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 September 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 September 30, 2020,2021, the number of shares outstanding of the Registrant’s common stock was 94,179,547.
186,013,802.




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 expected timing and completion of, and the integration of, the recently announced acquisition of Topgolf International, Inc. ("Topgolf"), 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"), Jack Wolfskin and 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;
risks and uncertainties related to the Company’s pending merger with Topgolf, including the failure to obtain, or delays in obtaining, required regulatory approval, the risk that such approval may result in the imposition of conditions that could adversely affect the Company or the expected benefits of the proposed transaction, any termination fee that may be payable by Callaway pursuant to the terms of the merger agreement, or the failure to satisfy any of the closing conditions to the proposed transaction on a timely basis or at all;
•costs, expenses or difficulties related to the merger with Topgolf, including the integration of the Topgolf business, or the failure to realize the expected benefits and synergies of the proposed transactionTopgolf merger in the expected timeframes or at all;
•the potential impact of the announcement, pendency or consummation of the proposed transactionmerger 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;


2


•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;businesses, and venue locations of the Topgolf business;
•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.


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, 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, 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, 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 RENEGADE, OGIO SAVAGE, OGIO SHADOW, OGIO XIX, Opti Flex, Opti Grip, Opti Shield, 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, Slice Stopper, SoftFast, Solaire,


3


Speed Regime, Speed Step, Steelhead XR, Steelhead, Strata, Stroke Lab, Stronomic, Sub Zero, Superhot, Supersoft, SureOut, Swing Suite, Tee Time Adventures,TM, Tank, Tank Cruiser, Tech Series, Teron, Texapore, TMCA, Toe Up,TopChallenge, TopChip , TopContender, TopDrive, TopGolf, TopGolf Crush, Topgolf Entertainment Group, TopGolf Media, Topgolf Shield Logo, 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, WGT, 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 September 30, 20202021 and December 31, 20192020
65
Consolidated Condensed Statements of Operations for the three and nine months ended September 30, 20202021 and 20192020
76
Consolidated Condensed Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 20202021 and 20192020
87
Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 20202021 and 20192020
98
109
Notes to Consolidated Condensed Financial Statements
1211
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
4050
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
5769
Item 4.
Controls and Procedures
5870
PART II. OTHER INFORMATION
Item 1.
5972
Item 1A.
5972
Item 2.
6272
Item 3.
6272
Item 4.
6272
Item 5.
6272
Item 6.
6373


54



PART I. FINANCIAL INFORMATION
Item 1.    Financial Statements (Unaudited)
CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
September 30, 2021December 31, 2020
ASSETS
Current assets:
Cash and cash equivalents$508,177 $366,119 
Restricted cash1,754 — 
Accounts receivable, net255,223 138,482 
Inventories385,311 352,544 
Prepaid expenses48,161 20,318 
Other current assets140,785 35,164
Total current assets1,339,411 912,627 
Property, plant and equipment, net1,330,326 146,495 
Operating lease right-of-use assets, net1,066,124 194,776 
Intangible assets, net1,537,047 484,339 
Goodwill2,025,175 56,658 
Investment in golf-related venture9,250 111,442 
Other assets90,046 74,263 
Total assets$7,397,379 $1,980,600 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses$453,638 $276,209 
Accrued employee compensation and benefits115,946 30,937 
Asset-based credit facilities30,108 22,130 
Operating lease liabilities, short-term55,507 29,579 
Construction advances54,264 — 
Deferred revenue84,359 2,546 
Other current liabilities46,333 29,871 
Total current liabilities840,155 391,272 
Long-term liabilities:
Long-term debt, net (Note 7)1,049,019 650,564 
Operating lease liabilities, long-term1,181,443 177,996 
Deemed landlord financing, long-term312,027 — 
Deferred taxes, net241,205 58,628 
Other long-term liabilities51,604 26,496 
Commitments and contingencies (Note 14)00
Shareholders’ equity:
Preferred stock, $0.01 par value, 3,000,000 shares authorized, none issued and outstanding at September 30, 2021 and December 31, 2020— — 
Common stock, $0.01 par value, 360,000,000 shares authorized, 186,031,283 and 95,648,648 shares issued at September 30, 2021 and December 31, 2020, respectively
1,860 956 
Additional paid-in capital3,037,609 346,945 
Retained earnings708,391 360,228 
Accumulated other comprehensive loss(25,422)(6,546)
Less: Common stock held in treasury, at cost, 17,481 and 1,446,408 shares at September 30, 2021 and December 31, 2020, respectively(512)(25,939)
Total shareholders’ equity3,721,926 675,644 
Total liabilities and shareholders’ equity$7,397,379 $1,980,600 
 September 30,
2020		 December 31,
2019
ASSETS   
Current assets:   
Cash and cash equivalents$286,656
 $106,666
Accounts receivable, net239,650
 140,455
Inventories324,852
 456,639
Income taxes receivable7,321
 9,919
Other current assets66,667
 75,671
Total current assets925,146
 789,350
Property, plant and equipment, net145,758
 132,760
Operating lease right-of-use assets, net186,721
 160,098
Intangible assets, net474,973
 493,423
Goodwill56,041
 203,743
Deferred taxes, net51,872
 73,948
Investment in golf-related venture111,442
 90,134
Other assets14,355
 17,092
Total assets$1,966,308
 $1,960,548
LIABILITIES AND SHAREHOLDERS’ EQUITY   
Current liabilities:   
Accounts payable and accrued expenses$245,053
 $276,300
Accrued employee compensation and benefits33,522
 46,891
Asset-based credit facilities30,235
 144,580
Accrued warranty expense9,640
 9,636
Operating lease liabilities, short-term28,011
 26,418
Current portion of long-term debt14,623
 7,317
Income taxes payable10,326
 12,104
Total current liabilities371,410
 523,246
Long-term liabilities:   
Operating lease liabilities, long-term170,732
 137,696
Long-term debt (Note 6)651,011
 443,259
Income tax liability7,456
 7,264
Deferred taxes, net60,636
 73,483
Other long-term liabilities16,529
 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 September 30, 2020 and December 31, 20190
 0
Common stock, $0.01 par value, 240,000,000 shares authorized, 95,648,648 shares issued at both September 30, 2020 and December 31, 2019, respectively
956
 956
Additional paid-in capital344,425
 323,600
Retained earnings400,805
 489,382
Accumulated other comprehensive loss(31,323) (22,422)
Less: Common stock held in treasury, at cost, 1,469,101 and 1,450,875 shares at September 30, 2020 and December 31, 2019, respectively(26,329) (24,163)
Total shareholders’ equity688,534
 767,353
Total liabilities and shareholders’ equity$1,966,308
 $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
September 30,		Nine Months Ended
September 30,
 2021202020212020
Net revenues:
Products$527,064 $475,559 $1,678,432 $1,214,831 
Services329,397 — 743,291 — 
Total net revenues856,461 475,559 2,421,723 1,214,831 
Costs and expenses:
Cost of products288,364 274,826 914,002 696,369 
Cost of services, excluding depreciation and amortization40,070 — 93,841 — 
Other venue expenses215,841 — 483,617 — 
Selling, general and administrative expenses217,736 127,085 612,740 384,054 
Research and development expense15,753 10,139 48,769 33,399 
Goodwill and trade name impairment— — — 174,269 
Venue pre-opening costs2,687 — 9,376 — 
Total costs and expenses780,451 412,050 2,162,345 1,288,091 
Income (loss) from operations76,010 63,509 259,378 (73,260)
Interest income77 178 319 396 
Interest expense(28,807)(12,905)(75,382)(34,401)
Gain on Topgolf investment— — 252,531 — 
Other income, net2,958 7,010 9,487 27,487 
Income (loss) before income taxes50,238 57,792 446,333 (79,778)
Income tax provision66,229 5,360 98,119 6,580 
Net income (loss)$(15,991)$52,432 $348,214 $(86,358)
Earnings (loss) per common share:
Basic($0.09)$0.56 $2.13 ($0.92)
Diluted($0.09)$0.54 $2.03 ($0.92)
Weighted-average common shares outstanding:
Basic185,96394,171163,141 94,207 
Diluted185,96396,612171,194 94,207 
 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2020 2019 2020 2019
Net sales$475,559
 $426,217
 $1,214,831
 $1,389,122
Cost of sales274,826
 234,828
 696,369
 752,483
Gross profit200,733
 191,389
 518,462
 636,639
Operating expenses:       
Selling expense93,855
 101,984
 285,082
 334,418
General and administrative expense33,230
 36,378
 98,972
 108,739
Research and development expense10,139
 12,538
 33,399
 38,158
Goodwill and trade name impairment0
 0
 174,269
 0
Total operating expenses137,224
 150,900
 591,722
 481,315
Income (loss) from operations63,509
 40,489
 (73,260) 155,324
Interest income178
 94
 396
 759
Interest expense(12,905) (9,639) (34,401) (30,203)
Other income, net7,010
 2,232
 27,487
 1,459
Income (loss) before income taxes57,792
 33,176
 (79,778) 127,339
Income tax provision5,360
 2,128
 6,580
 18,892
Net income (loss)52,432
 31,048
 (86,358) 108,447
Less: Net loss attributable to non-controlling interest0
 0
 0
 (179)
Net income (loss) attributable to Callaway Golf Company$52,432
 $31,048
 $(86,358) $108,626
        
Earnings (loss) per common share:       
Basic$0.56
 $0.33
 $(0.92) $1.15
Diluted$0.54
 $0.32
 $(0.92) $1.13
Weighted-average common shares outstanding:       
Basic94,171
 94,100
 94,207
 94,284
Diluted96,612
 96,287
 94,207
 96,197



















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
September 30,		Nine Months Ended
September 30,
 2021202020212020
Net income (loss)$(15,991)$52,432 $348,214 $(86,358)
Other comprehensive income (loss):
Change in derivative instruments541 (593)7,258 (14,635)
Foreign currency translation adjustments(12,929)9,128 (23,206)2,347 
Comprehensive income (loss), before income tax on other comprehensive income items(28,379)60,967 332,266 (98,646)
Income tax provision (benefit) on derivative instruments1,340 66 2,928 (3,387)
Comprehensive income (loss)$(29,719)$60,901 $329,338 $(95,259)




 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2020 2019 2020 2019
Net income (loss)$52,432
 $31,048
 $(86,358) $108,447
Other comprehensive income:       
Change in derivative instruments(593) 661
 (14,635) (8,080)
Foreign currency translation adjustments9,128
 (17,083) 2,347
 (18,740)
Comprehensive income (loss), before income tax on other comprehensive income items60,967
 14,626
 (98,646) 81,627
Income tax (provision) benefit on derivative instruments(66) (666) 3,387
 822
Comprehensive income (loss)60,901
 13,960
 (95,259) 82,449
Less: Comprehensive loss attributable to non-controlling interests0
 0
 0
 (339)
Comprehensive income (loss) attributable to Callaway Golf Company$60,901
 $13,960
 $(95,259) $82,788



































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)
Nine months ended September 30,
 20212020
Cash flows from operating activities:
Net income (loss)$348,214 $(86,358)
Adjustments to reconcile net income to net cash provided by operating activities:
   Depreciation and amortization107,919 28,668 
   Lease amortization expense45,996 24,293 
   Amortization of debt issuance costs4,042 3,024 
   Debt discount amortization10,255 3,857 
   Impairment loss— 174,269 
   Deferred taxes, net86,982 (117)
   Non-cash share-based compensation27,113 8,066 
   Loss on disposal of long-lived assets194 297 
   Gain on Topgolf investment(252,531)— 
   Gain on conversion of note receivable— (1,252)
   Unrealized net gains on hedging instruments and foreign currency(2,659)(8,899)
   Acquisition costs(16,199)— 
Change in assets and liabilities, net of effect from acquisitions:
   Accounts receivable, net(111,049)(96,344)
   Inventories(27,280)135,976 
   Leasing receivables(16,387)— 
   Other assets(57,943)11,097 
   Accounts payable and accrued expenses71,230 (40,855)
   Deferred revenue18,985 813 
   Accrued employee compensation and benefits46,930 (13,252)
   Payments on operating leases(37,658)(21,181)
   Income taxes receivable/payable, net2,679 43 
   Other liabilities(2,029)406 
Net cash provided by operating activities246,804 122,551 
Cash flows from investing activities:
Cash acquired in merger171,294 — 
Capital expenditures(198,896)(30,911)
Investment in golf-related ventures— (19,999)
Proceeds from sale of investment in golf-related ventures18,591 — 
Proceeds from sales of property and equipment— 8 
Net cash used in investing activities(9,011)(50,902)
Cash flows from financing activities:
Repayments of long-term debt(160,860)(8,203)
Proceeds from issuance of long-term debt20,000 37,728 
Proceeds from (repayments of) credit facilities, net7,978 (114,345)
Proceeds from issuance of convertible notes— 258,750 
Premium paid for capped call confirmations— (31,775)
Debt issuance cost(5,441)(9,143)
Payment on contingent earn-out obligation(3,577)— 
Repayments of financing leases(465)(530)
Proceeds from lease financing49,508 — 
Exercise of stock options19,520 130 
Dividends paid(3)(1,891)
Acquisition of treasury stock(12,938)(22,143)
Net cash (used in) provided by financing activities(86,278)108,578 
Effect of exchange rate changes on cash, cash equivalents and restricted cash(3,775)(237)
Net increase in cash, cash equivalents and restricted cash147,740 179,990 
Cash, cash equivalents and restricted cash at beginning of period366,119 106,666 
Cash, cash equivalents and restricted cash at end of period$513,859 $286,656 
Supplemental disclosures:
Cash paid for income taxes, net$8,021 $2,935 
Cash paid for interest and fees$68,124 $23,704 
Non-cash investing and financing activities:
Issuance of treasury stock and common stock for compensatory stock awards released from restriction$18,320 $19,609 
Accrued capital expenditures at period-end$36,750 $777 
Financed additions of capital expenditures$53,892 $— 
Issuance of common stock in Topgolf merger$2,650,201 $— 
 Nine Months Ended
September 30,
 2020 2019
Cash flows from operating activities:   
Net income (loss)$(86,358) $108,447
Adjustments to reconcile net income (loss) to net cash provided by operating activities:   
   Depreciation and amortization28,668
 25,471
   Lease amortization expense24,293
 23,615
   Amortization of debt issuance costs3,024
 2,428
   Debt discount amortization3,857
 0
   Inventory step-up on acquisition0
 10,703
   Impairment loss174,269
 0
   Deferred taxes, net(117) 8,407
   Non-cash share-based compensation8,066
 9,476
   Loss on disposal of long-lived assets297
 649
   Gain on conversion of note receivable(1,252) 0
   Unrealized net (gains) losses on hedging instruments(8,899) 999
Change in assets and liabilities, net of effect from acquisitions:   
   Accounts receivable, net(96,344) (123,560)
   Inventories135,976
 71,246
   Other assets11,097
 3,547
   Accounts payable and accrued expenses(40,042) (37,392)
   Accrued employee compensation and benefits(13,252) (5,558)
   Accrued warranty expense4
 412
   Change in operating leases, net(21,181) (22,463)
   Income taxes receivable/payable, net43
 (11,573)
   Other liabilities402
 (1,001)
Net cash provided by operating activities122,551
 63,853
Cash flows from investing activities:   
Capital expenditures(30,911) (36,843)
Investments in golf related ventures(19,999) 0
Acquisitions, net of cash acquired0
 (463,105)
Proceeds from sales of property and equipment8
 43
Net cash used in investing activities(50,902) (499,905)
Cash flows from financing activities:   
Proceeds from issuance of convertible notes258,750
 0
Proceeds from issuance of long-term debt37,728
 493,167
Premium paid for capped call confirmations(31,775) 0
Debt issuance cost(9,143) (19,088)
(Repayments of) proceeds from credit facilities, net(114,345) 70,411
Repayments of long-term debt(8,203) (34,298)
Repayments of financing leases(530) (583)
Exercise of stock options130
 0
Dividends paid, net(1,891) (2,834)
Acquisition of treasury stock(22,143) (27,505)
Purchase of non-controlling interest0
 (18,538)
Net cash provided by financing activities108,578
 460,732
Effect of exchange rate changes on cash and cash equivalents(237) (445)
Net increase in cash and cash equivalents179,990
 24,235
Cash and cash equivalents at beginning of period106,666
 63,981
Cash and cash equivalents at end of period$286,656
 $88,216
Supplemental disclosures:   
Cash paid for income taxes, net$2,935
 $14,874
Cash paid for interest and fees$23,704
 $25,184
Non-cash investing and financing activities:   
Issuance of treasury stock and common stock for compensatory stock awards released from restriction$19,609
 $19,613
Accrued capital expenditures at period-end$777
 $2,283

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)

 Common StockAdditional
Paid-in
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Loss		Treasury StockTotal Shareholders' Equity
 SharesAmountSharesAmount
Balance at June 30, 2021185,940 $1,859 $3,024,995 $724,393 $(11,694)(3)$(90)$3,739,463 
Acquisition of treasury stock— — 78 — — (17)(478)(400)
Exercise of stock options52 1 1,065 — — 2 51 1,117 
Compensatory awards released from restriction39 — (5)— — 1 5 — 
Share-based compensation— — 11,465 — — — — 11,465 
Stock dividends— — 11 (11)— — — — 
Equity adjustment from foreign currency translation— — — — (12,929)— — (12,929)
Change in fair value of derivative instruments, net of tax— — — — (799)— — (799)
Net loss— — — (15,991)— — — (15,991)
Balance at September 30, 2021186,031 $1,860 $3,037,609 $708,391 $(25,422)(17)$(512)$3,721,926 
                    
 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 June 30, 202095,649
 $956
 $341,615
 $348,376
  $(39,792)  (1,485) $(26,607)  $624,548
 
Acquisition of treasury stock—
 —
 —
 —
  —
  (10) (190)  (190) 
Compensatory awards released from restriction—
 —
 (466) —
  —
  26
 466
  —
 
Share-based compensation—
 —
 3,272
 —
  —
  —
 —
  3,272
 
Stock dividends—
 —
 1
 (3)  —
  —
 2
  —
 
Equity adjustment from foreign currency translation—
 —
 —
 —
  9,128
  —
 —
  9,128
 
Change in fair value of derivative instruments, net of tax—
 —
 —
 —
  (659)  —
 —
  (659) 
Equity component of convertible notes, net of issuance costs and tax—
 —
 3
 —
  —
  —
 —
  3
 
Net income—
 —
 —
 52,432
  —
  —
 —
  52,432
 
Balance at September 30, 202095,649
 $956
 $344,425
 $400,805
  $(31,323)  (1,469) $(26,329)  $688,534
 




Common StockAdditional
Paid-in
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
(Loss) Income		Treasury StockTotal Shareholders' Equity
Shareholders' Equity Callaway Golf Company SharesAmountSharesAmount
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) 
Balance at December 31, 2020Balance at December 31, 202095,649 $956 $346,945 $360,228 $(6,546)(1,446)$(25,939)$675,644 
Common stock issued in Topgolf mergerCommon stock issued in Topgolf merger89,776 898 2,649,303 — — — — 2,650,201 
Fair value of replacement awards converted in Topgolf mergerFair value of replacement awards converted in Topgolf merger— — 33,051 — — — — 33,051 
Common stock issued for replacement restricted stock awardsCommon stock issued for replacement restricted stock awards188 2 (2)— — — — — 
Acquisition of treasury stock—
 —
 —
 —
 —
 (1,178) (22,143) (22,143) Acquisition of treasury stock— — 331 — — (426)(13,269)(12,938)
Exercise of stock options—
 —
 (203) —
 —
 20
 333
 130
 Exercise of stock options379 4 (836)— — 911 20,352 19,520 
Compensatory awards released from restriction—
 —
 (19,609) —
 —
 1,138
 19,609
 —
 Compensatory awards released from restriction39 — (18,320)— — 943 18,320 — 
Share-based compensation—
 —
 8,066
 —
 —
 —
 —
 8,066
 Share-based compensation— — 27,113 — — — — 27,113 
Stock dividends—
 —
 4
 (39) —
 2
 35
 —
 Stock dividends— — 24 (48)— 1 24 — 
Cash dividends ($0.01 per share)—
 —
 —
 (1,891) —
 —
 —
 (1,891) Cash dividends ($0.01 per share)— — — (3)— — — (3)
Equity adjustment from foreign currency translation—
 —
 —
 —
 2,347
 —
 —
 2,347
 Equity adjustment from foreign currency translation— — — — (23,206)— — (23,206)
Change in fair value of derivative instruments, net of tax—
 —
 —
 —
 (11,248) —
 —
 (11,248) Change in fair value of derivative instruments, net of tax— — — — 4,330 — — 4,330 
Equity component of convertible notes, net of issuance costs and tax—
 —
 57,080
 —
 —
 —
 —
 57,080
 
Premiums paid for capped call transactions, net of tax—
 —
 (24,513) —
 —
 —
 —
 (24,513) 
Net loss—
 —
 —
 (86,358) —
 —
 —
 (86,358) 
Balance at September 30, 202095,649
 $956
 $344,425
 $400,805
 $(31,323) (1,469) $(26,329) $688,534
 
Net incomeNet income— — — 348,214 — — — 348,214 
Balance at September 30, 2021Balance at September 30, 2021186,031 $1,860 $3,037,609 $708,391 $(25,422)(17)$(512)$3,721,926 















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)

 Common StockAdditional Paid-in
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
(Loss) Income		Treasury StockTotal Shareholders' Equity
 SharesAmountSharesAmount
Balance at June 30, 202095,649 $956 $341,615 $348,376 $(39,792)(1,485)$(26,607)$624,548 
Acquisition of treasury stock— — — — — (10)(190)(190)
Compensatory awards released from restriction— — (466)— — 26 466 — 
Share-based compensation— — 3,272 — — — — 3,272 
Stock dividends— — 1 (3)— — 2 — 
Equity adjustment from foreign currency translation— — — — 9,128 — — 9,128 
Change in fair value of derivative instruments— — — — (659)— — (659)
Equity component of convertible notes, net of issuance costs and tax— — 3 — — — — 3 
Net income— — — 52,432 — — — 52,432 
Balance at September 30, 202095,649 $956 $344,425 $400,805 $(31,323)(1,469)$(26,329)$688,534 
                    
 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 June 30, 201995,649
 $956
 $319,579
 $489,445
  $(22,271)  (1,555) $(25,773)  $761,936
 
Acquisition of treasury stock—
 —
 —
 —
  —
  (7) (111)  (111) 
Compensatory awards released from restriction—
 —
 (309) —
  —
  19
 309
  —
 
Share-based compensation—
 —
 2,512
 —
  —
  —
 —
  2,512
 
Stock dividends—
 —
 —
 (1)  —
  —
 1
  —
 
Cash dividends ($0.01 per share)—
 —
 —
 (941)  —
  —
 —
  (941) 
Equity adjustment from foreign currency translation—
 —
 —
 —
  (17,083)  —
 —
  (17,083) 
Change in fair value of derivative instruments—
 —
 —
 —
  (5)  —
 —
  (5) 
Net Income—
 —
 —
 31,048
  —
  —
 —
  31,048
 
Balance at September 30, 201995,649
 $956
 $321,782
 $519,551
  $(39,359)  (1,543) $(25,574)  $777,356
 


 Common StockAdditional
Paid-in
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
(Loss) Income		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— — — — — (1,178)(22,143)(22,143)
Exercise of stock options— — (203)— — 20 333 130 
Compensatory awards released from restriction— — (19,609)— — 1,138 19,609 — 
Share-based compensation— — 8,066 — — — — 8,066 
Stock dividends— — 4 (39)— 2 35 — 
Cash dividends ($0.01 per share)— — — (1,891)— — — (1,891)
Equity adjustment from foreign currency translation— — — — 2,347 — — 2,347 
Change in fair value of derivative instruments, net of tax— — — — (11,248)— — (11,248)
Equity component of convertible notes, net of issuance costs and tax— — 57,080 — — — — 57,080 
Premiums paid for capped call confirmations, net of tax— — (24,513)— — — — (24,513)
Net loss— — — (86,358)— — — (86,358)
Balance at September 30, 202095,649 $956 $344,425 $400,805 $(31,323)(1,469)$(26,329)$688,534 
 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 at 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—
 —
 —
 —
  —
  (1,662) (27,505)  (27,505)  —
 (27,505)
Compensatory awards released from restriction—
 —
 (19,613) —
  —
  872
 19,613
  —
  —
 0
Share-based compensation—
 —
 9,476
 —
  —
  —
 —
  9,476
  —
 9,476
Stock dividends  —
 0
 (40)  —
  385
 40
  —
  —
 0
Cash dividends ($0.01 per share)—
 —
 —
 (2,834)  —
  —
 —
  (2,834)  —
 (2,834)
Equity adjustment from foreign currency translation—
 —
 —
 —
  (18,401)  —
 —
  (18,401)  (339) (18,740)
Change in fair value of derivative instruments—
 —
 —
 —
  (7,258)  —
 —
  (7,258)  —
 (7,258)
Acquisition of non-controlling interest—
 —
 (9,322) —
  —
  —
 —
  (9,322)  (9,216) (18,538)
Net Income—
 —
 —
 108,626
  —
  —
 —
  108,626
  (179) 108,447
Balance at September 30, 201995,649
 $956
 $321,782
 $519,551
  $(39,359)  (1,543) $(25,574)  $777,356
  $0
 $777,356

















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 three and nine months ended September 30, 2021 is from July 5, 2021 through October 3, 2021 and March 8, 2021 through October 3, 2021, respectively. 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 nine months ended September 30, 2021 and 2020, and its consolidated condensed balance sheets as of September 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 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 provisions for warranty, uncollectible accounts receivable, inventory obsolescence, sales returns,determining the nature and tax contingencies and estimates relatedtiming of satisfaction of performance obligations as it relates to the Tax Act enacted in December 2017, and estimates onrevenue recognition, the valuation of share-based awards, and recoverability of long-lived assets, assessing intangible assets and investments.goodwill for impairment, determining the incremental borrowing rate for operating and financing leases, in addition to provisions for warranty, expected credit losses, inventory obsolescence, sales returns, future price concessions, and tax contingencies and valuation allowances as well the estimated useful lives of property, plant and equipment and acquired intangible assets. Actual results may materially differ from these estimates. On an ongoing basis, the Company reviews its estimates to ensure that these estimates appropriately reflect changes in its business or as new information becomes available.
Recent Accounting Standards
In August 2020,July 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2021-05, “Leases (Topic 842): Lessors - Certain Leases with Variable Lease Payments” which requires lessors to classify and account for a lease with variable lease payments that do not depend on a reference index or a rate as an operating lease if both of the following criteria are met: (1) the lease would have been classified as a sales-type lease or a direct financing lease in accordance with the classification criteria in ASC 842-10-25-2 through 25-3; and (2) the lessor
11

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 removes certain settlement conditionsby 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 are requiredhave issued a convertible instrument that was bifurcated according to previously existing rules. Also, this ASU requires the application of the if-converted method for equity contracts to qualify for the derivative scope exception, and also simplifies thecalculating diluted earnings per share (EPS) calculation in certain areas. This ASUand the treasury stock method will be no longer available. The new guidance is effective for public filers for fiscal years, and interim periods within those fiscal years beginning after December 15, 2021. Early2021, with early adoption is permitted.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 evaluatingassessing the impact this ASU will have on its consolidated condensed financial statementsstatements. 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 disclosures.the unamortized original issuance discount as an adjustment to beginning retained earnings when it adopts this new standard on January 1, 2022.
In March 2020, the FASB issuedAdoption 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 U.S. GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBORthe 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 is effectiveclarifies that certain optional expedients and exceptions in Topic 848 for all entities ascontract 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 March 12, 2020 through December 31, 2022.the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. The Company is currently evaluatinghas elected to apply the impacthedge 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 willdid not have a material impact on itsthe Company's consolidated condensed financial statements and disclosures.
In December 2019, the FASB issuedThe 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


12


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." The adoption of this ASU did not have a material impact on the Company's consolidated condensed financial statements andor disclosures.

Significant Accounting Policies
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 rent payments over the lease term. When deemed reasonably certain of exercise, the renewal and purchase options are
12

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 ("DLF") obligation. These DLF obligations are generally non-cancelable leases with initial terms of 20 years containing various renewal options following the initial term and escalation clauses that increase the payments over the lease term.
With respect to the Company’s Toptracer operations, the Company enters into non-cancelable license agreements that provide software and hardware to driving ranges and golf courses. These license agreements provide the customer the right to use Company-owned software and hardware products for a specified period generally ranging from three to five years. The software and hardware are a distinct bundle of goods that are highly interrelated. At the inception of the arrangement, lease classification is assessed, which generally results in the license agreements being classified as sales-type leases. Upon lease commencement for sales-type leases, revenue is recognized for the software and hardware as a single component, and a leasing receivable is recorded consisting of the present value of payments over the non-cancellable term. Interest income on the leasing receivable is recognized over the lease term.
Revenue Recognition
The Company accounts for revenue recognition of products and services in accordance with ASC Topic 606, "Revenue from Contracts with Customers." See Note 4.
Product Revenue
The Company recognizes revenue from the sale of its golf clubs, golf balls, lifestyle and outdoor apparel, gear and accessories and golf apparel and accessories when it satisfies the terms of a sales order from a customer, and transfers control of the products ordered to the customer. Control transfers when products are shipped, and in certain cases, when products are received by customers under certain contract terms. In addition, the Company recognizes revenue at the point
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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 accounts payable and 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 and game credit breakage. Game credit breakage is recorded consistent with the historic redemption pattern.
Membership fees received from guests are deferred and recognized as revenue over the estimated life of the associated membership, which is one year or less.
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 franchise fees are recognized over the
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franchise term for each venue, which generally ranges from 15 to 20 years. Revenue from sales-based royalties is recognized as the related sales occur.
Leasing revenue is recognized on non-cancelable sales-type lease agreements related to the licensing of Toptracer software and hardware to driving ranges and golf courses. 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 September 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
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and distribute products. In addition, cost of products includes adjustments to reflect inventory at its net realizable value, as well as adjustments for obsolescence and product warranties.
Cost of Services, Excluding Depreciation and Amortization
The Company’s cost of services primarily consists of food and beverage costs and transaction fees with respect to in-app purchases within the Company’s WGT digital golf game. In addition, cost of services includes costs associated with Topgolf's Toptracer license agreements classified as sales-type leases. Food and beverage costs are variable by nature, change with sales volume, and are impacted by product mix and commodity pricing. Cost of services excludes employee costs as well as depreciation and amortization.
Other Venue Expenses
Other venue expenses consist of salaries and wages, bonuses, commissions, payroll taxes, and other employee costs that directly support venue operations, in addition to rent and occupancy costs, property taxes, depreciation associated with venues, supplies, credit card fees and marketing expenses. Other venue expenses include both fixed and variable components and are therefore not directly correlated with revenue.
Venue Pre-Opening Costs
Pre-opening costs primarily include costs associated with activities prior to the opening of a new Company-operated venue, as well as other costs that are not considered in the evaluation of ongoing performance. Pre-opening costs consist of, but are not limited to, labor, rent, occupancy costs, travel and marketing expenses. Pre-opening costs fluctuate based on the timing, size and location of new Company-operated venues.
Selling, General and Administrative Expenses (SG&A)
SG&A expenses are comprised primarily of employee costs, advertising and promotional costs, tour expenses, legal and professional fees, travel expenses, building and rent expenses, depreciation charges (excluding those related to manufacturing 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 deposits associated with gift cards as required under certain statutory mandates, and lender impound reserve accounts for the development of one of the Company’s venues. Long-term restricted cash is included in other assets on the accompanying consolidated condensed balance sheet as of September 30, 2021. The Company had no restricted cash as of December 31, 2020. The following is a summary of cash, cash equivalents and restricted cash as of September 30, 2021 and December 31, 2020 (in thousands):
September 30, 2021December 31, 2020
Cash and cash equivalents$508,177 $366,119 
Restricted cash, short-term1,754 — 
Restricted cash, long-term3,928 — 
Total cash, cash equivalents and restricted cash$513,859 $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
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Company's soft goods product lines, which are manufactured by third-party contractors, primarily include finished good products. Toptracer hardware and software, food and beverage products and Topgolf-specific retail merchandise inventories are stated at weighted average cost.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over estimated useful lives generally as follows:
Buildings and 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 DLF obligations 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 and then depreciated over the estimated useful life.
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 or intangible asset. 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
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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” 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. With respect to the Company's Toptracer operations, the Company also enters into non-cancellable license agreements that provide software and hardware to driving ranges and hospitality and entertainment venues, which are classified as sales-type leases.
Sales-Type Leases
Leasing revenue attributed to sales-type leases was $8,954,000 and $24,124,000 for the three and nine months ended September 30, 2021, respectively, and are included in services revenues within the consolidated condensed statement of operations. Leasing revenue attributed to sales-type leases consists of the selling price and interest income as follows (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
20212021
Sales-type lease selling price(1)
$7,529 $21,113 
Cost of underlying assets(2,990)(8,583)
Operating profit$4,539 $12,530 
Interest income$1,425 $3,011 
(1) Selling price is equal to the present value of lease payments over the non-cancellable term.
Leasing receivables related to the Company’s net investment in sales-type leases are as follows (in thousands):
Balance Sheet LocationSeptember 30, 2021
Leasing receivables, net - short-termOther current assets$12,016 
Leasing receivables - long-termOther assets38,604 
$50,620 
Operating and Finance Leases
In response to the COVID-19 pandemic, the Company received certain rent concessions in the form of deferments and abatementsabatement on a few of its operating leases. The Company opted to not modify these leases in accordance with theapply FASB Staff Q&A-Topic 842 and Topic 840: "Accounting For Lease Concessions Related to the Effects of the COVID-19 Pandemic" issued in April 2020, and account for these concessions as if they were made under the enforceable rights included in the original agreement. Rent deferments were recorded as a payable and paid at a later negotiated date. Rent abatements were recognized as reductions in rent expense over the periods covered by the abatement period. The Company received rent deferments of $687,000, which were recorded in accounts payable and accrued expenses in the Consolidated Condensed Balance Sheet as of September 30, 2020, and rent abatements of $120,000 and $1,431,000, which were recorded as reductions in rent expense in the Consolidated Condensed Statements of Operations for the three and nine months ended September 30, 2020, respectively.

 As of September 30, 2021 the Company recorded rent deferments of $6,722,000 of which $670,000 was recorded in accrued expenses, and $6,052,000 was recorded in other long-term liabilities in the consolidated condensed balance sheets. There were no material rent abatements recorded for the three and nine months ended September 30, 2021.

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Supplemental balance sheet information related to leases is as follows (in thousands):
Balance Sheet LocationSeptember 30, 2021December 31, 2020
Operating Leases
ROU assets, netOperating lease ROU assets, net$1,066,124 $194,776 
Lease liabilities, short-termOperating lease liabilities, short-term$55,507 $29,579 
Lease liabilities, long-termOperating lease liabilities, long-term$1,181,443 $177,996 
Finance Leases
ROU assets, netOther assets$12,025 $1,003 
Lease liabilities, short-termAccrued expenses$1,269 $252 
Lease liabilities, long-termLong-term other$12,121 $447 
 Balance Sheet Location September 30,
2020		 December 31, 2019
Operating leases  
  
ROU assets, netOperating lease ROU assets, net $186,721
 $160,098
Lease liabilities, short-termOperating lease liabilities, short-term $28,011
 $26,418
Lease liabilities, long-termOperating lease liabilities, long-term $170,732
 $137,696
      
Finance Leases  
  
ROU assets, net,Other assets $930
 $1,263
Lease liabilities, short-termAccounts payable and accrued expenses $271
 $589
Lease liabilities, long-termLong-term other $493
 $558


The components of lease expense are as follows (in thousands):
Three Months Ended
September 30,		 Nine Months Ended
September 30,		Three Months Ended September 30,Nine Months Ended September 30,
2020 2019 2020 20192021202020212020
Operating lease costs$10,458
 $8,758
 $31,759
 $28,357
Operating lease costs$41,610 $10,458 $103,022 $31,759 
Financing lease costs:       Financing lease costs:
Amortization of right-of-use assets185
 180
 505
 657
Amortization of right-of-use assets810 185 1,987 505 
Interest on lease liabilities9
 14
 31
 69
Interest on lease liabilities130 9 176 31 
Total financing lease costs194
 194
 536
 726
Total financing lease costs940 194 2,163 536 
Variable lease costs590
 1,091
 2,473
 3,277
Variable lease costs1,393 590 3,925 2,473 
Total lease costs$11,242
 $10,043
 $34,768
 $32,360
Total lease costs$43,943 $11,242 $109,110 $34,768 

Other information related to leases was as follows (in thousands):
Nine Months Ended September 30,
Supplemental Cash Flows Information20212020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflows from operating leases$95,757 $29,122 
Operating cash outflows from finance leases$390 $31 
Financing cash outflows from finance leases$465 $530 
Lease liabilities arising from new ROU assets:
Operating leases$87,484 $54,678 
Finance leases$10,959 $131 
  Nine Months Ended
September 30,
Supplemental Cash Flows Information 2020 2019
Cash paid for amounts included in the measurement of lease liabilities:    
Operating cash flows from operating leases $29,122
 $29,783
Operating cash flows from finance leases $31
 $69
Financing cash flows from finance leases $530
 $583
     
Lease liabilities arising from new ROU assets:    
Operating leases $54,678
 $8,819
Finance leases $131
 $172

September 30, 2021December 31, 2020
Weighted average remaining lease term (years):
Operating leases14.49.8
Finance leases17.43.0
Weighted average discount rate:
Operating leases8.2 %5.3 %
Finance leases5.3 %3.9 %
 September 30,
2020		 December 31,
2019
Weighted average remaining lease term (years):   
Operating leases10.0
 10.4
Finance leases3.1
 2.8
    
Weighted average discount rate:   
Operating leases5.4% 5.7%
Finance leases3.5% 4.2%
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Future minimum lease obligations as of September 30, 20202021 were as follows (in thousands):
Operating LeasesFinance Leases
Remainder of 2021$37,341 $343 
2022151,948 1,585 
2023150,345 1,580 
2024147,680 1,179 
2025145,734 836 
Thereafter1,566,420 16,123 
Total future lease payments2,199,468 21,646 
Less: imputed interest962,518 8,256 
Total$1,236,950 $13,390 
 Operating Leases Finance Leases
Remainder of 2020$10,644
 $89
202136,073
 274
202231,426
 234
202327,259
 124
202423,591
 51
Thereafter130,615
 31
Total future lease payments259,608
 803
Less: imputed interest60,865
 39
Total$198,743
 $764
Lease payments exclude $800,820,000 related to 15 non-cancellable leases that have been signed as of September 30, 2021 but have not yet commenced. The Company's minimum capital commitment related to leases was approximately $83,000,000 as of September 30, 2021. As the Company is actively involved in the construction of these properties, the Company recorded $120,983,000 in construction costs within property, plant and equipment as of September 30, 2021. Additionally, as of September 30, 2021, the Company recorded $54,264,000 in construction advances from the landlord in connection with properties. The Company will determine the lease classification for properties currently under construction at the end of the construction period. The initial base term upon the commencement of these leases is generally 20 years.
Financing Obligations (Deemed Landlord Financing Obligations)
During the nine months ended September 30, 2021, the Company accounted for 5 DLF obligations that did not meet the sale-leaseback criteria upon the completion of construction in accordance with ASC Topic 842. As of September 30, 2021, the Company was the accounting owner of a total of 13 buildings under DLF obligations. As of September 30, 2021, the net book value included in property, plant and equipment on the consolidated condensed balance sheets related to these buildings totaled $375,139,000. Buildings capitalized in conjunction with DLF obligations are depreciated, less residual value, over 20 years or over their estimated useful life, whichever is shorter.
Supplemental balance sheet information related to DLF obligations is as follows (in thousands):
Balance Sheet LocationSeptember 30, 2021
DLF obligation liabilities, short-termAccrued expenses$580 
DLF obligation liabilities, long-termDeemed landlord financing, long-term$312,027 
The components of DLF obligation expenses are as follows (in thousands):
Three Months Ended
September 30, 2021		Nine Months Ended
September 30, 2021
Amortization of DLF obligations$1,804 $3,507 
Interest on DLF obligations6,528 13,674 
Total DLF contracts expenses$8,332 $17,181 
Principal payments on DLF obligations presented below are included in repayments of long-term debt in the accompanying consolidated condensed statement of cash flows for the nine months ended September 30, 2021.
Supplemental Cash Flows Information (in thousands)Nine Months Ended
September 30, 2021
Financing cash outflows from DLF obligations$14,039 

September 30, 2021
Weighted average remaining lease term (years)19.25
Weighted average discount rate8.8 %
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Future minimum financing obligations related to DLF obligations as of September 30, 2021 were as follows (in thousands):
Remainder of 2021$6,742 
202227,176 
202327,044 
202427,335 
202527,728 
Thereafter486,354 
Total future lease payments602,379 
Less: imputed interest289,772 
Total$312,607 
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 Company's product revenues also include 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, 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 Topgolf operating segment, the Golf Equipment operating segment and the Apparel, Gear and Other operating segment. On March 8, 2021, the Company completed its merger with Topgolf. The Company’s results of operations, therefore, include the operations of Topgolf from that date forward. Topgolf contributed $333,783,000 in net revenues for the three months ended September 30, 2021, and $751,873,000 for the nine months ended September 30, 2021, which includes approximately seven months of revenues since the completion of the merger.
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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 September 30, 2021Three Months Ended September 30, 2020
TopgolfGolf EquipmentApparel, Gear
& Other		TotalGolf EquipmentApparel, Gear
& Other		Total
Major revenue categories:
Venues$313,640 $— $— $313,640 $— $— $— 
Other business lines20,143 — — 20,143 — — — 
Golf clubs— 229,346 — 229,346 209,356 — 209,356 
Golf balls— 60,269 — 60,269 57,921 — 57,921 
Apparel— — 150,240 150,240 — 125,609 125,609 
Gear, accessories & other— — 82,823 82,823 — 82,673 82,673 
$333,783 $289,615 $233,063 $856,461 $267,277 $208,282 $475,559 
 Operating and Reportable Segments
 Three Months Ended September 30, 2020 Three Months Ended September 30, 2019
 Golf Equipment 
Apparel, Gear
& Other
 Total Golf Equipment 
Apparel, Gear
& Other
 Total
Major product category:       
Golf Clubs$209,356
 $0
 $209,356
 $168,005
 $0
 $168,005
Golf Balls57,921
 0
 57,921
 42,497
 0
 42,497
Apparel0
 125,609
 125,609
 0
 139,998
 139,998
Gear, Accessories & Other0
 82,673
 82,673
 0
 75,717
 75,717
 $267,277
 $208,282
 $475,559
 $210,502
 $215,715
 $426,217
Operating and Reportable Segments
Nine Months Ended September 30, 2021Nine Months Ended September 30, 2020
TopgolfGolf EquipmentApparel, Gear
& Other		TotalGolf EquipmentApparel, Gear
& Other		Total
Major product category:
Venues$702,234 $— $— $702,234 $— $— $— 
Other business lines49,639 — — 49,639 — — — 
Golf clubs— 865,671 — 865,671 616,620 — 616,620 
Golf balls— 202,085 — 202,085 152,261 — 152,261 
Apparel— — 336,942 336,942 — 239,201 239,201 
Gear, accessories & other— — 265,152 265,152 — 206,749 206,749 
$751,873 $1,067,756 $602,094 $2,421,723 $768,881 $445,950 $1,214,831 
The Topgolf operating segment contributed $4,387,000 and $8,582,000 in product sales for the three and nine months ended September 30, 2021, respectively, that are included within the consolidated condensed statements of operations, which include sales of golf clubs, golf balls, apparel sales, and equipment sales.
The Apparel, Gear and Other and Topgolf operating segments include royalty income from licensing agreements of $17,009,000 and $50,117,000, respectively, for the three and nine months ended September 30, 2021. For the three and nine months ended September 30, 2020, the Company recognized royalty income of $5,849,000 and $14,946,000, respectively.
As of December 31, 2020, the Company's balance for deferred revenue was $2,546,000, which included deferred revenue from gift cards. In connection with the merger with Topgolf completed on March 8, 2021, the Company acquired deferred revenue related to event deposits, lifetime and premium memberships, prepaid sponsorships, virtual currency and game credits related to the WGT digital golf game, and gift cards. As of September 30, 2021, the Company’s deferred revenue balance was $84,359,000.
The Company recognized revenues of $106,283,000 and $231,561,000 related to the redemption and amortization of deferred revenue, including breakage on unredeemed gift cards, during the three and nine months ended September 30, 2021, respectively. The Company recognized revenues of $795,000 and $1,825,000 related to the redemption and breakage of unredeemed gift cards during the three and nine months ended September 30, 2020, respectively.
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 Operating and Reportable Segments
 Nine Months Ended September 30, 2020 Nine Months Ended September 30, 2019
 Golf Equipment 
Apparel, Gear
& Other
 Total Golf Equipment 
Apparel, Gear
& Other
 Total
Major product category:       
Golf Clubs$616,620
 $0
 $616,620
 $653,531
 $0
 $653,531
Golf Balls152,261
 0
 152,261
 172,943
 0
 172,943
Apparel0
 239,201
 239,201
 0
 309,439
 309,439
Gear, Accessories & Other0
 206,749
 206,749
 0
 253,209
 253,209
 $768,881
 $445,950
 $1,214,831
 $826,474
 $562,648
 $1,389,122


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The following table summarizes revenue by geographical areas in which the Company operates (in thousands):
Three Months Ended
September 30,		Nine Months Ended
September 30,
2021202020212020
Revenue by Major Geographic Region:
United States$552,895 $214,619 $1,583,874 $603,836 
Europe157,215 134,680 386,559 281,473 
Japan63,441 56,530 197,188 158,517 
Rest of world82,910 69,730 254,102 171,005 
$856,461 $475,559 $2,421,723 $1,214,831 
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.
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
September 30,		 Nine Months Ended
September 30,
 2020 2019 2020 2019
Major Geographic Region:       
United States$214,619
 $161,631
 $603,836
 $658,051
Europe134,680
 133,351
 281,473
 341,594
Japan56,530
 64,176
 158,517
 193,080
Rest of World69,730
 67,059
 171,005
 196,397
 $475,559
 $426,217
 $1,214,831
 $1,389,122


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 September 30, 2020 and 2019 was $5,849,000 and $5,466,000, respectively, and $14,946,000 and $15,611,000 for the nine months ended September 30, 2020 and 2019, 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 September 30, 2020United States and December 31, 2019, the Company's deferred revenue liability for gift cards was $2,046,000 and $2,190,000, respectively. During the three months ended September 30, 2020 and 2019, the Company recognized $795,000 and $528,000 of deferred gift card revenue, respectively, and $1,825,000 and $1,515,000 during the nine months ended September 30, 2020 and 2019, 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 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


16


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 nine months ended September 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 sales 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 balance for cost recovery was $36,652,000 and $23,441,000 as of September 30, 2021 and December 31, 2020, respectively. The Company's provision for the sales return liability will fluctuate with the seasonality of the business, while actual sales returns are generally more heavily weighted toward the back half of the year as the golf season comes to an end. Historically, the Company’s actual sales returns have not been materially different from management’s original estimates.
The following table provides a reconciliation of the activity related to the Company’s sales return liability (in thousands):
Three Months Ended
September 30,
 Nine Months Ended
September 30,
2021202020212020
Beginning balance$71,592 $56,837 $43,986 $34,314 
Provision14,381 20,578 79,271 82,588 
Sales returns(14,558)(17,099)(51,842)(56,586)
Ending balance$71,415 $60,316 $71,415 $60,316 
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 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 September 30, 20202021 was not significantly impacted.
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Actual uncollected amounts have historically been consistent with the Company’s expectations. The Company'sCompany’s payment terms on its receivables from customers are generally 60 days or less.
The following table provides a reconciliation of the activity related to the Company’s allowance for estimated credit losses (in thousands):
 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2020 2019 2020 2019
Beginning balance$8,944
 $5,499
 $5,992
 $5,610
Adjustment due to the adoption of Topic 326—
 —
 289
 —
Provision for credit losses(1,340) 778
 2,292
 920
Write-off of uncollectible amounts, net of recoveries(258) (155) (1,227) (408)
Ending balance$7,346
 $6,122
 $7,346
 $6,122

Three Months Ended
September 30,		Nine Months Ended
September 30,
2021202020212020
Beginning balance$6,701 $8,944 $8,841 $5,992 
Adjustment due to the adoption of Topic 326— — — 289 
(Recovery)/provision for credit losses(267)(1,340)(493)2,292 
Write-off of uncollectible amounts, net of recoveries(80)(258)(1,994)(1,227)
Ending balance$6,354 $7,346 $6,354 $7,346 


Note 5.6. Business Combinations

Merger with Topgolf International, Inc.

17


Acquisition of JW Stargazer Holding GmbH
In January 2019,On March 8, 2021, the Company completed its 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 technology-enabled golf entertainment business, with an innovative platform that comprises its state-of-the-art open-air golf and entertainment venues, Toptracer ball-tracking technology and innovative media platform with a differentiated position in eSports. The Company will benefit from a compelling family of brands with reach across multiple channels including retail, venues, e-commerce and digital communities.
Pursuant to the 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 amountconsideration transferred in the merger for these replacement awards, which represents the fair value of $480,000,000the vested portion the replacement awards. The unvested portion of these replacement awards related to future services that will be rendered in the post-combination period will be recognized as compensation expense over the remaining vesting period (see Note 6)15). 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 provided a platform for future growth in the active outdoor and urban outdoor categories, which the Company believes are complementary to its portfolio of brands and product capabilities. In addition, the Company realized 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 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 Full Swing Golf Holdings, Inc. ("Full Swing"), customer relationships and liquor licenses. The excess of the purchase price over the estimated fair value of the net assets and liabilities was allocated to goodwill. The Company determined the preliminary estimated fair values after review and consideration of relevant information as of the acquisition date, including discounted cash flows, quoted market prices and
24

estimates made by management. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are preliminary based on management's estimates and assumptions and may be subject to change as additional information is received and certain tax returns are finalized. The Company expects to finalize the valuation as soon as practicable, but not later than one year from the acquisition date.
The allocation of the purchase price presented below was based on management's preliminary estimate of the fair values of the acquired assets and assumed liabilities using valuation techniques including income, cost and market approaches. These valuation techniques incorporate the use of expected future revenues, cash flows and growth rates as well as estimated discount rates. Current and noncurrent assets and liabilities are valued at historical carrying values, which approximates fair value. 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 that were expected from combiningTopgolf hitting bays, Toptracer ball-tracking technology and the operationsWGT digital game was based on a combination of valuation methodologies, including the residual net income approach, royalty savings income approach and the cost approach. The Company utilized the options pricing model and revenue multiples of comparable companies to determine the fair value of the investment in Full Swing. Customer relationships and liquor licenses were valued using the replacement cost method. The Company amortizes the fair value of the finite-lived intangibles, which include technology and Jack Wolfskin. Duecustomer relationships, over a period ranging between one and ten years. The estimated fair value of operating leases was determined based on current market terms, which resulted in a net unfavorable adjustment to the recent significant business disruptionsright-of-use asset. Property, plant and challenges caused byequipment was valued based on its replacement cost, which resulted in an estimated step-up in value. The estimated fair value of the COVID-19 pandemic,debt assumed was based on a market credit rating, interest rates and repayment terms, which resulted in an overall decrease in value. As of September 30, 2021, 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 $148,375,000is in the second quarterprocess 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, the Company completedcompleting 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 the market analysis of the operating leases assumed, and the completion of the fair value assessment of the right-of-use assets of operating and DLF obligations, 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 $1,968,911,000, of which the Company attributed $1,405,556,000 to the future revenues and growth potential of the Topgolf business, and $563,355,000 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 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 yearnine months ended December 31, 2019,September 30, 2021, the Company recognized transaction costs of approximately $9,987,000,$16,199,000, consisting primarily of which $6,326,000 was recognized in generaladvisor, legal, valuation and administrative expenses during the nine months ended September 30, 2019.accounting fees. There were 0no transaction costs incurred duringrecognized in the three months ended September 30, 2019, or2021. There were $1,544,000 in transaction costs recognized during the three and nine months ended September 30, 2020. In addition, the CompanyTransaction costs were 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). selling, general & administrative expenses.
25

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):


18


 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 Wolfskinequipment1,018,727 
Operating lease right-of-use assets833,812 
Investments28,263 
Other assets33,664 
Intangibles - trade name994,200 
Intangibles - technology, customer relationships and liquor licenses81,929 
Goodwill1,405,556 
Total assets acquired4,644,783 
Liabilities Assumed
Accounts payable and accrued liabilities94,434 
Accrued employee costs36,992 
Construction advances60,333 
Deferred revenue62,617 
Other current liabilities7,821 
Long-term debt535,096 
Deemed landlord financing179,718 
Operating lease liabilities1,023,338 
Other long-term liabilities23,539 
Deferred tax liabilities135,400 
Net assets acquired$2,485,495 
Goodwill allocated to their fair values, which resultedother business units563,355 
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 
Proposed Acquisition
Supplemental Pro-Forma Information (Unaudited)
The following table presents supplemental pro-forma information for the three and nine months ended September 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 certain gains and costs associated with the merger were recognized as of January 1, 2020, including a gain of $252,531,000 recognized on the Company's pre-acquisition investment in Topgolf, acquisition costs of $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 13). Pre-acquisition net revenue and net income(loss) amounts for Topgolf were derived from the books and records of Topgolf International, Inc.
On October 27, 2020, the Company entered into a definitive agreement to acquire Topgolf in an all-stock transaction, pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, Topgolf and 51 Steps, Inc., a Delaware corporation and wholly-owned subsidiary of Callaway (“Merger Sub”). The Merger Agreement provides that, among other matters, and subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement, the Company will acquire Topgolf by way of a merger of Merger Sub with and into Topgolf, with Topgolf surviving as a wholly-owned subsidiary of Callaway (the “Merger”).
The Company currently estimates that it will issue approximately 90,000,000 shares of its common stock to the stockholders of Topgolf (excluding the Company) for 100% of the outstanding equity of Topgolf, using an exchange ratio based on an equity value of Topgolf of approximately $1,986,000,000 (or approximately $1,745,000,000 excluding Topgolf shares currently held by the Company) and a price per share of the Company’s common stock fixed at $19.40 per share. The Company currently holds approximately 14.3% of Topgolf's outstanding shares. Upon completion of the Merger, the former Topgolf stockholders (other than the Company) are expected to own approximately 48.5% of the combined company on a fully diluted basis. The Company will also assume certain outstanding Topgolf stock options, which will be converted into options to purchase the Company’s common stock, generally using the same exchange ratio. The Merger Agreement further provides that, upon termination of the Merger Agreement under specified circumstances, either party may be required to pay the other party a termination fee of $75,000,000. The Merger is expected to close in the first quarter of 2021, subject to shareholder approval and other customary conditions.
In connection with the Merger, the Company will prepare and file a registration statement on Form S-4, in which a proxy statement will be included as a prospectus, to register the Company’s common stock to be issued to Topgolf stockholders in connection with the Merger and solicit the approval of the Company’s stockholders of the issuance of the Company’s common stock that represents more than 20% of the shares of the Company’s common stock outstanding immediatelyprepared prior to the closingacquisition and are presented for informational purposes only and do not purport to be indicative of the Merger to Topgolf stockholders in connection with the Merger, pursuant to the rules and regulationsresults of future operations or of the New York Stock Exchange.results that would have occurred had the acquisition taken place as of the dates noted below.
Three Months Ended
September 30,		Nine Months Ended
September 30,
2021202020212020
(in thousands)(in thousands)
Net revenues$856,461 $691,437 $2,564,667 $1,700,339 
Net income (loss)$(15,991)$7,258 $101,205 $(187,478)


26
19


Supplemental Information of Operating Results
Topgolf is a leading tech-enabled golf entertainment business, with an innovative platform that comprises its state-of-the-art open-air golfFor the three months ended September 30, 2021, the Company's consolidated condensed statements of operations included net revenues of $333,783,000 and entertainment venues, revolutionary Toptracer ball-tracking technologynet income of $2,832,000 attributable to Topgolf. For the nine months ended September 30, 2021, the Company's consolidated condensed statements of operations included net revenues of $751,873,000 and innovative media platform with a differentiated position in eSports. The combined company will benefit from a compelling familynet income of brands with reach across multiple channels including retail, venues, e-commerce and digital communities.$396,000 for the period beginning March 8, 2021 through October 3, 2021.
Note 6.7. Financing Arrangements
The Company's debt obligations are summarized as follows (in thousands):
September 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 %$1,134 $30,108 $22,130 
Japan ABL FacilityJanuary 21, 20221.28 %— — — 
$1,134 $30,108 $22,130 
Balance Sheet Location
Prepaid expenses$1,047 $— $— 
Other long-term assets87 — — 
Asset-based credit facilities— 30,108 22,130 
$1,134 $30,108 $22,130 
September 30, 2021December 31, 2020
Maturity DateInterest RateUnamortized Original Issuance Discount and Debt Issuance CostsCarrying Value, netCarrying Value, net
Long-Term Debt and Credit Facility
Japan Term Loan FacilityJuly 31, 20250.86 %$— $14,379 $18,390 
Term Loan B FacilityJanuary 4, 20264.59 %16,217 421,783 428,150 
Topgolf Term Loan February 8, 20267.00 %6,654 334,596 — 
Topgolf Revolving Credit FacilityFebruary 8, 20244.75 %6,444 28,556 — 
Convertible NotesMay 1, 20262.75 %67,216 191,534 183,126 
Equipment NotesDecember 27, 2022 - March 19, 20272.36% - 3.79%— 25,546 31,822 
Mortgage LoansJuly 1, 2033 -
July 29, 2036		9.75% - 11.31%— 46,522 — 
Financed Tenant ImprovementsFebruary 1, 20358.00 %— 3,689 3,801 
$96,531 $1,066,605 $665,289 
Balance Sheet Location
Other current liabilities$3,816 $17,586 $— 
Accrued expenses— — 14,725 
Long-term debt92,715 1,049,019 650,564 
$96,531 $1,066,605 $665,289 
Revolving Credit Facilities and Available Liquidity
In addition to cash on hand, as well as cash generated from operations, the Company relies on its U.S. and Japan asset-based revolving credit facilities and the Topgolf revolving credit facility to manage seasonal fluctuations in liquidity and to provide additional liquidity when the Company’s operating cash flows are not sufficient to fund the Company’s requirements. As of September 30, 2021, the Company had $65,108,000 outstanding under these facilities and $508,177,000 in cash and cash equivalents. As of September 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 $918,000,000. As of September 30, 2020, the Company had $30,235,000 outstanding under theseits U.S. and Japan facilities, and $286,656,000 in cash and cash equivalents. As of September 30, 2020, the Company's available liquidity, which is comprised of cash on hand including cash received from the issuance of Convertible Senior Notes in May 2020, and amounts available under bothits U.S. and Japan facilities, after letters of credit and outstanding borrowings, was $636,891,000. As of September 30, 2019, the Company had $110,711,000 outstanding under these facilities, $1,014,000 in outstanding letters of credit, and $88,216,000 in cash and cash equivalents. As of September 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 $340,186,000.
U.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-yearthree-year period.
Amounts borrowed under the ABL Facility may be repaid and borrowed as needed. The entire outstanding principal amount (if any) is due and payable on the maturity date. Amounts available under the ABL Facility increase and decrease with changes in the Company’s inventory and accounts receivable balances. During the nine months ended September 30, 2021, average outstanding borrowings were $20,237,000 and average amount available, after outstanding borrowings and letters of credit, was approximately $307,753,000.
In April 2020, the Company amended the ABL Facility to permit a customary capped call transaction (see “Convertible Senior Notes” below) in connection with entering into the Merger Agreementissuance of convertible debt securities by the Company and to permit the Company to incur loans or financial assistance of up to $50,000,000 pursuant to governmental programs enacted due to the COVID-19 pandemic. As of September 30, 2021, the Company had not drawn on these funds. In addition, the ABL Facility imposes restrictions on the amount the Company could pay in annual cash dividends, including certain restrictions on the amount of additional indebtedness and requirements to maintain a certain fixed charge coverage ratio under certain circumstances. In addition, in connection with the merger with Topgolf (see Note 5)6), on October 27, 2020, the Company amended the ABL Facility to, among other things, permit the consummation of the Merger,merger, designate Topgolf and its subsidiaries as excluded subsidiaries under the ABL Facility and amend certain covenants and other provisions to allow the Company to make certain investments in, and enter into certain transactions with Topgolf. Fees in connection with this amendment will be combined with existing debt origination and amendment fees and amortized over the remaining term of the ABL Facility.
As of September 30, 2020, the Company had $28,813,000 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 nine months ended September 30, 2020 were $134,838,000, and average amounts available under the ABL Facility during the nine months ended September 30, 2020, after outstanding borrowings and letters of credit, was approximately $208,055,000. 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.
The ABL Facility includes certain restrictions including, among other things, restrictions on the incurrence of additional debt, liens, stock repurchases and other restricted payments, asset sales, investments, mergers, acquisitions and affiliate transactions. In April 2020, the Company amended the ABL Facility to permit a customary capped call transaction (see "Convertible Senior Notes" below) in connection with the issuance of convertible debt securities by the Company and to permit the Company to incur loans or financial assistance of up to $50,000,000 pursuant to governmental programs enacted due to the COVID-19 pandemic. As of September 30, 2020, 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.


20


As of September 30, 2020, the Company was in compliance with all financial covenants of the ABL Facility. Additionally, the Company is subject to compliance with a fixed charge coverage ratio covenant 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 nine months ended September 30, 2020,2021, and the Company was in compliance with the fixed charge coverage ratio as of September 30, 2020.2021. Had the Company not been in compliance with the fixed charge coverage ratio as of September 30, 2020,2021, the maximum amount of additional indebtedness that could have been outstanding on September 30, 20202021 would have been reduced by $40,000,000. As of September 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 September 30, 20202021 the Company’s trailing 12 month12-month average interest rate applicable to its outstanding loans under the ABL Facility was 3.78%3.07%. 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 prior amendments of the ABL Facility totaled $3,615,000, whichand prior amendments are amortized intoin interest expense over the term of the ABL Facility agreement. Unamortized origination fees at September 30, 2020 and December 31, 2019 were $1,834,000 and $2,115,000, respectively, of which $880,000 and $746,000, respectively, were included in other current assets and $954,000 and $1,369,000, respectively, were included in other long-term assets in the accompanying consolidated condensed balance sheets.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. $37,932,000,$35,948,000, using the exchange rate in effect as of September 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 had150,000,000 Yen (or U.S. $1,422,000, using the exchange rate in effect as of September 30, 2020) in borrowings outstanding under the 2018 Japan ABL Facility as of September 30, 2020. The 2018 Japan ABL Facility also includes certain restrictions including covenants related to certain pledged assets and financial performance metrics. As of September 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 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. $18,966,000$17,974,000 using the exchange rate in effect as of September 30, 2020)2021). This facility expired on July 30, 2020.
Long-Term Debt
Equipment Notes
In August 2020, the Company entered into two new long-term financing agreements (the "Equipment Notes") with Bank of America N.A. and other lenders in connection with the Company's investment initiatives at its North American Distribution Center in Roanoke, Texas, that are secured by certain equipment at this facility. Additionally, 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 between December 2017 and March 2020, that are secured by certain equipment at these facilities.
As of September 30, 2020 and December 31, 2019,2021, the Company had a combined $33,881,000 and $19,715,0001,600,000,000 Yen (or approximately U.S. $14,379,000 using the exchange rate in effect as of September 30, 2021) outstanding, under these Equipment Notes, respectively, of which $8,727,000 and $5,107,000 was included400,000,000 Yen (or approximately U.S. $3,595,000 using the exchange rate in effect as of September 30, 2021) is reflected in other current liabilities respectively, and $25,154,000 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 2.36% and 3.79%, and have maturity dates between December 2022 and March 2027.


21


During the three and nine months ended September 30, 2020, the Company recognizedconsolidated condensed balance sheets. Total interest expense of $247,000 and $624,000, respectively, andrecognized during the three and nine months ended September 30, 2019,2021 was 3,544,000 Yen (or approximately U.S. $32,000) and 11,156,000 Yen (or approximately U.S. $103,000), respectively.
Loans under the Company recognized interest expense of $115,000 and $288,000, 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. $899,000 using the exchange rate in effect as of September 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 September 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 September 30, 2020 and December 31, 2019, the Company had $442,800,000 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 September 30, 2020 was offset by unamortized debt issuance costs of $14,160,000, of which $2,697,000 was reflected in the short-term portion of the facility, and $11,463,000 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 September 30, 2021 and 2020 was $6,105,000 and 2019 was $5,986,000, respectively. Total interest and $7,902,000, respectively, and $19,681,000 and $24,449,000amortization expense recognized during the nine months ended September 30, 2021 and 2020 was $18,029,000 and 2019$19,681,000, 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 17 for further information on this hedging contract. Principal payments of $1,200,000 are due quarterly, however the Company has the option to prepay any outstanding loan balance in whole or in part without premium or penalty. In addition, as of December 31, 2019, the Term Loan Facility requires excess cash flow payments.
Loans outstanding under this facility are guaranteed by the Company's domestic subsidiaries. The loans and guaranties are secured by substantially all the assets of the Company and guarantors.
The Credit Agreement contains a cross-default provision with respect to any indebtedness of the Company as defined in the Credit Agreement, as well as customary representations and warranties and customary affirmative and negative covenants, including, among other things, restrictions on incurrence of additional debt, liens, dividends and other restricted payments, asset sales, investments, mergers, acquisitions and affiliate transactions. Events of default permitting
acceleration under the Credit Agreement include, among others, nonpayment of principal or interest, covenant defaults, material breaches of representations and warranties, bankruptcy and insolvency events, certain cross defaults or a change of control. As of September 30, 2020,2021, the Company was in compliance with these covenants.
In connection with the entry into the Merger Agreementmerger with Topgolf (see Note 5), on October 27, 20206), the Company entered into a debt financing commitment letter (the "Debt Commitment Letter") and related fee lettersamended the Term Loan Facility with Bank of America, N.A. and other lenders party to the Debt Commitment Letter (the "Commitment Parties"), to arrange and solicit consents from the Term Lenders to amend the Term Loan Facility 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 which excludes them from certain requirements, covenants and representations, 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 eventmerger with Topgolf on March 8, 2021, the Company cannot obtain the aforementioned consents from the Term Lenders, the Commitment Parties committed to arrange and provide the Company withassumed a secured$350,000,000 term loan facility for $442,800,000 on terms substantially similar(the “Topgolf Term Loan”), and a $175,000,000 revolving credit facility with JPMorgan Chase Bank, N.A (the “Topgolf Revolving Credit Facility”), with JPMorgan Chase Bank, N.A., as Administrative Agent, Swingline Lender and Issuing Bank, RBC Capital Markets, as Syndication Agent, and the other agents, arrangers and lenders party thereto (together, the “Topgolf Credit Facilities”).
Borrowings under the Topgolf Term Loan accrue interest at a rate per annum equal to, at the Company's option, either (i) an alternate base rate determined by reference to the highest of (a) the prime rate of JPMorgan Chase Bank, N.A. (the administrative agent), (b) the federal funds effective rate plus 0.50%, (c) the adjusted one-month LIBOR rate plus 1.00%, and (d) 1.75%, or (ii) an adjusted LIBOR rate (for a period equal to the relevant interest period) (which shall not be less than 0.75%), in each case plus an applicable margin. The applicable margin for loans under the Topgolf Term Loan is 5.25% with respect to alternate base rate borrowings and 6.25% with respect to LIBOR borrowings.
Borrowings under the Topgolf Revolving Credit Facility as proposedaccrue 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 modified byless 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 Amendment,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 includingunpaid interest thereon, is due upon maturity. Outstanding borrowings under the Topgolf Revolving Credit Facility do not amortize and are due and payable upon maturity.
The terms of the Topgolf Credit Facilities require the Company to maintain on a quarterly basis a total leverage ratio (measured on a trailing four-quarter basis) less than or equal to 5.50:1.00. On September 17, 2020, prior to the completion of the merger, Topgolf entered into an amendment to the credit agreement (the “Amended Credit Agreement”) to modify the financial covenants and make certain other changes. The Amended Credit Agreement (i) suspends the total leverage ratio financial covenant through and including the fiscal quarter ending on or about March 31, 2022 and (ii) provides for an increased level of 7.75:1.00 for the fiscal quarter ending on or about June 30, 2022, in each case


22


Japan Term Loan Facility
In August 2020,unless the Company entered into a new five-year Term Loan facility (the "2020 Japan Term Loan Facility") between its subsidiaryelects to restore the 5.50:1.00 total leverage ratio test (and eliminate the restrictions in Japan and Sumitomo Mitsui Banking Corporation (“SMBC”)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 2,000,000,000 Yen (or approximately U.S. $18,966,000 using the exchange rate in effect as ofperiod ending on or about September 30, 2020). The 2020 Japan Term Loan Facility2022 (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 due in August 2025.
required to maintain unrestricted cash on hand and/or availability under the Topgolf Credit Facilities of not less than $30,000,000. As of September 30, 2020, the Company had 2,000,000,000 Yen (or approximately U.S. $18,966,000 using the exchange rate in effect as of September 30, 2020) outstanding, of which 400,000,000 Yen (or approximately U.S. $3,793,000 using the exchange rate in effect as of September 30, 2020) is reflected in current liabilities in the accompanying consolidated balance sheet. Total interest expense recognized during the three months ended September 30, 2020 was 2,031,000 Yen (or approximately U.S. $19,000 using the exchange rate in effect as of September 30, 2020).
Loans under the 2020 Japan Term Loan Facility are subject to a rate per annum to 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. $948,000 using the exchange rate in effect as of September 30, 2020) are due quarterly and the facility imposes certain restrictions including covenants to certain financial performance obligations. As of September 30, 2020,2021, 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
OnIn 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 $191,534,000 as of September 30, 2020,2021. The carrying amount of the discount on the Convertible Notes, totaling $62,324,000 as of September 30, 2021, is amortized over the remaining term of approximately 4.6 years. The conversion feature of $76,508,000 was determined by deducting the fair value of the liability component from the initial proceeds ascribed to the Convertible Notes.
The Company incurred $8,527,000 of cost associated with the issuance of the Convertible Notes,Notes. These debt issuance costs were allocated between the debt and equity components in proportion to the allocation of whichthe proceeds to those components. As such, $6,005,000 was allocated to the liability component of the Convertible Notes, and $2,522,000 was allocated to the equity conversion feature.
As of September 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 $180,458,000, 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 $5,698,000 and debt discountbusiness on the second trading day immediately prior to the maturity date. Additionally, all or any portion of $72,594,000, which willthe Convertible Notes may be amortized overconverted at the remaining termconversion rate at the holders' option upon the occurrence of approximately 5.6 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 $2,522,000 are recorded as componentsthe conversion price of shareholders' equity asthe 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. 2020; (ii) if the trading price of the Convertible Notes, after a consecutive ten trading day period, is less than 98% of the closing price per share of the Company’s common stock multiplied by the conversion rate in effect (iii) upon the occurrence of certain corporate events or distributions on the Company’s common stock, as described in the Indenture; or (iv) if the Company calls the Convertible Notes for redemption.
Upon conversion, the Company has the option to settle the conversion obligation in any combination of cash and shares. The initial conversion rate is 56.7698 shares of the Company's common stock per $1,000 principal amount of Convertible Notes, which is equal to an initial conversion price of $17.62 per share. At September 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 have an impact on the Company’s diluted earnings per share when the average market price of its common stock exceeds the conversion price of $17.62 per share, as the Company intends to settle the principal amount of the Convertible Notes in cash upon conversion. As ofFor the nine months ended September 30, 2020,2021, the average market price of the Company's common stock was $30.85, which exceeded the conversion price and, asprice. As such, the Company used the treasury stock method to compute the dilutive shares of common stock related to the Convertible Notes for periods the Company reported net income. Upon conversion, there will be no economic dilution from the Convertible Notes until the average market price of the Company’s common stock exceeds the cap price of $27.10 per share, as exercise of the Capped Calls offsets any dilution from the Convertible Notes from the conversion price up to the cap price. Capped Calls are excluded from the calculation of diluted earnings per share, as they would be anti-dilutive under the treasury stock method.

Equipment Notes

Between December 2017 and August 2020, the Company entered into 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.
23

Interest expense recognized during the three months ended September 30, 2021 and 2020 was $205,000 and $247,000, respectively. Interest expense recognized during the nine months ended September 30, 2021 and 2020 was $665,000 and $624,000, respectively.

The Equipment Notes are subject to compliance with the financial covenants in the Company's ABL Facility. As of September 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, the 2020 Japan Term Loan Facility, and the Convertible NotesCompany's long-term debt over the next five years and thereafter as of September 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 September 30, 2020,2021, the Company does not anticipate excess cash flow repayments as defined by the Term Loan Facility.
  (in thousands)
Remainder of 2020 $4,312
2021 17,147
2022 17,437
2023 14,721
2024 13,432
Thereafter 691,031
  $758,080

(in thousands)
Remainder of 2021$5,254 
202221,232 
202318,575 
202452,352 
202514,155 
Thereafter1,051,568 
$1,163,136 
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 6)7).
27

Weighted-average common shares outstanding—diluted is the same as weighted-average common shares outstanding—basic in periods when a net loss is reported or in periods when anti-dilution occurs.  
The following table summarizes the computation of basic and diluted earnings per share (in thousands, except per share data):
Three Months Ended
September 30,		Nine Months Ended
September 30,
 2021202020212020
Earnings per common share—basic
Net income (loss)$(15,991)$52,432 $348,214 $(86,358)
Weighted-average common shares outstanding—basic(1)
185,963 94,171 163,141 94,207 
Basic earnings (loss) per common share$(0.09)$0.56 $2.13 $(0.92)
Earnings per common share—diluted
Net income (loss)$(15,991)$52,432 $348,214 $(86,358)
Weighted-average common shares outstanding—basic(1)
185,963 94,171 163,141 94,207 
Convertible notes weighted-average shares outstanding— 924 6,117 — 
Outstanding options, restricted stock units and performance share units— 1,517 1,936 — 
Weighted-average common shares outstanding—diluted185,963 96,612 171,194 94,207 
Diluted earnings (loss) per common share$(0.09)$0.54 $2.03 $(0.92)
 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2020 2019 2020 2019
Earnings (loss) per common share—basic       
Net income (loss) attributable to Callaway Golf Company$52,432
 $31,048
 $(86,358) $108,626
Weighted-average common shares outstanding—basic94,171
 94,100
 94,207
 94,284
Basic earnings (loss) per common share$0.56
 $0.33
 $(0.92) $1.15
Earnings (loss) per common share—diluted       
Net income (loss) attributable to Callaway Golf Company$52,432
 $31,048
 $(86,358) $108,626
Weighted-average common shares outstanding—basic94,171
 94,100
 94,207
 94,284
Convertible notes weighted-average shares outstanding924
 0
 0
 0
Outstanding options, restricted stock units and performance share units1,517
 2,187
 0
 1,913
Weighted-average common shares outstanding—diluted96,612
 96,287
 94,207
 96,197
Diluted earnings (loss) per common share$0.54
 $0.32
 $(0.92) $1.13

(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 67,884,937 weighted average shares for the three and nine months ended September 30, 2021, respectively, were included in the basic and diluted share calculations based on the number of days the shares were outstanding during the periods.
Convertible Notes
In May 2020, the Company issued $258,750,000 of 2.75% Convertible Notes. The Convertible Notes will have an impact on the Company’s diluted earnings per share when the average market price of its common stock exceeds the conversion price of $17.62 per share, as the Company intends to settle the principal amount of the Convertible Notes in cash upon conversion. The Company is required under the treasury stock method to compute the potentially dilutive shares of common stock related to the Convertible Notes for periods the Company reports net income. As of September 30, 2021 and September 30, 2020, the average market price of its common stock exceeded thisthe conversion price per share and, as such, the common shares underlying convertible notes were included in the calculation of earnings per common share—diluted calculation for the three months ended September 30, 2020. For2020 and the nine months


24


ended September 30, 2020, the Convertible Notes were anti-dilutive and therefore excluded from the diluted calculation (See2021, respectively (see Note 6)7).
For As a net loss was reported for the three months ended September 30, 2021 and the nine months ended September 30, 2020, therecommon shares underlying convertible notes of 6,139,949 and 502,517, respectively, were 0 securities excluded from the calculation of earnings (loss)loss per common share—diluted. diluted for these periods.
Options, Restricted Stock Units and Performance Share Units
As a net loss was reported for the three months ended September 30, 2021 and the nine months ended September 30, 2020, common shares underlying options, restricted stock units and performance share units of 1,822,402 and 1,345,695, respectively, were excluded from the calculation of loss per common share—diluted for these periods.
For the nine months ended September 30, 2020,2021, securities outstanding totaling approximately 1,848,0001,195,000 shares, comprised of stock options and restricted stock units, performance share units, and common shares underlying convertible notes, were excluded from the calculation of earnings (loss) per common share—diluted as they would be anti-dilutive. For the three and nine months ended September 30, 2019, the Company had a 0minal number of2020, there were no securities that had an anti-dilutive effect onexcluded from the calculation of diluted earnings per common share. Such securities were excluded from the calculation.
Note 8. Inventories
Inventories are summarized below (in thousands):share—diluted.
 September 30,
2020		 December 31, 2019
Inventories:   
Raw materials$59,031
 $76,140
Work-in-process843
 860
Finished goods264,978
 379,639
 $324,852
 $456,639
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Note 9. Goodwill and Intangible Assets
Changes in the carrying amount of goodwill by operating and reportable segment are as follows (in thousands):
 TopgolfGolf EquipmentApparel, Gear and OtherTotal
Balance at December 31, 2020$— $27,025 $29,633 $56,658 
Acquisitions1,405,556 504,690 58,665 $1,968,911 
Impairments— — — $— 
Foreign currency translation— (394)— $(394)
Balance at September 30, 2021$1,405,556 $531,321 $88,298 $2,025,175 
Goodwill at September 30, 2020 decreased2021 increased to $56,041,000$2,025,175,000 from $203,743,000$56,658,000 at December 31, 2019.2020. This $147,702,000 decrease$1,968,517,000 increase was primarily due to an impairment chargethe addition of $148,375,000 recognized$1,968,911,000 in goodwill in connection with the second quarterTopgolf merger in March 2021, of 2020,which the Company attributed $1,405,556,000 to the Topgolf business, and $504,690,000 and $58,665,000 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 September 30, 2021 and December 31, 2020, the Company performed a qualitative assessmentrecognized accumulated impairment losses on goodwill of goodwill 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 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.
In performing the second quarter quantitative goodwill impairment testing, the Company prepared valuations of its reporting units using both a market comparable methodology and an income methodology, and those valuations were compared with the respective carrying values of the reporting units to determine whether any goodwill impairment existed. The Company's reporting units are one level below its reportable segment level. In preparing the valuations, past, present and future expectations of performance were considered, including the impact of the COVID-19 pandemic. This methodology was consistent with the approach used to perform the annual quantitative goodwill assessment in prior years. The weighted average cost of capital used in the goodwill impairment testing ranged between 9.0% and 9.25%, which was derived from the financial structures of comparable companies corresponding to the industry of each reporting unit. There is inherent uncertainty associated with key assumptions used in the Company's impairment testing, including the duration of the economic downturn associated with the COVID-19 pandemic and the estimated recovery period. As a result of the second quarter assessment, the Company determined that the 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 at June 30, 2020.$148,375,000. There were 0no impairment chargeslosses recognized during the three or nine months ended September 30, 2020.
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


25


the impairment was $437,546,000 at September 30, 2020. There were 0 impairment charges recognized during the three months ended September 30, 2020.2021.
The following sets forth the intangible assets by major asset class (dollars in thousands):
 
Useful
Life
(Years)
 September 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 $437,546
  $—
  $437,546
 $453,837
  $—
  $453,837
Amortizing:                 
Patents2-16 31,581
  31,581
  0
 31,581
  31,581
  0
Customer and distributor relationships and other1-10 55,794
  18,367
  37,427
 53,904
  14,318
  39,586
Total intangible assets  $524,921
  $49,948
  $474,973
 $539,322
  $45,899
  $493,423

 Useful
Life
(Years)		September 30, 2021
 
Gross(1)
Accumulated AmortizationTranslation AdjustmentNet Book
Value
Indefinite-lived:
Trade name, trademark, trade dress and otherNA$1,441,003 $— $11,893 $1,429,110 
Liquor licensesNA7,756 — — 7,756 
Amortizing:
Patents2-1632,041 31,645 — 396 
Customer and distributor relationships and other1-1061,378 25,195 1,757 34,426 
Developed technology1069,821 3,909 553 65,359 
Total intangible assets$1,611,999 $60,749 $14,203 $1,537,047 
 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 — 
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 September 30, 20202021 includes an increase dueadditions of $1,001,600,000 and $74,529,000 in indefinite-lived and amortizing intangible assets, respectively, related to the impact of foreign exchange rates of $9,603,000Topgolf merger that was completed on the Jack Wolfskin non-amortizing intangible asset, as well as $1,554,000 on the amortizing customer and distributor relationships.March 8, 2021.
AggregateThe Company recognized amortization expense ofrelated to intangible assets was approximatelyof $3,358,000 and $1,321,000 and $1,113,000 for the three months ended September 30, 20202021 and 2019,2020, respectively, and $3,714,000$9,395,000 and $3,579,000$3,714,000 for the nine months ended September 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 September 30, 20202021 in each of the next five fiscal years and beyond is expected to be incurred as follows (in thousands):
Remainder of 2020$3,586
20214,724
20224,548
20234,409
20244,409
Thereafter15,751
 $37,427

Remainder of 2021$7,233 
202213,177 
202311,616 
202411,471 
202511,395 
Thereafter45,289 
$100,181 
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 September 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 nine months ended September 30, 2019, the Company recorded a net loss attributable to the non-controlling interest of $0 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 nine months ended September 30, 2020.


26


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 14.3% in Topgolf, the owner and operator of Topgolf entertainment centers,centers. On March 8, 2021, the Company completed its 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, the Company has a preferred partner agreement with Topgolf in which the Company has preferred signage rights, rights as the preferred supplier of golf products used or offered for use at Topgolf facilities at prices no less than those paid by the Company’s customers, preferred retail positioning in Topgolf retail stores, and other rights incidentalstock were stepped up 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.and applied toward the total purchase consideration in the merger. The Company accounts for changes in fair value adjustment resulted 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 investmentgain of the same issuer.$252,531,000.
In May 2020, dueImmediately prior to the business disruptions caused by the COVID-19 pandemic, which resulted in the temporary closure of Topgolf facilities worldwide, 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 an original issue discount of 20%. In connection with the Series H financing completed in September 2020, as discussed below, the note receivable was converted into additional shares of Topgolf. While outstanding, the note receivable accrued interest in the range of 5.75%merger and 5.87%. The note receivable would have matured in February 2026.
In Septemberat December 31, 2020, the Company invested $14,638,000 in Series H preferred shares of Topgolf as part of a new financing round. In connection with this financing round, the Company also converted the outstanding note receivable and accrued interest of $6,670,000, into additional Series H preferred shares of Topgolf. The series H preferred shares have preference, liquidation, conversion and other rights which differ from the other series of Topgolf preferred and common shares.
The Company's total investment in Topgolf as of September 30, 2020 and December 31, 2019 was $111,442,000 and $90,134,000, respectively.$111,442,000. The Company accountsaccounted for this investment at cost less impairments in accordance with ASCASU No. 2016-01. As of September 30, 2020,Prior to the merger, the Company hasdid not recordedrecord any impairments with respect to this investment.
On October 27, 2020,Investment in Full Swing
In connection with the merger with Topgolf, the Company entered into the Merger Agreement to acquire Topgolfacquired a minority interest of 17.7% in an all-stock transaction (see Note 5). At the effective timeFull 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, all preferred shares and common stock of Topgolf held bymerger date was $27,740,000. During the quarter ended September 30, 2021, the Company will be canceledsold a portion of its investment in Full Swing for no consideration. The Merger is expected to closecash proceeds of approximately $18,591,000. As a result of the transaction, the Company now owns a minority interest of 7.3% in the first quarter of 2021, subject to shareholder and regulatory approval as well as other customary conditions.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 nine months ended September 30, 2020 and September 30, 2019 includes the warranty reserves assumed in connection with the Jack Wolfskin acquisition (see Note 5).


30
27


The warranty reserve is included in other current liabilities in the accompanying consolidated condensed balance sheets as of September 30, 2021 and December 31, 2020. The following table provides a reconciliation of the activity related to the Company’sCompany's warranty reserve for warranty expense (in thousands):
Three Months Ended September 30,Nine Months Ended
September 30,
 2021202020212020
Beginning balance$11,533 $9,779 $9,364 $9,636 
Provision1,938 2,137 7,871 5,507 
Claims paid/costs incurred(1,950)(2,276)(5,714)(5,503)
Ending balance$11,521 $9,640 $11,521 $9,640 
 Three Months Ended September 30, Nine Months Ended
September 30,
 2020 2019 2020 2019
Beginning balance$9,779
 $10,976
 $9,636
 $7,610
Provision2,137
 1,494
 5,507
 6,492
Provision liability assumed from acquisition0
 0
 0
 2,208
Claims paid/costs incurred(2,276) (2,349) (5,503) (6,189)
Ending balance$9,640
 $10,121
 $9,640
 $10,121
Note 12. Selected Financial Statement Information
September 30, 2021December 31, 2020
(In thousands)
Inventories:
Finished goods$295,962 $281,602 
Work in process858 1,010 
Raw materials83,994 69,932 
Food and beverage4,497 — 
$385,311 $352,544 
Property, plant and equipment, net:
Land$90,200 $7,308 
Buildings and leasehold improvements841,664 100,653 
Machinery and equipment200,416 137,026 
Furniture, computer hardware and equipment193,638 100,558 
Internal-use software80,697 42,082 
Production molds7,220 6,809 
Construction-in-process215,090 13,299 
1,628,925 407,735 
Accumulated depreciation(298,599)(261,240)
$1,330,326 $146,495 
Accounts payable and accrued expenses:
Accounts payable$126,643 $66,282 
Accrued expenses230,178 136,277 
Accrued inventory96,817 73,650 
$453,638 $276,209 
Accrued employee compensation and benefits:
Accrued payroll and taxes$89,103 $17,009 
Accrued vacation and sick pay21,753 12,887 
Accrued commissions5,090 1,041 
$115,946 $30,937 

During the three months ended September 30, 2021 and 2020, the Company recorded depreciation expense of $40,920,000 and $8,990,000, respectively, and $98,425,000 and $24,954,000 for the nine months ended September 30, 2021 and 2020, respectively, on the accompanying consolidated condensed statements of operations.
Note 13. Income Taxes
The Company calculates its interim income tax provision in accordance with ASC Topic 270, “Interim Reporting,” and ASC Topic 740, “Accounting for Income Taxes.” Historically,At the end of nine months ended September 30, 2021, the Company calculated the provision for income taxes during the interim reporting periods by applying an estimate of theestimates its annual effective tax rate and applies that rate to its ordinary quarterly earnings to calculate the tax related to
31

ordinary income. The tax effects for other items that are excluded from ordinary income are discretely calculated and recognized in the full fiscal year to “ordinary” income or loss (pretax income or loss excluding unusual or infrequently occurring discrete items) forperiod in which they occur.
In March 2021, the reporting period.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 determined that since small changes in estimated “ordinary” income would result in significant changes inrecorded a deferred tax liability of approximately $293,000,000 related to the estimated annual effectiveacquired intangibles, offset by approximately $154,000,000 of other acquired deferred tax rate, the historical method would not provide a reliable estimate for the three- and nine-month periods ended September 30, 2020. Therefore, a discrete effective tax rate method was used to calculate taxes for the three- and nine-month periods ended September 30, 2020.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 of 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). 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 the Company’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 notacquired in the merger. As a consequence of utilizing the annual effective tax rate method to be realized. The valuation allowance onrecord tax provision impacts instead of utilizing the Company’s U.S. deferreddiscrete effective tax assets as ofrate method used in the quarter ended June 30, 2021, for the three months ended September 30, 2020 primarily relates to state net operating loss carryforwards and credits that2021, the Company estimates it may not be able to utilize in future periods.recorded Topgolf valuation allowances of approximately $32,743,000 which were previously released during the three months ended June 30, 2021. 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 has not 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 provisionexpense of $5,360,000$66,229,000 and $2,128,000$98,119,000 for the three and nine months ended September 30, 2020 and 2019,2021, respectively. This increase was primarily due to a significant increase in earnings for the third quarter of 2020 compared to the third quarter of 2019 combined with the calculation differences inherent in using a discrete effective rate for the period endedSeptember 30, 2020. As a percentage of pre-tax income, the Company's effective tax rate increasedwas 131.8% and 22.0% for the three and nine months ended September 30, 2021, respectively. In the three months ended September 30, 2021, the primary difference between the statutory rate and the effective rate relates to 9.3% inutilizing the third quarterannual effective tax rate method for the three months ended September 30, 2021 instead of 2020 compared to 6.4% inutilizing the third quarter of 2019, primarily due to changes in the mix of U.S. and foreign earnings and due to calculation differences inherent in using a discrete effective tax rate method which was used for the periodthree months endedSeptember June 30, 2020. The Company recorded an income tax provision of $6,580,000 and $18,892,000 for2021. In the nine months ended September 30, 20202021, the primary difference between the statutory rate and 2019, respectively. This decrease was primarily duethe effective rate relates to a reduction in earningsexcluding the book gain on pre-merger Topgolf shares for tax purposes offset by valuation allowances on the nine months ended September 30, 2020 compared to the same period in 2019.Company’s deferred tax assets.
At September 30, 2020,2021, the gross liability for income taxes associated with uncertain tax positions was $27,823,000.$27,265,000. Of this amount, $11,640,000$5,463,000 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 $428,000$463,000 during the


28


next 12 months. The gross liability for uncertain tax positions increased by $706,000 and $1,830,000$237,000 for the three and nine months ended September 30, 2020, respectively,2021 primarily due to increases in tax positions taken during the current quarter.quarter, as well as currency translation adjustments. The gross liability for uncertain tax positions decreased by $1,037,000 for the nine months ended September 30, 2021. The decrease was primarily due to an increase in effectively settled tax positions taken in the current year.
The Company recognizes interest and penalties related to income tax matters in income tax expense. For the three months ended September 30, 20202021 and 2019,2020, the Company's provision for income taxes includes a benefit of $46,000 and an expense of $110,000, and $47,000, respectively, and an expenserelated to the recognition of $163,000 and a benefit of $142,000, forinterest and/or penalties. For the nine months ended September 30, 2021 and 2020, the Company's provision for income taxes includes a benefit of $236,000 and 2019,an expense of $163,000, respectively, related to the recognition of interest and/or penalties. As of September 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 $1,833,000$996,000 and $1,669,000,$1,232,000, respectively.
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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.
As described in Note 5, on October 27, 2020 the Company entered into a Merger Agreement with Top golf. The Company is currently evaluating if this transaction will cause an ownership change under IRC 382. The Company cannot presently estimate the impact the merger will have on the realizability of its deferred tax assets as the Company lacks sufficient information to make a complete assessment at this time.
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. TheseHowever, these matters


29


are inherently unpredictable and the resolutions of these matters are subject to many uncertainties and the outcomes are not predictable with assurance. Consequently, management is unable to estimate the ultimate aggregate amount of monetary loss, amounts covered by insurance, or the financial impact that will result from such matters. In addition, the Company cannot assure that it will be able to successfully defend itself in those matters, or that any amounts accrued are sufficient. The Company does not believe that the matters currently pending against the Company will have a material adverse effect on the Company's consolidated business, financial condition, cash flows, or results of operations on an annual basis.
Unconditional Purchase Obligations
During the normal course of its business, the Company enters into agreements to purchase goods and services, including 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 September 30, 20202021 under these agreements is $70,699,000$85,143,000 over the next fourfive years and thereafter as follows (in thousands):
Remainder of 2020$36,774
202125,229
20227,085
20231,505
2024106
 $70,699

Remainder of 2021$31,167 
202232,429 
202320,759 
2024664 
2025124 
Thereafter— 
$85,143 
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 and guarantees to various lessors in connection with facility leases for certain claims arising from such facilities or leases, (iii) indemnities, commitments, and/or guarantees 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.contracts, and (v) indemnities, commitments, and/or guarantees in connection with the Company's credit facilities. 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 September 30, 20202021 was not material to the Company’s financial position, results of operations, or cash flows.


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Employment Contracts
In addition, theThe Company has made contractual commitments to each of its officers and certain other employees providing for severance payments, including salary continuation, upon the termination of employment by the Company without substantial cause or by the officer for good reason or non-renewal. In addition, in order to assure that the officers would continue to provide independent leadership consistent with the Company’s best interest, the contracts also generally provide for certain protections in the event of a change in control of the Company. These protections include the payment of certain severance benefits, such as salary continuation, upon the termination of employment following a change in control.
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Note 15. Share-Based Employee Compensation
As of September 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 Directors Stock Incentive Plan (the "2013 Directors Plan"). From time to time,and the 2021 Employment Inducement Plan, which was adopted in connection with the merger with Topgolf on March 8, 2021. This inducement plan has substantially the same terms as the Company's other stock plans. In general, the Company grants stock options, restricted stock units, performance share units,based awards, 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 and ASU No. 2014-12, which requires the measurement and recognition of compensation expense, net of an estimated forfeiture rate, for all share-based payment awards to employees and directorsdirectors.
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 into shares of Callaway common stock (together, the "replacement awards"). The Company included $33,051,000 in the consideration transferred in the merger for these replacement awards, which represents the fair value of the vested portion the replacement awards. The unvested portion of these replacement awards, which is associated with the future services that will be rendered in the post-combination period, is comprised of 3,168,000 shares underlying stock options with an acquisition date fair value of $5,343,000, and 188,000 shares of restricted stock awards with an acquisition date fair value of $4,794,000.
The fair value of the stock options was based on the Black-Scholes option-pricing model. The model uses various assumptions including a risk-free interest rate, an expected term, stock price volatility and a dividend yield. The table below summarizes the range and the weighted averages of the fair value assumptions used in the valuation as of March 8, 2021.
Assumptions:RangeWeighted Averages
Expected term (in years)0.3 - 7.13.7
Volatility43.0% - 85.4%55.1%
Risk free interest rate0.1% -1.3%0.6%
Dividend yield——
During the three and nine months ended September 30, 2021, the Company recognized compensation expense of $1,525,000 and $3,503,000, respectively, related to these awards, net of estimated fair values,forfeitures. At September 30, 2021, unamortized compensation expense related to stock options and ASU No. 2014-12 forrestricted stock awards that are subject to performance measures. ASC Topic 718 further requireswas $2,857,000 and $2,831,000, respectively, which will be recognized over 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.weighted average vesting period of 1.3 years and 1.4 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.five years. 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.
There were 0 shares underlying restricted stock units granted duringDuring the three months ended September 30, 2020 and 2019.2021, the Company granted 40,000 shares underlying restricted stock units at a weighted average grant-date fair value of $29.67 per share. There were no restricted stock units granted for the three months ended September 30, 2020. During the nine months ended September 30, 2021, the Company granted 1,149,000 shares underlying restricted stock units, including 612,000 shares in connection with the merger with Topgolf, at a weighted average grant-date fair value of $29.62. During the nine months ended September 30, 2020, and 2019, the Company granted 406,000 and 452,000 shares underlying restricted stock units respectively, at a weighted average grant-date fair value of $17.82 and $15.35 per share, respectively.share.
Total compensationCompensation expense, net of estimated forfeitures, recognized for restricted stock units was $1,907,000$3,840,000 and $1,176,000$1,907,000 for the three months ended September 30, 20202021 and 2019,2020, respectively, and $4,884,000$9,790,000 and $4,495,000,$4,884,000 for the nine months ended September 30, 2021 and 2020, and 2019, respectively.
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At September 30, 2020,2021, the Company had $8,993,000$29,298,000 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 1.82.1 years.
Performance Based Awards
PerformanceThe Company grants 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 adjusted earnings before interest, taxes, depreciation, amortization, 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 fixedPerformance 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 stock price on the date of grant. Stockgrant, and compensation expense, net of estimated forfeitures, is recognized on a straight-line basis over the vesting period. The expense recognized over the vesting period of three to five years, and is adjusted up or down based onaccording to the anticipatedlevel of performance levelexpected to be achieved during the performance period. IfAwards that do not achieve the minimum performance metrics are not probable of achievement during the performance period, compensation expense would be reversed. The awardsthreshold are forfeited if the threshold performance metrics are not achieved as ofat 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.


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Performance share units with total shareholder return requirements are awards that compare 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 of the Company and the Company's peer group. The Monte Carlo fair value is expensed on a straight-line basis over the vesting 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 226,000 shares underlying performance share units duringDuring the nine months ended September 30, 2020 and 2019, respectively,2021, the Company granted 1,440,000 shares underlying performance based awards, including 1,063,000 shares in connection with the merger with Topgolf, at a weighted average grant-date fair value of $19.66 and $15.17 per share, respectively. There were 0 shares underlying performance share units granted during three months ended September 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.
During the nine months ended September 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 0 performance share units subject to total shareholder return requirements granted during three months ended September 30, 2020 and 2019.
During the three months ended September 30, 2020 and 2019, the Company recognized total compensation expense, net of estimated forfeitures, for performance-based awards of $1,365,000 and $1,337,000, respectively, and, $3,182,000 and $4,983,000 for the nine months ended September 30, 2020 and 2019, respectively.$29.42. During the nine months ended September 30, 2020, the Company performedgranted 250,000 shares underlying performance based awards at a remeasurementweighted average grant-date fair value of these$21.44. There were no performance based awards granted during three months ended September 30, 2021 and 2020.
Compensation expense, net of estimated forfeitures, for performance based onawards was $6,100,000 and $1,365,000 for the Company’s most recent financial targets resulting in a reduction to expense. The decrease in expense reflects a decrease inthree months ended September 30, 2021 and 2020, respectively, and $13,820,000 and $3,182,000 for 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. nine months ended September 30, 2021 and 2020, respectively.

At September 30, 2020,2021, unamortized compensation expense related to these awards was $5,519,000,$50,257,000, which is expected to be recognized over a weighted-average period of 1.42.2 years.

Share-Based Compensation Expense
The table below summarizes the amounts recognized in the financial statements for the three and nine months ended September 30, 20202021 and 20192020 for share-based compensation, including expense for restricted stock units, performance based awards units and performance share unitsstock options (in thousands).
 Three Months Ended September 30, Nine Months Ended
September 30,
 2020 2019 2020 2019
    
Cost of sales$158
 $213
 $553
 $715
Operating expenses3,114
 2,300
 7,513
 8,763
Total cost of share-based compensation included in income, before income tax$3,272
 $2,513
 $8,066
 $9,478

Three Months Ended September 30,Nine Months Ended
September 30,
2021202020212020
Cost of products$345 $158 $892 $553 
Selling, general and administrative expenses10,867 2,930 25,548 7,044 
Research and development expenses263 184 683 469 
Total cost of share-based compensation included in income, before income tax11,475 3,272 27,123 8,066 
Income tax benefit2,754 785 6,510 1,936 
Total cost of employee share-based compensation, after tax$8,721 $2,487 $20,613 $6,130 
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 nonrecurringnon-recurring 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;


32


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.
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The following table summarizes the valuation of the Company’s foreign currency forward contracts and interest rate hedge agreements (see Note 17) that are measured at fair value on a recurring basis by the above pricing levels at September 30, 20202021 and December 31, 20192020 (in thousands):
 
Fair
Value
 Level 1 Level 2 Level 3
September 30, 2020       
Foreign currency forward contracts—asset position$2,701
 $—
 $2,701
 $—
Foreign currency forward contracts—liability position(2,440) —
 (2,440) —
        
Interest rate hedge agreements—liability position(19,505) —
 (19,505) —
 $(19,244) $—
 $(19,244) $—
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—liability position(8,894) —
 (8,894) —
 $(3,461) $—
 $(3,461) $—

Fair
Value		Level 1Level 2Level 3
September 30, 2021
Foreign currency forward contracts—asset position(1)
$4,855 $— $4,855 $— 
Foreign currency forward contracts—liability position(1)
(470)— (470)— 
Interest rate hedge agreements—liability position(2)
(12,224)— (12,224)— 
$(7,839)$— $(7,839)$— 
December 31, 2020
Foreign currency forward contracts—asset position(1)
$90 $— $90 $— 
Foreign currency forward contracts—liability position(1)
(1,553)— (1,553)— 
Interest rate hedge agreements—liability position(2)
(17,922)— (17,922)— 
$(19,385)$— $(19,385)$— 
(1)The fair value of the Company’s foreign currency forward contracts 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).


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Disclosures about the Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, net accounts receivable, accounts payable and accrued expenses, and other current liabilities, at September 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 September 30, 20202021 and December 31, 2020 (in thousands).
 September 30, 2021December 31, 2020
Carrying
Value		Fair
Value		Carrying
Value		Fair 
Value
Term Loan Facility(1)$438,000 $439,883 $441,600 $443,243 
Japan Term Loan Facility(2)14,379 13,381 18,390 16,083 
Convertible Notes(3)258,750 452,937 258,750 414,191 
U.S. Asset-Based Revolving Credit Facility(4)30,108 30,108 22,130 22,130 
Equipment Notes(5)25,546 24,777 31,822 29,385 
Topgolf Revolving Credit Facility(6)35,000 28,556 — — 
Mortgage Loans(7)46,522 52,546 — — 
Topgolf Term Loan(8)341,250 339,782 — — 
(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.
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 September 30, 2020 December 31, 2019
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair 
Value
Term Loan Facility(1)
$442,800
 $443,221
 $446,400
 $450,864
2020 Japan Term Loan Facility(2)
$18,966
 $18,966
 $0
 $0
Convertible Notes(3)
$258,750
 $349,561
 $0
 $0
Primary Asset-Based Revolving Credit Facility(4)
$28,813
 $28,813
 $114,480
 $114,480
Japan ABL Facility(4)
$1,422
 $1,422
 $30,100
 $30,100
Equipment notes(5)
$33,881
 $33,881
 $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 August 2020, the Company entered into the 2020 Japan 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.
(3)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.
(4)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.
(5)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.
Nonrecurring(2)In August 2020, the Company entered into the Japan Term Loan Facility. The fair value is categorized within Level 2 of the fair value hierarchy. The Company used discounted cash flows and market-based expectations for interest rates, credit risk, and the contractual terms of the debt to derive the fair value. See Note 7 for further information.
(3)In May 2020, the Company issued $258,750,000 of 2.75% Convertible Notes due in 2026. The fair value of this debt is based on quoted prices in secondary markets combined with quantitative pricing models, and is therefore categorized within Level 2 of the fair value hierarchy. For further discussion, see Note 7.
(4)The carrying value of the amounts outstanding under the Company's ABL Facility approximates the fair value due to the short-term nature of these obligations. The fair value of this debt is categorized within Level 2 of the fair value hierarchy based on the observable market borrowing rates. See Note 7 for information on the Company's credit facilities, including certain risks and uncertainties related thereto.
(5)The Company entered into equipment notes in 2017, 2019 and 2020 that are secured by certain equipment at the Company's golf ball manufacturing facility. The fair value of this debt is categorized within Level 2 of the fair value hierarchy. The Company used discounted cash flows and market-based expectations for interest rates, credit risk, and the contractual terms of the debt to derive the fair value. See Note 7 for further information.
(6)The carrying amount of the Topgolf Revolving Credit Facility approximates its fair value because the applicable interest rate is adjusted regularly based on current market conditions. See Note 7 for further information.
(7)The fair value of the mortgage loans is calculated based on the future payments under the mortgage agreement discounted at the incremental borrowing rate. See Note 7 for further information.
(8)The fair value of the Topgolf Term Loan is based on quoted market rate from the lender. See Note 7 for further information.
Non-recurring Fair Value Measurements
The Company measures certain assets at fair value on a nonrecurringnon-recurring 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 0no impairment losses recorded during the three and nine months ended September 30, 2020.2021.
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.


34


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 period in
38

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).income.
Foreign currency forward contracts, cross-currency debt swap contracts and interest rate hedge contracts are used only to meet the Company’s objectives of minimizing variability in the Company’s operating results arising from foreign exchange rate movements and changes in interest rates. The Company does not enter into foreign currency forward contracts, cross-currency debt swap contracts and interest rate hedge contracts for speculative purposes. The Company utilizes counterparties for its derivative instruments that it believes are credit-worthy at the time the transactions are entered into and the Company closely monitors the credit ratings of these counterparties.
The following table summarizes the fair value of the Company's derivative instruments as well as the location of the asset and/or liability on the consolidated condensed balance sheets at September 30, 20202021 and December 31, 20192020 (in thousands):
Balance Sheet Location 
Fair Value of
Asset Derivatives
Balance Sheet LocationFair Value of
Asset Derivatives
September 30, 2020 December 31, 2019September 30, 2021December 31, 2020
Derivatives designated as cash flow hedging instruments:    Derivatives designated as cash flow hedging instruments:
Foreign currency forward contractsOther current assets $158
 $53
Foreign currency forward contractsOther current assets$1,109 $37 
Derivatives not designated as hedging instruments:    Derivatives not designated as hedging instruments:
Foreign currency forward contractsOther current assets 2,543
 8
Foreign currency forward contractsOther current assets3,746 53 
    
Total asset positionTotal asset position $2,701
 $61
Total asset position$4,855 $90 
 Balance Sheet Location 
Fair Value of
Liability Derivatives
 September 30, 2020 December 31, 2019
Derivatives designated as cash flow hedging instruments:     
Foreign currency forward contractsAccounts payable and accrued expenses $225
 $24
      
Cross-currency debt swap agreementsAccounts payable and accrued expenses 0
 25
      
Interest rate hedge agreementsAccounts payable and accrued expenses 4,757
 1,865
 Other long-term liabilities 14,748
 7,030
   19,730
 8,944
Derivatives not designated as hedging instruments:     
Foreign currency forward contractsAccounts payable and accrued expenses 2,215
 741
      
Total liability position $21,945
 $9,685

Balance Sheet LocationFair Value of
Liability Derivatives
September 30, 2021December 31, 2020
Derivatives designated as cash flow hedging instruments:
Foreign currency forward contractsAccounts payable and accrued expenses$7 $38 
Interest rate hedge contractsAccounts payable and accrued expenses4,752 4,780 
Interest rate hedge contractsOther long-term liabilities7,472 13,142 
12,231 17,960 
Derivatives not designated as hedging instruments:
Foreign currency forward contractsAccrued AP and expenses463 1,515 
Total liability position$12,694 $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 September 30, 20202021 and December 31, 2019.


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2020.
Cash Flow Hedging Instruments
Foreign Currency Forward Contracts
The Company uses foreign currency derivatives designated as qualifying cash flow hedging instruments, including foreign currency forward contracts to help mitigate the Company's foreign currency exposure on intercompany sales of inventory to its foreign subsidiaries. These contracts generally mature within 12 months to 15 months from their inception. At September 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 $14,503,000. At December 31, 2019, the Company had 0 outstanding foreign currency forward contracts designated as cash flow hedge instruments.$14,632,000 and $756,000, respectively.
As of September 30, 2020,2021, the Company recorded a net gain of $904,000$2,196,000 in accumulated other comprehensive loss related to foreign currency forward contracts. Of this amount, net gains of $486,000 and $894,000$645,000 for the three months ended September 30, 2021 and net gains of $567,000 for the nine months ended September 30, 2020, respectively,2021, were removed from accumulated other comprehensive loss and recognized in cost of goods soldproducts for the underlying intercompany sales that were recognized, and net gains of $135,000
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$17,000 and $599,000$61,000 for the three and nine months ended September 30, 2020,2021, respectively, related to the amortization of forward points were removed from accumulated other comprehensive loss related to the amortizationand recognized in cost of forward points.products. There were 0no ineffective hedge gains or losses recognized during the three and nine months ended September 30, 2020.2021. Based on the current valuation, the Company expects to reclassify net gains of $588,000$1,299,000 from accumulated other comprehensive loss into net earnings during the next 12 months.
The Company recognized net gains of $413,000$486,000 and $222,000$894,000 in cost of goods sold forproducts in the three and nine months ended September 30, 2019,2020, respectively.
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 March 31, 2020, the Company unwound the cross currencycross-currency swap, and as of June 30, 2020 the Company determined that the forecasted transaction in connection with the underlying EUR denominated intercompany loan was no longer probable of occurring. As such, the Company discontinued the hedge and released net gains of $11,046,000 from accumulated other comprehensive income to other income (expense), net during the second quarter of 2020. The Company maintained the interest rate hedge related to the USD denominated Term Loan Facility in order to continue mitigating the risk of changes in interest rates. Over the life of the facility, the Company will receive variable interest payments from the counterparty lenders in exchange for the Company making fixed rate payments, without exchange of the underlying notional amount. As of September 30, 2020, theThe notional amount outstanding under the interest rate hedge contract was $196,851,000. As$194,847,000 and $196,350,000 as of September 30, 2021 and December 31, 2019,2020, respectively.
During the notional amount outstanding underthree and nine months ended September 30, 2021, the cross-currency debt swapCompany recorded a net loss of $146,000 and a net gain of $2,082,000, respectively, 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 $1,217,000 and $3,608,000 were relieved from accumulated other comprehensive loss and recognized in interest expense during the three and nine months ended September 30, 2021, respectively. Based on the current valuation, the Company expects to reclassify a net loss of $4,752,000 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 $1,198,000 and $2,644,000 in interest expense during the three and nine months ended September 30, 2020, respectively.
In connection with the cross-currency swap contract, during the nine months ended September 30, 2020, the Company recorded a remeasurement net gain of $15,081,000 in accumulated other comprehensive loss. There were no remeasurement gains or losses recorded during the three months ended September 30, 2020. During the three and nine months ended September 30, 2020, net gains of $0 and $18,510,000 respectively, were relieved from accumulated other comprehensive loss.loss, respectively. The recognition of these net gains into earnings is summarized as follows:
•Net gains of $0 and $11,046,000 related to the discontinuation of the cross-currency swap contract were recognized in other income (expense) in the three and nine months ended September 30, 2020. There were no net gains related to the discontinuation of the cross-currency swap contract in the three months ended September 30, 2020.
•Net gains of $5,735,000 related to foreign currency of $5,735,000 were recognized in other income (expense) in the nine months ended September 30, 2020. There were no net foreign currency gains or losses recognized in the three months ended September 30, 2020.
•Net gains of $0 and $1,730,000 were recognized in interest income during the three and nine months ended September 30, 2020, respectively.
During the three and nine months ended September 30, 2019, net gains of $9,868,000 and $12,119,000 were relieved from accumulated other comprehensive loss in connection with the cross currency swap, respectively. The recognition of these net gains and losses into earnings is summarized as follows:
Net gains of $1,579,000 and $3,865,000 were recognized in interest income in the three and nine months ended September 30, 2019, respectively.


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Net gains related to foreign currency of $8,289,000 and $8,254,000 were recognized in other income (expense) in the three and nine months ended September 30, 2019, respectively.
During the three and nine months ended September 30, 2020, the Company recorded net losses of $100,000 and $13,261,000, respectively, related to the remeasurement of the interest rate hedge contract in accumulated other comprehensive loss. Of these amounts, net losses of $1,198,000 and $2,644,000 were relieved from accumulated other comprehensive loss and recognized in interest expense during the three and nine months ended September 30, 2020, respectively. Based on the current valuation, the Company expects to reclassify aThere were no net loss of $4,766,000 related to thegains or losses recognized in interest rate hedge contract from accumulated other comprehensive loss into earningsincome during the next 12 months.three and nine months ended September 30, 2021.
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The following tables summarize the net effect of all cash flow hedges on the consolidated condensed financial statements for the three and nine months ended September 30, 20202021 and 20192020 (in thousands):
Gain/(Loss) Recognized in Other Comprehensive Income
(Effective Portion)
Three Months Ended
September 30,		Nine Months Ended
September 30,
Derivatives designated as cash flow hedging instruments2021202020212020
Foreign currency forward contracts$131 $(1,070)$2,196 $904 
Cross-currency debt swap agreements— — — 15,081 
Interest rate hedge agreements(146)(100)2,082 (13,261)
$(15)$(1,170)$4,278 $2,724 
 Gain/(Loss) Recognized in Other Comprehensive Income
(Effective Portion)		Gain/(Loss) Reclassified from Other Comprehensive Income into Earnings
(Effective Portion)
 Three Months Ended
September 30,		 Nine Months Ended
September 30,		Three Months Ended
September 30,		Nine Months Ended
September 30,
Derivatives designated as cash flow hedging instruments 2020 2019 2020 2019Derivatives designated as cash flow hedging instruments2021202020212020
Foreign currency forward contracts $(1,070) $464
 $904
 $1,037
Foreign currency forward contracts$662 $621 $628 $1,493 
Cross-currency debt swap agreements 0
 13,133
 15,081
 14,297
Cross-currency debt swap agreements— — — 18,510 
Interest rate hedge agreements (100) (2,662) (13,261) (10,559)Interest rate hedge agreements(1,217)(1,198)(3,608)(2,644)
 $(1,170) $10,935
 $2,724
 $4,775
$(555)$(577)$(2,980)$17,359 
  
Gain/(Loss) Reclassified from Other Comprehensive Income into Earnings
(Effective Portion)
  Three Months Ended
September 30,		 Nine Months Ended
September 30,
Derivatives designated as cash flow hedging instruments 2020 2019 2020 2019
Foreign currency forward contracts $621
 $556
 $1,493
 $930
Cross-currency debt swap agreements 0
 9,868
 18,510
 12,119
Interest rate hedge agreements (1,198) (150) (2,644) (194)
  $(577) $10,274
 $17,359
 $12,855


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 September 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 $106,474,000$116,252,000 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).


37


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 nine months ended September 30, 20202021 and 2019,2020, respectively, in addition to the derivative contract type (in thousands):
  
 Location of Net Gain/(Loss) Recognized in Income on Derivative Instruments Amount of Net Gain/(Loss) Recognized in Income on 
Derivative Instruments
Derivatives not designated as hedging instruments Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2020 2019 2020 2019
Foreign currency forward contracts Other expense, net $(4,639) $4,035
 $622
 $5,476

  
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
September 30,		Nine Months Ended
September 30,
2021202020212020
Foreign currency forward contractsOther income, net$2,792 $(4,639)$11,822 $622 
In addition, for the three months ended September 30, 20202021 and 2019,2020, the Company recognized a net foreign currency transaction gainsloss of $10,098,000$1,174,000 and lossesa gain of $10,051,000,$10,098,000, respectively, and net foreign currency transaction gainsloss of $7,857,000$4,241,000 and lossesa gain of $12,660,000,$7,857,000, respectively, for the nine months ended September 30, 20202021 and 2019,2020, related to transactions with its foreign subsidiaries, respectively.subsidiaries.
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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 nine months ended September 30, 2020.2021. Amounts are in thousands.
  Derivative Instruments Foreign Currency Translation Total
       
Accumulated other comprehensive loss, June 30, 2020, after tax $(14,792) $(25,000) $(39,792)
Change in derivative instruments (1,170) 0
 (1,170)
Net gains reclassified to cost of goods sold (621) 0
 (621)
Net gains reclassified to interest expense 1,198
 —
 1,198
Income tax expense on derivative instruments (66) 0
 (66)
Foreign currency translation adjustments 0
 9,128
 9,128
Accumulated other comprehensive loss, September 30, 2020, after tax $(15,451) $(15,872) $(31,323)
  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 2,724
 0
 2,724
Net gains reclassified to cost of goods sold (1,493) 0
 (1,493)
Net gains reclassified to other expense (16,781) 0
 (16,781)
Net gains reclassified to interest expense 915
 0
 915
Income tax benefit on derivative instruments 3,387
 0
 3,387
Foreign currency translation adjustments 0
 2,347
 2,347
Accumulated other comprehensive loss, September 30, 2020, after tax $(15,451) $(15,872) $(31,323)

Derivative InstrumentsForeign Currency TranslationTotal
Accumulated other comprehensive loss, June 30, 2021, after tax$(8,888)$(2,806)$(11,694)
Change in derivative instruments(15)— (15)
Net gains reclassified to cost of goods sold(661)— (661)
Net losses reclassified to interest expense1,217 — 1,217 
Income tax provision on derivative instruments(1,340)— (1,340)
Foreign currency translation adjustments— (12,929)(12,929)
Accumulated other comprehensive loss, September 30, 2021, after tax$(9,687)$(15,735)$(25,422)
Derivative InstrumentsForeign Currency TranslationTotal
Accumulated other comprehensive loss, December 31, 2020, after tax$(14,017)$7,471 $(6,546)
Change in derivative instruments4,278 — 4,278 
Net gains reclassified to cost of products(628)— (628)
Net losses reclassified to interest expense3,608 — 3,608 
Income tax provision on derivative instruments(2,928)— (2,928)
Foreign currency translation adjustments— (23,206)(23,206)
Accumulated other comprehensive loss, September 30, 2021, after tax$(9,687)$(15,735)$(25,422)
Note 19. Segment Information
TheOn March 8, 2021, the Company has 2 reportable operating segments:completed its merger with Topgolf. Topgolf is primarily a services-based business that provides hospitality offerings and golf entertainment experiences, which is uniquely different compared to the Company's Golf Equipment operating segment 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 segment. segments, the Company added a third operating segment for its Topgolf business. Therefore, as of September 30, 2021, the Company had 3 reportable operating segments: Topgolf, Golf Equipment and Apparel, Gear and Other.
The Topgolf operating segment is primarily comprised of service revenues and expenses for its Company-operated Topgolf venues equipped with technology-enabled hitting bays, multiple bars, dining areas and event spaces, as well as Toptracer ball-flight tracking technology used by independent driving ranges and broadcast television, and the Company's WGT digital golf game.
The Golf Equipment operating segment 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 consistconsists 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


38


goods products.
There arewere no significant intersegment transactions during the three and nine months ended September 30, 2021 or 2020.
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The tables below containscontain information utilized by management to evaluate its operating segments for the interim periods presented (in thousands).
Three Months Ended
September 30,		Nine Months Ended
September 30,
 2021202020212020
Net revenues:
Topgolf(1)
$333,783 $— $751,873 $— 
Golf equipment289,615 267,277 1,067,756 768,881 
Apparel, gear and other233,063 208,282 602,094 445,950 
Total net revenues$856,461 $475,559 $2,421,723 $1,214,831 
Income (loss) before income taxes:
Topgolf(1)
$23,928 $— $52,086 $— 
Golf equipment45,815 56,784 228,825 144,585 
Apparel, gear and other34,634 25,909 70,792 10,399 
Total segment operating income104,377 82,693 351,703 154,984 
Reconciling items(2)
(54,139)(24,901)94,630 (234,762)
Total income (loss) before income taxes$50,238 $57,792 $446,333 $(79,778)
Additions to long-lived assets:(3)
Topgolf$85,446 $— $225,583 $— 
Golf equipment8,976 1,616 24,760 21,356 
Apparel, gear and other7,036 3,508 18,196 16,774 
Total additions to long-lived assets$101,458 $5,124 $268,539 $38,130 
 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2020 2019 2020 2019
Net sales:       
Golf Equipment$267,277
 $210,502
 $768,881
 $826,474
Apparel, Gear and Other208,282
 215,715
 445,950
 562,648
 $475,559
 $426,217
 $1,214,831
 $1,389,122
Income (loss) before income taxes:       
Golf Equipment$56,784
 $23,124
 $144,585
 $148,782
Apparel, Gear and Other25,909
 34,877
 10,399
 68,909
Reconciling items(1)
(24,901) (24,825) (234,762) (90,352)
 $57,792
 $33,176
 $(79,778) $127,339
Additions to long-lived assets:(2)
       
Golf Equipment$1,616
 $7,648
 $21,356
 $20,989
Apparel, Gear and Other3,508
 6,783
 16,774
 15,465
 $5,124
 $14,431
 $38,130
 $36,454

(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, which are not utilized by management in determining segment profitability. Reconciling items for the three and nine months ended September 30, 2021 also include (i) transaction, transition and other non-recurring expenses in connection with the merger with Topgolf of $614,000 and $19,345,000, respectively; (ii) amortization and depreciation expense of $6,654,000 and $17,620,000, respectively, on the acquired intangible assets from the merger with Topgolf and the acquisitions of OGIO, TravisMathew and Jack Wolfskin, in addition to the fair value step-up of property, plant and equipment and the market valuation adjustment on operating leases in connection with the merger with Topgolf (see Note 6); and (iii) $510,000 and $1,990,000, respectively, of costs related to the implementation of new IT systems for Jack Wolfskin. The nine months ended September 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 nine months ended September 30, 2020 included (i) $1,235,000 and $3,592,000, respectively, of amortization expense on intangible assets from the acquisitions of OGIO, TravisMathew and Jack Wolfskin; and (ii) non-recurring costs of $5,088,000 and $12,526,000, respectively, including costs associated with the Company's transition to its new North America Distribution Center, costs associated with the acquisition of Topgolf, and the implementation of new IT systems for Jack Wolfskin, and severance related to the Company's cost reduction initiatives in response to the COVID-19 pandemic. In addition, the nine months ended September 30, 2020 includes an impairment charge of $174,269,000 recognized in the second quarter of 2020 related to Jack Wolfskin (see Note 9), and a net gain of $11,046,000 related to a cash flow hedge that was discontinued during the second quarter of 2020 (see Note 17).
(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 nine months ended September 30, 2020 compared to September 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) and a $4,198,000 increase in interest expense. These increases were partially offset by a $26,028,000 increase in other income primarily due to foreign currency and hedging contract gains, combined with $10,703,000 of amortization expense recognized in 2019 related to the inventory valuation step-up from Jack Wolfskin acquisition.
(2)Additions to long-lived assets are comprised of purchases of property, plant and equipment.

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Note 20. Subsequent Events
Subsequent to September 30, 2021, the Company announced that it has completed a $30,000,000 minority investment in Five Iron Golf, an emerging, privately-owned, urban indoor golf and entertainment company offering simulator rentals, golf lessons, custom club fittings, social events and a curated food and beverage menu. This investment will be accounted for at cost less impairments, adjusted for observable changes in fair value.

44
39


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 nine months ended September 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 nine months ended September 30, 2019,2020, non-GAAP financial results exclude certain non-cash charges, including purchase accounting amortization expense associated withan impairment charge to write-down the goodwill and trade name of Jack Wolfskin, acquisition andas well as 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 and 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 sellsCallaway is a full line of high qualitytechnology-enabled golf company delivering leading golf equipment, apparel and entertainment, with a portfolio of global brands including Callaway Golf, Topgolf, Odyssey, OGIO, TravisMathew and Jack Wolfskin. The Company's golf products, comprised of Callaway Golf branded golf clubs and golf balls and apparel, gear and other products. The Company designs its golf productsOdyssey branded putters, are designed 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 designsThe Company's soft goods are largely designed and sellsdeveloped internally, and are comprised of Callaway Golf, OGIO, TravisMathew and Jack Wolfskin branded products. Callaway Golf soft goods offers a full line of high quality soft goods, includingpremium golf bags, apparel, footwear, gear and other golf accessories. In 2017, the Company expanded its soft goods lines with the acquisitions of OGIO and TravisMathew. Under theThe 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,Under the Jack Wolfskin brand, the Company completed the acquisitionoffers a full line of JW Stargazer Holding GmbH, the owner of the international, premium outdoor apparel, gear and accessoriesaccessories.
On March 8, 2021, the Company completed its merger with Topgolf, a leading technology-enabled golf entertainment business that offers an innovative platform comprised of state-of-the-art open-air golf and entertainment venues, in addition to proprietary ball-tracking technology under the Toptracer brand Jack Wolfskin. This acquisition further enhancedand an innovative media platform. The Company believes the combined company will benefit from a compelling family of brands that are sold across multiple channels including retail, venues, e-commerce and digital communities.
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The Topgolf 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. As of September 30, 2021, Topgolf had 66 Company-operated venues and one Company-operated lounge in the United States, with an additional eight venues under construction in the United States, and three Company-operated venues in the United Kingdom, with an additional one venue under construction in the United Kingdom. Topgolf receives a royalty from its franchised locations. As of September 30, 2021, Topgolf had three franchised venues (in Australia, Mexico and the United Arab Emirates) and one licensed lounge (in China), with an additional three franchised venues under construction (in Germany, Thailand and China).
In addition to its venue business, 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 September 30, 2021, Topgolf had over 13,000 Toptracer bays installed.
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 lifestyle categoryconsolidated condensed financial statements for the three and provides a platform for future growth in the active outdoornine months ended September 30, 2021 is from July 5, 2021 through October 3, 2021 and urban outdoor categories. The Company's soft goods under the Callaway, OGIO, TravisMathew and Jack Wolfskin brands are largely designed and developed internally.
OnMarch 8, 2021 through October 27, 2020, the Company entered into a definitive agreement to acquire Topgolf International, Inc. (“Topgolf”) in an all-stock transaction, pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, Topgolf and 51 Steps, Inc., a Delaware corporation and wholly-owned subsidiary of Callaway (“Merger Sub”). The Merger Agreement provides that, among other matters, and subject to the satisfaction or waiver of the conditions set forth in the


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Merger Agreement, the Company will acquire Topgolf by way of a merger of Merger Sub with and into Topgolf, with Topgolf surviving as a wholly-owned subsidiary of Callaway (the “Merger”). We currently estimate that we will issue approximately 90 million shares of our common stock to the stockholders of Topgolf (excluding the Company) for 100% of the outstanding equity of Topgolf, using an exchange ratio3, 2021, respectively. Additionally, based on an equity value of Topgolf of approximately $1.986 billion (or approximately $1.745 billion excluding Topgolf shares currently held by the Company) and a price per share of the Company’s common stock fixed at $19.40 per share. Upon completion of the Merger, the former Topgolf stockholders (other than the Company) are expected to own approximately 48.5%Company's assessment of the combined company on a fully diluted basis. The Merger is expected to closebusiness, the Company modified the presentation of its consolidated condensed statements of operations for the three and nine months ended September 30, 2021 and 2020. For further information about the merger with Topgolf see Note 6 "Business Combinations" in the first quarterNotes to Consolidated Condensed Financial Statements in Part I, Item 1 of 2021, subject to shareholder approval and other customary conditions.this Form 10-Q.
Operating and Reportable Segments
The Company has twothree operating and reportable segments, namely Golf Equipment, and Apparel, Gear and Other.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 Jack Wolfskin outdoor apparel, gear and accessories business, the TravisMathew golf and lifestyle apparel and accessories business, and the Callaway soft goods and OGIO businesses, which consistconsists 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” toin 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 relative significance of the components of cost of sales doesproducts do 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
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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 Endedand Nine months ended September 30, 20202021 and 2019—2020—Segment Profitability" and "Operating Segment Results for the Nine Months Ended September 30, 2020 and 2019—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.year. Sales


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of outdoor apparel, footwear and equipment related to the Jack Wolfskin business focuses primarily on outerwear and consequently experiences stronger sales for such products during the cold-weather months and the corresponding prior sell-in periods. Therefore, sales of Jack Wolfskin 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 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.
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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 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.
Executive Summary to the Results of Operations and Financial Condition
Net sales in the first nine months of 2020 decreased $174.3 million or 12.5% to $1,214.8 million compared to the same period in 2019. This decrease reflects the challenges the Company faced primarily during the first half of 2020, at the height of the worldwide regulatory restrictions around COVID-19, which included the temporary closure of the Company’s retail locations, manufacturing facilities and distribution centers at varying times. The Company began to see signs of improvement coming out of the second quarter of 2020, and in the third quarter of 2020,2021 represented another period of record results for the Company from both a revenue and operating income perspective, as Topgolf experienced record sales due to an unprecedentedstrong walk-in traffic and social events bookings, and strong demand for the Company’s golf equipment particularlyand apparel products continued. The strong quarterly results built upon the momentum from earlier in the United States and Europe, combined with a significantly faster than anticipated recovery in its soft goods business. This surge in the popularity of golf2021, resulted in net salesrevenue of $475.6$856.5 million in the third quarter of 2020, a $49.3and $2,421.7 million or 11.6% increase compared to the third quarter of 2019. Net sales of golf equipment increased $56.8 million or 27.0% to $267.3 million in the third quarter of 2020 due to increased interest in the game of golf, as it supports an active and healthy way of life that is compatible with social distancing. This increase was slightly offset by a decline in sales of soft goods, which decreased by $7.4 million or 3.4% to $208.3 million in the third quarter of 2020. Despite this decline, soft goods sales are recovering faster than anticipated since the end of the second quarter of 2020, particularly the Company’s TravisMathew and Jack Wolfskin brands, which have benefited from increased outdoor consumer activity. Although the Company anticipates some level of volatility to continue into the fourth quarter of 2020, the Company is encouraged that sales in all of its businesses are improving.
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 third quarter and the first nine months of 2020, the Company realized savings in operating expenses of $13.7 million (9.1%) and $63.9 million (13.3%), 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. Additionally, in May 2020, the Company issued convertible senior notes, with net proceeds to the Company of approximately $218 million. As the result of the improved business performance, cost cutting efforts, and the cash from the convertible notes, the Company’s liquidity, including cash and availability under its credit facilities, increased to $636.9 million as of September 30, 2020 compared to $340.2 million as of September 30, 2019.
The Company’s diluted earnings per share for the third quarter of 2020 was $0.54 compared to $0.32 in the third quarter of 2020. Earnings per share in the first nine months of 2020 resulted in a loss per share of $0.92 compared to diluted earnings per share of $1.13 in the comparative period of 2019. Excluding the impairment charge the Company recorded on the Jack Wolfskin goodwill and trade name during the second quarter of 2020, and other non-recurring and non-cash charges discussed in more detail below, on a non-GAAP basis, the Company’s diluted earnings per share was $0.60 and $0.98 in the third quarter and first nine months of 2020,2021, respectively, which increased $380.9 million (80.1%) and $1,206.9 million (99.3%) compared to non-GAAP diluted earnings per share of $0.98 and $1.35 in the respective comparative periods in 2020.
From an operating segment perspective, Topgolf performed exceptionally well during the third quarter and first nine months of 2019.


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Three-Month Periods Ended September 30, 20202021 since the merger on March 8, 2021. This resulted in incremental revenue of $333.8 million in the third quarter and 2019
Net sales$751.9 million in the first nine months of 2021. The Company continues to be excited by the growth opportunity embedded within the Topgolf business and feels it will be a strong contributor to overall growth for the Company and for the industry as more consumers are introduced to golf through Topgolf venues. The Company's Golf Equipment and Apparel, Gear and Other operating segments delivered strong results, despite the supply chain disruptions experienced during the third quarter of 20202021, as demand remained high for golf clubs and balls in addition to the Company's soft goods brands. As a result, net revenues for Golf Equipment increased $49.4$22.3 million (11.6%(8.3%) to $475.6$289.6 million and $299.0 million (38.9%) to $1,067.5 million for the three and nine months ended September 30, 2021, respectively, and net revenues for Apparel, Gear and Other increased $24.8 million (11.9%) to $233.1 million and $156.0 million (35.0%) to $602.0 million for the three and nine months ended September 30, 2021, respectively.
Total operating income increased $12.5 million (19.7%) in the third quarter of 2021 to $76.0 million, compared to $426.2$63.5 million in the third quarter of 2019. This improvement was largely driven by strong demand for golf equipmentthe prior year period, primarily due to incremental operating income of $23.9 million resulting from the surgeaddition of the Topgolf business for the full third quarter, combined with an $8.7 million (33.6%) increase in popularity of golf, as consumers looked to engage in outdoor activities that are compatible with social distancing.Apparel, Gear and Other. This increase was partially offset by a decline of $11.0 million (19.4%) in soft goods sales, primarilyGolf Equipment, which was impacted by higher freight costs due to the ongoing shipping container shortages and port delays in the U.S., combined with an overall increase in operating expenditures in the third quarter of 2021 compared to the same period in 2020, as the Company gradually returns to more normal levels of spending in order to support a declinelarger overall business.
Looking ahead, the Company believes the business is well-positioned for both near-term and long-term growth as the Topgolf business continues to expand, Golf Equipment maintains its leadership position within the golf industry and the Apparel brands continue to gain increased exposure. The Company believes that its unique diversified business portfolio will continue to deliver strong results despite increased freight costs, staffing challenges and inflationary pressures, and is optimistic about the long-term growth prospects for the business.
Three-Month Periods Ended September 30, 2021 and 2020
Net Revenues
Net revenues for the third quarter of 2021 increased $380.9 million (80.1%) to $856.5 million compared to $475.6 million in retail traffic causedthe third quarter of 2020. This increase was driven by COVID-19,incremental net revenues of $333.8 million due to the merger with Topgolf, and higher-than-expected strength across both the Golf Equipment and Apparel, Gear and Other operating segments, which negatively impactedincreased $22.3 million (8.3%) and $24.8 million (11.9%), respectively, compared to the third
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quarter of 2020. This increase reflects the continued popularity of and high demand for the game of golf as well as other outdoor activities. Net revenues from the Company's retailGolf Equipment and wholesale channels. By operating segment,Apparel, Gear and Other businesses increased significantly across all product categories and in all major geographic regions, despite supply chain challenges during the third quarter of 2021. Net revenues in the third quarter of 2020 net sales of Golf Equipment increased $56.8 million or 27.0% to $267.3 million, and net sales of Apparel, Gear and Other declined $7.4 million or 3.4%, both comparedwere negatively impacted by a decline in retail traffic due to the third quarter of 2019. Fluctuations in foreign currencies had a favorable impact on net sales of $8.2 million in the third quarter of 2020.COVID-19 pandemic.
The Company’s net salesrevenues by operating segment are presented below (dollars in millions):
Three Months Ended September 30,Growth
 20212020DollarsPercent
Net revenues:
Topgolf$333.8 $— $333.8 n/a
Golf equipment289.6 267.3 22.3 8.3 %
Apparel, gear and other233.1 208.3 24.8 11.9 %
$856.5 $475.6 $380.9 80.1 %
 Three Months Ended September 30, Growth/(Decline)
 2020 2019 Dollars Percent
Net sales:       
Golf Equipment$267.3
 $210.5
 $56.8
 27.0 %
Apparel, Gear and Other208.3
 215.7
 (7.4) -3.4 %
 $475.6
 $426.2
 $49.4
 11.6%
For further discussion of each operating segment’s results, see "Operating Segment Results for the Three Months Ended
September 30, 20202021 and 2019"2020" below.
Net salesrevenues information by region is summarized as follows (dollars in millions):
Three Months Ended September 30,GrowthConstant Currency Growth vs. 2020
 20212020DollarsPercentPercent
Net revenues:
United States$552.9 $214.6 $338.3 157.6 %157.6%
Europe157.2 134.7 22.5 16.7 %14.2%
Japan63.4 56.5 6.9 12.2 %16.5%
Rest of world83.0 69.8 13.2 18.9 %14.5%
$856.5 $475.6 $380.9 80.1 %79.2%
 Three Months Ended September 30, Growth/(Decline) Constant Currency Growth/( Decline) vs. 2019
 2020 2019 Dollars Percent Percent
Net sales:         
United States$214.6
 $161.6
 $53.0
 32.8% 32.8%
Europe134.7
 133.4
 1.3
 1.0% -3.9%
Japan56.6
 64.2
 (7.6) -11.8% -13.0%
Rest of World69.7
 67.0
 2.7
 4.0% 2.5%
 $475.6
 $426.2
 $49.4
 11.6% 9.7%
Net salesrevenues in the United States increased $53.0$338.3 million (32.8%(157.6%) to $214.6$552.9 million during the third quarter of 20202021 compared to $161.6$214.6 million in the third quarter of 2019. This increase was largely driven by an increase in golf equipment sales.2020. The Company’s sales in regions outside of the United States decreased $3.6increased $42.6 million (1.4%(16.3%) to $261.0$303.6 million during the third quarter of 20202021 compared to $264.6$261.0 million in the third quarter of 2019. This decrease was largely driven by a $7.6 million (-11.8%) decline2020. The increase in Japan due to a decrease in product launchesboth domestic and international net revenue in the third 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 soft goods businesses in the United States and Europe, respectively. Net revenues in the third quarter of 2020, comparedprimarily with respect to soft goods, were negatively impacted by a decline in retail traffic due to the third quarter of 2019.COVID-19 pandemic. Foreign currency fluctuations had a favorable impact of $8.2$4.0 million on net salesrevenues during the third quarter of 20202021 relative to the same period in the prior year.
Gross profitCosts and Expenses
Cost of products increased $9.3$13.6 million (4.9%) to $200.7$288.4 million in the third quarter of 2021 compared to $274.8 million in the same period in 2020. The Company’s cost of products are highly variable in nature and this increase is due to the significant increase in sales volumes in the third quarter of 2021, combined with an increase in freight and overall commodity costs due to the supply chain challenges experienced during the third quarter of 2021. In the third quarter of 2020, sales volumes were significantly lower due to the business disruptions caused by the COVID-19 pandemic.
Costs of services of $40.1 million consist primarily of the cost of food and beverage sold in the Company’s Topgolf venues as well as costs associated with licensing the Company's Toptracer ball-flight tracking technology.
Other venue expenses of $215.8 million consist primarily of Topgolf venue related employee costs, rent, depreciation and amortization, utilities, and other costs associated with Topgolf venues.
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Selling, general and administrative expenses increased $90.6 million to $217.7 million (25.4% of net revenues) in the third quarter of 2021 compared to $127.1 million (26.7% of net revenues) in the third quarter of 2020. This increase reflects incremental expenses of $47.0 million related to the merger with Topgolf completed in March 2021. The remaining $43.6 million was primarily due to a gradual increase in spending levels back toward normal pre-pandemic levels in 2021, costs associated with the start up of the Company's new Korea apparel business and expansion of the TravisMathew business as well as increased corporate costs to support a larger organization. In the third quarter of 2020, general expenditures were lower due to certain cost savings initiatives that the Company implemented in response to the various restrictions imposed by the COVID-19 pandemic.
Research and development expenses increased $5.7 million to $15.8 million (1.8% of net revenues) in the third quarter of 2021 compared to $10.1 million (2.1% of net revenues) in the third quarter of 2020. This increase was primarily due to a $2.0 million increase in employee costs combined with incremental expenses of $1.7 million related to the merger with Topgolf completed in March 2021.
Venue pre-opening costs of $2.7 million 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 venue performance. The Company expects to continue to incur 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.
Other Income and Expense
Interest expense increased $15.9 million to $28.8 million in the third quarter of 2021 compared to $12.9 million in the third quarter of 2020 compared to $191.4 million in the third quarter of 2019. Gross profit as a percentage of net sales ("gross margin") decreased 270 basis points to 42.2% in the third quarter of 2020 compared to 44.9% in the third quarter of 2019. The decline in gross margin was driven primarily by the negative impact of COVID-19 on the Company’s soft goods retail sales (which generally have higher gross margins), and inventory reduction initiatives. These decreases were partially offset by the favorable impact of changes in foreign currency rates in the third quarter of 2020 compared to the same period in 2019, and a higher mix of e-commerce sales, which generally also 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 September 30, 2020 and 2019—Segment Profitability" below.


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Selling expenses decreased $8.1 million to $93.9 million (19.7% of net sales) in the third quarter of 2020 compared to $102.0 million (23.9% of net sales) in the third quarter of 2019. This 8.0% decrease was primarily due the Company's planned cost reductions in response to the COVID-19 pandemic, including a $5.5 million reduction in travel and entertainment and employee costs.
General and administrative expenses declined $3.2 million to $33.2 million (7.0% of net sales) in the third quarter of 2020 compared to $36.4 million (8.5% of net sales) in the third quarter of 2019. This 8.8% decrease was primarily due to a $1.9incremental interest of $15.7 million reduction in non-recurring costs, primarily related to business integration costs incurred in the third quarter of 2019 in connection with the Jack Wolfskin acquisition, a $1.8 million decrease in bad debt expense, and a $1.4 million decline in employee costs and travel expenseDLF obligations assumed as a resultpart of the Company's planned cost reduction initiatives implemented in the second quarter of 2020. These decreases were partially offset by an increase in legal and other professional fees.
Research and development expenses decreased $2.4 million to $10.1 million (2.1% of net sales) in the third quarter of 2020 compared to $12.5 million (2.9% of net sales) in the third quarter of 2019, primarily due to declines of $1.4 million in employee costs and $0.4 million in employee travel as a result of the Company's planned cost reduction initiatives implemented in the second quarter of 2020.
Interest expense increased by $3.3 million to $12.9 million in the third quarter of 2020 compared to $9.6 million in the third quarter of 2019 primarily due to an increase in the Company's net debt position, primarily resulting from the issuance of $258.8 million in convertible notes in May 2020.Topgolf merger. See Note 67 “Financing Arrangements” toin the Notes to Consolidated Condensed Financial Statements included in Part I, Item 1, of this Form 10-Q.
Other income increased by $4.8decreased $4.0 million to $7.0$3.0 million in the third quarter of 2021 compared to $7.0 million in the third quarter of 2020 compared to $2.2 million in the third quarter of 2019, primarily due to an increase$11.3 million decrease in net foreign currency transaction gains, partially offset by a decrease$7.4 million increase in net gains from non-designated foreign currency hedging contractscontract gains.
Income Taxes
The provision for income taxes increased $60.8 million to $66.2 million in the third quarter of 20202021, compared to the third quarter of 2019.
The Company’s provision for income taxes increased by $3.3 million to $5.4 million in the third quarter of 2020, compared to $2.1$5.4 million in the third quarter of 2019.2020. As a percentpercentage of pre-tax income, the Company’s incomeeffective tax rate increased to 9.3%was 131.8% in the third quarter of 20202021 compared to 6.4%9.3% in the third quarter of 20192020. This increase was primarily due to a shiftthe impact of using the annual effective tax rate method for three months ended September 30, 2021 compared to using the discrete effective tax rate method for the three months ended June 30, 2021. There are many items causing volatilty in the mix of foreign versus domestic earnings relative toCompany’s income tax rate during its interim periods this year. However, the prior year. Company is forecasting an annualized rate for 2021 in the low-twenties which more closely aligns with its statutory rate. For further discussion see Note 13 “Income Taxes” toin the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q.
Net Income (Loss)
Net income for the third quarter of 2020 increased $21.42021 decreased $68.4 million to $52.4a net loss of $16.0 million compared to $31.0net income of $52.4 million in the third quarter of 2019.2020. Diluted earnings per share increased $0.22decreased$0.63 to a loss per share of $0.09 in the third quarter of 2021 compared to earnings per share of $0.54 in the third quarter of 2020 compared to $0.32 in the third quarter of 2019.2020.
On a non-GAAP basis, excluding the after-tax non-cash intangible amortization expenses related toitems described in 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 September 30, 20202021 would have been $58.0$26.3 million and $0.60,$0.14 per share, respectively, compared to net income of $34.3$59.2 million and diluted earnings$0.61 per share, of $0.36respectively, for the comparative period in 2019. The increase in non-GAAP earnings in 2020 was primarily due to an increase in operating income resulting from an increase in net sales2020. Fully diluted shares were 193.9 million shares of common stock in the third quarter of 20202021, an increase of 97.3 million shares compared to 96.6 million shares in the third quarter of 2019,2020. The increased share count is primarily related to the issuance of additional shares in connection with the Topgolf merger. The decrease in non-GAAP earnings in 2021 resulted primarily from an $11.0 million decline in Golf Equipment operating income driven by higher freight costs and operating expenses, partially offset by an increase in sales volume, in addition to a $15.9 million increase in interest expense related to the impactaddition of Topgolf and a $3.9 million net decrease in foreign currency gains compared to the Company's planned cost reduction initiatives implementedprior year. These decreases were partially offset by increases of $23.9 million in the second quarter of 2020.

incremental Topgolf operating income and $8.7 million in Apparel, Gear and Other operating income.

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44


The table below presents a reconciliation of the Company's as-reported results for the three months ended September 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 September 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(5)
Net income (loss)$(16.0)$(5.8)$(2.0)$(1.7)$(32.8)$26.3 
Diluted earnings (loss) per share$(0.09)$(0.03)$(0.01)$(0.01)$(0.18)$0.14 
Weighted-average shares outstanding186.0186.0186.0186.0186.0193.9
 Three Months Ended September 30, 2020 
 As Reported 
Non-Cash Intangible Amortization Expense(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$52.4
 $(1.0) $(1.9) $(2.7) $58.0
 
           
Diluted earnings (loss) per share$0.54
 $(0.01) $(0.02) $(0.03) $0.60
 
Weighted-average shares outstanding96.6
 96.6
 96.6
 96.6
 96.6
 
 Three Months Ended September 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$31.1
 $(0.9) $(2.3) $34.3
 
         
Diluted earnings (loss) per share$0.32
 $(0.01) $(0.03) $0.36
 
Weighted-average shares outstanding96.3
 96.3
 96.3
 96.3
 
Three Months Ended September 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)$52.4 $(1.0)$(1.9)$(3.9)$59.2 
Diluted earnings (loss) per share$0.54 $(0.01)$(0.02)$(0.04)$0.61 
Weighted-average shares outstanding96.6 96.6 96.6 96.6 96.6 
(1)Includes the non-cash amortization expense of intangible assets in connection with the acquisitions of Jack Wolfskin, TravisMathew and OGIO.
(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, and severance charges associated with workforce reductions due to the COVID-19 pandemic.
(4)Represents non-recurring costs associated with the acquisition of Jack Wolfskin completed in January 2019.
(1)Includes the non-cash amortization expense of intangible assets in connection with the acquisitions of Jack Wolfskin, TravisMathew and OGIO. In addition, the third 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 market valuation adjustment on operating leases assumed from Topgolf.
(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 third quarter of 2021 primarily include 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 and Topgolf. Other non-recurring items for the third quarter of 2020 primarily include redundant costs associated with the Company's transition of its North America distribution center to a new facility, costs associated with the acquisition of Topgolf, implementation costs for new IT systems for Jack Wolfskin, and severance charges associated with workforce reductions due to the COVID-19 pandemic.
(4)As Topgolf's losses exceed Callaway's income in prior years, the Company has recorded a valuation allowance against certain of its deferred tax assets until the Company can demonstrate cumulative consolidated earnings.
(5)Non-GAAP diluted earnings per share for the three months ended September 30, 2021 was calculated using the diluted weighted average outstanding shares, as earnings on a non-GAAP basis resulted in net income after giving effect to pro forma adjustments.
Operating Segment Results for the Three Months Ended September 30, 20202021 and 20192020
As a result of the Topgolf merger, the Company now has three operating segments, namely Topgolf, Golf Equipment; and Apparel, Gear and Other.
Topgolf
Topgolf added an incremental $333.8 million to the Company's consolidated net revenues for the third quarter of 2021, primarily comprised of $313.6 million from the domestic venue business, due to strong domestic venue walk-in traffic and better-than-expected event bookings. This also reflects two new incremental venue openings during the third quarter of 2021, Net revenues from other Topgolf business lines of $20.2 million were driven by Toptracer bay licensing
51

revenue during the third quarter of 2021. Revenues from Topgolf's other business lines also include digital content creation and sponsorship operations, and the WGT digital golf game.
Net revenues for the Topgolf operating segment is summarized as follows (dollars in millions):
Three months ended September 30, 2021
Net revenues:
Venues$313.6 
Other business lines20.2
$333.8 
Golf Equipment
Golf Equipment net salesrevenues increased $56.8$22.3 million (8.3%) to $267.3$289.6 million in the third quarter of 2021 compared to $267.3 million in the third quarter of 2020 compared to $210.5 million in the third quarter of 2019 due to a $41.4$19.9 million (24.6% (9.5%) increase in golf club sales and a $15.4$2.4 million (36.2%(4.1%) increase in golf ball sales. This improvement was primarily due to an increaseThese increases were driven by growth in sales volume across all product categories resulting from the continued popularity for the game of golf as a safe outdoor activity compatible with social distancing, combined with an improvementand high demand for golf products, which outweighed the global supply chain disruptions during the third quarter in the Company's e-commerce business, which increased significantly compared to2021. Net revenues of golf equipment in the third quarter of 2019.2020 were negatively impacted by the decline in retail traffic due to the COVID-19 pandemic.
Net sales informationrevenues for the Golf Equipment operating segment by product category is summarized as follows (dollars in millions):
Three Months Ended
September 30,		Growth
 20212020DollarsPercent
Net revenues:
Golf clubs$229.3 $209.4 $19.9 9.5 %
Golf balls60.3 57.9 2.4 4.1 %
$289.6 $267.3 $22.3 8.3 %
 Three Months Ended
September 30,		 Growth
 2020 2019 Dollars Percent
Net sales:       
Golf Clubs$209.4
 $168.0
 $41.4
 24.6%
Golf Balls57.9
 42.5
 15.4
 36.2%
 $267.3
 $210.5
 $56.8
 27.0%
Apparel, Gear and Other
The $41.4Net revenues of Apparel, Gear and Other increased $24.8 million (24.6% (11.9%) increaseto $233.1 million in netthe third quarter of 2021 compared to $208.3 million in the third quarter of 2020. Apparel sales increased $24.6 million (19.6%) and sales of golf clubs to $209.4gear, accessories and other increased $0.2 million for (0.2%) in the third quarter ended September 30, 2020,of 2021 compared to $168.0 million in the comparable period in 2019, was primarily due to an increase in sales volume across all product categories, combined with


45


an increase in average selling prices in the woods and putters product categories, partially offset by a decline in the irons product category.third quarter of 2020. The increase in Apparel, Gear & Other was due to sales volumegrowth across all brands compared to the third quarter of 2020 led by the TravisMathew brand, despite global supply chain challenges during the third quarter of 2021. The increase in Gear, Accessories and Other was driven by increases across all golf accessory categories for the Callaway brand, headwear and footwear for TravisMathew, and footwear for Jack Wolfskin. Net revenues in the third quarter of 2020 were negatively impacted by the decline in retail traffic due to the COVID-19 pandemic.
The increase in TravisMathew sales was driven by strong brand momentum across all sales channels. The Callaway brand increased due to a significant increase in demand for golf accessories driven by the heightened popularity of the game of golf combined with the success of the Callaway branded product in the Asian markets. The increase in Jack Wolfskin sales was driven by an increase in popularityretail sales combined with the wholesale business in golf as a result of heightened demand for outdoor, socially-distanced activities. The increase in average selling prices in the woods and putters categories was primarily due to the current year launch of the Mavrik line of fairway woods, which have a higher average selling price compared to the Epic Flash fairway woods launched in the prior year, and the Triple Track and Stroke Lab Black putters, which launched at a higher price compared to the Stroke Lab putters launched in the prior year. The decline in the average selling prices of irons was primarily due to lower average selling prices of Mavrik irons launched in the current year compared to the Apex and Epic Forged Star irons launched in 2019.Europe.
Net sales of golf balls increased $15.4 million (36.2%) to $57.9 million for the quarter ended September 30, 2020 compared to $42.5 million in the comparable period in 2019, primarily due to increases in sales volume and average selling prices. The increase in sales volume was driven by an increase in popularity of golf as a result of heightened demand for outdoor, socially-distanced activities. The increase in average selling prices was due to an increase in sales of the Chrome Soft 2020 line of golf balls launched in the current year, which have higher selling prices compared to the predecessor models sold in the prior year.
Apparel, Gear and Other
Net sales of Apparel, Gear and Other decreased $7.4 million to $208.3 million in the third quarter of 2020 compared to $215.7 million in the third quarter of 2019 due to a $14.4 million (10.3%) decrease in apparel sales, partially offset by a $7.0 million (9.2%) increase in sales of gear, accessories and other. The decrease in apparel sales was primarily due to a decline in Jack Wolfskin apparel sales in Europe and China. While sales of Jack Wolfskin apparel improved in the third quarter of 2020 compared to the second quarter in 2020, sales are down compared to the third quarter of 2019 due to a decline in retail traffic caused by COVID-19, which impacted sales in the retail and wholesale channels. This decrease was partially offset by an increase in sales of TravisMathew apparel products, which was primarily driven by significant increases in the e-commerce and wholesale channels compared to the third quarter in 2019.
Net sales informationrevenues for the Apparel, Gear and Other operating segment is summarized as follows (dollars in millions):
Three Months Ended
September 30,		Growth
 20212020DollarsPercent
Net revenues:
Apparel$150.2 $125.6 $24.6 19.6 %
Gear, accessories, & other82.9 82.7 0.2 0.2 %
$233.1 $208.3 $24.8 11.9 %

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 Three Months Ended
September 30,		 Growth/(Decline)
 2020 2019 Dollars
 Percent
Net sales:       
Apparel$125.6
 $140.0
 $(14.4) -10.3 %
Gear, Accessories, & Other82.7
 75.7
 7.0
 9.2 %
 $208.3
 $215.7
 $(7.4) -3.4 %

Net salesSegment Profitability
The Company evaluates the performance of apparel decreased $14.4 million (10.3%) to $125.6 million in the third quarter of 2020 compared to the third quarter of 2019, due to a decline in sales for Jack Wolfskin-branded apparelits operating segments based on segment operating income. Management uses total segment operating income, excluding corporate overhead and certain non-recurring and non-cash charges, as a resultmeasure of the continued business challenges, primarily in the retail sector, caused by the COVID-19 pandemic during the third quarter of 2020. This decline was partially offset by an increase in sales of TravisMathew apparel due to strong e-commerce sales in the United States.
Net sales of gear, accessories and other increased $7.0 million (9.2%) to $82.7 million for the third quarter of 2020 compared to $75.7 million in the third quarter of 2019, primarily due to an increase in demand for Callaway-branded golf bags and golf gloves.


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Segment Profitabilityits operational performance.
Profitability by operating segment is summarized as follows (dollars in millions):
 Three Months Ended
September 30,		 Growth/(Decline)
 2020 2019 Dollars Percent
Income before income taxes:       
Golf Equipment$56.8
 $23.1
 $33.7
 145.9 %
Apparel, Gear and Other25.9
 34.9
 (9.0) -25.8 %
Reconciling items(1) 
(24.9) (24.8) (0.1) 0.4 %
 $57.8
 $33.2
 $24.6
 74.1 %
Three Months Ended
September 30,		Growth
Non-GAAP Constant Currency Growth vs. 2020(1)
20212020DollarsPercentPercent
Net revenues:
Topgolf$333.8 $— $333.8 n/an/a
Golf Equipment289.6 267.3 22.3 8.3 %7.9%
Apparel, Gear and Other233.1 208.3 24.8 11.9 %11.1%
Total net revenues$856.5 $475.6 $380.9 80.1 %79.2%
Segment operating income:
Topgolf$23.9 $— $23.9 n/a
Golf Equipment45.8 56.8 (11.0)(19.4)%
Apparel, Gear and Other34.6 25.9 8.7 33.6 %
Total segment operating income104.3 82.7 21.6 26.1 %
Corporate G&A and other(2)
28.3 19.2 9.1 47.4 %
Total operating income76.0 63.5 12.5 19.7 %
Interest expense, net(28.7)(12.7)(16.0)126.0 %
Other income, net2.9 7.0 (4.1)(58.6)%
Total income before income taxes$50.2 $57.8 $(7.6)(13.1)%
(1)Reconciling items include corporate general and administrative expenses, other income (expense), and non-recurring charges not included by management in determining segment profitability.
Pre-tax income(1)Calculated by applying 2020 exchange rates to 2021 reported sales in regions outside the United States.
(2)Amounts for the third 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) $0.6 million of transition and other non-recurring costs associated with the merger with Topgolf completed on March 8, 2021, (ii) $6.7 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 of the market valuation adjustment on operating segment increased $33.7leases assumed in connection with the merger with Topgolf, and (iii) $0.5 million (145.9%)of costs related to $56.8 million inthe implementation of new IT systems for Jack Wolfskin and Topgolf. The amount for the third quarter of 2020 from $23.1includes (i) $1.2 million in the third quarter of 2019. This increase was primarily due to a $25.8 million increase in gross profit (an increase of 20 basis points in gross margin) driven by an increase in net sales as discussed above, combined with a $7.9 million decrease in operating expenses. The decline in operating expenses was primarily due to decreases in employee travel and tour expenses resulting from travel restrictions and canceled golf tournaments caused by the COVID-19 pandemic, combined with a decrease in employee costs resultingamortization expense on intangible assets from the acquisitions of OGIO,TravisMathew and Jack Wolfskin; (ii) non-recurring costs of $5.1 million, including costs associated with the Company's plannedtransition to its new North America Distribution Center and the implementation of new IT systems for Jack Wolfskin, and severance related to the Company's cost reduction initiatives in response to the COVID-19 pandemic.
Pre-taxOperating income for the golf equipment operating segment decreased $11.0 million (-19.4%) to $45.8 million in the Company'sthird quarter of 2021 from $56.8 million in the third quarter of 2020. This decrease was driven by higher freight costs related to the ongoing shipping container shortages and port delays in the U.S., in addition to higher manufacturing costs associated with golf balls and a gradual increase in operating expenses towards normal pre-pandemic levels compared to the third quarter of 2020, where the Company had significantly reduced its spending in response to the COVID-19 pandemic. These declines were partially offset by the positive impact of leveraging fixed overhead costs on golf clubs due to higher sales volumes period over period, combined with price increases on certain golf club products.
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Operating income for the Apparel, Gear and Other operating segment decreased $9.0increased $8.7 million (25.8%(33.6%) to $25.9$34.6 million in the third quarter of 20202021 compared to $34.9$25.9 million in the third quarter of 2019.2020. This decreaseincrease was primarily due to a $14.1 million decrease in gross profit (a decline of 510 basis points in gross margin),driven by sales growth across all brands, as discussed above, combined with less promotional activity. These increases were partially offset by a $5.1 million decreasegradual increase in operating expenses. The declineexpenses toward normal pre-pandemic levels compared to the third quarter of 2020, where the Company had significantly reduced its spending in gross margin was driven primarily byresponse to the negative impactCOVID-19 pandemic.
Topgolf contributed an incremental $23.9 million of COVID-19 onoperating income to the Company’s soft goods retail sales (which generally have higher gross margins), and inventory reduction initiatives. These decreases were partially offset by the favorable impact of changes in foreign currency ratesCompany in the third quarter of 2020 compared to2021, which includes the same period in 2019, and a higher mixopening of e-commerce sales, which also have higher gross margins. The decline in operating expenses was primarily due to decreases in employee travel resulting from travel restrictions caused by the COVID-19 pandemic,two new domestic locations combined with a decrease in employee costs resulting fromincremental Toptracer bay installations during the Company's planned cost reduction initiatives in response to the COVID-19 pandemic.third quarter of 2021.
Nine-Month PeriodPeriods Ended September 30, 20202021 and 20192020
Net salesRevenues
Net revenues for the nine months ended September 30, 2020 decreased $174.32021 increased $1,206.9 million (12.5% (99.3%) to $1,214.8$2,421.7 million compared to $1,389.1$1,214.8 million for the nine months ended September 30, 2019.2020. This declineincrease was duedriven by $751.9 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 $455.0 million (37.5%) compared to the negative impactfirst nine months of the COVID-19 pandemic on2020. Net revenues from the Company's golf equipmentGolf Equipment and soft goodsApparel, Gear and Other businesses during the first half of 2020 resulting from the temporary closure ofgenerated significant increases across all non-essential businesses as mandated by government authorities. Duringproduct categories and in all major geographic regions, despite global supply chain challenges experienced during the third quarter of 2020,2021. This increase reflects the demand for golf equipment increased as the sport became popular as a safe outdoor, social-distancing activity in the COVID-19 environment. For the nine months ended September 30, 2020, net sales decreased in all product categories and across all major geographic regions. This decline was partially offset by an improvement insuccess of the Company's e-commerce business, which increased compared tocurrent year product lines and overall brand momentum, and the same period in 2019. By operating segment,continued popularity of the game of golf and other outdoor activities. Net revenues in the first nine months of 2020 net saleswere negatively impacted by temporary closure of Golf Equipment decreased $57.6 million or 7.0% to $768.9 million,the Company's retail locations, manufacturing facilities and net sales of Apparel, Gear and Other decreased $116.7 million or 20.7% to $445.9 million, both compareddistributions centers, as well as its customers' retail locations due to the first nine months in 2019. Fluctuations in foreign currencies had a favorable impact on net sales of $2.1 million in the first nine months of 2020.


47


COVID-19 pandemic.
The Company’s net salesrevenues by operating segment are presented below (dollars in millions):
Nine Months Ended
September 30,		Growth
 20212020DollarsPercent
Net revenues:
Topgolf$751.9 $— $751.9 n/a
Golf Equipment1,067.8 768.8 299.0 38.9 %
Apparel, Gear and Other602.0 446.0 156.0 35.0 %
$2,421.7 $1,214.8 $1,206.9 99.3 %
 Nine Months Ended
September 30,		 Decline
 2020 2019 Dollars Percent
Net sales:       
Golf Equipment$768.9
 $826.5
 $(57.6) -7.0 %
Apparel, Gear and Other445.9
 562.6
 (116.7) -20.7 %
 $1,214.8
 $1,389.1
 $(174.3) -12.5 %

For further discussion of each operating segment’s results, see below “Operating Segment Results for the Nine Months Ended September 30, 20202021 and 2019.2020.”
Net salesrevenues information by region is summarized as follows (dollars in millions):
 Nine Months Ended
September 30,		GrowthNon-GAAP Constant Currency Growth vs. 2020
20212020DollarsPercentPercent
Net revenues:
United States$1,583.9 $603.8 $980.1 162.3 %162.3%
Europe386.6 281.5 105.1 37.3 %29.0%
Japan197.1 158.5 38.6 24.4 %25.5%
Rest of world254.1 171.0 83.1 48.6 %38.6%
$2,421.7 $1,214.8 $1,206.9 99.3 %96.1%
 Nine Months Ended
September 30,		 Decline Constant Currency Decline vs. 2019
 2020 2019 Dollars Percent Percent
Net sales:         
United States$603.8
 $658.1
 $(54.3) -8.3 % -8.3%
Europe281.5
 341.6
 (60.1) -17.6 % -18.5%
Japan158.5
 193.1
 (34.6) -17.9 % -19.0%
Rest of World171.0
 196.3
 (25.3) -12.9 % -11.4%
 $1,214.8
 $1,389.1
 $(174.3) -12.5 % -12.7%

Net salesrevenues in the United States decreased $54.3increased $980.1 million (8.3%(162.3%) to $603.8$1,583.9 million during the nine months ended September 30, 20202021 compared to the nine months ended September 30, 2019.same period in the prior year. Net salesrevenues in regions outside of the United States decreased 120.0increased $226.8 million (16.4%(37.1%) to $837.8 million for the nine months ended September 30, 2021 compared to $611.0 million for the nine months ended September 30, 2020 compared $731.1 million to2020. The increase in both domestic and international net revenue
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in the first nine months 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 nine months ended September 30, 2019.of 2020 were 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 COVID-19 pandemic. Fluctuations in foreign currencies had a favorable impact on international net salesrevenues of $2.1$39.0 million in the first nine 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 $217.6 million to the business disruption caused by the COVID-19 pandemic.
Gross profit decreased $118.2$914.0 million (18.6%) to $518.5 million for the nine months ended September 30, 20202021 compared to $636.6$696.4 million in for the same period in 2020. The Company’s cost of 2019. Gross margin decreased 310 basis pointsproducts are highly variable in nature and this increase is due to 42.7% forthe significant increase in sales volumes in the first nine months of 2021, combined with an increase in freight and overall commodity costs. In the first nine months of 2020, sales volumes were significantly lower due to the business disruptions caused by the COVID-19 pandemic.
Costs of services of $93.8 million consist primarily of the cost of food and beverage sold in the Company’s Topgolf venues as well as certain costs associated with licensing the Company’s Toptracer ball-flight tracking technology.
Other venue expenses of $483.6 million consist primarily of Topgolf venue related employee costs, rent, depreciation and amortization, utilities, and other costs associated with Topgolf venues.
Selling, general and administrative expenses increased by $228.6 million to $612.7 million (25.3% of net revenues) during the nine months ended September 30, 20202021 compared to 45.8%$384.1 million (31.6% of net revenues) in the comparable period of 2020. This increase reflects incremental expenses of $99.1 million related to the merger with Topgolf completed in March 2021, and a $32.7 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. This was partially offset by severance expense incurred in the third quarter of 2020 related to the cost reduction initiatives in response to COVID-19. Excluding these incremental expenses and non-recurring charges, selling, general and administrative expenses increased $96.8 million (25.2%) due to a gradual increase in spending levels back toward normal pre-pandemic levels in the first nine months of 2021, costs associated with the start up of the Company's new Korea apparel business and expansion of the TravisMathew business as well as increased corporate costs to support a larger organization. These investments resulted in increases in employee costs, including an overall increase in salaries and wages and employee incentive compensation, due to an increase in headcount, in addition to advertising and promotional expenses, tour, professional fees primarily related to IT projects and infrastructure improvements, building and furniture expenses, and depreciation and amortization expense. In the first nine months of 2020, general expenditures were lower due to certain restrictions imposed by the COVID-19 pandemic combined with the cost savings initiatives carried out by the Company.
Research and development expenses increased $15.4 million to $48.8 million (2.0% of net revenues) in the nine months ended September 30, 2019. The decline2021 compared to $33.4 million (2.7% of net revenues) during the same period in gross margin was2020, primarily due to (i)incremental expenses of $9.4 million related to the negative impact of fixed costs on the lower sales base caused by the temporary shut-down of the Company's distribution centersmerger with Topgolf completed in March 2021, and manufacturing facilities in the first half of 2020 as a result of the COVID-19 pandemic; (ii) inventory reduction initiatives in the Company’s soft goods business; and (iii) an increase in U.S. tariffs on imports from China on golf equipment. These declines were partially offset by a higher mixemployee costs.
Venue pre-opening costs of e-commerce sales, which have higher gross margins. In addition, gross margin in the first nine months of 2020 benefited from a reduction in non-recurring expenses related to non-cash purchase accounting adjustments recognized in 2019 related$9.4 million include costs associated with activities prior to the Jack Wolfskin acquisition. For further discussion of gross margin, see above "Results of Operations—Overview of Business and Seasonality—Cost of Sales" and see below "Operating Segments Results for the Nine Months Ended September 30, 2020 and 2019—Segment Profitability."
Selling expenses decreased by $49.3 million to $285.1 million (23.5% of net sales) during the nine months ended September 30, 2020 compared to $334.4 million (24.1% of net sales) in the comparable period of 2019. This 14.7% decrease was primarily due to the Company's planned reduction in operating expenses in response to the decline in sales caused by the COVID-19 pandemic. These reductions consistedopening of a $25.7million decline in marketing and tour expenses, a $10.9 million decline in employee costs, and a $6.2 million decline in employee travel expenses,new Company-operated venue, as well as an overall decline in variable expenses. These decreases were partially offset by severance charges of $1.4 million due to workforce reductions initiatedother costs that are not considered in the second quarterevaluation of 2020.
Generalongoing venue performance. The Company expects to continue to incur pre-opening costs of adding new Company-operated venues. These costs are expected to fluctuate based on the timing, size and administrative expenses decreased by $9.7 million to $99.0 million (8.1%location of net sales) during the nine months ended September 30, 2020 compared to $108.7 million (7.8% of net sales) in the comparable period of 2019. This 8.9% decrease was primarily due to a $7.2 million decline in employee costs as a result of the Company's planned cost reduction initiatives implemented during the first nine m


48


onths 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 nine months of 2020 also benefited from a $6.2 million reduction in non-recurring costs, primarily related to the acquisition and integration of the Jack Wolfskin business incurred in the first nine months of 2019. These decreases were partially offset by an increase of $1.1 million in severance charges due to workforce reductions initiated in the second quarter of 2020, as well as increases in legal and professional fees, and depreciation expense.
Research and development expenses decreased by $4.8 million to $33.4 million (2.7% of net sales) during the nine months ended September 30, 2020 compared to $38.2 million (2.7% of net sales) in the comparable period of 2019, primarily due to a $3.7 million decline in employee costs resulting from the Company's planned cost reduction initiatives implemented during the first nine months of 2020, and a $0.9 million decline in travel and entertainment as a result of travel restrictions related to the COVID-19 pandemic. These decreases were partially offset by an increase of $0.6 million in severance charges due to workforce reductions initiated in the second quarter of 2020.new Company-operated venues.
Due to the significant business disruption and macro-economic impact of the COVID-19 pandemic 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 which resultedresulting in an impairment charge of $174.3 million (see$174.3 million. There were no impairment charges for the nine months ended September 30, 2021. (see Note 9, "Goodwill and Intangible Assetsto" in the Notes to Consolidated Condensed Financial Statements included in Part I, Item 1, of this Form 10-Q).
Other Income and Expense
Interest expense increased by $4.2$41.0 million to $34.4$75.4 million during the nine months ended September 30, 20202021 compared to $30.2$34.4 million in the comparable period of 2019,2020, primarily due to the issuanceinterest expense related to the debt and
55

DLF obligations acquired as part of $258.8 million in convertible notes in May 2020 (seethe Topgolf merger. See Note 67 “Financing Arrangements” toin the Notes to Consolidated Condensed Financial Statements included in Part I, Item 1, of this Form 10-Q).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 nine months of 2021.
Other income increaseddecreased to $27.5$9.5 million during the nine months ended September 30, 20202021 compared to $1.5$27.5 million in the comparable period of 2019.2020. This increasedecline was primarily due to the $11.0 million gain recognized in 2020 in connection with the settlement of a $20.5 million increasecross-currency swap, in addition to a decrease in net foreign currency transaction gains, and a $5.5 million increase, primarily in net hedging contract gains, due to a $3.2 million net loss recognized in 2019 from the settlement of a hedging contract in connection with the Jack Wolfskin acquisition.gains.
Income Taxes
The Company’s provision for income taxes decreased $12.3increased $91.5 million to $6.6$98.1 million for the nine months ended September 30, 2020,2021, compared to $18.9$6.6 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 nine months of 2020 decreased2021 increased to -8.2%22.0% compared to 14.8%(8.2)% in the comparable period of 2019. This decrease2020. The Company's effective tax rate in 2021 was primarily due toimpacted by the goodwill impairment charge recorded during$252.5 million nontaxable gain recognized on the second quarterCompany's pre-merger investment in Topgolf shares as well as the recognition of 2020, which is non-deductiblea valuation allowance on certain net operating losses and tax credits. The Company's effective tax rate for tax purposes combined with an overall decline in pre-tax earnings in the first nine months of 2020 was impacted by the recognition of a $174.3 million non-deductible impairment charge to write-down certain goodwill and intangible assets related to Jack Wolfskin. Excluding these non-recurring items from both periods, the Company's effective income tax rate would have been 30.5% for the first nine months of 2021 compared to 15.3% for the same periodfirst nine 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” toin 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 nine months ended September 30, 2020 decreased $195.02021 increased to net income of $348.2 million compared to a net loss of $86.4$86.4 million compared to net income of $108.6 million in the comparable period of 2019.2020. Diluted earnings (loss) per share decreased $2.05increased $2.95 to a lossearnings of $2.03 per share of $0.92 in the first nine months of 20202021 compared to earningsa loss per share of $1.13$(0.92) 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 nine months ended September 30, 20202021 would have been $94.2$173.4 million and $0.98$1.01 per share, respectively, compared to $129.8$95.4 million and $1.35$0.99 per share, respectively, for the comparative period in 2019.2020. Fully diluted shares were 171.2 million shares of common stock for the nine months ended September 30, 2021, an increase of 75.1 million shares compared to 96.1 million shares for the comparative period in 2020. The decreaseincreased share count is primarily related to the issuance of additional shares in connection with the Topgolf merger. The increase in non-GAAP net income in 2021 was primarily driven 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 was primarily due to were negatively impacted by the business disruptions and challenges caused by the COVID-19 pandemic duringpandemic. These increases were partially offset by an increase in operating expenditures to normal pre-pandemic levels in the first nine months 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 net foreign currency transaction gains.


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2021.
The table below presents a reconciliation of the Company's as-reported results for the nine months ended September 30, 20202021 and 20192020 to the Company's non-GAAP results reported above for the same periods (in millions, except per share information).
Nine Months Ended September 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)$348.2 $(15.4)$(5.9)$235.1 $(39.0)$173.4 
Diluted earnings (loss) per share$2.03 $(0.09)$(0.03)$1.37 $(0.23)$1.01 
Weighted-average shares outstanding171.2171.2171.2171.2171.2171.2

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 Nine Months Ended September 30, 2020
 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(4)
Net income (loss) attributable to Callaway Golf Company$(86.4) $(169.1) $(3.0) $(8.5) $94.2
Diluted earnings (loss) per share$(0.92) $(1.80) $(0.03) $(0.09) $0.98
Weighted-average shares outstanding94.2
 94.2
 94.2
 94.2
 96.1
 Nine Months Ended September 30, 2019
 GAAP 
Non-Cash Purchase Accounting Adjustments and Acquisition Amortization(1)
 
Acquisition and Transition Expenses(5)
 Non-GAAP
Net income (loss) attributable to Callaway Golf Company$108.6
 $(11.0) $(10.2) $129.8
Diluted earnings (loss) per share$1.13

$(0.11) $(0.11) $1.35
Weighted-average shares outstanding96.2
 96.2
 96.2
 96.2
Nine Months Ended September 30, 2020
GAAP
Non-Cash Acquisition Amortization and Impairment Charges(1)
Non-Cash Amortization of Discount on Convertible Notes(2)
Other Non-Recurring Items(3)
Non-GAAP(5)
Net income (loss)$(86.4)$(169.1)$(3.0)$(9.7)$95.4 
Diluted earnings (loss) per share$(0.92)$(1.80)$(0.03)$(0.10)$0.99 
Weighted-average shares outstanding94.2 94.2 94.2 94.2 96.1 
(1)Includes the non-cash amortization expense of intangible assets in connection with the acquisitions of Jack Wolfskin, TravisMathew and OGIO. In addition, the nine months ended September 30, 2020 include the recognition of a $174.3 million impairment of the Jack Wolfskin goodwill and trade name, and the nine months ended September 30, 2019 include 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)Total diluted earnings per share on a non-GAAP basis for the nine months ended September 30, 2020 was calculated using diluted weighted average shares outstanding, as earnings on a non-GAAP basis resulted in net income after giving effect to the non-recurring and non-cash charges discussed above.
(5)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 nine months ended September 30, 2021 includes approximately seven 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 market valuation adjustment on operating leases assumed from Topgolf. The first nine 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)Acquisition and other non-recurring items for the nine months ended September 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 and Topgolf. 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 acquisition of Topgolf, implementation costs for 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.
(5)Non-GAAP diluted earnings per share for the nine months ended September 30, 2020 was calculated using the diluted weighted average outstanding shares, as earnings on a non-GAAP basis resulted in net income after giving effect to pro forma adjustments.
Operating Segment Results for the Nine Months Ended September 30, 20202021 and 20192020
As a result of the Topgolf merger, the Company now has three operating segments, namely Topgolf; Golf Equipment; and Apparel, Gear and Other.
Topgolf
On March 8, 2021 the Company completed its merger with Topgolf, and the Company’s results of operations include the operations of Topgolf from that date forward. Topgolf contributed an incremental $751.9 million in net revenues for the nine months ended September 30, 2021, which includes approximately seven months of revenues since the completion of the merger. Net revenues from the domestic venue business of $702.2 million include the opening of two new venues during the third quarter of 2021 and 6 new venues during the first nine months of 2021. Net revenues of $49.7 million from other business lines were driven by incremental Toptracer bay installations during the first nine months
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of 2021, additional revenues from digital content creation and sponsorship operations, and the revenues from the Company's WGT digital golf game.
Net revenues for the Topgolf operating segment is summarized as follows (dollars in millions):
Nine months ended September 30, 2021
Net revenues:
Venues$702.2 
Other business lines49.7 
$751.9 
Golf Equipment
Golf equipment sales decreased $57.6net revenues increased $298.9 million (7.0% (38.9%) to $768.9$1,067.8 million for the nine-months ended September 30, 20202021 compared to $826.5$768.9 million for the same period in 20192020 due toto a $37.0$249.1 million (5.7%(40.4%) declineincrease in golf club salesrevenue and $20.6a $49.8 million (11.9%(32.7%) declineincrease in golf ball sales.revenue. These declinesincreases were driven by the continued growth and high demand for the game of golf, continued 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, despite global supply chain challenges in 2021. Net revenues of golf equipment in the nine months of 2020 were negatively impacted by the temporary closure of the Company's retail locations, manufacturing facilities and distributions centers, as well as its customers' retail locations, due to the business disruptions and challenges caused by the COVID-19 pandemic during the first nine months of 2020. This was offset by an improvement in the Company's e-commerce business, which increased significantly compared to 2019.


50


pandemic.
Net sales informationrevenues for the Golf Equipment operating segment by product category is summarized as follows (dollars in millions):
 Nine Months Ended
September 30,		 Decline
 2020 2019 Dollars Percent
Net sales:       
Golf Clubs$616.6
 $653.6
 $(37.0) -5.7 %
Golf Balls152.3
 172.9
 (20.6) -11.9 %
 $768.9
 $826.5
 $(57.6) -7.0 %
Net sales of golf clubs decreased $37.0 million (5.7%) to $616.6 million for the nine months ended September 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 business disruptions caused by the COVID-19 pandemic. This decline was partially offset by an increase in sales during the third quarter of 2020 driven by an increase in the popularity of golf as a result of heightened demand for outdoor, socially-distanced activities. 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 to lower margin pre-owned products.
Net sales of golf balls decreased $20.6 million (11.9%) to $152.3 million for the nine months ended September 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 business disruptions caused by the COVID-19 pandemic. This decline was partially offset by an increase in sales in the third quarter driven by an increase in the popularity of golf as a result of heightened demand for outdoor, socially-distanced activities. 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 Company's golf ball manufacturing facility in the United States, primarily in the second quarter of 2020, due to COVID-19 mandates.
Nine Months Ended
September 30,		Growth
 20212020DollarsPercent
Net revenues:
Golf clubs$865.7 $616.6 $249.1 40.4 %
Golf balls202.1 152.3 49.8 32.7 %
$1,067.8 $768.9 $298.9 38.9 %
Apparel, Gear and Other
Apparel, Gear and Other sales decreased $116.7increased $156.1 million (35.0%) to $445.9$602.0 million during the nine months ended September 30, 20202021 compared to $562.6$445.9 million for the same period in 2019,2020, due to a $70.2$97.7 million (22.7%(40.8%) decreaseincrease in apparel sales and a $46.5$58.4 million (18.4% (28.3%) decreaseincrease in sales of gear, accessories and other. These decreases wereThe increase in the apparel, gear and other was due to the temporary closure of many of the Company's wholesale customers and direct retail locations as a result of the COVID-19 pandemic, primarily during the first half of 2020. This decline was offset by an improvement in the Company's e-commerce businessstrong rebound across all brands in the first nine months of 2020, which increased significantly2021 compared to the same period in 2019.2020, 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, Callaway and Jack Wolfskin apparel brands, despite global supply chain challenges in 2021. The increase in gear, accessories and other was 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 surge 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 China, partially offset by lower retail revenue due to further government mandated retail shutdowns during the second quarter of 2021 in Europe.
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Net sales informationrevenues for the Apparel, Gear and Other segment is summarized as follows (dollars in millions):
Nine Months Ended
September 30,		Growth
 20212020DollarsPercent
Net revenues:
Apparel$336.9 $239.2 $97.7 40.8 %
Gear, accessories, & other265.1 206.7 58.4 28.3 %
$602.0 $445.9 $156.1 35.0 %
Segment Profitability
 Nine Months Ended
September 30,		 Decline
 2020 2019 Dollars Percent
Net sales:       
Apparel$239.2
 $309.4
 $(70.2) -22.7 %
Gear, Accessories, & Other206.7
 253.2
 (46.5) -18.4 %
 $445.9
 $562.6
 $(116.7) -20.7 %
Net salesThe Company evaluates the performance of apparel decreased $70.2 million (22.7%) to $239.2 million for the nine months ended September 30, 2020 compared to the same period in 2019 due to a decline in sales across all apparel brandsits 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 nine months of 2020.
Net sales of gear, accessoriesits operational performance, excluding corporate overhead and other decreased $46.5 million (18.4%) to $206.7 million for the nine months ended September 30, 2020 compared to the same period in 2019 due to the business challenges caused by the COVID-19 pandemic during the first nine months of 2020.


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Segment Profitabilitycertain non-recurring and non-cash charges.
Profitability by operating segment is summarized as follows (dollars in millions):
 Nine Months Ended
September 30,		 Decline
 2020 2019 Dollars Percent
Income before income taxes:       
Golf Equipment$144.6
 $148.8
 $(4.2) -2.8 %
Apparel, Gear and Other10.4
 68.9
 (58.5) -84.9 %
Reconciling items(1) 
(234.8) (90.4) (144.4) 159.7 %
 $(79.8) $127.3
 $(207.1) -162.7 %
Nine Months Ended
September 30,		Growth
Non-GAAP Constant Currency Growth vs. 2020(1)
20212020DollarsPercentPercent
Net revenues:
Topgolf$751.9 $— $751.9 n/an/a
Golf Equipment1,067.8 768.9 298.9 38.9%36.2%
Apparel, Gear and Other602.0 445.9 156.1 35.0%31.7%
Total net revenues$2,421.7 $1,214.8 $1,206.9 99.3%96.1%
Segment operating income (loss):
Topgolf$52.1 $— $52.1 n/a
Golf Equipment228.8 144.6 84.2 58.2%
Apparel, Gear and Other70.8 10.4 60.4 580.8%
Total segment operating income351.7 155.0 196.7 126.9%
Corporate G&A and other(2)
92.3 228.3 (136.0)(59.6)%
Total operating income (loss)259.4 (73.3)332.7 453.9%
Gain on Topgolf investment(3)
252.5 — 252.5 n/a
Interest expense, net(75.1)(34.0)(41.1)120.9%
Other income, net9.5 27.5 (18.0)(65.5)%
Total income (loss) before income taxes$446.3 $(79.8)$526.1 659.3%
(1)
Reconciling items represent corporate general and administrative expenses, net interest expense, other income and non-recurring expenses not included by management in determining segment profitability. The $144.4 million increase in reconciling items in the first nine months of 2020 compared to the same period in 2019 includes the recognition of a $174.3 million impairment of the Jack Wolfskin goodwill and trade name in 2020 (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) and a $4.2 million increase in interest expense. These increases were partially offset by a $26.0 million increase in other income primarily due to foreign currency and hedging contract gains, combined with $10.7 million of amortization expense recognized in 2019 related to the inventory valuation step-up from the Jack Wolfskin acquisition.
Pre-tax income(1)Calculated by applying 2020 exchange rates to 2021 reported sales in regions outside the United States.
(2)Amounts for the first nine months of 2021 and 2020 include corporate general and administrative expenses not utilized by management in determining segment profitability. In addition, the amount for 2021 includes (i) transaction, transition and other non-recurring expenses in connection with the merger with Topgolf of $19.3 million; (ii) amortization and depreciation expense of $17.6 million on intangible assets from the Golf Equipmentmerger with Topgolf and the acquisitions of OGIO, TravisMathew and Jack Wolfskin, in addition to the fair value step-up of property, plant and equipment and the market valuation adjustment on operating leases in connection with the merger with Topgolf; and (iii) $2.0 million of costs related to the implementation of new IT systems for Jack Wolfskin.

Reconciling items for the first nine months of 2020 included (i) $3.6 million of amortization expense on intangible assets from the acquisitions of OGIO, TravisMathew and Jack Wolfskin; (ii) non-recurring costs $12.5 million, including costs associated with the Company's transition to its new North America Distribution Center, costs associated with the acquisition of Topgolf, and the implementation of new IT systems for Jack Wolfskin, and severance related to the Company's cost reduction initiatives in response to the COVID-19 pandemic; and (iii) an impairment charge of $174.3 million recognized in the second quarter of 2020 related to Jack Wolfskin.
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(3)Amount represents the 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 $4.2increased $84.2 million (2.8%(58.2%) to $144.6$228.8 million for the nine months ended September 30, 20202021 from $148.8$144.6 million in the comparable period in the prior year. This decreaseincrease was primarilydriven by a significant increase in revenue across all product categories as discussed above, despite global supply chain challenges experienced during the third quarter of 2021, combined with the favorable impact of foreign currency exchange rates, favorable absorption of fixed overhead due to a $44.0 million decrease in gross profit (a decline of 230 basis points in gross margin),higher sales volumes period over period, improved operating expense leverage, and less promotional activity. These increases were partially offset by a $39.8 million decrease in operating expenses. The decline in gross margin was largely due to lower sales and the negative impact of fixed costs on the lower sales base caused by the temporary shut-down of the Company's distribution centers and manufacturing facilities during the first half of 2020 as a result of the COVID-19 pandemic, in addition to an increase in U.S. tariffs on imports from China. The decrease in operating expenses was primarilyfreight costs due to decreasesthe ongoing shipping container shortages and port delays in marketing expenses and employee costs resulting fromthe U.S., combined with prior year savings due to the Company's cost reduction initiatives in response to COVID-19 in the decline in sales period over period, in addition to decreases in employee travel costsfirst nine months of 2020.
Operating income for the apparel, gear and tour expense resulting from travel restrictions and canceled golf tournaments caused by the COVID-19 pandemic.
Pre-tax income from the Apparel, Gear and Otherother operating segment decreased $58.5increased $60.4 million (84.9%(580.8%) to $10.4$70.8 million for the nine months ended September 30, 20202021 from $68.9$10.4 million in the comparable period in the prior year. This decreaseincrease was primarily due todriven by a $77.9 millionstrong rebound in sales across all brands as discussed above, despite global supply chain challenges experienced during the third quarter of 2021, combined with the favorable impact of foreign currency exchange rates, the favorable impact of leveraging fixed overhead on a higher revenue base period over period, improved operating expense leverage, a decrease in gross profit (a decline of 540 basis pointspromotional activity and an increase in gross margin), partially offset by a $19.4 million decrease in operating expenses. The decline in gross margin was primarily due to lower sales and the negative impact of fixed costs on the lower sales base caused by the temporary shut-down of the Company's distribution centers and retail locations primarily during the first half of 2020 as a result to the COVID-19 pandemic, in addition to inventory reduction initiatives. These declines were partially offset by a higher mix of direct to consumerdirect-to-consumer e-commerce sales, which have higher gross margins. The decreaseprofit margins relative to wholesale.
Topgolf contributed an incremental $52.1 million of operating income in the first nine months of 2021, which represents approximately seven months of operating expenses was primarily due to decreases in marketing expensesresults since the completion of the merger on March 8, 2021, and employee costs resulting fromreflects the Company's cost reduction initiatives in response to the decline in sales period over period, in addition to a decrease in employee travel costs due to the COVID-19 pandemic.opening of two new domestic locations combined with incremental Toptracer bay installations.
Financial Condition
The Company’s cash and cash equivalents increased $180.0$142.1 million to $286.7$508.2 million at September 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 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 2020.March 8, 2021. During the first nine months of 2020,2021, the Company used its cash and cash equivalentsprovided by operations of $246.8 million, combined with the proceeds of $49.5 million from lease financing arrangements, $28.0 million from its credit and long-term debt facilities, $19.5 million from the issuanceexercise of stock options and $18.6 million from the Convertible Notessale of investments in golf related ventures, to fund its operations,capital expenditures of $198.9 million, repay $122.5$160.9 million of amounts outstanding under its credit and long-term debt facilities fund capital expenditures of $30.9 million, primarily for the Company's transition of its North America distribution center to a new facility, as well as in its golf ball manufacturing plant to increase capacity and improve its manufacturing capabilities, invest $20.0 million in golf-related ventures, and repurchase shares of its common stock for $22.1 million. In addition,$12.9 million to satisfy payroll tax withholding obligations in connection with the Convertible Notes, the Company paid a premiumvesting and settlement of $31.8 million for capped call


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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" toin 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/fall and winter season.seasons. 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 September 30, 2020,2021, the Company’s net accounts receivable increased to $239.7$255.2 million from $140.5$138.5 million as of December 31, 2019.2020. This increase wasreflects the Company's seasonality combined with incremental accounts receivable from the merger with Topgolf. The Company’s net accounts receivable as of September 30, 2021 increased $15.6 million compared to September 30, 2020 primarily due to an increase in net revenues of $380.9 million in the third quarter of 2021 compared to the third quarter of 2020 resulting from the
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continued increase in demand for golf equipment as the result of the increased popularity of golf combined with a strong rebound in the current COVID-19 environment. The Company’s net accounts receivable as of September 30, 2020 increased $16.3 million compared to September 30, 2019 primarily due to an increase in net sales of $49.3 million (11.6%)apparel, gear and accessories across all brands, in addition to incremental revenues from the merger with Topgolf. In addition, sales in the third quarter of 2020 compared towere more negatively impacted by the third quarter of 2019 primarily due to an increase in demand for golf equipment aseconomic downturn caused by the result of the increased popularity of golf in the current COVID-19 environment.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 decreasedincreased $32.8 million to $324.9$385.3 million as of September 30, 20202021 compared to $456.6$352.5 million as of December 31, 2019.2020. This decreaseincrease in inventories was primarily duerelated to the apparel, gear, and other business in order to meet the increased demand of general seasonality, the expansion of the Company's TravisMathew business into new product categories combined with the opening of new retail locations, as well as an increase in demand for golf equipment as the result ofinventory to meet the increased popularitydemand of golf in the current COVID-19 environment,equipment sales, combined with incremental inventory from the general seasonality of the Company's business.merger with Topgolf. The Company’s inventory as of September 30, 2020 decreased2021 increased by $15.5$60.4 million compared to the Company's inventory as of September 30, 20192020 primarily due an increaseto increases in demand for golf equipment asin order to support increased sales and upcoming product launches, combined with incremental inventory from the popularity of golfmerger with Topgolf. This increase was partially offset by decreases in apparel, gear, and other inventory primarily due increased seasonality demand in the third quartersecond half of 2020.the year, combined with supply chain constraints.
Liquidity and Capital Resources
The Company’s principal sources of liquidity consist of its existing cash balances, including cash from the issuance of Convertible Notes in May 2020, funds expected to be generated from operations and funds from its credit facilities. Based upon the Company’s current cash balances, its estimates of funds expected to be generated from operations, in 2020, 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’s ability to generate sufficient positive cash flows from operations is subject to many risks and uncertainties, including future economic trends and conditions, the future economic impact from the COVID-19 pandemic, demand for the Company’s products, supply chain challenges, 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 contained2020 and 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)2021). 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 third 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 September 30, 2020,2021, the Company had $636.9$918.0 million in cash and availability under its credit facilities, which is an incr


53


easeincrease of $296.7$281.1 million or 44% compared to September 30, 2019.2020. Information about the Company's credit facilities and long-term borrowings is presented in Note 67 “Financing Arrangements” toin 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.
In October 2020,On March 8, 2021, the Company entered into a definitive agreement to acquirecompleted the merger with Topgolf International, Inc. ("Topgolf") in an all-stock transaction (see to Note 56 "Business Combinations" toin 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 anticipates it will assume an estimated $555acquired cash of $171.3 million and assumed $535.1 million in long-term debt, net of cash.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 simultaneously paying down debt.
In October 2020, the Company amendedmeeting its ABL Facility in order to permit the consummation of the merger with Topgolf. The amendment designates Topgolf and its subsidiaries as excluded subsidiaries under the ABL Facility and amends certain covenants and other provisions to allow the Company to make certain investments in, and enter into certain transactions with Topgolf, among other things. In addition, the Company entered into a debt financing commitment letter (the "Debt Commitment Letter") and related fee letters with Bank of America, N.A. and other lenders party to the Debt Commitment Letter (the "Commitment Parties"), to arrange and solicit consents from the Term Lenders to amend the Term Loan Facility to permit the consummation of the merger with Topgolf and certain other transactions contemplated in the Merger Agreement. In the event the Company cannot obtain the consents from the Term Lenders, the Commitment Parties committed to arrange and provide the Company with a secured term loan facility for $442.8 million on terms substantially similar to the existing Term Loan Facility, as proposed to be modified by the Term Loan Amendment, and including certain other changes.financial obligations.
As of September 30, 2020,2021, approximately 48%35.3% 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
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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.


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Other Significant Cash and Contractual Obligations
The table set forth below summarizes certain significant cash obligations as of September 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)
$442.8
 $4.8
 $9.6
 $9.6
 $418.8
Interest on Term Loan Facility112.4
 21.7
 43.1
 42.2
 5.4
2020 Japan Term Loan Facility(2)
19.0
 3.8
 7.6
 7.6
 —
Interest on Japan Term Loan Facility0.4
 0.1
 0.2
 0.1
 —
Convertible Notes(3)
258.8
 —
 —
 —
 258.8
Equipment Notes(4)
33.9
 8.3
 15.4
 7.9
 2.3
Interest on Equipment Notes2.3
 0.9
 1.0
 0.3
 0.1
ABL Facility28.8
 28.8
 —
 —
 —
Japan ABL Facility1.4
 1.4
 —
 —
 —
Finance leases, including imputed interest(5)
0.8
 0.1
 0.5
 0.2
 —
Operating leases, including imputed interest(6)
259.6
 10.6
 67.5
 50.9
 130.6
Unconditional purchase obligations(7)
70.7
 36.8
 32.3
 1.6
 —
Uncertain tax contingencies(8) 
7.7
 0.5
 1.1
 1.0
 5.1
Total$1,238.6

$117.8

$178.3

$121.4

$821.1
 Payments Due By Period
TotalRemainder of 20212022 - 20232024 - 2025Thereafter
(in millions)
Japan Term Loan Facility (1)
$14.4 $0.9 $7.2 $6.3 $— 
Interest on Japan Term Loan Facility0.3 — 0.2 0.1 — 
Term Loan B Facility (2)
438.0 1.2 9.6 9.6 417.6 
Interest on Term Loan Facility104.5 5.2 46.3 46.2 6.8 
Topgolf Term Loan (3)
341.3 0.9 7.0 7.0 326.4 
Topgolf Revolving Credit Facility (3)
35.0 — — 35.0 — 
Convertible Notes (4)
258.8 — — — 258.8 
Equipment Notes (5)
25.5 2.1 14.6 6.9 1.9 
Interest on Equipment Notes1.3 0.2 0.9 0.2 — 
Mortgage Loans (6)
46.5 0.1 1.0 1.3 44.1 
Financed Tenant Improvements3.6 — 0.3 0.4 2.9 
ABL Facility (7)
30.1 30.1 — — — 
Finance leases, including imputed interest (8)
21.6 0.3 3.2 2.0 16.1 
Operating leases, including imputed interest (9)
2,199.5 37.3 302.3 293.4 1,566.5 
DLF obligations (10)
602.4 6.7 54.2 55.1 486.4 
Minimum lease payments for leases signed but not yet commenced (11)
800.8 10.0 80.1 80.1 630.6 
Capital commitments (12)
86.0 43.0 43.0 — — 
Unconditional purchase obligations (13)
85.1 31.2 53.2 0.7 — 
Uncertain tax contingencies (14)
4.6 0.7 1.5 1.0 1.4 
Total$5,099.3 $169.9 $624.6 $545.3 $3,759.5 
(1)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
(1)In August 2020, the Company entered into the Japan Term Loan Facility for 2,000 million Yen (or approximately U.S. $18.0 million which was issued less $9.6 million in an original issue discount and other transaction fees. As of September 30, 2020, the Company had $442.8 million outstanding under the Term Loan Facility, which is offset by unamortized debt issuance costs of $14.2 million as presented on the Company's consolidated condensed balance sheet as of September 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.
(2)In August 2020, the Company entered into the 2020 Japan Term Loan Facility for 2,000,000,000 Yen (or approximately U.S. $18,966,000 using the exchange rate in effect as of September 30, 2020). The Company had 2,000,000,000 Yen (or approximately U.S. $18,966,000 using the exchange rate in effect as of September 30, 2020) outstanding under the Japan Term Loan Facility on the Company's consolidated condensed balance sheet as of September 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 September 30, 2020, the Company had $180.5 million outstanding under the Convertible Notes, net of unamortized debt issuance costs of $5.7 million and debt discount of $72.6 million, as presented on the Company's Consolidated Condensed Balance Sheet as of September 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 August 2020, the Company entered into two new long-term financing agreements in connection with the Company's investment initiatives at its North American Distribution Center in Roanoke, Texas, and in addition, 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 (collectively, the "Equipment Notes") between 2017 and 2020 that are secured by certain equipment at this facility. As of September 30, 2020, the Company had a combined $33.9 million outstanding under these Equipment Notes. 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.
(5)Amounts represent future minimum payments under financing leases. At September 30, 2020, finance lease liabilities of $0.3 million were recorded in accounts payable and accrued expenses and $0.5 million were recorded in other long-term l


55


iabilities in the accompanying consolidated condensed balance sheets.effect as of September 30, 2021). For further discussion, see Note 2 "Leases" to7 "Financing Arrangements" in the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q.
(6)
(2)In January 2019, to fund the purchase price of the Jack Wolfskin acquisition, the Company entered into a Credit Agreement, which provides for a Term Loan B facility in an aggregate principal of $480.0 million, which was issued less $9.6 million in an original issue discount and other transaction fees. For further discussion, see Note 7 "Financing Arrangements" in the Notes to Consolidated 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" in 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" in the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q.
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(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 Note 7 "Financing Arrangements" in 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" in 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" in 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 September 30, 2021, finance lease liabilities of $1.3 million were recorded in accounts payable and accrued expenses and $12.1 million were recorded in other long-term liabilities in the accompanying consolidated condensed balance sheets. For further discussion, see Note 3 "Leases" in 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 September 30, 2021, short-term and long-term operating lease liabilities of $55.5 million and $1,181.4 million, respectively, were recorded in the accompanying consolidated condensed balance sheets. For further discussion, see Note 3 "Leases" in 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 DLF obligations in connection with the construction of Topgolf venue facilities. At September 30, 2021, the short-term and long-term obligations were $0.6 million and $312.0 million, respectively. For further discussion, see Note 3 "Leases" in 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 September 30, 2021. For further discussion, see Note 3 "Leases" in 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 September 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 September 30, 2021. Amounts exclude uncertain income tax
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positions that the Company would be able to offset against deferred taxes. For further discussion, see Note 13 “Income Taxes” in this line item represent commitments for minimum lease payments under non-cancelable operating leases. At September 30, 2020, short-term and long-term operating lease liabilities of $28.0 million and $170.7 million, respectively, were recorded 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.
(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)
Amountrepresents the current and non-current portions of uncertain income tax positions as recorded on the Company's consolidated condensed balance sheet as of September 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 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 nine months ended September 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” toin 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).


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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 September 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 $152.0 million. In addition, in 2021, the Company expects to have additional capital expenditures of approximately $73.0 million for the Callaway legacy business and Topgolf, combined. Total estimated capital expenditures are expected to be approximately $225.0 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 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" toin 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.
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Foreign Currency Fluctuations
Information about the Company's foreign currency hedging activities is set forth in Note 17 “Derivatives and Hedging,” toin 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.
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 September 30, 20202021 through its foreign currency forward contracts.
At September 30, 2020,2021, the estimated maximum loss from the Company’s foreign currency forward contracts, calculated using the sensitivity analysis model described above, was $17.2$14.2 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" toin 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


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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" toin 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 sensitivity analysis quantified that the incremental expense incurred by a 10% increase in interest rates would be $1.9 millionnominal over the 12-month period ending on September 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 September 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 September 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" in 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
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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 September 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’sCompany's internal control over financial reporting.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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PART II. OTHER INFORMATION
Item 1.    Legal Proceedings
The information set forth in Note 14 “Commitments & Contingencies,” toin 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 and June 30, 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 and June 30, 2020 with respect to the Risk Factors, other than the additionas previously reported in Part II, Item 1A of the Risk Factors below.

The COVID-19 pandemic has had, and is expected to continue to have, a material and adverse effect on the Company's business, financial condition and results of operations.
The outbreak of COVID-19 has created considerable instability and disruption in the U.S. and world economies. In March 2020, the World Health Organization declared COVID-19 a global pandemic, and 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 the Company's markets. In particular, the COVID-19 pandemic has caused significant disruption in the Company's supply and distribution chains for its golf equipment, apparel and other products sold globally, and resulted in temporary closures of its corporate offices and retail stores around the world. A majority of the Company's employees in the United States and Europe are continuing to work from home. Additionally, the COVID-19 pandemic has resulted in the cancellation of golf tournaments, closures of golf courses and a significant decrease in demand for consumer products, including the Company's golf equipment, apparel and other products.
Especially in light of the rising cases of COVID-19 in the United States and worldwide, the Company is unable to accurately predict the impact that the COVID-19 pandemic and the resulting disruptions will have on its operations going forward due to the currently unknowable duration, scope and severity of the COVID-19 pandemic. Also, the Company is unable to accurately predict the impact of the ongoing governmental regulations that have been imposed or new regulations that may be imposed in response to the pandemic. To date, such disruptions have resulted in, among other things, production delays and closures of the Company's manufacturing facilities, retail locations and warehouses, any or all of which could materially and adversely affect its supply and distribution chains and ability to manage its operations. The Company has also experienced staffing shortages as a result of remote working requirements or otherwise. Although certain aspects of the Company's business has improved and net sales increased in the third quarter of 2020 as compared to the third quarter of 2019, the Company expects to continue to be impacted by, the instability and disruption in global economic and market conditions, and the related decreases in customer demand and spending. To the extent that third parties on whom the Company relies for revenue, including, among others, its customers and licensees, are negatively impacted by COVID-19, such third parties may be unwilling or unable to make payments otherwise due to the Company on a timely basis, or at all. In the event of a nonpayment, default or bankruptcy by such third party, the Company's cash flows may be adversely impacted, costs may be incurred to protect its contractual rights, and the Company may be unable to recognize the revenue that the Company otherwise expected to receive from such third party.
Although the Company has taken actions to significantly reduce costs, maximize liquidity and strengthen its operating and financial position, there can be no assurance that such actions will be able to counteract the global economic impacts of the COVID-19 pandemic. If the Company experiences a decline in revenues, cash flows or earnings due to COVID-19, the Company may have difficulty paying interest and principal amounts due on its existing credit facilities or other indebtedness and meeting certain of the financial covenants contained in such credit facilities. Also, if additional financing is required to operate the Company's business, such financing may not be available to the Company on acceptable terms, or at all. While it is premature to predict the ultimate impact of these developments, the Company expects its results in the near-term and beyond will be adversely impacted in a significant manner. Furthermore, when conditions return to a more normal state, the Company may experience difficulties efficiently ramping up its operations to pre-COVID-19 levels in an effective manner.


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To the extent the COVID-19 pandemic adversely affects the Company's business, financial condition and results of operations, it may also have the effect of heightening many of the other risks described in “Risk Factors” under Item 1A and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 7 of the Company's AnnualCompany’s Quarterly Report on Form 10-K10-Q for the yearquarter ended DecemberMarch 31, 2019 that was filed with the SEC on March 2, 2020, including, without limitation, risks relating to changes in demand for the Company's products or the supply of the components and materials used to make its products, level of indebtedness, need to generate sufficient cash flows to service the Company's indebtedness, ability to comply with the obligations and financial covenants contained in the Company's existing credit facilities, availability of adequate capital, the ability to execute the Company's strategic plans, U.S. trade, tax or other policies that restrict imports or increase import tariffs, 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, the Company may be subject to similar risks as posed2021, which are incorporated herein by COVID-19.this reference.
There can be no assurance when or if the Company's proposed Merger with Topgolf will be consummated.
The completion of the Merger is subject to the satisfaction or waiver of a number of conditions as set forth the Merger Agreement, including, among others, the absence of laws in the United States and certain specified jurisdictions enjoining or prohibiting the consummation of the transactions contemplated by the Merger Agreement, the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, the required approvals by the stockholders of the Company and Topgolf, the effectiveness of a registration statement on Form S-4 (the “Registration Statement”), and the absence of any material adverse effect on the Company or Topgolf. There can be no assurance that the Company and Topgolf will be able to satisfy the closing conditions or that closing conditions beyond the Company’s or Topgolf’s control will be satisfied or waived.
The Merger Agreement also contains certain customary termination rights, including, among others, the right of either party to terminate the Merger Agreement with mutual written consent and in other specified circumstances. The Merger Agreement further provides that, upon termination of the Merger Agreement under specified circumstances, either party may be required to pay the other party a termination fee of $75.0 million.
The Company and Topgolf are both subject to various business uncertainties, contractual restrictions and requirements while the Merger is pending, that could adversely affect the Company's and Topgolf’s businesses, financial condition and results of operations.
During the pendency of the Merger, it is possible that customers, suppliers, vendors, commercial partners and/or other persons with whom the Company or Topgolf has a business relationship may elect to delay or defer certain business decisions or decide to seek to terminate, change or renegotiate their relationships with the Company or Topgolf, as the case may be, as a result of the Merger, which could significantly reduce the expected benefits of the Merger and/or adversely affect the Company's revenues, earnings and cash flows, and the market price of its common stock, regardless of whether the Merger is completed. Uncertainty about the effects of the Merger on employees may impair the Company’s and Topgolf’s the ability to attract, retain and motivate key personnel during the pendency of the Merger and, if the Merger is completed, for a period of time thereafter. If key employees depart because of issues related to the uncertainty and difficulty of integration or a desire not to remain with the Company or Topgolf following the completion of the Merger, the Company and Topgolf may have to incur significant costs in identifying, hiring and retaining replacements for departing employees and may lose significant expertise and talent. The Company will also incur significant costs related to the Merger, some of which must be paid even if the Merger is not completed. These costs are substantial and include financial advisory, legal and accounting costs.
Under the terms of the Merger Agreement, the Company and Topgolf are also subject to certain restrictions on the conduct of their respective businesses prior to the completion of the Merger, which may adversely affect the Company's and Topgolf’s ability to execute certain of their respective business strategies. Such limitations could adversely affect the Company's and Topgolf’s business, strategy, operations and prospects prior to the completion of the Merger.
Any difficulties resulting from the Merger could adversely affect the Company's business, financial condition and results of operations.
Following the completion of the Merger, the Company may not be able to integrate the Topgolf business successfully or operate the Topgolf business profitably. Integrating any newly acquired business, including Topgolf, could be expensive


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and time-consuming. Integration efforts often take a significant amount of time, place a significant strain on managerial, operational and financial resources and could prove to be more difficult or expensive than predicted. The diversion of management’s attention and any delay or difficulties encountered in connection with any such acquisitions could result in the disruption of on-going business or inconsistencies in standards and controls that could negatively affect the Company’s ability to maintain third-party relationships. Moreover, the Company may need to raise additional funds through public or private debt or equity financing, or issue additional shares, to continue operating the Topgolf business, which may result in dilution for stockholders or the incurrence of indebtedness.
As part of the Company’s efforts to acquire companies, business or products or to enter into other significant transactions, including Topgolf, the Company conducts business, legal and financial due diligence with the goal of identifying and evaluating material risks involved in the transaction. Despite the Company’s efforts, the Company ultimately may be unsuccessful in ascertaining or evaluating all such risks and, as a result, might not achieve its projected financial performance or realize the intended advantages of the Merger. In addition, it is not possible to accurately predict the full impact of the COVID-19 pandemic on the business, financial condition and results of operations of Topgolf, due to the evolving nature of the COVID-19 pandemic and the extent of its impact across industries and geographies and numerous other uncertainties. There can be no assurance that any efforts taken by Topgolf to address the adverse impacts of the COVID-19 pandemic or actions taken to contain the COVID-19 pandemic or its impact will be effective or will not result in significant additional costs. If Topgolf is unable to recover from a business disruption on a timely basis or otherwise mitigate the adverse effects of the COVID-19 pandemic, the business, financial condition and results of operations of Topgolf could be materially and adversely affected, which could make the Merger less attractive, and the Merger and efforts to integrate the businesses of the two companies may be delayed or become more costly or difficult.
If the Company fails to realize the expected benefits from the Merger, whether as a result of unidentified risks, integration difficulties, COVID-19-related disruptions, litigation with current or former employees and other events, the Company’s business, financial condition and results of operations could be adversely affected.
There has been no public market for Topgolf common stock and the lack of a public market makes it difficult to determine the fair market value of Topgolf.
The outstanding shares of Topgolf common stock are privately held and are not traded on any public market. The lack of a public market may make it more difficult to determine the fair market value of Topgolf than if the outstanding shares of Topgolf common stock were traded publicly. The value ascribed to Topgolf’s securities in other contexts, including in private valuations or financings, may not be indicative of the price at which the outstanding shares of Topgolf common stock may have traded if they were traded on a public market. The consideration to be paid to Topgolf stockholders in the Merger was determined based on negotiations between the parties and likewise may not be indicative of the price at which the outstanding shares of Topgolf common stock may have traded if they were traded on a public market.
The Company may be targeted by securities class action and derivative lawsuits that could result in substantial costs and may delay or prevent the Merger from being completed.
Securities class action lawsuits and derivative lawsuits are often brought against public companies that have entered into merger agreements. Even if the lawsuits are without merit, defending against these claims can result in substantial costs and divert management time and resources. An adverse judgment could result in monetary damages, which could have a negative impact on the Company’s liquidity and financial condition. Additionally, if a plaintiff is successful in obtaining an injunction prohibiting completion of the Merger, then that injunction may delay or prevent the Merger from being completed, or from being completed within the expected time frame, which may adversely affect the Company’s and Topgolf’s respective businesses, financial positions and results of operation. Currently, the Company is not aware of any securities class action lawsuits or derivative lawsuits having been filed in connection with the Merger.
The market price of the Company's common stock may decline as a result of the Merger, and the issuance of shares of its common stock to Topgolf stockholders in the Merger may have a negative impact on the Company's financial results, including earnings per share.
The market price of the Company's common stock may decline as a result of the Merger, and holders of its common stock (including Topgolf stockholders who receive the Company's common stock in connection with the Merger) could see a decrease in the value of their investment in its common stock, if, among other things, the Company and the surviving company are unable to achieve the expected growth in earnings, or if the anticipated benefits from the Merger are not realized, or if the


61


Merger and integration-related costs related to the Merger are greater than expected. The market price of the Company's common stock may also decline if it does not achieve the anticipated benefits of the Merger as rapidly or to the extent expected by financial or industry analysts or if the effects of the Merger on its financial position, results of operations or cash flows are not otherwise consistent with the expectations of financial or industry analysts. The issuance of shares of the Company's common stock in the Merger could on its own have the effect of depressing the market price for its common stock. In addition, some Topgolf stockholders may decide not to continue to hold the shares of the Company's common stock they receive as a result of the Merger, and any such sales of the Company's common stock could have the effect of depressing their market price. Moreover, general fluctuations in stock markets could have a material adverse effect on the market for, or liquidity of, the Company's common stock, regardless of its actual operating performance following the completion of the Merger.
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 third quarter of 2020.2021. 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 September 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)
July 1, 2021 - July 31, 20212 $32.80 — $77,369 
August 1, 2021 - August 31, 20211 33.11 — 77,369 
September 1, 2021 - September 30, 202114 28.23 — 77,369 
Total17 $28.90 — $77,369 

 Three Months Ended September 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)
July 1, 2020-July 31, 2020 —
   $—
   —
   $77,369
 
August 1, 2020-August 31, 2020 10
   $18.71
   —
   $77,369
 
September 1, 2020-September 30, 2020 —
   $—
   —
   $77,369
 
Total 10
   $18.71
   —
   $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
Item 5.    Other Information
None.

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Item 6.    Exhibits
2.1
Agreement and Plan of Merger, dated as of October 27, 2020, by and among Callaway Golf Company, 51 Steps, Inc., and Topgolf International, Inc., incorporated herein by this reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K, as filed with the Commission on October 27, 2020 (file no. 1-10962).
3.1
3.1 
SecondRestated Certificate of Incorporation of Callaway Golf Company, incorporated herein by this reference to Exhibit 3.33.2 to the Company's Current Report on Form 8-K, as filed with the Commission on May 14, 202020, 2021 (file no. 1-10962).
3.2
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).
10.1
Form of Support Agreement, dated as of October 27, 2020, by and among Callaway Golf Company, 51 Steps, Inc. and certain stockholders of Topgolf International, Inc., incorporated herein by this reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, as filed with the Commission on October 27, 2020 (file no. 1-10962).
10.2
Stockholders Agreement, dated as of October 27, 2020, by and among Callaway Golf Company and certain stockholders of Topgolf International, Inc., incorporated herein by this reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, as filed with the Commission on October 27, 2020 (file no. 1-10962).
10.3
Registration Rights Agreement, dated as of October 27, 2020, by and among Callaway Golf Company, Topgolf International, Inc. and certain stockholders of Topgolf International, Inc., incorporated herein by this reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K, as filed with the Commission on October 27, 2020 (file no. 1-10962).
10.4
Fourth Amendment to Fourth Amended and Restated Loan and Security Agreement, dated as of October 27, 2020, by and among Callaway Golf Company, certain subsidiaries of Callaway Golf Company, and Bank of America, N.A., as administrative agent and as security trustee, incorporated herein by this reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K, as filed with the Commission on October 27, 2020 (file no. 1-10962).
10.5
Commitment Letter, dated as of October 27, 2020, among Callaway Golf Company, Bank of America, N.A., JPMorgan Chase Bank, N.A., MUFG Union Bank, N.A, Truist Bank, and Truist Securities, Inc., incorporated herein by this reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K, as filed with the Commission on October 27, 2020 (file no. 1-10962).
31.1
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. †
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.

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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
Senior Vice President and

Chief Accounting Officer
Date: November 9, 2020

2021

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