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 inthe 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 intoU.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 endedSeptember 30, 2021 , including a gain to step-up the Company's former investment in Topgolf to its fair value, amortization expense of intangible assets associated with the Jack Wolfskin, OGIO, TravisMathew acquisitions and more recently the merger with Topgolf, the discount amortization of the Convertible Notes issued inMay 2020 , a valuation allowance on certain deferred tax assets, in addition to other non-recurring expenses. For the three and nine months endedSeptember 30, 2020 , non-GAAP financial results exclude certain non-cash charges, including an impairment charge to write-down the goodwill and trade name of Jack Wolfskin, as well as amortization expense of intangible assets associated with the Jack Wolfskin, OGIO and TravisMathew acquisitions, in addition to non-recurring costs associated with the Company's transition to the new North America Distribution Center and other integration costs associated with Jack 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 Callaway is a technology-enabled golf company delivering leading golf equipment, apparel and entertainment, with a portfolio of global brands includingCallaway Golf , Topgolf, Odyssey, OGIO, TravisMathew and Jack Wolfskin. The Company's golf products, comprised ofCallaway Golf branded golf clubs and balls and Odyssey branded putters, are designed to be technologically advanced for golfers of all skill levels, both amateur and professional. The Company's soft goods are largely designed and developed internally, and are comprised ofCallaway Golf , OGIO, TravisMathew and Jack Wolfskin branded products.Callaway Golf soft goods offers a full line of premium golf apparel, footwear, gear and accessories. The OGIO brand 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. Under the Jack Wolfskin brand, the Company offers a full line of premium outdoor apparel, gear and accessories. OnMarch 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 and 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. 45 -------------------------------------------------------------------------------- The Topgolf venues business consists of Company-operated venues within theUnited States and Company -operated and franchised venues outsidethe 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 ofSeptember 30, 2021 , Topgolf had 66 Company-operated venues and one Company-operated lounge inthe United States , with an additional eight venues under construction inthe United States , and three Company-operated venues in theUnited Kingdom , with an additional one venue under construction in theUnited Kingdom . Topgolf receives a royalty from its franchised locations. As ofSeptember 30, 2021 , Topgolf had three franchised venues (inAustralia ,Mexico and theUnited Arab Emirates ) and one licensed lounge (inChina ), with an additional three franchised venues under construction (inGermany ,Thailand andChina ). 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 ofSeptember 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 toDecember 31 . As such, the Topgolf financial information included in the Company's consolidated condensed financial statements for the three and nine months endedSeptember 30, 2021 is fromJuly 5, 2021 throughOctober 3, 2021 andMarch 8, 2021 throughOctober 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 endedSeptember 30, 2021 and 2020. For further information about the 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. Operating and Reportable Segments The Company has three operating and reportable segments, namely Golf Equipment, Apparel, Gear and Other and Topgolf. The Golf Equipment operating segment, which is comprised of golf club and golf ball products, includesCallaway 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 consists 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 ofthe 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" in the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q. Cost of Products and Services The Company's cost of products is comprised primarily of material and component costs, distribution and warehousing costs, and overhead. In addition, cost of products includes retail merchandise costs for products sold in retail shops within Topgolf venue facilities. Historically, over 85% of the Company's manufacturing costs, primarily material and component costs, are variable in nature and fluctuate with sales volumes. With respect to the Company's Golf Equipment operating segment, variable costs range between 85% to 95% for golf club products and 70% to 80% for golf ball products. Variable costs for soft goods in the Apparel, Gear and Other operating segment are generally greater than 85% as fewer fixed costs are used in the manufacturing of soft goods products. Generally, the relative significance of the components of cost of products do not vary materially from these percentages from period to period. 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 46 -------------------------------------------------------------------------------- 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 and Nine months endedSeptember 30, 2021 and 2020-Segment 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. Sales of outdoor apparel, footwear and equipment related to the Jack Wolfskin business focuses primarily on outerwear and consequently experiences stronger sales for such products during the cold-weather months and the corresponding prior sell-in periods. Therefore, sales of Jack Wolfskin 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. 47 -------------------------------------------------------------------------------- Foreign Currency A significant portion of the Company's business is conducted outside ofthe United States in currencies other than theU.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 intoU.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 weakerU.S. dollar and are affected negatively by a strongerU.S. dollar as compared to the foreign currencies in which the Company conducts its business. Executive Summary The third quarter of 2021 represented another period of record results for the Company from both a revenue and operating income perspective, as Topgolf experienced strong walk-in traffic and social events bookings, and strong demand for the Company's golf equipment and apparel products continued. The strong quarterly results built upon the momentum from earlier in 2021, resulted in net revenue of$856.5 million and$2,421.7 million in the third quarter and first nine months of 2021, respectively, which increased$380.9 million (80.1%) and$1,206.9 million (99.3%) compared to the respective comparative periods in 2020. From an operating segment perspective, Topgolf performed exceptionally well during the third quarter and first nine months of 2021 since the merger onMarch 8, 2021 . This resulted in incremental revenue of$333.8 million in the third quarter and$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 2021, 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$22.3 million (8.3%) to$289.6 million and$299.0 million (38.9%) to$1,067.5 million for the three and nine months endedSeptember 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 endedSeptember 30, 2021 , respectively. Total operating income increased$12.5 million (19.7%) in the third quarter of 2021 to$76.0 million , compared to$63.5 million in the third quarter of the prior year period, primarily due to incremental operating income of$23.9 million resulting from the addition of the Topgolf business for the full third quarter, combined with an$8.7 million (33.6%) increase in Apparel, Gear and Other. This increase was partially offset by a decline of$11.0 million (19.4%) in Golf Equipment, which was impacted by higher freight costs due to the ongoing shipping container shortages and port delays in theU.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 larger 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 EndedSeptember 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 the third quarter of 2020. This increase was driven by 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 increased$22.3 million (8.3%) and$24.8 million (11.9%), respectively, compared to the third 48 -------------------------------------------------------------------------------- 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 Golf Equipment and 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 were negatively impacted by a decline in retail traffic due to the COVID-19 pandemic. The Company's net revenues by operating segment are presented below (dollars in millions): Three Months Ended September 30, Growth 2021 2020 Dollars Percent Net revenues: Topgolf $ 333.8 $ -$ 333.8 n/a Golf equipment 289.6 267.3 22.3 8.3 % Apparel, gear and other 233.1 208.3 24.8 11.9 % $ 856.5$ 475.6 $ 380.9 80.1 % For further discussion of each operating segment's results, see "Operating Segment Results for the Three Months EndedSeptember 30, 2021 and 2020" below. Net revenues information by region is summarized as follows (dollars in millions): Three Months Ended September Constant Currency 30, Growth Growth vs. 2020 2021 2020 Dollars Percent Percent Net revenues: United States$ 552.9 $ 214.6 $ 338.3 157.6 % 157.6% Europe 157.2 134.7 22.5 16.7 % 14.2% Japan 63.4 56.5 6.9 12.2 % 16.5% Rest of world 83.0 69.8 13.2 18.9 % 14.5%$ 856.5 $ 475.6 $ 380.9 80.1 % 79.2% Net revenues inthe United States increased$338.3 million (157.6%) to$552.9 million during the third quarter of 2021 compared to$214.6 million in the third quarter of 2020. The Company's sales in regions outside ofthe United States increased$42.6 million (16.3%) to$303.6 million during the third quarter of 2021 compared to$261.0 million in the third quarter of 2020. The increase in both 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 inthe United States andEurope , respectively. Net revenues in the third quarter of 2020, primarily with respect to soft goods, were negatively impacted by a decline in retail traffic due to the COVID-19 pandemic. Foreign currency fluctuations had a favorable impact of$4.0 million on net revenues during the third quarter of 2021 relative to the same period in the prior year. Costs and Expenses Cost of products increased$13.6 million to$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. 49 -------------------------------------------------------------------------------- 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 inMarch 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 newKorea 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 inMarch 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 primarily due to incremental interest of$15.7 million related to the debt and DLF obligations assumed as part of the Topgolf merger. See Note 7 "Financing Arrangements" in the Notes to Consolidated Condensed Financial Statements included in Part I, Item 1, of this Form 10-Q. Other income decreased$4.0 million to$3.0 million in the third quarter of 2021 compared to$7.0 million in the third quarter of 2020 primarily due to an$11.3 million decrease in foreign currency transaction gains, partially offset by a$7.4 million increase in hedging contract gains. Income Taxes The provision for income taxes increased$60.8 million to$66.2 million in the third quarter of 2021, compared to$5.4 million in the third quarter of 2020. As a percentage of pre-tax income, the Company's effective tax rate was 131.8% in the third quarter of 2021 compared to 9.3% in the third quarter of 2020. This increase was primarily due to the impact of using the annual effective tax rate method for three months endedSeptember 30, 2021 compared to using the discrete effective tax rate method for the three months endedJune 30, 2021 . There are many items causing volatilty in the Company's income tax rate during its interim periods this year. However, the 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" in 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 2021 decreased$68.4 million to a net loss of$16.0 million compared to net income of$52.4 million in the third quarter of 2020. Diluted earnings per share decreased$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. On a non-GAAP basis, excluding the items described in the table below, the Company's net income and diluted earnings per share for the three months endedSeptember 30, 2021 would have been$26.3 million and$0.14 per share, respectively, compared to$59.2 million and$0.61 per share, respectively, for the comparative period in 2020. Fully diluted shares were 193.9 million shares of common stock in the third quarter of 2021, an increase of 97.3 million shares compared to 96.6 million shares in the third quarter of 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 addition of Topgolf and a$3.9 million net decrease in foreign currency gains compared to the prior year. These decreases were partially offset by increases of$23.9 million in incremental Topgolf operating income and$8.7 million in Apparel, Gear and Other operating income. 50 -------------------------------------------------------------------------------- The table below presents a reconciliation of the Company's as-reported results for the three months endedSeptember 30, 2021 and 2020 to the Company's non-GAAP results reported above for the same periods (in millions, except per share information). Three Months Ended September 30, 2021 Non-Cash Amortization of Discount on Non-Cash Acquisition Convertible Acquisition and Other Tax Valuation GAAP Amortization(1) Notes(2) Non-Recurring Items(3) Allowance(4) Non-GAAP(5) Net income (loss)$ (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 outstanding 186.0 186.0 186.0 186.0 186.0 193.9
Three Months Ended
Non-Cash Non-Cash Acquisition Amortization of Amortization and Discount on Impairment Convertible Other Non-Recurring GAAP Charges(1) Notes(2) 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)
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. In addition, the third quarter of 2021 includes non-cash amortization expense related to intangible assets acquired in connection with the merger with Topgolf inMarch 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 inMay 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 itsNorth 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 endedSeptember 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 EndedSeptember 30, 2021 and 2020 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 lines 20.2 $ 333.8 Golf Equipment Golf Equipment net revenues increased$22.3 million (8.3%) to$289.6 million in the third quarter of 2021 compared to$267.3 million in the third quarter of 2020 due to a$19.9 million (9.5%) increase in golf club sales and a$2.4 million (4.1%) increase in golf ball sales. These increases were driven by growth in sales volume across all product categories resulting from the continued popularity for the game of golf and high demand for golf products, which outweighed the global supply chain disruptions during the third quarter in 2021. Net revenues of golf equipment in the third quarter of 2020 were negatively impacted by the decline in retail traffic due to the COVID-19 pandemic. Net revenues for the Golf Equipment operating segment by product category is summarized as follows (dollars in millions): Three Months Ended September 30, Growth 2021 2020 Dollars Percent Net revenues: Golf clubs$ 229.3 $ 209.4 $ 19.9 9.5 % Golf balls 60.3 57.9 2.4 4.1 %$ 289.6 $ 267.3 $ 22.3 8.3 % Apparel, Gear and Other Net revenues of Apparel, Gear and Other increased$24.8 million (11.9%) to$233.1 million in the 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 gear, accessories and other increased$0.2 million (0.2%) in the third quarter of 2021 compared to the third quarter of 2020. The increase in Apparel, Gear & Other was due to sales growth across all brands compared to the third quarter of 2020 led by the TravisMathew brand, despite global supply chain challenges during the third quarter of 2021. The increase in Gear, Accessories and Other was driven by increases across all golf accessory categories for the Callaway brand, headwear and footwear for TravisMathew, and footwear for Jack Wolfskin. Net revenues in the third quarter of 2020 were negatively impacted by the decline in retail traffic due to the COVID-19 pandemic. The increase in TravisMathew sales was driven by strong brand momentum across all sales channels. The Callaway brand increased due to a significant increase in demand for golf accessories driven by the heightened popularity of the game of golf combined with the success of the Callaway branded product in the Asian markets. The increase in Jack Wolfskin sales was driven by an increase in retail sales combined with the wholesale business inEurope . Net revenues for the Apparel, Gear and Other operating segment is summarized as follows (dollars in millions): Three Months Ended September 30, Growth 2021 2020 Dollars Percent Net revenues: Apparel$ 150.2 $ 125.6 $ 24.6 19.6 % Gear, accessories, & other 82.9 82.7 0.2 0.2 %$ 233.1 $ 208.3 $ 24.8 11.9 % 52
-------------------------------------------------------------------------------- Segment Profitability The Company evaluates the performance of its 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 measure of its operational performance. Profitability by operating segment is summarized as follows (dollars in millions): Non-GAAP Constant Three Months Ended Currency Growth September 30, Growth vs. 2020(1) 2021 2020 Dollars Percent Percent Net revenues: Topgolf$ 333.8 $ -$ 333.8 n/a n/a Golf Equipment 289.6 267.3 22.3 8.3 % 7.9% Apparel, Gear and Other 233.1 208.3 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 Equipment 45.8 56.8 (11.0) (19.4) % Apparel, Gear and Other 34.6 25.9 8.7 33.6 % Total segment operating income 104.3 82.7 21.6 26.1 % Corporate G&A and other(2) 28.3 19.2 9.1 47.4 % Total operating income 76.0 63.5 12.5 19.7 % Interest expense, net (28.7) (12.7) (16.0) 126.0 % Other income, net 2.9 7.0 (4.1) (58.6) % Total income before income taxes$ 50.2 $ 57.8 $ (7.6) (13.1) % (1)Calculated by applying 2020 exchange rates to 2021 reported sales in regions outsidethe 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 onMarch 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 fair value step-up of Topgolf property, plant and equipment and amortization expense of the market valuation adjustment on operating leases assumed in connection with the merger with Topgolf, and (iii)$0.5 million of costs related to the implementation of new IT systems for Jack Wolfskin and Topgolf. The amount for the third quarter of 2020 includes (i)$1.2 million of amortization 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 transition 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. Operating income for the golf equipment operating segment decreased$11.0 million (-19.4%) to$45.8 million in the third 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 theU.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. 53 -------------------------------------------------------------------------------- Operating income for the Apparel, Gear and Other operating segment increased$8.7 million (33.6%) to$34.6 million in the third quarter of 2021 compared to$25.9 million in the third quarter of 2020. This increase was driven by sales growth across all brands, as discussed above, combined with less promotional activity. These increases were partially offset by a gradual increase in operating expenses toward 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. Topgolf contributed an incremental$23.9 million of operating income to the Company in the third quarter of 2021, which includes the opening of two new domestic locations combined with incremental Toptracer bay installations during the third quarter of 2021. Nine-Month Periods EndedSeptember 30, 2021 and 2020 Net Revenues Net revenues for the nine months endedSeptember 30, 2021 increased$1,206.9 million (99.3%) to$2,421.7 million compared to$1,214.8 million for the nine months endedSeptember 30, 2020 . This increase was driven 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 onMarch 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$455.0 million (37.5%) compared to the first nine months of 2020. Net revenues from the Company's Golf Equipment and Apparel, Gear and Other businesses generated significant increases across all product categories and in all major geographic regions, despite global supply chain challenges experienced during the third quarter of 2021. This increase reflects the success of the Company's current year product lines and overall brand momentum, and the continued popularity of the game of golf and other outdoor activities. Net revenues in the first nine months of 2020 were negatively impacted by temporary closure of the Company's retail locations, manufacturing facilities and distributions centers, as well as its customers' retail locations due to the COVID-19 pandemic. The Company's net revenues by operating segment are presented below (dollars in millions): Nine Months Ended September 30, Growth 2021 2020 Dollars Percent Net revenues: Topgolf$ 751.9 $ -$ 751.9 n/a Golf Equipment 1,067.8 768.8 299.0 38.9 % Apparel, Gear and Other 602.0 446.0 156.0 35.0 %$ 2,421.7 $ 1,214.8 $ 1,206.9 99.3 % For further discussion of each operating segment's results, see below "Operating Segment Results for the Nine Months EndedSeptember 30, 2021 and 2020." Net revenues information by region is summarized as follows (dollars in millions): Non-GAAP Constant Nine Months Ended Currency Growth vs. September 30, Growth 2020 2021 2020 Dollars Percent Percent Net revenues: United States$ 1,583.9 $ 603.8 $ 980.1 162.3 % 162.3% Europe 386.6 281.5 105.1 37.3 % 29.0% Japan 197.1 158.5 38.6 24.4 % 25.5% Rest of world 254.1 171.0 83.1 48.6 % 38.6%$ 2,421.7 $ 1,214.8 $ 1,206.9 99.3 % 96.1% Net revenues inthe United States increased$980.1 million (162.3%) to$1,583.9 million during the nine months endedSeptember 30, 2021 compared to the same period in the prior year. Net revenues in regions outside ofthe United States increased$226.8 million (37.1%) to$837.8 million for the nine months endedSeptember 30, 2021 compared to$611.0 million for the nine months endedSeptember 30, 2020 . The increase in both domestic and international net revenue 54 -------------------------------------------------------------------------------- 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 inthe United States and Jack Wolfskin business inEurope andChina . Net revenues across all brands in the nine months 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 revenues of$39.0 million in the first nine months of 2021 relative to the same period in the prior year. Costs and Expenses Costs of products increased$217.6 million to$914.0 million for the nine months endedSeptember 30, 2021 compared to$696.4 million for 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 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 endedSeptember 30, 2021 compared to$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 inMarch 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 newKorea 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 endedSeptember 30, 2021 compared to$33.4 million (2.7% of net revenues) during the same period in 2020, primarily due to incremental expenses of$9.4 million related to the merger with Topgolf completed inMarch 2021 , and an increase in employee costs. Venue pre-opening costs of$9.4 million 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 of adding new Company-operated venues. These costs are expected to fluctuate based on the timing, size and location of 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 resulting in an impairment charge of$174.3 million . There were no impairment charges for the nine months endedSeptember 30, 2021 . (see Note 9, "Goodwill and Intangible Assets" 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$41.0 million to$75.4 million during the nine months endedSeptember 30, 2021 compared to$34.4 million in the comparable period of 2020, primarily due to the interest expense related to the debt and 55 -------------------------------------------------------------------------------- DLF obligations acquired as part of the Topgolf merger. See Note 7 "Financing Arrangements" in the Notes to Consolidated Condensed Financial Statements included in Part I, Item 1, of this Form 10-Q. As a result of the merger with Topgolf, the Company wrote up the value of its pre-merger shares of Topgolf to their fair value and recorded a gain of$252.5 million during the nine months of 2021. Other income decreased to$9.5 million during the nine months endedSeptember 30, 2021 compared to$27.5 million in the comparable period of 2020. This decline was primarily due to the$11.0 million gain recognized in 2020 in connection with the settlement of a cross-currency swap, in addition to a decrease in net foreign currency gains. Income Taxes The Company's provision for income taxes increased$91.5 million to$98.1 million for the nine months endedSeptember 30, 2021 , compared to$6.6 million in the comparable period of 2020. As a percentage of pre-tax income, the Company's effective tax rate for the first nine months of 2021 increased to 22.0% compared to (8.2)% in the comparable period of 2020. The Company's effective tax rate in 2021 was impacted by the$252.5 million nontaxable gain recognized on the Company's pre-merger investment in Topgolf shares as well as the recognition of a valuation allowance on certain net operating losses and tax credits. The Company's effective tax rate for 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 first nine months in 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" in 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 endedSeptember 30, 2021 increased to net income of$348.2 million compared to a net loss of$86.4 million in the comparable period of 2020. Diluted earnings (loss) per share increased$2.95 to earnings of$2.03 per share in the first nine months of 2021 compared to a loss per share of$(0.92) in the same period in 2020. On a non-GAAP basis, excluding the items described in the table below, the Company's net income and diluted earnings per share for the nine months endedSeptember 30, 2021 would have been$173.4 million and$1.01 per share, respectively, compared to$95.4 million and$0.99 per share, respectively, for the comparative period in 2020. Fully diluted shares were 171.2 million shares of common stock for the nine months endedSeptember 30, 2021 , an increase of 75.1 million shares compared to 96.1 million shares for the comparative period in 2020. The increased share count is primarily related to the issuance of additional shares in connection with the Topgolf merger. The increase in non-GAAP net income in 2021 was primarily driven by continued strong demand for the Company's products resulting from the overall increase in popularity of the game of golf, combined with a strong rebound in revenues of the Company's apparel and soft goods product lines, and the incremental net income attributable to Topgolf. Additionally, the Company's earnings in 2020 were negatively impacted by the business disruptions and challenges caused by the COVID-19 pandemic. These increases were partially offset by an increase in operating expenditures to normal pre-pandemic levels in the first nine months of 2021. The table below presents a reconciliation of the Company's as-reported results for the nine months endedSeptember 30, 2021 and 2020 to the Company's non-GAAP results reported above for the same periods (in millions, except per share information). Nine Months Ended September 30, 2021 Non-Cash Amortization of Discount on Non-Cash
Acquisition Convertible Acquisition and Other Tax Valuation
GAAP Amortization(1) Notes(2) Non-Recurring Items(3) Allowance(4) Non-GAAP Net income (loss)$ 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 outstanding 171.2 171.2 171.2 171.2 171.2 171.2 56
--------------------------------------------------------------------------------
Nine Months Ended September 30, 2020 Non-Cash Non-Cash Acquisition Amortization of Amortization and Discount on Impairment Convertible Other Non-Recurring GAAP Charges(1) Notes(2) Items(3) Non-GAAP(5) Net income (loss) $
(86.4)
$
(0.92)
94.2 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 endedSeptember 30, 2021 includes approximately seven months of non-cash amortization expense of the intangible assets acquired in the merger with Topgolf onMarch 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 inMay 2020 . (3)Acquisition and other non-recurring items for the nine months endedSeptember 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 endedSeptember 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 EndedSeptember 30, 2021 and 2020 As a result of the Topgolf merger, the Company now has three operating segments, namely Topgolf; Golf Equipment; and Apparel, Gear and Other. Topgolf OnMarch 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 endedSeptember 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 57 -------------------------------------------------------------------------------- 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 lines 49.7 $ 751.9 Golf Equipment Golf equipment net revenues increased$298.9 million (38.9%) to$1,067.8 million for the nine-months endedSeptember 30, 2021 compared to$768.9 million for the same period in 2020 due to a$249.1 million (40.4%) increase in golf club revenue and a$49.8 million (32.7%) increase in golf ball revenue. These increases were driven by the continued growth and high demand for the game of golf, continued surge in golf demand and participation, combined with the successful launch of the Company's new EPIC line of woods and APEX line of irons and the continued success of the Chrome Soft and Super Soft lines of golf balls, which resulted in a significant increase in sales volume across all product categories, despite global supply chain challenges in 2021. Net revenues of golf equipment in the nine months of 2020 were negatively impacted by the temporary closure of the Company's retail locations, manufacturing facilities and distributions centers, as well as its customers' retail locations, due to the COVID-19 pandemic. Net revenues for the Golf Equipment operating segment by product category is summarized as follows (dollars in millions): Nine Months Ended September 30, Growth 2021 2020 Dollars Percent Net revenues: Golf clubs$ 865.7 $ 616.6 $ 249.1 40.4 % Golf balls 202.1 152.3 49.8 32.7 %$ 1,067.8 $ 768.9 $ 298.9 38.9 % Apparel, Gear and Other Apparel, Gear and Other sales increased$156.1 million (35.0%) to$602.0 million during the nine months endedSeptember 30, 2021 compared to$445.9 million for the same period in 2020, due to a$97.7 million (40.8%) increase in apparel sales and a$58.4 million (28.3%) increase in sales of gear, accessories and other. The increase in the apparel, gear and other was due to a strong rebound across all brands in the first nine months of 2021 compared to the same period in 2020, which was severely impacted by the shutdown of distribution centers and many retail stores in all major regions due to the COVID-19 pandemic. The increase in apparel was driven by increases across each of the Company's TravisMathew, Callaway and Jack Wolfskin apparel brands, despite global supply chain challenges in 2021. The increase in gear, accessories and other was driven by strong increases across all golf accessory categories for the Callaway brand, headwear and footwear for TravisMathew, and footwear at Jack Wolfskin. The increase for TravisMathew products was driven by strong brand momentum and increases across all sales channels. The Callaway brand increased due to a surge in demand for golf accessories driven by the heightened popularity of the game of golf. The increase in Jack Wolfskin sales was driven by significant e-commerce sales and an increase in the wholesale business inChina , partially offset by lower retail revenue due to further government mandated retail shutdowns during the second quarter of 2021 inEurope . 58 -------------------------------------------------------------------------------- Net revenues for the Apparel, Gear and Other segment is summarized as follows (dollars in millions): Nine Months Ended September 30, Growth 2021 2020 Dollars Percent Net revenues: Apparel$ 336.9 $ 239.2 $ 97.7 40.8 % Gear, accessories, & other 265.1 206.7 58.4 28.3 %$ 602.0 $ 445.9 $ 156.1 35.0 % Segment Profitability The Company evaluates the performance of its operating segments based on segment operating income. Management uses total segment operating income as a measure of its operational performance, excluding corporate overhead and certain non-recurring and non-cash charges. Profitability by operating segment is summarized as follows (dollars in millions): Non-GAAP Constant Nine Months Ended Currency Growth September 30, Growth vs. 2020(1) 2021 2020 Dollars Percent Percent Net revenues: Topgolf$ 751.9 $ -$ 751.9 n/a n/a Golf Equipment 1,067.8 768.9 298.9 38.9% 36.2% Apparel, Gear and Other 602.0 445.9 156.1 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 Equipment 228.8 144.6 84.2 58.2% Apparel, Gear and Other 70.8 10.4 60.4 580.8% Total segment operating income 351.7 155.0 196.7 126.9% 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, net 9.5 27.5 (18.0) (65.5)%
Total income (loss) before income taxes
$ 526.1 659.3% (1)Calculated by applying 2020 exchange rates to 2021 reported sales in regions outsidethe 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 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; 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. 59 -------------------------------------------------------------------------------- (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 increased$84.2 million (58.2%) to$228.8 million for the nine months endedSeptember 30, 2021 from$144.6 million in the comparable period in the prior year. This increase was driven 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 higher sales volumes period over period, improved operating expense leverage, and less promotional activity. These increases were partially offset by an increase in freight costs due to the ongoing shipping container shortages and port delays in theU.S. , combined with prior year savings due to the Company's cost reduction initiatives in response to COVID-19 in the first nine months of 2020. Operating income for the apparel, gear and other operating segment increased$60.4 million (580.8%) to$70.8 million for the nine months endedSeptember 30, 2021 from$10.4 million in the comparable period in the prior year. This increase was driven by a strong 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 promotional activity and an increase in direct-to-consumer e-commerce sales, which have higher profit 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 results since the completion of the merger onMarch 8, 2021 , and reflects the opening of two new domestic locations combined with incremental Toptracer bay installations. Financial Condition The Company's cash and cash equivalents increased$142.1 million to$508.2 million atSeptember 30, 2021 from$366.1 million atDecember 31, 2020 . This increase reflects the combined cash positions of the Company and Topgolf as a result of the merger completed onMarch 8, 2021 . During the first nine months of 2021, the Company used its cash provided by operations of$246.8 million , combined with 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 exercise of stock options and$18.6 million from the sale of investments in golf related ventures, to fund capital expenditures of$198.9 million , repay$160.9 million of amounts outstanding under its long-term debt facilities and repurchase shares of its common stock for$12.9 million to satisfy payroll tax withholding obligations in connection with the vesting and settlement of employee restricted stock 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 7 "Financing Arrangements" in 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 accounts 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 and winter seasons. OnMarch 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 ofSeptember 30, 2021 , the Company's net accounts receivable increased to$255.2 million from$138.5 million as ofDecember 31, 2020 . This increase reflects the Company's seasonality combined with incremental accounts receivable from the merger with Topgolf. The Company's net accounts receivable as ofSeptember 30, 2021 increased$15.6 million compared toSeptember 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 60 -------------------------------------------------------------------------------- continued increase in demand for golf equipment as the result of the increased popularity of golf combined with a strong rebound in sales of 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 were more negatively impacted by the economic downturn caused by the COVID-19 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. OnMarch 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 increased$32.8 million to$385.3 million as ofSeptember 30, 2021 compared to$352.5 million as ofDecember 31, 2020 . This increase in inventories was primarily related 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 golf equipment inventory to meet the increased demand of golf equipment sales, combined with incremental inventory from the merger with Topgolf. The Company's inventory as ofSeptember 30, 2021 increased by$60.4 million compared to the Company's inventory as ofSeptember 30, 2020 primarily due to increases in golf equipment in order to support increased sales and upcoming product launches, combined with incremental inventory from the merger with Topgolf. This increase was partially offset by decreases in apparel, gear, and other inventory primarily due increased seasonality demand in the second half of the year, combined with supply chain constraints. Liquidity and Capital Resources The Company's principal sources of liquidity consist of its existing cash balances, funds expected to be generated from operations and funds from its credit facilities. Based upon the Company's current cash balances, its estimates of funds expected to be generated from operations, 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 endedDecember 31, 2020 and in Part II, Item 1A on Form 10-Q for the quarter endedMarch 31, 2021 ). As ofSeptember 30, 2021 , the Company had$918.0 million in cash and availability under its credit facilities, which is an increase of$281.1 million or 44% compared toSeptember 30, 2020 . Information about the Company's credit facilities and long-term borrowings is presented in Note 7 "Financing Arrangements" in 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. OnMarch 8, 2021 , the Company completed the merger with Topgolf in an all-stock transaction (see Note 6 "Business Combinations" in the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q). In connection with the merger with Topgolf, the Company acquired cash of$171.3 million and assumed$535.1 million in long-term debt. The Company believes that with its continued strong cash generation and increased liquidity, its geographic diversity and the strength of its brands, it will be able to fund Topgolf's growth while meeting its other financial obligations. As ofSeptember 30, 2021 , approximately 35.3% of the Company's cash was held in regions outside ofthe United States . The Company continues to maintain its indefinite reinvestment assertion with respect to most jurisdictions in which it operates because of local cash requirements to operate its business. If the Company were to repatriate cash tothe United States outside of settling intercompany balances, it may need to pay incremental foreign withholding taxes which, subject 61 -------------------------------------------------------------------------------- to certain limitations, generate foreign tax credits for use against the Company'sU.S. tax liability, if any. Additionally, the Company may need to pay certain state income taxes. Other Significant Cash and Contractual Obligations The table below summarizes certain significant cash obligations as ofSeptember 30, 2021 that will affect the Company's future liquidity. Payments Due By Period Remainder of Total 2021 2022 - 2023 2024 - 2025 Thereafter (in millions) Japan Term Loan Facility (1)$ 14.4 $
0.9
0.3 - 0.2 0.1 - Term Loan B Facility (2) 438.0 1.2 9.6 9.6 417.6 Interest on Term Loan Facility 104.5 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 Notes 1.3 0.2 0.9 0.2 - Mortgage Loans (6) 46.5 0.1 1.0 1.3 44.1 Financed Tenant Improvements 3.6 - 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)InAugust 2020 , the Company entered into the Japan Term Loan Facility for2,000 million Yen (or approximatelyU.S. $18.0 million using the exchange rate in effect as ofSeptember 30, 2021 ). 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. (2)InJanuary 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 onMarch 8, 2021 , the Company assumed a$350.0 million term loan facility (the "Topgolf Term Loan"), and a$175.0 million revolving credit facility withJPMorgan Chase Bank, N.A (the "Topgolf Revolving Credit Facility"), both withJPMorgan 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)InMay 2020 , the Company issued$258.8 million of 2.75% Convertibles Notes, which mature onMay 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. 62 -------------------------------------------------------------------------------- (5)BetweenDecember 2017 andAugust 2020 , the Company entered into four long-term financing agreements (the "Equipment Notes") withBank of America N.A . and other lenders to invest in its golf ball manufacturing facility inChicopee, Massachusetts , its North American Distribution Center inRoanoke, 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 onMarch 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 inthe United States ,Germany ,Canada and theUnited 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. AtSeptember 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. AtSeptember 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 onMarch 8, 2021 , the Company assumed certain DLF obligations in connection with the construction of Topgolf venue facilities. AtSeptember 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 ofSeptember 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 ofSeptember 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)Amount represents the current and non-current portions of uncertain income tax positions as recorded on the Company's consolidated condensed balance sheets as ofSeptember 30, 2021 . Amounts exclude uncertain income tax 63 -------------------------------------------------------------------------------- positions that the Company would be able to offset against deferred taxes. For further discussion, see Note 13 "Income Taxes" in 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 endedSeptember 30, 2021 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" in 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). Capital Expenditures The Company has certain capital expenditure commitments under lease agreements for Topgolf venues that have been signed as ofSeptember 30, 2021 . Estimated capital expenditures for the year endingDecember 31, 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 endedDecember 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 Due to the recent 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 8, "Financial Statements and Supplementary Data" included in the Company's Form 10-K for the fiscal year endedDecember 31, 2020 , see Note 2 "Summary of Significant Accounting Policies" in the Notes to the Consolidated Condensed Financial Statements in Part I, Item I of this Form 10-Q. Item 3. Quantitative and Qualitative Disclosures about Market RiskThe 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 7 "Financing Arrangements" in 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. 64 -------------------------------------------------------------------------------- Foreign Currency Fluctuations Information about the Company's foreign currency hedging activities is set forth in Note 17 "Derivatives and Hedging," in 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 atSeptember 30, 2021 through its foreign currency forward contracts. AtSeptember 30, 2021 , the estimated maximum loss from the Company's foreign currency forward contracts, calculated using the sensitivity analysis model described above, was$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 7 "Financing Arrangements" in the Notes to Consolidated Condensed Financial Statements in Part I, Item 1, and in "Liquidity and Capital Resources" in Part I, Item 2 of this Form 10-Q. The Company's long-term borrowing commitments are subject to interest rate fluctuations, which could be material to the Company's cash flows and results of operations. In order to mitigate this risk, the Company enters into interest rate hedges as part of its interest rate risk management strategy. Information about the Company's interest rate hedges is provided in Note 17 "Derivatives and Hedging" in 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 results 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 nominal over the 12-month period ending onSeptember 30, 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 ofSeptember 30, 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 ofSeptember 30, 2021 . Changes in Internal Control over Financial Reporting. OnMarch 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 inGermany ,China ,Korea andJapan . 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 65 -------------------------------------------------------------------------------- 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 endedSeptember 30, 2021 . As the implementation continues, the Company's internal processes, procedures and controls will be refined as appropriate. There were no other changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, the Company'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. 66
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