administrative expenses increased $105.9 million to $221.1 million (24.2% of net revenues) in the second quarter of 2021 compared to $115.2 million (38.8% of net revenues) in the second quarter of 2020. This

Gross profit decreased $84.849

increase reflects incremental expenses of $45.1 million (41.0%related to the merger with Topgolf completed in March 2021, and a $6.4 million increase in non-recurring expenses primarily related to transition expenses incurred in connection with the merger with Topgolf. Excluding these incremental expenses and non-recurring charges, selling, general and administrative expenses increased $54.4 million (47.2%) primarily due to $122.1an increase in variable costs associated with the Company's improved results combined with the Company's gradual reinvestment in the business in the second quarter of 2021, compared to the cost savings initiatives that the Company implemented in response to the various restrictions imposed by the COVID-19 pandemic in the second quarter of 2020. This resulted in increases in employee costs, which include an overall increase in salaries and wages and employee incentive compensation, advertising and promotional expenses, tour, professional fees primarily related to IT infrastructure improvements, and building expenses.
Research and development expenses increased $10.3 million to $20.3 million (2.2% of net revenues) in the second quarter of 2021 compared to $10.0 million (3.4% of net revenues) in the second quarter of 2020, compared to $206.8 million in the second quarter of 2019. Gross profit as a percentage of net sales ("gross margin") decreased 520 basis points to 41.1% in the second quarter of 2020 compared to 46.3% in the second quarter of 2019. The decline in gross margin was primarily due to (i) a decreaseincremental expenses of $7.8 million related to the merger with Topgolf completed in net salesMarch 2021, and business challenges caused by COVID-19; (ii) the negative impact of fixed costs on a lower sales base caused by the temporary shut-down of the Company's distribution centers and manufacturing facilities as a result of COVID-19; (iii) an unfavorable shift in sales mix due to a decrease in higher margin retail sales resulting from temporary store closures, combined with an increase in salesemployee costs.
Venue pre-opening costs of lower margin products, including packaged sets, entry level


42


golf balls and pre-owned product as a result of an increase in new and returning golfers; and (iv) an increase in U.S. tariffs on imports from China. These declines were partially offset by a higher mix of e-commerce sales, which have higher gross margins.
For further discussion of gross margin, see "Results of Operations—Overview of Business and Seasonality—Cost of Sales" above and "Operating Segment Results for the Three Months Ended June 30, 2020 and 2019—Segment Profitability" below.
Selling expenses decreased $32.9$4.8 million to $80.2 million (27.0% of net sales) in the second quarter of 2020 compared to $113.1 million (25.3% of net sales) in the second quarter of 2019. This 29.1% decrease was primarily dueinclude costs associated with activities prior to the Company's planned reduction in operating expenses in response to the adverse effect on the Company's business caused by COVID-19 resulting inopening of a $19.5 million decline in marketing and tour expenses, a $7.7 million decline in employee costs, including severance charges of $1.3 million due to workforce reductions in the second quarter of 2020, and a $2.2 million decline in travel and entertainment expenses,new Company operated venue, as well as an overall decline in variable expenses.
General and administrative expenses declined $0.4 million to $35.0 million (11.8% of net sales)other costs that are not considered in the second quarterevaluation of 2020 comparedongoing venue performance. The Company expects to $35.4 million (7.9%continue to incur pre-opening costs as it executes its growth trajectory of net sales) inadding new Company-operated venues. Pre-opening costs are expected to fluctuate based on the second quartertiming, size and location of 2019. This decrease was primarily due to a $3.5 million decline in employee costs, net of severance charges of $0.5 million, as a result of the Company's planned cost reduction initiatives during the second quarter of 2020, which resulted in a reduction in workforce, a temporary reduction in salaries and certain benefits, and a decrease in accrued incentive compensation expense. In addition, travel and entertainment decreased $1.0 million due to travel restrictions caused by the COVID-19 pandemic. The Company's results for the second quarter of 2020 also benefited from a $1.4 million reduction in non-recurring costs, primarily related to acquisition and business integration costs incurred in the second quarter of 2019. These decreases were partially offset by an increase in legal and bad debt expense.new Company-operated venues.
Research and development expenses decreased $3.1 million to $10.0 million (3.4% of net sales) in the second quarter of 2020 compared to $13.1 million (2.9% of net sales) in the second quarter of 2019, primarily due to a $1.8 million decline in employee costs, net of severance charges of $0.6 million, as a result of the Company's planned cost reduction initiatives during the second quarter of 2020, which resulted in a reduction in workforce, a temporary reduction in salaries and certain benefits, and a decrease in accrued incentive compensation expense. In addition, travel and entertainment decreased $0.3 million due to travel restrictions caused by the COVID-19 pandemic.
Due to the significant business disruption and macro-economic impact of COVID-19 on the Company's financial results, the Company performed a quantitative assessment of its goodwill and non-amortizing intangible assets during the second quarter of 2020 resulting in an impairment charge of $174.3 million (see(see Note 9, "Goodwill and Intangible Assets to the Notes to Consolidated Condensed Financial Statements included in Part I, Item 1, of this Form 10-Q).
Interest expense increased by $1.5 million to $12.3 million in the second quarter of 2020 compared to $10.7 million in the second quarter of 2019 primarily due to an increase in the Company's net debt position due to the issuance of $258.8 million in convertible notes in May 2020. See Note 6 “Financing Arrangements”Assets" to the Notes to Consolidated Condensed Financial Statements included in Part I, Item 1, of this Form 10-Q).
Other incomeIncome and Expense
Interest expense increased by $12.8$16.8 million to $29.1 million in the second quarter of 2021 compared to $12.3 million in the second quarter of 2020 primarily due to incremental interest of $16.2 million related to the debt and deemed landlord financing liabilities acquired as part of the Topgolf merger. See Note 7 “Financing Arrangements” to the Notes to Consolidated Condensed Financial Statements included in Part I, Item 1, of this Form 10-Q.
Other income/expense decreased by $16.5 million to other expense of $2.5 million in the second quarter of 2021 compared to other income of $14.0 million in the second quarter of 2020, compared to other income of $1.2 million in the second quarter of 2019, primarily due to an $11.0 million gain recognized in the second quarter of 2020 related toin connection with the settlement of a discontinued cash flow hedge,cross-currency swap, combined with a decline$4.5 million decrease in net foreign currency losses from non-designated foreign currency hedging contracts in the second quarter of 2020 compared to the second quarter of 2019.transaction gains period over period.
Income Taxes
The Company’s provisionbenefit for income taxes decreasedincreased by $15.1$8.0 million to a $7.9 million benefit in the second quarter of 2020, compared to a provision of $7.2$15.9 million in the second quarter of 2019.2021, compared to $7.9 million in the second quarter of 2020. As a percentpercentage of pre-tax income, (loss), the Company’s income tax rate decreasedwas -20.9% in the second quarter of 2021 compared to 4.5% in the second quarter of 2020 comparedprimarily due to 20.0%the release of a portion of the Company's valuation allowance on certain net operating losses in the second quarter of 2019. This decrease was primarily due to the impairment charge recorded during the second quarter of 2020 to write down certain Jack Wolfskin goodwill and intangible assets to their estimated fair values, combined with an overall reduction in pre-tax earnings2021. The effective tax rate in the second quarter of 2020 comparedwas 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 items as well as other non-recurring items from both periods, the Company's effective income tax rate would have been 22.5% for the second quarter of 2019.2021 compared to 27.2% for the second quarter of 2020. This decline is primarily due to a shift in mix of earnings to regions with lower tax rates. For further discussion see Note 13 “Income Taxes” to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q.
Net Income (Loss)
Net income (loss) for the second quarter of 2020 decreased $196.62021 increased $259.4 million to net income of $91.7 million compared to a net loss of $167.7 million compared to net income of $28.9 million in the second quarter of 2019.2020, which includes the $174.3 million impairment charge. Diluted

50

earnings (loss) per share increased $2.25 to earnings per share decreased $2.08of $0.47 in the second quarter of 2021 compared to a loss per share of $1.78 in the second quarter of 2020 compared to earnings per share of $0.30 in the second quarter of 2019.


43


2020.
On a non-GAAP basis, excluding the after-tax loss fromitems described in the impairment of the Jack Wolfskin goodwill and certain other intangible assets, after-tax non-cash intangible amortization expenses related to the Jack Wolfskin, TravisMathew and OGIO acquisitions, non-cash amortization expense of the discount on the convertible notes issued in May 2020, other non-recurring charges and acquisition and transition costs related to Jack Wolfskin,table below, the Company's net income and diluted earnings per share for the three months ended June 30, 20202021 would have been $70.5 million and $0.36 per share, respectively, compared to $5.3 million and $0.06 respectively, compared to net income of $35.1 million and diluted earnings per share, of $0.37respectively, for the comparative period in 2019.2020. The decreaseincrease in non-GAAP earnings in 20202021 was primarily duedriven by continued strong demand for the Company's 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 net income attributable to Topgolf. The Company's loss in the second quarter of 2020 resulted from the business disruptions and challenges caused by the COVID-19 pandemic and the $167.7 million impairment charge recognized in the second quarter of 2020, which resulted in a significant decline in net sales and operating income compared to the second quarter of 2019, partially offset by the Company's planned cost reduction initiatives combinedconnection with an increase in foreign currency hedging gains.Jack Wolfskin .
The table below presents a reconciliation of the Company's as-reported results for the three months ended June 30, 20202021 and 20192020 to the Company's non-GAAP results reported above for the same periods (in millions, except per share information).
Three Months Ended June 30, 2021
GAAP
Non-Cash Acquisition Amortization(1)
Non-Cash Amortization of Discount on Convertible Notes(2)
Acquisition and Other Non-Recurring Items(3)
Tax Valuation Allowance(4)
Non-GAAP
Net income (loss)$91.7 $(6.8)$(2.0)$(2.7)$32.7 $70.5 
Diluted earnings (loss) per share$0.47 $(0.03)$(0.01)$(0.02)$0.17 $0.36 
Weighted-average shares outstanding194.3 194.3 194.3 194.3 194.3 194.3 
 Three Months Ended June 30, 2020 
 As Reported 
Non-Cash Intangible Amortization and Impairment Charges(1)
 
Non-Cash Amortization of Discount on Convertible Notes(2)
 
Other Non-Recurring Charges(3)
 Non-GAAP 
Net income (loss) attributable to Callaway Golf Company$(167.7) $(167.3) $(1.2) $(4.5) $5.3
 
           
Diluted earnings (loss) per share$(1.78) $(1.78) $(0.01) $(0.05) $0.06
 
Weighted-average shares outstanding94.1
 94.1
 94.1
 94.1
 94.1
 
 Three Months Ended June 30, 2019 
 As Reported 
Non-Cash Intangible Amortization Expense(1)
 
Acquisition and Transition Costs(4)
 Non-GAAP 
Net income (loss) attributable to Callaway Golf Company$28.9
 $(5.0) $(1.2) $35.1
 
         
Diluted earnings (loss) per share$0.30
 $(0.05) $(0.02) $0.37
 
Weighted-average shares outstanding95.9
 95.9
 95.9
 95.9
 
Three Months Ended June 30, 2020
GAAP
Non-Cash Acquisition Amortization and Impairment Charges(1)
Non-Cash Amortization of Discount on Convertible Notes(2)
Other Non-Recurring Items(3)
Non-GAAP
Net income (loss)$(167.7)$(167.3)$(1.2)$(4.5)$5.3 
Diluted earnings (loss) per share$(1.78)$(1.78)$(0.01)$(0.05)$0.06 
Weighted-average shares outstanding94.1 94.1 94.1 94.1 94.1 
(1)Includes the non-cash amortization expense of intangible assets in connection with the acquisitions of Jack Wolfskin, TravisMathew and OGIO. In addition, the three months ended June 30, 2020 includes the recognition of a $174.3 million impairment of the Jack Wolfskin goodwill and trade name, and the three months ended June 30, 2019 includes the amortization of the inventory valuation step-up in connection with the Jack Wolfskin acquisition.
(2)Represents the non-cash amortization of the discount on the convertible notes issued in May 2020.
(3)Other non-recurring charges primarily include redundant costs associated with the Company's transition of its North America distribution center to a new facility, severance charges associated with workforce reductions due to the COVID-19 pandemic, and the recognition of a deferred gain from a cash flow hedge that was discontinued in the second quarter of 2020.
(4)Represents non-recurring costs associated with the acquisition of Jack Wolfskin completed in January 2019.
(1)Amounts for the second quarters of 2021 and 2020 include the non-cash amortization expense of intangible assets in connection with the acquisitions of Jack Wolfskin, TravisMathew and OGIO. In addition, the second quarter of 2021 includes non-cash amortization expense related to intangible assets acquired in connection with the merger with Topgolf in March 2021, as well as 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. The second quarter of 2020 also reflects an impairment charge of $174.3 million to write-down goodwill and 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)Acquisition and other non-recurring items for the second quarter of 2021 primarily include transaction, transition and other non-recurring charges in connection with the merger with Topgolf, as well as implementation costs for new IT systems for Jack Wolfskin. Other non-recurring items for the second quarter of 2020 primarily include redundant costs associated with the Company's transition of its North America distribution center to a new facility, implementation costs for new IT systems for Jack Wolfskin, and severance charges associated with workforce reductions due to the COVID-19 pandemic.
(4)Represents the release of a portion of the valuation allowance attributable to the merger with Topgolf.

51

Operating Segment Results for the Three Months Ended June 30, 20202021 and 20192020
As a result of the Topgolf merger, the Company now has three operating segments, namely Golf Equipment; Apparel, Gear and Other; and Topgolf.
Golf Equipment
Golf Equipment net sales decreased $82.4revenues increased $191.4 million (91.2%) to $401.3 million in the second quarter of 2021 compared to $209.9 million in the second quarter of 2020 compared to $292.3 million in the second quarter of 2019 due to a $67.7$164.0 million (30.3%(105.1%) declineincrease in golf club sales and a $14.7$27.4 million (21.4%(50.8%) declineincrease in golf ball sales. These decreasesincreases were due todriven by the continued business disruptionsunprecedented surge in golf demand and challenges caused byparticipation, combined with the COVID-19 pandemic duringsuccessful 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. Net revenues of golf equipment in the second quarter of 2020 which had an adverse impact onwere negatively impacted by the temporary closure of the Company's wholesale business.


44


This was slightly offsetretail locations, manufacturing facilities and distributions centers, as well as its customers' retail locations, for the majority of the quarterly period caused by an improvement in the Company's e-commerce business, which increased significantly compared to the second quarter of 2019.COVID-19 pandemic.
Net salesrevenues information for the Golf Equipment operating segment by product category is summarized as follows (dollars in millions):
 Three Months Ended
June 30,		 Decline
 2020 2019 Dollars Percent
Net sales:       
Golf Clubs$156.0
 $223.7
 $(67.7) -30.3 %
Golf Balls53.9
 68.6
 (14.7) -21.4 %
 $209.9
 $292.3
 $(82.4) -28.2 %
The $67.7 million (30.3%) decrease in net sales of golf clubs to $156.0 million for the quarter ended June 30, 2020, compared to $223.7 million in the comparable period in 2019, was primarily due to a decline in sales volume and average selling prices across all product categories. The decline in sales volume was due to the temporary closure of many of the Company's retail partner locations as a result of the COVID-19 pandemic. The decline in average selling prices was primarily due to the current year launch of the Mavrik line of drivers and irons, which have a lower average selling price compared to the Epic Flash drivers and Apex irons launched in 2019, combined with a shift in sales mix of lower priced pre-owned products.
Net sales of golf balls decreased $14.7 million (21.4%) to $53.9 million for the quarter ended June 30, 2020 compared to $68.6 million in the comparable period in 2019 primarily due to a decline in sales volume due to the temporary closure of many of the Company's retail partner locations as a result of the COVID-19 pandemic, in addition to a decline in average selling prices due to a shift in sales mix to lower priced golf balls as a result of supply constraints of premium golf balls. This was due to the temporary shut-down of the golf ball manufacturing facility in the United States caused by COVID-19 mandates.
 Three Months Ended
June 30,		Growth
 20212020DollarsPercent
Net revenues:
Golf Clubs$320.0 $156.0 $164.0 105.1 %
Golf Balls81.3 53.9 27.4 50.8 %
$401.3 $209.9 $191.4 91.2 %
Apparel, Gear and Other
Net salesrevenues of Apparel, Gear and Other decreased $67.3increased $99.8 million (114.6%) to $186.9 million in the second quarter of 2021 compared to $87.1 million in the second quarter of 2020 compared to $154.42020. Apparel sales increased $55.1 million (151.8%) and sales of gear, accessories and other increased $44.7 million (88.0%) in the second quarter of 20192021 compared to the second quarter of 2020. The increase in Apparel, Gear & Other was due to a $36.9 million (50.4%) decrease in apparel sales and a $30.4 million (37.4%) decrease in sales of gear, accessories and other. These decreases were duestrong rebound across all brands compared to the temporary closure of many of the Company's wholesale and direct retail locations as a result of the COVID-19 pandemic during the first half of 2020. This decline was slightly offset by an improvement in the Company's e-commerce business during the second quarter of 2020, which was severely impacted by the shutdown of distribution centers and many retail stores in all major regions. The increase in apparel sales was driven by increases across each of the Company's TravisMathew, Jack Wolfskin and Callaway apparel brands. The increase in Gear, Accessories and Other sales was driven by strong demand across all golf accessory categories for the Callaway brand, headwear and footwear for TravisMathew, and footwear at Jack Wolfskin.
The increase in TravisMathew sales was driven by strong brand momentum across all sales channels. The Callaway brand increased significantly compareddue to a significant increase in demand for golf accessories driven by the heightened popularity of the game of golf. The increase in Jack Wolfskin sales was driven by significant e-commerce sales and an increase in the wholesale business in Europe, despite most European retail locations being shut down for a significant portion of the second quarter of 2019.quarter.
Net salesrevenues information for the Apparel, Gear and Other operating segment is summarized as follows (dollars in millions):
 Three Months Ended
June 30,		Growth
 20212020DollarsPercent
Net revenues:
Apparel$91.4 $36.3 $55.1 151.8 %
Gear, Accessories, & Other95.5 50.8 44.7 88.0 %
$186.9 $87.1 $99.8 114.6 %

52

 Three Months Ended
June 30,		 Decline
 2020 2019 Dollars
 Percent
Net sales:       
Apparel$36.3
 $73.2
 $(36.9) -50.4 %
Gear, Accessories, & Other50.8
 81.2
 (30.4) -37.4 %
 $87.1
 $154.4
 $(67.3) -43.6 %
Topgolf
Net sales of apparel decreased $36.9 million (50.4%) to $36.3 million in the second quarter of 2020 compared to the second quarter of 2019, due to a decline in sales across all apparel brands as a result of the continued business challenges caused by the COVID-19 pandemic during the second quarter of 2020.
Net sales of gear, accessories and other decreased $30.4 million (37.4%) to $50.8 millionrevenues for Topgolf were $325.4 for the second quarter of 2020 compared to $81.2 million2021. Topgolf revenue is primarily generated from Company-operated venues equipped with technology-enabled hitting bays, multiple bars, dining areas and event spaces. Other business lines primarily include the Toptracer ball-flight tracking technology used by independent driving ranges and broadcast television, and the Company's WGT digital golf game.
Net revenues information for the Topgolf segment is summarized as follows (dollars in the second quarter of 2019 due to the continued business challenges caused by the COVID-19 pandemic during the second quarter of 2020.millions):

Three months ended June 30, 2021
Net revenues:
Venues$303.4 
Other business lines22.0 
$325.4 

45


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):
 Three Months Ended
June 30,		 Decline
 2020 2019 Dollars Percent
Income before income taxes:       
Golf Equipment$29.2
 $55.7
 $(26.5) -47.6 %
Apparel, Gear and Other(11.7) 11.3
 (23.0) -203.5 %
Reconciling items(1) 
(193.1) (30.9) (162.2) 524.9 %
 $(175.6) $36.1
 $(211.7) -586.4 %
Three Months Ended
June 30,		Growth
Non-GAAP Constant Currency Growth vs. 2020(1)
20212020DollarsPercentPercent
Net revenues:
Golf Equipment$401.3 $209.9 $191.4 91.2 %86.1%
Apparel, Gear and Other186.9 87.1 99.8 114.6 %108.4%
Topgolf325.4 — 325.4 — —
Total net revenues$913.6 $297.0 $616.6 207.6 %201.5%
Segment operating income:
Golf Equipment$98.1 $29.2 $68.9 236.0 %
Apparel, Gear and Other15.7 (11.7)27.4 234.2 %
Topgolf24.2 — 24.2 — 
Total segment operating income138.0 17.5 120.5 688.6 %
Corporate G&A and other(2)
30.7 194.9 (164.2)(84.2)%
Total operating income107.3 (177.4)284.7 (160.5)%
Interest expense, net(28.9)(12.2)(16.7)136.9 %
Other income, net(2.5)14.0 (16.5)(117.9)%
Total income before income taxes$75.9 $(175.6)$251.5 (143.2)%
(1)
Reconciling items represent corporate general and administrative expenses and other income (expense) not included by management in determining segment profitability. The $162.2 million increase in reconciling items in the second quarter of 2020 compared to the second quarter of 2019 was primarily due to the recognition of a $174.3 million impairment of the Jack Wolfskin goodwill and trade name (see Note 9 "Goodwill and Intangible Assets" to the Notes to Consolidated Condensed Financial Statements included in Part I, Item 1, of this Form 10-Q), partially offset by an $11.0 million gain that was recognized in the second quarter of 2020 related to a discontinued cash flow hedge.
Pre-tax income(1)Calculated by applying 2020 exchange rates to 2021 reported sales in regions outside the United States.
(2)Amounts for the second quarter of 2021 and 2020 include corporate general and administrative expenses not utilized by management in determining segment profitability, as well as non-cash amortization expense of intangible assets in connection with the acquisitions of OGIO, TravisMathew and Jack Wolfskin. In addition, the amount for 2021 includes (i) $2.5 million of transaction, transition and other non-recurring costs associated with the merger with Topgolf completed on March 8, 2021, (ii) $6.2 million of non-cash amortization expense for intangible assets acquired in connection with the merger with Topgolf, combined with depreciation expense from the Golf Equipmentfair value step-up of Topgolf property, plant and equipment and amortization expense related to the fair value adjustments to Topgolf leases, and (iii) $0.8 million of costs related to the implementation of new IT systems for Jack Wolfskin. The amount for the second quarter of 2020 includes (i) an impairment charge of $174.3 million related to Jack Wolfskin, (ii) $3.7 million of severance charges associated with workforce reductions due to the COVID-19 pandemic, (iii) $1.8 million

53

of non-recurring costs associated with the Company's transition to the new North America Distribution Center as well as costs related to the implementation of new IT systems for Jack Wolfskin.
Operating income for the golf equipment operating segment decreased $26.5increased $68.9 million (47.6%(236.0%) to $98.1 million in the second quarter of 2021 from $29.2 million in the second quarter of 2020 from $55.72020. This increase was driven by a significant increase in sales volume across all product categories as discussed above, in addition to the favorable impact of foreign currency exchange rates, the positive impact of leveraging fixed overhead and operating expenses on a higher revenue base period over period, and less promotional and discounting activities. In addition, the Company's second quarter results for its golf equipment business were severely impacted by the business disruptions and challenges caused by the COVID-19 pandemic.
Operating income for the apparel, gear and other operating segment increased $27.4 million (234.2%) to $15.7 million in the second quarter of 2019. This decrease was primarily due to a $49.5 million decrease in gross profit (a decline of 520 basis points in gross margin), partially offset by a $23.1 million decrease in operating expenses. The decline in gross margin was primarily due to (i) lower sales and the negative impact of fixed costs on a lower sales base caused by the temporary shut-down of the Company's distribution centers and manufacturing facilities for a significant portion of the second quarter in 2020 as a result of COVID-19; (ii) an increase in sales of lower margin products, including packaged sets, entry level golf balls and pre-owned product as a result of an increase in new and returning golfers; and (iii) an increase in U.S. tariffs on imports from China. These decreases were partially offset by a higher mix of e-commerce sales, which have higher gross margins. The decline in operating expenses was primarily due to decreases in marketing expenses and employee costs resulting from the Company's planned cost reduction initiatives in response to the COVID-19 pandemic.
Pre-tax income in the Company's Apparel, Gear and Other operating segment decreased $23.0 million (203.5%)2021 compared to a pre-tax loss of $11.7 million in the second quarter of 2020 compared2020. This increase was driven by a strong rebound in sales across all brands as discussed above combined with the favorable impact of foreign currency exchange rates, in addition to pre-taxthe favorable impact of leveraging fixed overhead and operating expenses on a higher revenue base period over period, less promotional activity, and an increase in direct-to-consumer e-commerce sales, which have higher profit margins relative to wholesale.
Topgolf contributed an incremental $24.2 million of operating income of $11.3 million in the second quarter of 2019. This decrease was primarily due to a $37.2 million decrease in gross profit (a decline2021, which includes the opening of 480 basis points in gross margin), partially offset by a $14.2 million decrease in operating expenses. The decline in gross margin was primarily due to (i) lower salesfour new domestic locations during the second quarter of 2021, and the negative impact of fixed costs on a lower sales base caused by the temporary shut-down of the Company's distribution centers and retail locations as a result to the COVID-19 pandemic; and (ii) an unfavorable shift in sales mix due to a decrease in higher margin retail sales resulting from temporary store closures. These decreases were partially offset by a higher mixlevel of e-commerce sales, which have higher gross margins. The decline in operating expenses was primarily duecustomer engagement as venues welcomed guests back to decreases in marketing expenses and employee costs resulting from the Company's planned cost reduction initiatives in response to the COVID-19 pandemic.all locations.
Six-Month Period Ended June 30, 20202021 and 20192020
Net salesRevenues
Net revenues for the six months ended June 30, 2020 decreased $223.62021 increased $825.9 million (23.2%(111.7%) to $739.3$1,565.3 million compared to $962.9$739.3 million for the six months ended June 30, 2019.2020. This declineincrease was duedriven by $418.1 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 strength of the Company's legacy Golf Equipment and Apparel, Gear and Other businesses, which increased $407.8 million (49.4%) compared to the negative impactfirst half of 2020. Net revenues from the Company's Golf Equipment and Apparel, Gear and Other businesses experienced significant increases across all product categories and in all major geographic regions, resulting from the success of the COVID-19 pandemic onCompany's current year product lines and overall brand momentum, and the Company's golf equipment and soft goods businesses duringcontinued popularity of the game of golf. Net revenues in the first half of 2020 resulting from thewere negatively impacted by temporary closure of all non-essential businesses as mandated by government authorities. These business disruptions mostly began late in the first quarter of 2020 and continued during the second quarter of 2020. Net sales decreased in all product categories and across all major geographic regions. By sales channel, the Company's wholesaleretail locations, manufacturing facilities and distributions centers, as well as its customers' retail businesses had the largest decline in sales, despite the limited reopening of the retail sector later in the second quarter in most regions. This decline was partially offset by an improvement in the Company's e-commerce business, which increased comparedlocations due to the same period in 2019. By operating segment, in the first six months of 2020, net sales of Golf Equipment decreased $114.4 million or 18.6% to $501.6 million,


46


and net sales of Apparel, Gear and Other decreased $109.2 million or 31.5%, both compared to the first six months in 2019.COVID-19 pandemic. Fluctuations in foreign currencies had an unfavorablea favorable impact on net salesrevenues of $6.1$35.0 million in the first six months of 2020.2021.
The Company’s net salesrevenues by operating segment are presented below (dollars in millions):
 Six Months Ended
June 30,		Growth
 20212020DollarsPercent
Net revenues:
Golf Equipment$778.1 $501.6 $276.5 55.1 %
Apparel, Gear and Other369.0 237.7 131.3 55.2 %
Topgolf418.1 — 418.1 — 
$1,565.2 $739.3 $825.9 111.7 %
 Six Months Ended
June 30,		 Decline
 2020 2019 Dollars Percent
Net sales:       
Golf Equipment$501.6
 $616.0
 $(114.4) -18.6 %
Apparel, Gear and Other237.7
 346.9
 (109.2) -31.5 %
 $739.3
 $962.9
 $(223.6) -23.2 %

For further discussion of each operating segment’s results, see below “Operating Segment Results for the Six Months Ended June 30, 20202021 and 2019.2020.”

54

Net salesrevenues information by region is summarized as follows (dollars in millions):
 Six Months Ended
June 30,		GrowthNon-GAAP Constant Currency Growth vs. 2020
 20212020DollarsPercentPercent
Net revenues:
United States$1,031.0 $389.2 $641.8 164.9 %164.9%
Europe229.3 146.8 82.5 56.2 %42.5%
Japan133.7 102.0 31.7 31.1 %30.5%
Rest of World171.2 101.3 69.9 69.0 %55.2%
$1,565.2 $739.3 $825.9 111.7 %107.0%
 Six Months Ended
June 30,		 Decline Constant Currency Decline vs. 2019
 2020 2019 Dollars Percent Percent
Net sales:         
United States$389.2
 $496.4
 $(107.2) -21.6 % -21.6%
Europe146.8
 208.2
 (61.4) -29.5 % -27.8%
Japan102.0
 128.9
 (26.9) -20.9 % -22.0%
Rest of World101.3
 129.4
 (28.1) -21.7 % -18.6%
 $739.3
 $962.9
 $(223.6) -23.2 % -22.6%

Net salesrevenues in the United States decreased $107.2increased $641.8 million (21.6%(164.9%) to $389.2$1,031.0 million during the six months ended June 30, 20202021 compared to the six months ended June 30, 2019.same period in the prior year. Net salesrevenues in regions outside of the United States decreased $116.4increased $184.1 million (25.0%(52.6%) to $534.2 million for the six months ended June 30, 2021 compared to $350.1 million for the six months ended June 30, 2020. The increase in both domestic and international net revenue in the first half of 2021 reflects the addition of the Topgolf business, as well as the continued strength and brand momentum of the Company's Golf Equipment business, combined with the strong rebound of the TravisMathew business in the United States and Jack Wolfskin business in Europe and China. Net revenues across all brands in the first half of 2020 comparedwere severely impacted by the temporary shutdown of many of the Company's and its customer's retail locations and facilities in all major regions due to the six months ended June 30, 2019.COVID-19 pandemic. Fluctuations in foreign currencies had an unfavorablea favorable impact on international net salesrevenues of $6.1$35.0 million in the first halfsix months of 20202021 relative to the same period in the prior year. The general decrease in net sales by region was primarily due
Costs and Expenses
Costs of products increased $204.1 million to the business disruption caused by the COVID-19 pandemic.
Gross profit decreased $127.5 million (28.6%) to $317.7$625.6 million for the six months ended June 30, 20202021 compared to $445.3$421.5 million infor the same period in 2020. The Company’s cost of 2019. Gross profit as a percentage of netproducts are highly variable in nature and this increase is due to the significant increase in sales ("gross margin") decreased 320 basis points to 43.0%volumes in the first halfsix months of 2020 compared to 46.2% in the first half of 2019. The decline in gross margin was primarily due to (i) a decrease in net sales and business challenges caused by COVID-19; (ii) the negative impact of fixed costs on a lower sales base caused by the temporary shut-down of the Company's distribution centers and manufacturing facilities as a result of COVID-19; (iii) an unfavorable shift in sales mix due to a decrease in higher margin retail sales resulting from temporary store closures,2021, combined with an increase in freight and overall commodity costs. In the first six months of 2020, sales volumes were significantly lower due to the business disruptions caused by the COVID-19 pandemic.
Costs of lower margin products, including packaged sets, entry level golf ballsservices of $53.8 million primarily consist of the cost of food and pre-owned product as a result of an increase in new and returning golfers; and (iv) an increase in U.S. tariffs on imports from China. These declines were partially offset by a higher mix of e-commerce sales, which have higher gross margins. In addition, gross marginbeverage sold in the first halfCompany’s Topgolf venues as well as certain costs associated with licensing the Company’s Toptracer ball-flight tracking technology.
Other venue expenses of 2020 benefited from a reduction in non-recurring expenses$267.8 million primarily consist of Topgolf venue related to non-cash purchase accounting adjustments recognized in 2019 related to the Jack Wolfskin acquisition, offset by warehouse consolidationdepreciation and amortization, employee costs, incurred in 2020. For further discussion of gross margin, see above "Results of Operations—Overview of Businessrent, utilities, and Seasonality—Cost of Sales" and see below "Operating Segments Results for the Six Months Ended June 30, 2020 and 2019—Segment Profitability."other costs associated with Topgolf venues.
Selling, general and administrative expenses decreasedincreased by $41.2$138.0 million to $191.2$395.0 million (25.9%(25.2% of net sales)revenues) during the six months ended June 30, 20202021 compared to $232.4$257.0 million (24.1%(34.8% of net sales)revenues) in the comparable period of 2019.2020. This 17.7% decrease was primarilyincrease reflects incremental expenses of $53.3 million related to the merger with Topgolf completed in March 2021, and a $26.6 million increase in non-recurring expenses, which include transaction and transition expenses incurred in connection with the merger with Topgolf, expenses related to the implementation of new IT systems for Jack Wolfskin, and non-cash amortization expense related to acquired intangible assets. Excluding these incremental expenses and non-recurring charges, selling, general and administrative expenses increased $59.3 million (23.6%) due to an increase in variable costs combined with the Company's planned reductiongradual reinvestment in operating expensesthe business in the first half of 2021, compared to the cost savings initiatives that the Company implemented in response to the adverse effect onvarious restrictions imposed by the Company's business caused by COVID-19 resultingpandemic in a $28.2 million declinethe first half of 2020. This resulted in marketing and tour expenses, a $7.3 million declineincreases in employee


47


costs, which includes severance charges of $1.3 million due to workforce reductions in the second quarter of 2020, and a $2.9 million decline in travel and entertainment expenses, as well asinclude an overall declineincrease in variable expenses.salaries and wages and employee incentive compensation, advertising and promotional expenses, tour, professional fees primarily related to IT projects and infrastructure improvements, building and furniture expenses, and depreciation and amortization expense.
GeneralResearch and administrativedevelopment expenses decreased by $6.6increased $9.7 million to $65.7$33.0 million (8.9%(2.1% of net sales) duringrevenues) in the six months ended June 30, 20202021 compared to $72.4 million (7.5% of net sales) in the comparable period of 2019. This 9.1% decrease was primarily due to a $5.9 million decline in employee costs, net of severance charges of $0.5 million, as a result of the Company's planned cost reduction initiatives during the first half of 2020, which resulted in a reduction in workforce, a temporary reduction in salaries and certain benefits, and a decrease in accrued incentive compensation expense. The Company's results for the first six months of 2020 also benefited from a $5.9 million reduction in non-recurring costs, primarily related to the acquisition and business integration costs incurred in the first six months of 2019. These decreases were partially offset by an increase in legal and bad debt expense.
Research and development expenses decreased by $2.4 million to $23.3 million (3.1% of net sales) duringrevenues) the six months ended June 30,same period in 2020, compared to $25.6 million (2.7% of net sales) in the comparable period of 2019, primarily due to a $1.8incremental expenses of $7.8 million declinerelated to the merger with Topgolf completed in March 2021, and an increase in employee costs.

55

Venue pre-opening costs net of severance charges$6.7 million consist of $0.6 million,costs associated with activities prior to the opening of a new Company-operated venue, as well as other costs that are not considered in the evaluation of ongoing performance. The Company expects to continue to incur pre-opening costs as it executes its growth trajectory of adding new Company-operated venues. These costs are expected to fluctuate based on the timing, size and a $0.6 million decline in travel and entertainment resulting from the Company's planned cost reduction initiatives during the first halflocation of 2020.new Company-operated venues.
Due to the significant business disruption and macro-economic impact of COVID-19 on the Company's financial results, the Company performed a quantitative assessment of its goodwill and non-amortizing intangible assets during the second quarter of 2020 resulting in an impairment charge of $174.3 million (see(see Note 9, "Goodwill and Intangible Assets to the Notes to Consolidated Condensed Financial Statements included in Part I, Item 1, of this Form 10-Q).
Interest expense increased by $0.9 million to $21.5 million during the six months ended June 30, 2020 compared to $20.6 million in the comparable period of 2019, primarily due to an increase in the Company's net debt position due to the issuance of $258.8 million in convertible notes in May 2020 (see Note 6 “Financing Arrangements”Assets" to the Notes to Consolidated Condensed Financial Statements included in Part I, Item 1, of this Form 10-Q).
Other income (expense)Income and Expense
Interest expense increased by $25.1 million to other income of $20.5$46.6 million during the six months ended June 30, 20202021 compared to other expense of $0.8$21.5 million in the comparable period of 20192020, primarily due to the interest expense related to the debt and deemed landlord financing liabilities acquired as part of the Topgolf merger. See Note 7 “Financing Arrangements” to the Notes to Consolidated Condensed Financial Statements included in Part I, Item 1, of this Form 10-Q.
As a result of the merger with Topgolf, the Company wrote up the value of its pre-merger shares of Topgolf to their fair value and recorded a gain of $252.5 million during the first quarter of 2021.
Other income decreased to $6.5 million during the six months ended June 30, 2021 compared to $20.5 million in the comparable period of 2020. This decline was primarily due to the $11.0 million in gainsgain recognized in Junethe second quarter of 2020 on discontinued cash flow hedges,in connection with the settlement of a cross-currency swap, in addition to a $9.6 millionan increase in net gains on non-designated foreign currency contracts.losses.
Income Taxes
The Company’s provision for income taxes decreased $15.6increased $30.7 million to $1.2$31.9 million for the six months ended June 30, 2020,2021, compared to $16.8$1.2 million in the comparable period of 2019.2020. As a percentpercentage of pre-tax income, (loss), the Company's effective tax rate for the first six months of 2021 increased to 8.1% compared to (0.9)% in the comparable period of 2020, The Company's effective tax rate in 2021 was impacted by the $252.5 million nontaxable gain recognized on the Company's pre-merger investment 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 for the first six months of 2020 decreased to 4.5% compared to 20.0% inwas impacted by the comparable periodrecognition of 2019. This decrease was primarily due to thea $174.3 million non-deductible impairment charge recorded during the second quarter of 2020 to write downwrite-down certain goodwill and intangible assets related to their estimated fair values, combined with an overall reduction in pre-tax earnings inJack Wolfskin. Excluding these non-recurring items from both periods, the Company's effective income tax rate would have been 17.9% for the first six months of 20202021 compared to 24.8% for the same periodfirst six months in 2019.2020. This decline is primarily due to a shift in mix of earnings to regions with lower tax rates. For further discussion see Note 13 “Income Taxes” to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q.
Net Income (Loss)
Net income (loss) for the six months ended June 30, 2020 decreased $216.4 million2021 increased to a lossnet income of $138.8$364.2 million compared to incomea net loss of $77.6$138.8 million in the comparable period of 2019.2020. Diluted earnings (loss) per share decreasedincreased $3.75 to earnings of $2.28 per share in the first six months of 2021 compared to a loss per share of $1.47 in the first six months of 2020 compared to earnings per share of $0.81 in the same period in 2019.2020.
On a non-GAAP basis, excluding the after-tax loss fromitems described in the impairment of the Jack Wolfskin goodwill and certain other intangible assets, after-tax non-cash acquisition amortization expenses related to the Jack Wolfskin, TravisMathew and OGIO acquisitions, non-cash amortization expense of the discount on the convertible notes issued in May 2020, other non-recurring charges and acquisition and transition costs related to Jack Wolfskin,table below, the Company's net income and diluted earnings per share for the sixthree months ended June 30, 20202021 would have been $27.8$147.1 million and $0.29$0.92 per share, respectively, compared to $95.6$36.3 million and $0.99$0.38 per share, respectively, for the comparative period in 2019.2020. The decreasedincrease in non-GAAP earnings in 20202021 was primarily duedriven by continued strong demand for the Company's 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 net income attributable to Topgolf. Additionally, the Company's earnings in 2020 were negatively impacted by the business disruptions and challenges caused by the COVID-19 pandemic during the first half of 2020, which resulted in a significant decline in net sales and operating income compared to the same period in 2019, partially offset by the Company's planned cost reduction initiatives combined with an increase in foreign currency hedging gains.


48


pandemic.
The table below presents a reconciliation of the Company's as-reported results for the six months ended June 30, 20202021 and 20192020 to the Company's non-GAAP results reported above for the same periods (in millions, except per share information).

56

Six Months Ended June 30, 2021
Six Months Ended June 30, 2020GAAP
Non-Cash Acquisition Amortization(1)
Non-Cash Amortization of Discount on Convertible Notes(2)
Acquisition and Other Non-Recurring Items(3)
Tax Valuation Allowance(4)
Non-GAAP
GAAP 
Non-Cash Acquisition Amortization and Impairment Charges(1)
 
Non-Cash Amortization of Discount on Convertible Notes(2)
 
Other Non-Recurring Charges(3)
 Non-GAAP
Net income (loss) attributable to Callaway Golf Company
($138.8) 
($168.2) 
($1.2) 
$2.8
 
$27.8
Net income (loss)Net income (loss)$364.2 $(9.7)$(3.9)$236.9 $(6.2)$147.1 
Diluted earnings (loss) per share
($1.47) 
($1.78) 
($0.01) 
$0.03
 
$0.29
Diluted earnings (loss) per share$2.28$(0.06)$(0.02)$1.48$(0.04)$0.92
Weighted-average shares outstanding94.2
 94.2
 94.2
 94.2
 94.2
Weighted-average shares outstanding159.6159.6159.6159.6159.6159.6

 Six Months Ended June 30, 2019
 GAAP 
Non-Cash Purchase Accounting Adjustments and Acquisition Amortization(1)
 
Acquisition and Transition Expenses(4)
 Non-GAAP
Net income (loss) attributable to Callaway Golf Company
$77.6
 
($10.1) 
($7.9) 
$95.6
Diluted earnings (loss) per share
$0.81


($0.10) 
($0.08) 
$0.99
Weighted-average shares outstanding96.2
 96.2
 96.2
 96.2
Six Months Ended June 30, 2020
GAAP
Non-Cash Acquisition Amortization and Impairment Charges(1)
Non-Cash Amortization of Discount on Convertible Notes(2)
Other Non-Recurring Items(3)
Non-GAAP
Net income (loss)$(138.8)$(168.2)$(1.2)$(5.7)$36.3 
Diluted earnings (loss) per share$(1.47)$(1.78)$(0.01)$(0.06)$0.38 
Weighted-average shares outstanding94.2 94.2 94.2 94.2 94.2 
(1)Includes the non-cash amortization expense of intangible assets in connection with the acquisitions of Jack Wolfskin, TravisMathew and OGIO. In addition, the six months ended June 30, 2020 includes the recognition of a $174.3 million impairment of the Jack Wolfskin goodwill and trade name, and the six months ended June 30, 2019 includes the amortization of the inventory valuation step-up in connection with the Jack Wolfskin acquisition.
(2)Represents the non-cash amortization of the discount on the convertible notes issued in May 2020.
(3)Other non-recurring charges primarily include redundant costs associated with the Company's transition of its North America distribution center to a new facility, severance charges associated with workforce reductions due to the COVID-19 pandemic, and the recognition of a deferred gain from a cash flow hedge that was discontinued in the second quarter of 2020.
(4)Represents 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, and a net loss from the remeasurement of a foreign currency forward contract in connection with the acquisition of Jack Wolfskin.
(1)Includes the non-cash amortization expense of intangible assets in connection with the acquisitions of Jack Wolfskin, TravisMathew and OGIO. In addition, the six months ended June 30, 2021 includes approximately four months of non-cash amortization expense of the intangible assets acquired in the merger with Topgolf on March 8, 2021, as well as 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. The first six months of 2020 also reflects an impairment charge of $174.3 million to write-down goodwill and 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)Other non-recurring items for the six months ended June 30, 2021 include a gain to write-up the Company's pre-acquisition investment in Topgolf to its fair value, as well as transaction, transition and other non-recurring costs related to the Topgolf merger, and costs related to the implementation of new IT systems for Jack Wolfskin. Items for the comparable period of 2020 include costs associated with the Company's transition to its new North America Distribution Center, costs related to the implementation of new IT systems for Jack Wolfskin, as well as 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.
Operating Segment Results for the Six Months Ended June 30, 20202021 and 20192020
As a result of the Topgolf merger, the Company now has three operating segments, namely Golf Equipment; Apparel, Gear and Other; and Topgolf.
Golf Equipment
Golf equipment sales decreased $114.4net revenues increased $276.5 million (18.6%(55.1%) to $501.6$778.1 million for the six-months ended June 30, 20202021 compared to $323.6$501.6 million for the same period in 2019 as2020 due to a result of decreases of $78.3$229.1 million (16.1%(56.2%) increase in golf club salesrevenue and $36.1a $47.5 million (27.7%(50.3%) increase in golf ball sales.revenue. These decreasesincreases were due to the business disruptions and challenges causeddriven by the COVID-19 pandemic duringcontinued unprecedented surge in golf demand and 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. Net revenues of golf equipment in the first half of 2020 which had an adverse impact on

57

were negatively impacted by temporary closure of the Company's wholesale business. This was slightly offset by an improvement inretail locations, manufacturing facilities and distributions centers, as well as its customers' retail locations, for the Company's e-commerce business, which increased significantly comparedmajority of the second quarter due to 2019.


49


the COVID-19 pandemic.
Net salesrevenues information for the Golf Equipment operating segment by product category is summarized as follows (dollars in millions):
 Six Months Ended
June 30,		 Decline
 2020 2019 Dollars Percent
Net sales:       
Golf Clubs$407.3
 $485.6
 $(78.3) -16.1 %
Golf Balls94.3
 130.4
 (36.1) -27.7 %
 $501.6
 $616.0
 $(114.4) -18.6 %
Net sales of golf clubs decreased $78.3 million (16.1%) to $407.3 million for the six months ended June 30, 2020 compared to the same period in the prior year primarily due to a decline in sales volume and average selling prices. The decline in sales volume was due to the temporary closure of many of the Company's retail partner locations as a result of the COVID-19 pandemic. The decline in average selling prices was primarily due to the current year launch of the Mavrik line of drivers and irons, which have a lower average selling price compared to the Epic Flash drivers and Apex irons launched in 2019, combined with a shift in sales mix of lower margin pre-owned products.
Net sales of golf balls decreased $36.1 million (27.7%) to $94.3 million for the six months ended June 30, 2020 compared to the same period in the prior year due to a decline in sales volume and average selling prices. The decline in sales volume was due to the temporary closure of many of the Company's retail partner locations as a result of the COVID-19 pandemic. The decline in average selling prices was due to a shift in sales mix to lower priced golf balls as a result of supply constraints of premium golf balls due to the temporary shut-down of the golf ball manufacturing facility in the United States caused by COVID-19 mandates.
 Six Months Ended
June 30,		Growth
 20212020DollarsPercent
Net revenues:
Golf Clubs$636.3 $407.3 $229.0 56.2 %
Golf Balls141.8 94.3 47.5 50.4 %
$778.1 $501.6 $276.5 55.1 %
Apparel, Gear and Other
Apparel, Gear and Other sales decreased $109.2increased $131.3 million (55.3%) to $237.7$369.0 million induring the six months ended June 30, 20202021 compared to $346.9$237.7 million for the same period in 20192020, due to a $55.8$73.1 million (32.9%(64.3%) decreaseincrease in apparel sales and a $53.4$58.2 million (30.1%(46.9%) decreaseincrease in sales of gear, accessories and other. The increase in the apparel, gear and other segment was due to a strong rebound across all brands in the first half of 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. The increase in apparel was driven by increases across each of the Company's TravisMathew, Jack Wolfskin and Callaway apparel brands. The increase in gear, accessories and other sales. These decreases werewas driven by strong increases across all golf accessory categories for the Callaway brand, headwear and footwear for TravisMathew, and footwear at Jack Wolfskin.
The increase for TravisMathew products was driven by strong brand momentum and increases across all sales channels. The Callaway brand increased due to a unprecedented demand for golf accessories driven by the temporary closure of manyheightened popularity of the Company'sgame of golf. The increase for Jack Wolfskin was driven by significant e-commerce sales and an increase in the wholesale and directbusiness in China, partially offset by lower retail locations as a result of the COVID-19 pandemicrevenue due to further government-mandated retail shutdowns during the first halfsecond quarter of 2020. This decline was slightly offset by an improvement2021 in the Company's e-commerce business in the first half of 2020, which increased significantly compared to same period in 2019.Europe.
Net salesrevenues information for the Apparel, Gear and Other segment is summarized as follows (dollars in millions):
 Six Months Ended
June 30,		Growth
 20212020DollarsPercent
Net revenues:
Apparel$186.7 $113.6 $73.1 64.3 %
Gear, Accessories, & Other182.3 124.1 58.2 46.9 %
$369.0 $237.7 $131.3 55.2 %
 Six Months Ended
June 30,		 Decline
 2020 2019 Dollars Percent
Net sales:       
Apparel$113.6
 $169.4
 $(55.8) -32.9 %
Gear, Accessories, & Other124.1
 177.5
 (53.4) -30.1 %
 $237.7
 $346.9
 $(109.2) -31.5 %
Topgolf
Net salesOn March 8, 2021 the Company completed its merger with Topgolf, and the Company’s results of apparel decreased $55.8operations include the operations of Topgolf from that date forward. Topgolf contributed $418.1 million (32.9%) to $113.6 millionin net revenues for the six months ended June 30, 2020 compared to2021, which includes approximately four months of revenues since the same periodcompletion of the prior year due to a declinemerger. Topgolf revenue is primarily generated from Company-operated venues equipped with technology-enabled hitting bays, multiple bars, dining areas and event spaces. Other business lines primarily include the Toptracer ball-flight tracking technology used by independent driving ranges and broadcast television, and the Company's WGT digital golf game.
Net revenues information for the Topgolf segment is summarized as follows (dollars in sales across all apparel brandsmillions):
Six months ended June 30, 2021
Net revenues:
Venues$388.6 
Other business lines29.5 
$418.1 

58

Segment Profitability
The Company evaluates the performance of its operating segments based on segment operating income. Management uses total segment operating income as a resultmeasure of the business challenges caused by the COVID-19 pandemic during the first six months of 2020.
Net sales of gear, accessoriesits operational performance, excluding corporate overhead and other decreased $53.4 million (30.1%) to $124.1 million for the six months ended June 30, 2020 compared to the same period in the prior year due to the business challenges caused by the COVID-19 pandemic during the first six month of 2020.


50


Segment Profitabilitycertain non-recurring and non-cash charges.
Profitability by operating segment is summarized as follows (dollars in millions):
 Six Months Ended
June 30,		 Growth/(Decline)
 2020 2019 Dollars Percent
Income before income taxes:       
Golf Equipment$87.8
 $125.7
 $(37.9) -30.2 %
Apparel, Gear and Other(15.5) 34.0
 (49.5) -145.6 %
Reconciling items(1) 
(209.9) (65.5) (144.4) 220.5 %
 $(137.6) $94.2
 $(231.8) -246.1 %
Six Months Ended
June 30,		Growth
Non-GAAP Constant Currency Growth vs. 2020(1)
20212020DollarsPercentPercent
Net revenues:
Golf Equipment$778.1 $501.6 $276.5 55.1 %51.3%
Apparel, Gear and Other369.0 237.7 131.3 55.2 %49.7%
Topgolf418.1 — 418.1 — —
Total net revenues$1,565.2 $739.3 $825.9 111.7 %107.0%
Segment operating income (loss):
Golf Equipment$183.0 $87.8 $95.2 108.4 %
Apparel, Gear and Other36.2 (15.5)51.7 333.5 %
Topgolf28.2 — 28.2 — 
Total segment operating income247.4 72.3 175.1 242.2 %
Corporate G&A and other(2)
64.0 209.1 (145.1)(69.4)%
Total operating income (loss)183.4 (136.8)320.2 (234.1)%
Gain on Topgolf investment(3)
252.5 — 252.5 — 
Interest expense, net(46.3)(21.3)(25.0)117.4 %
Other income, net6.5 20.5 (14.0)(68.3)%
Total income (loss) before income taxes$396.1 $(137.6)$533.7 (387.9)%
(1)
Reconciling items represent corporate general and administrative expenses and other income (expense) not included by management in determining segment profitability. The $144.4 million increase in reconciling items
(1)Calculated by applying 2020 exchange rates to 2021 reported sales in regions outside the United States.
(2)Amounts for the first half of 2020 compared to the same period in 2019 was primarily due to the recognition of a $174.3 million impairment of the Jack Wolfskin goodwill and trade name (see Note 9 "Goodwill and Intangible Assets to the Notes to Consolidated Condensed Financial Statements included in Part I, Item 1, of this Form 10-Q). This increase was partially offset by a $11.0 million gain that was recognized in the six months ended June 30, 2020 related to a discontinued cash flow hedge, combined with a foreign currency forward loss of $3.9 million that was recognized in the six months ended June 30, 2019 on a forward contract to mitigate the risk of foreign currency fluctuations on the acquisition of Jack Wolfskin, in addition to $10.7 million of 2021 and 2020 include corporate general and administrative expenses not utilized by management in determining segment profitability as well as non-cash amortization expense of intangible assets in connection with the acquisitions of OGIO, TravisMathew and Jack Wolfskin. In addition, the amount for 2021 includes (i) $18.7 million of transaction, transition and other non-recurring costs associated with the merger with Topgolf completed on March 8, 2021, (ii) $8.4 million of non-cash amortization expense for intangible assets acquired in connection with the merger with Topgolf, combined with depreciation expense recognized in the six months ended June 30, 2019 related to the inventory valuation step-up from the Jack Wolfskin acquisition.
Pre-tax income from the Golf Equipmentfair value step-up of Topgolf property, plant and equipment and amortization expense related to the fair value adjustments to Topgolf leases, and (iii) $1.5 million of costs related to the implementation of new IT systems for Jack Wolfskin. The amount for 2020 also includes (i) an impairment charge of $174.3 million related to Jack Wolfskin, (ii) $3.4 million of non-recurring costs associated with the Company's transition to the new North America Distribution Center, as well as costs related to the implementation of new IT systems for Jack Wolfskin, and (iii) $3.7 million of severance charges associated with workforce reductions due to the COVID-19 pandemic.
(3)Amount represents 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 Condensed Financial Statements included in Part I, Item 1, of this Form 10-Q
Operating income for the golf equipment operating segment decreased $37.9increased $95.2 million (30.2%(108.4%) to $87.8$183.0 million for the six months ended June 30, 20202021 from $125.7$87.8 million in the comparable period in the prior year. This decreaseincrease was primarilydriven by a significant increase in revenue volume across all product categories as discussed above combined with the favorable impact of foreign currency exchange rates and favorable absorption of fixed overhead and operating expenses due to the higher revenue base period over period, in addition to a $69.8 million decrease in gross profit (a declinepromotional and discounting activities. In addition, the Company's results for its golf equipment business in the first six months of 300 basis points in gross margin), partially offset2021 were severely impacted by a $31.9 million decrease in operating expenses. The decline in gross margin was largely due to (i) lower salesthe business disruptions and the negative impact of fixed costs on a lower sales basechallenges caused by the temporary shut-down ofCOVID-19 pandemic.

59

Operating income for the Company's distribution centersapparel, gear and manufacturing facilities as a result of COVID-19; (ii) an increase in sales of lower margin products, including packaged sets, entry level golf balls and pre-owned product as a result of an increase in new and returning golfers; and (iii) an increase in U.S. tariffs on imports from China. These decreases were partially offset by a higher mix of e-commerce sales, which have higher gross margins. The decrease in operating expenses was primarily due to decreases in marketing expenses and employee costs resulting from cost reduction initiatives in response to the decline in sales period over period.
Pre-tax income from the Apparel, Gear and Otherother operating segment decreased $49.5increased $51.7 million (145.6%(333.1%) to a pre-tax loss of $15.5$36.2 million for the six months ended June 30, 20202021 from pre-tax incomean operating loss of $34.0$15.5 million forin the comparable period in the prior year. This decreaseincrease was primarily duedriven by a strong rebound in sales across all brands as discussed above, in addition to the favorable impact of foreign currency exchange rates, in addition to the favorable impact of leveraging fixed overhead and operating expenses on a $63.8 millionhigher revenue base period over period, a decrease in gross profit (a decline of 530 basis pointspromotional activity, and an increase in gross margin), partially offset by a $14.3 million decrease in operating expenses. The decline in gross margin was primarily due to lower sales and the negative impact of fixed costs on a lower sales base caused by the temporary shut-down of the Company's distribution centers and retail locations as a result to the COVID-19 pandemic. These declines were partially offset by a higher mix ofdirect-to-consumer e-commerce sales, which have higher gross margins. The decreaseprofit margins relative to wholesale.
Topgolf contributed an incremental $28.2 million of operating income in the first six months of 2021, which represents approximately four months of operating expenses was primarily dueresults since the completion of the merger on March 8, 2021, and reflects the opening of four new domestic locations during the second quarter of 2021, and a higher level of customer engagement as venues welcomed guests back to decreases in marketing expenses and employee costs resulting from cost reduction initiatives in response to the decline in sales period over period.all locations.
Financial Condition
The Company’s cash and cash equivalents increased $57.8$49.1 million to $164.4$415.2 million at June 30, 20202021 from $106.7$366.1 million at December 31, 2019, primarily due to proceeds of $258.8 million from Convertible Notes issued in May of 2020, partially offset by a decline in net income period over period due to2020. This increase reflects the adverse effectscombined cash positions of the COVID-19 pandemicCompany and Topgolf as a result of the merger completed on the Company's business during the first half of 2020.March 8, 2021. During the first six months of 2020,2021, the Company used its cash and cash equivalentsprovided by operations of $100.5 million, combined with the proceeds of $18.4 million from the issuanceexercise of the Convertible Notesstock options in addition to proceeds of $24.8 million from lease financing arrangements, to fund its operations,capital expenditures of $120.8 million, repay $89.0$122.8 million of amounts outstanding under its credit facilities, fund capital expenditures of $25.1 million, primarily in its golf ball manufacturing plant to increase capacity and improve its manufacturing capabilitieslong-term debt facilities, and repurchase shares of its common stock for $22.0 million. In addition,$12.5 million to satisfy payroll tax withholding obligations in connection with the Convertible Notes, the Company paid a premiumvesting and settlement of $31.8 million


51


for capped call transactions, which are expected to generally reduce the potential dilution to the Company’s commonemployee restricted stock upon any conversion of the notes.unit awards and performance share unit awards. 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 current and future credit facilities as well as from other available sources of capital, as deemed necessary. See Note 67 "Financing Arrangements" to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 and "Liquidity and Capital Resources" in Part I, Item 2 of this Form 10-Q for further information on the Company's credit facilities and the Term Loan Facility.
The Company’s accounts receivable balance fluctuates throughout the year as a result of the general seasonality of the Company’s business and is also affected by the timing of new product launches. With respect to the Company’s Golf Equipment business, the accounts receivable balance will generally be at its highest during the first and second quarters due to the seasonal peak in the golf season, and it will generally decline significantly during the third and fourth quarters as a result of an increase in cash collections and lower sales. The Company's Apparel, Gear and Other Accountsaccounts receivable balances are expected to be higher during the second half of the year due to the seasonal nature of the Jack Wolfskin business, with a significant portion of its products geared toward the fall/winter season. On March 8, 2021, the Company completed its merger with Topgolf, which primarily records revenue and collects payment at point-of-sale for most of its venue business. Therefore, Topgolf's accounts receivable balance is smaller than the Company's other business segments and primarily consists of media sponsorship receivables. As of June 30, 2020,2021, the Company’s net accounts receivable increased to $214.0$325.3 million from $140.5$138.5 million as of December 31, 2019.2020. This increase reflects the generalCompany's seasonality ofcombined with incremental accounts receivable from the Company's business.merger with Topgolf. The Company’s net accounts receivable as of June 30, 2020 decreased $49.62021 increased $111.3 million compared to June 30, 20192020 primarily due to a decreasean increase in net salesrevenues of $149.7$616.6 million (33.5%)in the second quarter of 2021 compared to the second quarter of 2020 resulting from the continued increase in demand for golf equipment as the result of the increased popularity of golf combined with incremental revenues from the merger with Topgolf. In addition, sales in the second quarter of 2020 compared towere more negatively impacted by the second quarter of 2019 due to the continued business disruptions and challengeseconomic downturn caused by the COVID-19 pandemic in 2020.pandemic.
The Company’s inventory balance fluctuates throughout the year as a result of the general seasonality of the Company’s business and is also affected by the timing of new product launches. With respect to the Company's 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 the beginning of the second quarter in order to meet 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 Other inventory levels start to build in the second quarter and continues into the third and fourth quarters due to the seasonal nature of the Company's Jack Wolfskin business, as many products are geared toward the fall/winter season. On March 8, 2021, the Company completed its merger with Topgolf, which is primarily a services business with lower inventory balances than the Company's other business segments, and primarily consists of food and beverage as well as retail merchandise and Toptracer inventory. The Company’s inventory decreased $17.2 million to $379.2$335.3 million as of

60

June 30, 20202021 compared to $456.6$352.5 million as of December 31, 2019.2020. This decrease reflectswas primarily due to the general seasonalityseasonal increase in demand of golf equipment in the first half of 2021 and the continued increase in demand for golf equipment as a result of the Company's business.heightened popularity of golf, combined with the sell-through of close-out and end-of-life inventory. This increase was partially offset by the incremental inventory from the merger with Topgolf. The Company’s inventory as of June 30, 2020 increased2021 decreased by $18.7$43.8 million compared to the Company's inventory as of June 30, 20192020 primarily due to higher inventory levels resulting from lower salesan increase in demand for golf equipment and golf accessories as the popularity of golf increased starting in the firstsecond half of 2020 due tothrough the business disruptionssecond quarter of 2021, combined with the sell-through of close-out and challenges causedend-of-life inventory. This decrease was partially offset by the COVID-19 pandemic.addition of Topgolf inventory.
Liquidity and Capital Resources
The Company’s principal sources of liquidity consist of its existing cash balances, funds expected to be generated from operations and funds from its credit facilities. In addition, in May 2020, the Company issued an aggregate principal amount of $258.8 million of Convertible Notes due in 2026. Based upon the Company’s current cash balances, its estimates of funds expected to be generated from operations, in 2020, combined with proceeds from the Convertible Notes as well as from current and projected availability under its current or future credit facilities, the Company believes that it 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-Q. The Company also received in early May proceeds from its convertible note offering discussed below, which will also significantly increase the Company’s liquidity.
The Company’s ability to generate sufficient positive cash flows from operations is subject to many risks and uncertainties, including future economic trends and conditions, primarily the future economic impact from the COVID-19 pandemic, demand for the Company’s products, foreign currency exchange rates, and other risks and uncertainties applicable to the Company and its business (see “Risk Factors” contained in Part I, Item 1A of its Annual Report on Form 10-K for the year ended December 31, 2019, in addition to updates to the Risk Factors concerning the negative impact of the COVID-19 pandemic on the Company's business contained in Part II, Item 1A of its Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 and on this Form 10-Q)2020). Given the uncertain duration of the COVID-19-related impact, the Company has proactively taken actions to significantly reduce costs, maximize liquidity and conserve cash for as long as may be required in light of current conditions. Through the end of the second quarter of 2020, the Company achieved significant savings in planned reductions in operating expenses and capital expenditures by reducing discretionary spending and infrastructure costs on a worldwide basis, which included a reduction in workforce and a temporary reduction in salaries and certain benefits, in addition to voluntary reductions in compensation by the Board of Directors, the Chief Executive Officer and other members of senior management. As of June 30, 2020,2021, the Company had $483.1$876.8 million in cash and availability under its credit facilities.


52


While the Company believes its cash and credit facilities, are adequatewhich is an increase of $393.7 million or 81% compared to sustain its business through this crisis, the Company continues to consider other available sources of capital as market conditions and programs present themselves. 
With this increased liquidity, cost reduction actions, the Company's geographic diversity and the strength of its brands, the Company believes is has adequate liquidity to sustain its business through this crisis.June 30, 2020. Information about the Company's credit facilities and long-term borrowings is presented in Note 67 “Financing Arrangements” to the Notes to Consolidated Condensed Financial Statements included in Part I, Item 1 of this Form 10-Q, which is incorporated herein by this reference.
On March 8, 2021, the Company completed the merger with Topgolf in an all-stock transaction (see Note 6 "Business Combinations" to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q). In connection with the merger with Topgolf, the Company acquired cash of $171.3 million and assumed $535.1 million in long-term debt. The Company believes that with its continued strong cash generation 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.
As of June 30, 2020,2021, approximately 66%37.7% of the Company's cash was held in regions outside of the United States. DueThe Company continues to changes enacted by the Tax Actmaintain its indefinite reinvestment assertion with respect to most jurisdictions in December 2017, incremental U.S. federal income tax is no longer a consideration ifwhich it operates because of local cash requirements to operate its business. If the Company were to repatriate cash to the United States outside of settling intercompany balances. However, if the Company were to repatriate such cash,balances, it may need to pay incremental foreign withholding taxes which, subject to certain limitations, generate foreign tax credits for use against the Company's U.S. tax liability, if any. Additionally, the Company may need to pay certain state income taxes. The Company continues to maintain its indefinite reinvestment assertion with respect to most jurisdictions in which it operates because of local cash requirements to operate its business.

61

Other Significant Cash and Contractual Obligations
The table set forth below summarizes certain significant cash obligations as of June 30, 20202021 that will affect the Company’s future liquidity.
 Payments Due By Period
 Total 
Less than
1 Year
 1-3 Years 3-5 Years 
More than
5 Years
 (in millions)
Term Loan Facility(1)
$444.0
 $2.4
 $9.6
 $9.6
 $422.4
Interest on Term Loan Facility114.5
 21.3
 41.9
 41.0
 10.3
Convertible Notes(2)
258.8
 —
 —
 —
 258.8
Equipment Notes(3)
26.7
 6.2
 11.8
 6.1
 2.6
Interest on Equipment Notes1.9
 0.7
 0.8
 0.3
 0.1
ABL Facility27.8
 27.8
 —
 —
 —
Japan ABL Facility27.8
 27.8
 —
 —
 —
Finance leases, including imputed interest(4)
1.1
 0.4
 0.5
 0.2
 —
Operating leases, including imputed interest(5)
262.8
 20.4
 65.4
 49.4
 127.6
Unconditional purchase obligations(6)
77.1
 45.2
 29.4
 2.5
 —
Uncertain tax contingencies(7) 
7.5
 0.5
 1.0
 1.1
 4.9
Other long term liabilities7.9
 0.4
 0.9
 0.9
 5.7
Total$1,257.9

$153.1

$161.3

$111.1

$832.4
 Payments Due By Period
 TotalRemainder of 20212022 - 20232024 - 2025Thereafter
(in millions)
Japan Term Loan Facility (1)
$15.3 $1.8 $7.2 $6.3 $— 
Interest on Japan Term Loan Facility0.3 0.1 0.1 0.1 — 
Term Loan B Facility (2)
439.2 2.4 9.6 9.6 417.6 
Interest on Term Loan Facility96.1 10.9 43.0 36.8 5.4 
Topgolf Term Loan (3)
342.1 1.8 7.0 7.0 326.3 
Topgolf Revolving Credit Facility (3)
50.0 — — 50.0 — 
Convertible Notes (4)
258.8 — — — 258.8 
Equipment Notes (5)
27.7 4.2 14.7 6.9 1.9 
Interest on Equipment Notes1.5 0.4 0.9 0.2 — 
Mortgage Loans (6)
46.6 0.2 1.1 1.3 44.0 
Financed Tenant Improvements3.7 0.1 0.4 0.4 2.8 
ABL Facility (7)
21.4 21.4 — — — 
Finance leases, including imputed interest (8)
3.0 0.6 2.0 0.4 — 
Operating leases, including imputed interest (9)
2,165.8 67.6 296.7 286.5 1,515.0 
Deemed landlord financing leases (10)
515.5 9.8 46.3 46.9 412.5 
Minimum lease payments for leases signed but not yet commenced (11)
896.8 24.0 92.6 93.2 687.0 
Capital commitments (12)
178.0 77.0 101.0 — — 
Unconditional purchase obligations (13)
96.2 40.9 54.4 0.9 — 
Uncertain tax contingencies (14)
4.4 0.7 1.4 1.1 1.2 
Total$5,162.4 $263.9 $678.4 $547.6 $3,672.5 
(1)In January 2019, to fund the purchase price of the Jack Wolfskin acquisition, the Company entered into a Credit Agreement.
(2)which provides for a Term Loan B facility in an aggregate principal of $480.0 million, which was issued less $9.6 million in original issue discount and other transaction fees. As of June 30, 2020, the Company had $444.0 million outstanding under the Term Loan Facility, which is offset by unamortized debt issuance costs of $14.8 million
(1)In August 2020, the Company entered into the Japan Term Loan Facility for 2,000,000,000 Yen (or approximately U.S. $18,000,000 using the exchange rate in effect as presented on the Company's consolidated condensed balance sheet as of June 30, 2020. For further discussion, see Note 6 "Financing Arrangements" to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q.
(3)In May 2020, the Company issued $258.8 million of 2.75% Convertibles Notes, which mature on May 1, 2026 unless earlier redeemed or repurchased by the Company or converted. As of June 30, 2020, the Company had $177.8 million outstanding under the Convertible Notes, net of unamortized debt issuance costs of $5.9 million and debt discount of $75.0 million, as presented on the Company's Consolidated Condensed Balance Sheet as of June 30, 2020. For further discussion, see Note 6 "Financing Arrangements" to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q.
(4)In connection with the Company's investment initiatives to improve its manufacturing capabilities at its golf ball manufacturing facility in Chicopee, Massachusetts, the Company entered into a series of long-term financing agreements (the "Equipment


53


Notes") between 2017 and 2020 that are secured by certain equipment at this facility. As of June 30, 2020, the Company had a combined $26.8 million outstanding under these Equipment Notes.2021). For further discussion, see Note 67 "Financing Arrangements" to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q.
(5)Amounts represent future minimum payments under financing leases. At June 30, 2020, finance lease liabilities of $0.5 million were recorded in accounts payable and accrued expenses and $0.5 million were recorded in other long-term liabilities in the accompanying consolidated condensed balance sheets. For further discussion, see Note 2 "Leases" to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q.
(6)
The Company leases 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. AtJune 30, 2020, short-term and long-term operating lease liabilities of $28.8 million and $172.1 million, respectively, were recorded in the accompanying consolidated condensed balance sheets. For further discussion, see Note 2
(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" to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q.
(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”), and a $175.0 million revolving credit facility with JPMorgan Chase Bank, N.A (the “Topgolf Revolving Credit Facility”), both with JPMorgan Chase Bank, N.A. For further discussion, see Note 7 "Financing Arrangements" to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q.
(4)In May 2020, the Company issued $258.8 million of 2.75% Convertibles 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" to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q.
(5)Between December 2017 and August 2020, the Company entered into four long-term financing agreements (the "Equipment Notes") with Bank of America N.A. and other lenders to invest in its golf ball manufacturing facility in Chicopee, Massachusetts, its North American Distribution Center in Roanoke, Texas, and in corporate IT equipment. The loans are secured by the underlying equipment at each facility and the IT equipment. For further discussion, see

62

Note 7 "Financing Arrangements" to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q.
(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" to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q.
(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" to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q.
(8)Amounts represent future minimum payments under financing leases. At June 30, 2021, finance lease liabilities of $1.2 million were recorded in accounts payable and accrued expenses and $1.7 million were recorded in other long-term liabilities in the accompanying consolidated condensed balance sheets. For further discussion, see Note 3 "Leases" to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q.
(9)The Company leases 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 June 30, 2021, short-term and long-term operating lease liabilities of $55.5 million and $1,174.8 million, respectively, were recorded in the accompanying consolidated condensed balance sheets. For further discussion, see Note 3 "Leases" to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q.
(10)In connection with the merger with Topgolf on March 8, 2021, the Company assumed certain deemed landlord financed leases in connection with the construction of Topgolf venue facilities. At June 30, 2021, the short-term and long-term obligations under these leases were $0.5 million and $263.2 million, respectively. For further discussion, see Note 3 "Leases" to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q.
(11)Amount represents the future minimum lease payments under lease agreements related to future Topgolf facilities that have not yet commenced as of June 30, 2021. For further discussion, see Note 3 "Leases" to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q.
(12)Amount represents capital expenditure commitments under lease agreements for Topgolf venues under construction that have been signed as of June 30, 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)Amountrepresents the current and non-current portions of uncertain income tax positions as recorded on the Company's consolidated condensed balance sheets as of June 30, 2021. Amounts exclude uncertain income tax positions that the Company would be able to offset against deferred taxes. For further discussion, see Note 13 “Income Taxes” to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q.
(7)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.
(8)Amount represents the current and non-current portions of uncertain income tax positions as recorded on the Company's consolidated condensed balance sheet as of June 30, 2020. Amounts exclude uncertain income tax positions that the Company would be able to offset against deferred taxes. For further discussion, see Note 13 “Income Taxes” to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q.
During its normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These include (i) intellectual property

63

indemnities to the Company’s customers and licensees in connection with the use, sale and/or license of Company 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 Company or based on the negligence or willful misconduct of the Company, and (iv) indemnities involving the accuracy of representations and warranties in certain contracts. In addition, the Company has made contractual commitments to each of its officers and certain other employees providing for severance payments upon the termination of employment. The Company has also issued guarantees in the form of a standby letter of credit 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 Company could be obligated to make. Historically, costs incurred to settle claims related to indemnities have not been material to the Company’s financial position, results of operations or cash flows. In addition, the Company believes the likelihood is remote that payments under the commitments and guarantees described above will have a material effect on the Company’s financial condition. The fair value of indemnities, commitments and guarantees that the Company issued during the three and six months ended June 30, 20202021 was not material to the Company’s financial position, results of operations or cash flows.
In addition to the contractual obligations listed above, the Company’s liquidity could also be adversely affected by an unfavorable outcome with respect to claims and litigation that the Company is subject to from time to time (see Note 14 “Commitments & Contingencies” to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 and “Legal Proceedings” in Part II, Item 1 of this Form 10-Q).


54


Capital Expenditures
The Company does not currentlyhas certain capital expenditure commitments under lease agreements for Topgolf venues that have any material commitments forbeen signed as of June 30, 2021. Estimated capital expenditures. Previously, the Company announced it would invest an estimated $55.0 million in capital expenditures in 2020. Due to the COVID-19 pandemic, the Company is taking actions to significantly reduce costs, including reductions in capital expenditures. As such, the Company revised its estimate of capital expenditures to be in the range of approximately $35.0 million to $40.0 million for the year ending December 31, 2020.2021 in connection with these leases total approximately $143.1 million. In addition, in 2021, the Company expects to have additional capital expenditures of approximately $100.1 million for the Callaway legacy business and Topgolf, combined. Total estimated capital expenditures are expected to be approximately $243.2 million for the year ended December 31, 2021.
Off-Balance Sheet Arrangements
The Company has no material off-balance sheet arrangements as defined in Regulation S-K Item 303(a)(4)(ii).
Critical Accounting Policies and Estimates
There have been no material changesDue to the Company's criticalrecent merger with Topgolf, the Company updated its significant accounting policies. For an update to the Company’s significant accounting policies and estimates from the information provided in Part II, Item 7, “Management’s Discussion8, “Financial Statements and Analysis of Financial Condition and Results of Operations,”Supplementary Data” included in the Company's Form 10-K for the fiscal year ended December 31, 2019, except for the Company's adoption of the Accounting Standards Update ("ASU") No 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" which became effective as of January 1, 2020. For further discussion on the adoption of this new accounting standard please2020, see Note 1 "Basis2 “Summary of Presentation" toSignificant Accounting Policies” in the Notes to the Consolidated Condensed Financial Statements in Part I, Item 1I of this Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company uses derivative financial instruments to mitigate its 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's credit facilities (see Note 67 "Financing Arrangements" to the Notes to Consolidated Condensed Financial Statements in Part 1, Item 1 of this Form 10-Q). The use of these instruments exposes the Company 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's foreign currency hedging activities is set forth in Note 17 “Derivatives and Hedging,” to the Notes to Consolidated Condensed Financial Statements included in Part I, Item 1, of this Form 10-Q, which is incorporated herein by this reference.

64

As part of the Company’s 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 was exposed at June 30, 20202021 through its foreign currency forward contracts.
At June 30, 2020,2021, the estimated maximum loss from the Company’s foreign currency forward contracts, calculated using the sensitivity analysis model described above, was $18.7$22.5 million. The Company believes that such a hypothetical loss from its 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 will be incurred by the Company, 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 is exposed to interest rate risk from its credit facilities and long-term borrowing commitments. Outstanding borrowings under these credit facilities and long-term borrowing commitments accrue interest as described in Note 67 "Financing Arrangements" to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1, and in “Liquidity and Capital Resources” in Part I, Item 2 of this Form 10-Q. The Company's long-term borrowing commitments are subject to interest rate fluctuations, which could be material to the Company's cash flows and results of operations. In order to mitigate this risk, the Company enters into interest rate hedges as part of its interest rate risk management strategy. Information about the Company's interest rate hedges is provided in Note 17 "Derivatives and Hedging" to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q. In order to determine the impact of unfavorable changes in interest rates on the Company's cash flows and resultresults of operations, the Company performed a sensitivity analysis as part of its risk management procedures. The


55


sensitivity analysis quantified that the incremental expense incurred by a 10% increase in interest rates would be $1.4$0.1 million over the 12-month period ending on June 30, 2020.2021.
Item 4.    Controls and Procedures
Disclosure Controls and Procedures. The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness, as of June 30, 2020,2021, of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2020.2021.
Changes in Internal Control over Financial Reporting. On March 8, 2021, the Company completed its merger with Topgolf. See Note 6 "Business Combinations" to the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q. The Company is in the process of integrating the Topgolf business and evaluating its internal controls over financial reporting. As a result of these integration activities, certain controls will be evaluated and may be revised. In addition, the Company is implementing a new version of its existing enterprise resource planning ("ERP") system on a worldwide basis, which is expected to improve the efficacy of certain financial and related transaction processes. During the second quarter of 2021, the Company completed the implementation of the new ERP system at its subsidiaries in Germany, China, Korea and Japan. The implementation is expected to progress in phased launches across the Company's organization over the next several years. As the phased implementation of the ERP system advances, the Company appropriately considered its controls over financial reporting within the testing for effectiveness with respect to the implementation. The Company concluded as part of its evaluation described above, that the implementation of the ERP system has not materially affected its internal controls over financial reporting during the quarter ended June 30, 2020, there2021. As the implementation continues, the Company's internal processes, procedures and controls will be refined as appropriate. There were no other changes in the Company’sour 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.

65

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.


66
56



PART II. OTHER INFORMATION
Item 1.    Legal Proceedings
The information set forth in Note 14 “Commitments & Contingencies,” to the Notes to Consolidated Condensed Financial Statements included in Part I, Item 1, of this Form 10-Q, is incorporated herein by this reference. 
Item 1A. Risk Factors
Certain Factors Affecting Callaway Golf Company
The Company has included in Part I, Item 1A of its Annual Report on Form 10-K for the year ended December 31, 2019, as updated in Part II, Item 1A of its Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, a description of certain risks and uncertainties that could affect the Company’s business, future performance or financial condition (the “Risk Factors”). Investors should consider the Risk Factors prior to making an investment decision with respect to the Company’s stock. There are no material changes from the disclosure provided in the Form 10-K for the year ended December 31, 2019 and the Form 10-Q for the quarter ended March 31, 2020 with respect to the Risk Factors, other than the additionas previously reported in Part II, Item 1A of the Risk Factor below.

The COVID-19 pandemic has had and is expected to continue to have a material and adverse effect on our 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 governmental authorities around the world have implemented measures to reduce the spread of COVID-19, 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 our markets. In particular, the COVID-19 pandemic has caused significant disruption in our supply and distribution chains for our golf equipment, apparel and other products sold globally, and resulted in temporary closures of our corporate offices and retail stores around the world. A majority of our 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, closures of golf courses and a significant decrease in demand for consumer products, including our golf equipment, apparel and other products.
Especially in light of the rising cases of COVID-19 in the United States and worldwide, we are unable to accurately predict the impact that the COVID-19 pandemic and the resulting disruptions will have on our operations going forward due to the currently unknowable duration, scope and severity of the COVID-19 pandemic. Also, we are 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 our manufacturing facilities, retail locations and warehouses, any or all of which could materially and adversely affect our supply and distribution chains and ability to manage our operations. We have also experience staffing shortages as a result of remote working requirements or otherwise. We have been impacted, and expect 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. To the extent that third parties on whom we rely for revenue, including, among others, our customers and licensees, are negatively impacted by COVID-19, such third parties may be unwilling or unable to make payments otherwise due to us on a timely basis, or at all. In the event of a nonpayment, default or bankruptcy by such third party, our cash flows may be adversely impacted, we may incur costs in protecting our contractual rights, and we may be unable to recognize the revenue that we otherwise expected to receive from such third party.
Although we have taken actions to significantly reduce costs, maximize liquidity and strengthen our 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 we continue to experience a decline in revenues or adjusted EBITDA due to COVID-19, we may have difficulty paying interest and principal amounts due on our 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 our business, such financing may not be available to us on acceptable terms, or at all. While it is premature to predict the ultimate impact of these developments, we expect our results in the near-term and beyond will be adversely impacted in a significant


57


manner. Furthermore, when conditions return to a more normal state, we may experience difficulties efficiently ramping up our operations to pre-COVID-19 levels in an effective manner.
To the extent the COVID-19 pandemic 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 “Risk Factors” under Item 1A and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 7 of our AnnualCompany’s Quarterly Report on Form 10-K10-Q for the yearquarter ended DecemberMarch 31, 2019 that we filed with the SEC on March 2, 2020, including, without limitation, risks relating to changes in demand for our products or the supply of the components and materials used to make our products, our level of indebtedness, our need to generate sufficient cash flows to service our indebtedness, our ability to comply with the obligations and financial covenants contained in our existing credit facilities, availability of adequate capital, our ability to execute our strategic plans, U.S. trade, tax or other policies that restrict imports or increase import tariffs, and regulatory restrictions. In addition, if in the future there is a further outbreak of COVID-19, or an outbreak of another highly infectious or contagious disease or other health concern, we may be subject to similar risks as posed2021, which are incorporated herein by COVID-19.this reference.
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
Stock Purchases
In July 2019, the Board of Directors authorized $100.0 million share repurchase program (the "2019 Repurchase Program"), under which the Company is authorized to repurchase shares of its common stock in the open market or in private transactions, subject to the Company's assessment of market conditions and buying opportunities. Repurchases under the 2019 Repurchase Program are made consistent with the terms of the Company's ABL Facility and long-term debt, which limits the amount of stock that can be repurchased. Although the 2019 Repurchase Program will remain in effect until completed or until terminated by the Board of Directors, the Company has temporarily suspended the 2019 Repurchase Program. The Company has the ability to resume purchases if it deems circumstances warrant it.
The following table summarizes the purchases by the Company during the second quarter of 2020 under the 2019 Repurchase Program.2021. These repurchases represent the number of shares the Company withheld to satisfy payroll tax withholding obligations in connection with the vesting and settlement of employee restricted stock unit awards and performance share unit awards. The Company’s repurchases of shares of common stock are recorded at cost and result in a reduction of shareholders’ equity.
Three Months Ended June 30, 2021
Total Number
of Shares
Purchased		Weighted
Average Price
Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced ProgramMaximum Dollar Value that May Yet Be Purchased Under the Program
(in thousands, except per share data)
April 1, 2021-April 30, 20216 $27.52 — $77,379 
May 1, 2021-May 31, 2021— $— — $77,379 
June 1, 2021-June 30, 20213 $35.23 — $77,369 
Total9 $30.06 — $77,369 

 Three Months Ended June 30, 2020
 Total Number
of Shares
Purchased		 Weighted
Average Price
Paid per Share		 
Total Number of Shares Purchased as Part of Publicly Announced Program(1)
 Maximum Dollar Value that May Yet Be Purchased Under the Program
 (in thousands, except per share data)
April 1, 2020-April 30, 2020 1
   $9.58
   1
   $77,379
 
May 1, 2020-May 31, 2020 —
   $—
   —
   $77,379
 
June 1, 2020-June 30, 2020 1
   $15.38
   1
   $77,369
 
Total 2
   $12.79
   2
   $77,369
 
(1)The Company has suspended the 2019 Repurchase Program. The Company has the ability to resume purchases if it deems circumstances warrant it.
Item 3.    Defaults upon Senior Securities
None.
Item 4.    Mine Safety Disclosures
None


58


Item 5.    Other Information
None.


67
59


Item 6.    Exhibits
3.1
3.1 
Certificate of Amendment to the Certificate of Incorporation of Callaway Golf Company, incorporated herein by this reference to Exhibit 3.1 to the Company's Current Report on Form 8-K, as filed with the Commission on May 14, 202020, 2021 (file no. 1-10962).
3.2
3.2 
SecondRestated Certificate of ChangeIncorporation of Registered Agent and/or Registered Office,Callaway Golf Company, incorporated hereinherein by this reference to Exhibit 3.23.2 to the Company's Current Report on Form 8-K, as filed with the Commission on May 14, 202020, 2021 (file no. 1-10962).
3.3
Restated Certificate of Incorporation of Callaway Golf Company, incorporated herein by this reference to Exhibit 3.3 to the Company's Current Report on Form 8-K, as filed with the Commission on May 14, 2020 (file no. 1-10962).
3.4
Seventh Amended and Restated Bylaws of Callaway Golf Company, incorporated herein by this reference to Exhibit 3.4 to the Company's Current Report on Form 8-K, as filed with the Commission on May 14, 2020 (file no. 1-10962).
4.1
10.1 
4.2
Form of 2.75% Convertible Senior Notes due May 1, 2026, incorporated herein by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K, as filed with the Commission on May 4, 2020 (file no. 1-10962).
10.131.1 
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).
10.2
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 reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, as filed with the Commission on April 29, 2020 (file no. 1-10962).
10.3
Confirmation of Base Capped Call Transaction, dated April 29, 2020, between Callaway Golf Company and Goldman Sachs & Co. LLC, incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, as filed with the Commission on May 4, 2020 (file no. 1-10962).
10.4
Confirmation of Base Capped Call Transaction, dated April 29, 2020, between Callaway Golf Company and Bank of America, N.A., incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, as filed with the Commission on May 4, 2020 (file no. 1-10962).
10.5
Confirmation of Base Capped Call Transaction, dated April 29, 2020, between Callaway Golf Company and Morgan Stanley & Co. LLC, incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K, as filed with the Commission on May 4, 2020 (file no. 1-10962).
10.6
Confirmation of Additional Capped Call Transaction, dated April 30, 2020, between Callaway Golf Company and Goldman Sachs & Co. LLC, incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K, as filed with the Commission on May 4, 2020 (file no. 1-10962).
10.7
Confirmation of Additional Capped Call Transaction, dated April 30, 2020, between Callaway Golf Company and Bank of America, N.A., incorporated herein by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K, as filed with the Commission on May 4, 2020 (file no. 1-10962).
10.8
Confirmation of Additional Capped Call Transaction, dated April 30, 2020, between Callaway Golf Company and Morgan Stanley & Co. LLC incorporated herein by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K, as filed with the Commission on May 4, 2020 (file no. 1-10962).
31.1
Certification of Oliver G. Brewer III pursuant to Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.2002. †


60


31.2
Certification of Brian P. Lynch pursuant to Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. †
32.1
Certification of Oliver G. Brewer III and Brian P. Lynch pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. †
101.1
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.2
XBRL Taxonomy Extension Schema Document †
101.3
XBRL Taxonomy Extension Calculation Linkbase Document †
101.4
XBRL Taxonomy Extension Definition Linkbase Document †
101.5
XBRL Taxonomy Extension Label Linkbase Document †
101.6
XBRL Taxonomy Extension Presentation Linkbase Document †
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) †
(†) Included with this Report.


68
61



SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
CALLAWAY GOLF COMPANY
CALLAWAY GOLF COMPANY
By:
By:/s/  Jennifer Thomas
Jennifer Thomas
Vice President and

Chief Accounting Officer
Date: August 7, 20209, 2021



6269