ACUSHNET HOLDINGS CORP. The following discussion contains management's discussion and analysis of our financial condition and results of operations and should be read together with our unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this report. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs and involve numerous risks and uncertainties, including those described in "Part II, Item 1A. Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q and in our other filings with theSecurities and Exchange Commission ("SEC"). Actual results may differ materially from those contained in any forward-looking statements. You should carefully read "Special Note Regarding Forward-Looking Statements" following the Table of Contents. Unless otherwise noted, the figures in the following discussion are unaudited. Overview We are the global leader in the design, development, manufacture and distribution of performance-driven golf products, which are widely recognized for their quality excellence. Today, we are the steward of two of the most revered brands in golf-Titleist, one of golf's leading performance equipment brands, and FootJoy, one of golf's leading performance wear brands. Our target market is dedicated golfers,who are the cornerstone of the worldwide golf industry. These dedicated golfers are avid and skill-biased, prioritize performance and commit the time, effort and money to improve their game. We believe our focus on innovation and process excellence yields golf products that represent superior performance and consistent product quality, which are the key attributes sought after by dedicated golfers. Many of the game's professional players,who represent the most dedicated golfers, prefer our products, thereby validating our performance and quality promise, while also driving brand awareness. We seek to leverage a pyramid of influence product and promotion strategy, whereby our products are the most played by the best players, creating aspirational appeal for a broad range of golferswho want to emulate the performance of the game's best players. Our net sales are diversified by both product category and mix as well as geography. Our product categories include golf balls, golf clubs, wedges and putters, golf shoes, golf gloves, golf gear and golf outerwear and apparel. Our product portfolio contains a favorable mix of consumable products, which we consider to be golf balls and golf gloves, and more durable products, which we consider to be golf clubs, golf shoes, golf gear and golf outerwear and apparel. Our net sales are also diversified by geography with a substantial majority of our net sales generated in five countries:the United States ,Japan ,Korea , theUnited Kingdom andCanada . We have the following reportable segments: Titleist golf balls; Titleist golf clubs; Titleist golf gear; and FootJoy golf wear. Impact of COVID-19 on our Business InMarch 2020 , theWorld Health Organization declared a pandemic related to the novel coronavirus ("COVID-19"), which led to government-ordered shutdowns of non-essential businesses, travel restrictions and restrictions on public gatherings and, as a result, our results of operations for the second quarter and first half of 2020 were negatively impacted. As restrictions were eased, the game of golf experienced a surge in rounds of play around the world, which resulted in increased demand for our products. On a Company-wide basis, we quickly began to experience demand pressures across all brands and product categories, which challenged, and continue to challenge, our supply chain and our ability to service our trade partners and golfers. During the first nine months of 2021, rounds of play remained high and we continued to see an increase in demand for our products, leading to increased sales volumes across all reportable segments. However, during this period, we also experienced supply chain disruptions causing shortages of various raw materials and increased freight charges. While government-ordered shutdowns and restrictions have eased in most regions and mass vaccination programs are underway, the emergence of virus variants and resurgences of positive cases has led to an increase in restrictions in some regions and could prompt increased restrictions in other regions, which could further disrupt our supply chain. Although we have seen increased rounds of play and demand for golf-related products, over the course of the pandemic, this could change as mass vaccination programs continue to advance and restrictions are further eased on other activities. Accordingly, our business, results of operations, financial position and cash flows could be materially impacted in ways that we cannot currently predict. 27
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Table of Contents Key Performance Measures We use various financial metrics to measure and evaluate our business, including, among others: (i) net sales on a constant currency basis, (ii) Adjusted EBITDA on a consolidated basis, (iii) Adjusted EBITDA margin on a consolidated basis and (iv) segment operating income (loss). Since a significant percentage of our net sales are generated outside ofthe United States , we use net sales on a constant currency basis to evaluate the sales performance of our business in period over period comparisons and for forecasting our business going forward. Constant currency information allows us to estimate what our sales performance would have been without changes in foreign currency exchange rates. This information is calculated by taking the current period local currency sales and translating them intoU.S. dollars based upon the foreign currency exchange rates for the applicable comparable prior period. This constant currency information should not be considered in isolation or as a substitute for any measure derived in accordance with generally accepted accounting principles inthe United States ("U.S. GAAP"). Our presentation of constant currency information may not be consistent with the manner in which similar measures are derived or used by other companies. We primarily use Adjusted EBITDA on a consolidated basis to evaluate the effectiveness of our business strategies, assess our consolidated operating performance and make decisions regarding pricing of our products, go to market execution and costs to incur across our business. We present Adjusted EBITDA as a supplemental measure of our operating performance because it excludes the impact of certain items that we do not consider indicative of our ongoing operating performance. We define Adjusted EBITDA in a manner consistent with the term "Consolidated EBITDA" as it is defined in our credit agreement. Adjusted EBITDA represents net income (loss) attributable toAcushnet Holdings Corp. plus interest expense, net, income tax expense (benefit), depreciation and amortization and other items defined in the agreement, including: share-based compensation expense; restructuring and transformation costs; certain transaction fees; extraordinary, unusual or non-recurring losses or charges; indemnification expense (income); certain pension settlement costs; certain other non-cash (gains) losses, net and the net income relating to noncontrolling interests. Adjusted EBITDA is not a measurement of financial performance underU.S. GAAP. It should not be considered an alternative to net income (loss) attributable toAcushnet Holdings Corp. as a measure of our operating performance or any other measure of performance derived in accordance withU.S. GAAP. In addition, Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items, or affected by similar non-recurring items. Adjusted EBITDA has limitations as an analytical tool, and you should not consider such measure either in isolation or as a substitute for analyzing our results as reported underU.S. GAAP. Our definition and calculation of Adjusted EBITDA is not necessarily comparable to other similarly titled measures used by other companies due to different methods of calculation. For a reconciliation of Adjusted EBITDA to net income (loss) attributable toAcushnet Holdings Corp. , see "-Results of Operations" below. We also use Adjusted EBITDA margin on a consolidated basis, which measures our Adjusted EBITDA as a percentage of net sales, because our management uses it to evaluate the effectiveness of our business strategies, assess our consolidated operating performance and make decisions regarding pricing of our products, go to market execution and costs to incur across our business. We present Adjusted EBITDA margin as a supplemental measure of our operating performance because it excludes the impact of certain items that we do not consider indicative of our ongoing operating performance. Adjusted EBITDA margin is not a measurement of financial performance underU.S. GAAP. It should not be considered an alternative to any measure of performance derived in accordance withU.S. GAAP. In addition, Adjusted EBITDA margin should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items, or affected by similar non-recurring items. Adjusted EBITDA margin has limitations as an analytical tool, and you should not consider such measure either in isolation or as a substitute for analyzing our results as reported underU.S. GAAP. Our definition and calculation of Adjusted EBITDA margin is not necessarily comparable to other similarly titled measures used by other companies due to different methods of calculation. Lastly, we use segment operating income (loss) to evaluate and assess the performance of each of our reportable segments and to make budgeting decisions. Segment operating income (loss) includes directly attributable expenses and certain shared costs of corporate administration that are allocated to the reportable segments, but excludes interest expense, net; restructuring charges; the non-service cost component of net periodic benefit cost; transaction fees and other non-operating gains and losses as we do not allocate these to the reportable segments. 28
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Table of Contents
Results of Operations
The following table sets forth, for the periods indicated, our results of
operations.
Three months ended Nine months ended
September 30, September 30,
(in thousands) 2021 2020 2021 2020
Net sales $ 521,629 $ 482,932 $ 1,727,364 $ 1,191,675
Cost of goods sold 252,792 230,911 813,362 582,242
Gross profit 268,837 252,021 914,002 609,433
Operating expenses:
Selling, general and administrative 199,787 153,724 586,411 436,982
Research and development 14,597 10,611 39,947 34,963
Intangible amortization 1,967 1,964 5,909 5,875
Restructuring charges - 518 - 13,250
Income from operations 52,486 85,204 281,735 118,363
Interest expense, net 1,147 3,831 6,611 12,356
Other expense, net 939 3,186 3,170 8,050
Income before income taxes 50,400 78,187 271,954 97,957
Income tax expense 10,475 14,141 62,882 21,183
Net income 39,925 64,046 209,072 76,774
Less: Net income attributable to noncontrolling
interests (661) (830) (3,765) (2,368)
Net income attributable to
$ 63,216 $ 205,307 $ 74,406 Interest expense, net 1,147 3,831 6,611 12,356 Income tax expense 10,475 14,141 62,882 21,183 Depreciation and amortization 10,178 10,487 30,816 31,058 Share-based compensation 7,012 3,674 20,822 10,077 Restructuring & transformation costs (1) - 643 - 13,710 Other extraordinary, unusual or non-recurring items, net (2)(3) 1,517 2,417 3,099 19,960 Net income attributable to noncontrolling interests 661 830 3,765 2,368 Adjusted EBITDA$ 70,254 $ 99,239 $ 333,302 $ 185,118 Adjusted EBITDA margin 13.5 % 20.5 % 19.3 % 15.5 %
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(1)Relates to severance and other costs associated with management's program to refine the Company's business model and improve operational efficiencies. (2)The three and nine months endedSeptember 30, 2021 include pension settlement costs of$0.5 million and$2.1 million , respectively, related to lump-sum distributions to participants in our defined benefit plans as a result of the voluntary retirement program as part of management's approved restructuring program, as well as other immaterial unusual or non-recurring items, net. (3)The nine months endedSeptember 30, 2020 include salaries and benefits paid for associateswho could not work due to government mandated shutdowns, fringe benefits paid for furloughed associates, spoiled raw materials, incremental costs to support remote work and the cost of additional health and safety equipment of$13.5 million . The three and nine months endedSeptember 30, 2020 also includes$1.2 million and$5.1 million of pension settlement costs related to lump-sum distributions to participants in our defined benefit plans as a result of the voluntary retirement plan as part of management's approved restructuring program, as well as other immaterial unusual or non-recurring items, net. 29
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Table of Contents
Three Months Ended
Net sales by reportable segment is summarized as follows:
Three months ended Constant Currency
September 30, Increase/(Decrease) Increase/(Decrease)
(in millions) 2021 2020 $ change % change $ change % change
Titleist golf balls $ 167.2 $ 170.1 $ (2.9) (1.7) % $ (4.6) (2.7) %
Titleist golf clubs 135.6 120.8 14.8 12.3 % 13.9 11.5 %
Titleist golf gear 46.6 44.3 2.3 5.2 % 1.8 4.1 %
FootJoy golf wear 137.9 116.0 21.9 18.9 % 20.4 17.6 %
Net sales information by region is summarized as follows:
Three months ended Constant Currency
September 30, Increase/(Decrease) Increase/(Decrease)(in millions) 2021 2020 $ change % change $ change % change United States$ 282.6 $ 271.3 $ 11.3 4.2 % $ 11.3 4.2 % EMEA (1) 68.9 65.4 3.5 5.4 % 0.7 1.1 % Japan 47.9 42.3 5.6 13.2 % 7.4 17.5 % Korea 75.8 61.5 14.3 23.3 % 12.3 20.0 % Rest of world 46.4 42.4 4.0 9.4 % 1.9 4.5 % Total net sales$ 521.6 $ 482.9 $ 38.7 8.0 % $ 33.6 7.0 %
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(1)Europe , theMiddle East andAfrica ("EMEA") Segment operating income by reportable segment is summarized as follows: Three months ended (in millions) September 30, Increase/(Decrease) Segment operating income 2021 2020 $ change % change Titleist golf balls$ 32.0 $ 47.7 $ (15.7) (32.9) % Titleist golf clubs 13.5 19.2 (5.7) (29.7) % Titleist golf gear 0.6 7.2 (6.6) (91.7) % FootJoy golf wear 4.4 6.5 (2.1) (32.3) % Net Sales Net sales increased by$38.7 million , or 8.0%, to$521.6 million for the three months endedSeptember 30, 2021 compared to$482.9 million for the three months endedSeptember 30, 2020 . On a constant currency basis, net sales increased by$33.6 million , or 7.0%, to$516.5 million . The increase in net sales on a constant currency basis resulted from an increase of$20.4 million in FootJoy golf wear primarily related to higher average selling prices in apparel and footwear categories, an increase of$13.9 million in Titleist golf clubs primarily driven by higher average selling prices and an increase of$1.8 million in Titleist golf gear. These increases were partially offset by a$4.6 million decrease in Titleist golf balls. Sales volume growth of products that are not allocated to one of our four reportable segments also contributed to the increase in net sales. The increase in net sales inthe United States was primarily driven by an increase of$9.1 million in Titleist golf clubs and an increase of$8.2 million in FootJoy golf wear, partially offset by a decrease of$8.1 million in Titleist golf balls. Net sales in regions outsidethe United States increased by$27.4 million , or 12.9%, to$239.0 million for the three months endedSeptember 30, 2021 compared to$211.6 million for the three months endedSeptember 30, 2020 . On a constant currency basis, net sales in regions outside ofthe United States increased by$22.3 million , or 10.5%, to$233.9 million . InKorea , the increase in net sales was primarily due to an increase in FootJoy golf wear and inJapan the increase in net sales was primarily due to an increase in Titleist golf clubs. 30
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Table of Contents Gross Profit Gross profit increased by$16.8 million to$268.8 million for the three months endedSeptember 30, 2021 compared to$252.0 million for the three months endedSeptember 30, 2020 . Gross margin decreased to 51.5% for the three months endedSeptember 30, 2021 compared to 52.2% for the three months endedSeptember 30, 2020 . The increase in gross profit primarily resulted from an increase of$11.6 million in FootJoy golf wear primarily due to higher average selling prices in apparel and footwear and an increase of$11.2 million in Titleist golf clubs due to higher average selling prices, partially offset by decreases of$5.1 million and$1.9 million in Titleist golf balls and Titleist golf gear, respectively, and increased inbound freight costs across all reportable segments. The decrease in gross margin was primarily due to higher inbound freight costs across all reportable segments, as well as higher manufacturing costs and raw material price increases in Titleist golf balls, which was partially offset by higher gross margins in FootJoy golf wear and Titleist golf clubs primarily due to higher average selling prices. Selling, General and Administrative Expenses SG&A expenses increased by$46.1 million to$199.8 million for the three months endedSeptember 30, 2021 compared to$153.7 million for the three months endedSeptember 30, 2020 . The increase was the result of higher expenditures required to support the continued high levels of demand across all reportable segments. This increase was comprised of an increase of$21.8 million in selling expense as a result of higher sales volumes as discussed above, an increase of$13.3 million in administrative expense primarily due to higher employee-related costs and information technology-related consulting expenses and an increase of$9.6 million in advertising and promotional expenses. Research and Development R&D expenses increased by$4.0 million to$14.6 million for the three months endedSeptember 30, 2021 compared to$10.6 million for the three months endedSeptember 30, 2020 , primarily related to an increase in employee-related costs. Income Tax Expense Income tax expense decreased by$3.6 million to$10.5 million for the three months endedSeptember 30, 2021 compared to$14.1 million for the three months endedSeptember 30, 2020 . Our Effective Tax Rate ("ETR") was 20.8% for the three months endedSeptember 30, 2021 compared to 18.1% for the three months endedSeptember 30, 2020 . The change in the ETR was primarily driven by the impact of the COVID-19 pandemic on our jurisdictional mix of earnings, as well as a discrete tax benefit recognized for the three months endedSeptember 30, 2020 related to a reduction of tax expense pertaining to theU.S. taxation of foreign earnings. Segment Results Titleist Golf Balls Segment Net sales in our Titleist golf balls segment decreased by$2.9 million , or 1.7%, to$167.2 million for the three months endedSeptember 30, 2021 compared to$170.1 million for the three months endedSeptember 30, 2020 . On a constant currency basis, net sales in our Titleist golf balls segment decreased by$4.6 million , or 2.7%, to$165.5 million . This decrease was largely due to sales volume declines in our performance golf balls and AVX models as a result of manufacturing and supply chain disruptions. Operating income in our Titleist golf balls segment decreased by$15.7 million , or 32.9%, to$32.0 million for the three months endedSeptember 30, 2021 compared to$47.7 million for the three months endedSeptember 30, 2020 . The decrease in operating income resulted from higher operating expenses and lower gross profit. Operating expenses increased primarily as a result of increases of$5.0 million and$3.7 million in administrative and selling expenses, respectively, as discussed above. Gross profit decreased by$5.1 million primarily due to higher inbound freight costs, manufacturing costs, raw material price increases and lower sales volumes discussed above. Titleist Golf Clubs Segment Net sales in our Titleist golf clubs segment increased by$14.8 million , or 12.3%, to$135.6 million for the three months endedSeptember 30, 2021 compared to$120.8 million for the three months endedSeptember 30, 2020 . On a constant currency basis, net sales in our Titleist golf clubs segment increased by$13.9 million , or 11.5%, to$134.7 million . This increase was largely due to higher average selling prices across all product categories and higher volumes of drivers and fairways, partially offset by lower volumes in wedges, putters and irons due to supply chain constraints. 31
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Table of Contents Operating income in our Titleist golf clubs segment decreased by$5.7 million , or 29.7%, to$13.5 million for the three months endedSeptember 30, 2021 compared to$19.2 million for the three months endedSeptember 30, 2020 . The decrease in operating income resulted from higher operating expenses, partially offset by higher gross profit. Higher operating expenses were primarily a result of increases of$6.7 million ,$4.8 million and$3.8 million in advertising and promotional, selling and administrative expenses, respectively, as discussed above. Gross profit increased$11.2 million primarily driven by higher average selling prices, partially offset by increased inbound freight costs. Titleist Golf Gear Segment Net sales in our Titleist golf gear segment increased by$2.3 million , or 5.2%, to$46.6 million for the three months endedSeptember 30, 2021 compared to$44.3 million for the three months endedSeptember 30, 2020 . On a constant currency basis, net sales in our Titleist golf gear segment increased by$1.8 million , or 4.1%, to$46.1 million . This increase was largely due to higher average selling prices and sales volumes in golf bag and travel gear product categories. Operating income in our Titleist golf gear segment decreased by$6.6 million , or 91.7%, to$0.6 million for the three months endedSeptember 30, 2021 compared to$7.2 million for the three months endedSeptember 30, 2020 . The decrease in operating income resulted from higher operating expenses and lower gross profit. Operating expenses increased primarily as a result of increases of$2.8 million and$1.4 million in selling and administrative expenses, respectively, as discussed above. Gross profit decreased$1.9 million primarily due to increased inbound freight costs, partially offset by higher average selling prices and sales volumes discussed above. FootJoy Golf Wear Segment Net sales in our FootJoy golf wear segment increased by$21.9 million , or 18.9%, to$137.9 million for the three months endedSeptember 30, 2021 compared to$116.0 million for the three months endedSeptember 30, 2020 . On a constant currency basis, net sales in our FootJoy golf wear segment increased by$20.4 million , or 17.6%, to$136.4 million . This increase was largely due to higher average selling prices and sales volumes in apparel and footwear product categories, partially offset by lower sales volumes in our glove category due to supply chain constraints. Operating income in our FootJoy golf wear segment decreased by$2.1 million , or 32.3%, to$4.4 million for the three months endedSeptember 30, 2021 compared to$6.5 million for the three months endedSeptember 30, 2020 . The decrease in operating income resulted from higher operating expenses, partially offset by higher gross profit. Higher operating expenses were primarily a result of increases of$8.5 million and$3.1 million in selling and administrative expenses, respectively, as discussed above. Gross profit increased$11.6 million primarily driven by higher average selling prices and sales volumes discussed above, partially offset by increased inbound freight costs. 32
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Table of Contents Nine Months EndedSeptember 30, 2021 Compared to the Nine Months EndedSeptember 30, 2020 Net sales by reportable segment is summarized as follows: Nine months ended
Constant Currency
September 30, Increase/(Decrease) Increase/(Decrease)
(in millions) 2021 2020 $ change % change $ change % change
Titleist golf balls $ 543.1 $ 388.5 $ 154.6 39.8 % $ 142.0 36.6 %
Titleist golf clubs 444.3 286.4 157.9 55.1 % 147.6 51.5 %
Titleist golf gear 164.7 120.2 44.5 37.0 % 39.5 32.9 %
FootJoy golf wear 462.0 314.7 147.3 46.8 % 132.2 42.0 %
Net sales information by region is summarized as follows:
Nine months ended Constant Currency
September 30 , Increase/(Decrease) Increase/(Decrease) (in millions) 2021 2020 $ change % change $ change % change United States$ 906.6 $ 627.5 $ 279.1 44.5 % $ 279.1 44.5 % EMEA 246.9 174.2 72.7 41.7 % 52.7 30.3 % Japan 149.9 102.0 47.9 47.0 % 49.0 48.0 % Korea 251.8 177.8 74.0 41.6 % 58.9 33.1 % Rest of world 172.2 110.2 62.0 56.3 % 47.9 43.5 % Total net sales$ 1,727.4 $ 1,191.7 $ 535.7 45.0 % $ 487.6 40.9 %
Segment operating income by reportable segment is summarized as follows:
Nine months ended
(in millions) September 30, Increase/(Decrease)
Segment operating income 2021 2020 $ change % change
Titleist golf balls $ 106.8 $ 61.0 $ 45.8 75.1 %
Titleist golf clubs 84.7 21.3 63.4 *
Titleist golf gear 22.7 20.7 2.0 9.7 %
FootJoy golf wear 53.6 18.9 34.7 183.6 %
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*Percentage change not meaningfulNet Sales Net sales increased by$535.7 million , or 45.0%, to$1,727.4 million for the nine months endedSeptember 30, 2021 compared to$1,191.7 million for the nine months endedSeptember 30, 2020 . On a constant currency basis, net sales increased by$487.6 million , or 40.9%, to$1,679.3 million . The increase in net sales on a constant currency basis was largely due to sales volume increases across all reportable segments, as rounds of play and consumer demand for golf-related products remained elevated during the first nine months of 2021, coupled with the adverse impact of government-ordered shutdowns in the second quarter of 2020. Sales volume growth of products that are not allocated to one of our four reportable segments also contributed to the increase in net sales. The increase in net sales inthe United States was driven by an increase of$99.4 million in Titleist golf balls, an increase of$87.5 million in Titleist golf clubs, an increase of$65.3 million in FootJoy golf wear and an increase of$21.7 million in Titleist golf gear, all driven by the same factors discussed above. Net sales in regions outsidethe United States increased by$256.6 million , or 45.5%, to$820.8 million for the nine months endedSeptember 30, 2021 compared to$564.2 million for the nine months endedSeptember 30, 2020 . On a constant currency basis, net sales in such regions increased by$208.5 million , or 37.0%, to$772.7 million . The increase in net sales in all regions was primarily driven by increased sales across all reportable segments also driven by the same factors discussed above. 33
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Table of Contents Gross Profit Gross profit increased by$304.6 million to$914.0 million for the nine months endedSeptember 30, 2021 compared to$609.4 million for the nine months endedSeptember 30, 2020 . Gross margin increased to 52.9% for the nine months endedSeptember 30, 2021 compared to 51.1% for the nine months endedSeptember 30, 2020 . The increase in gross profit primarily resulted from an increase of$101.8 million in Titleist golf clubs, an increase of$90.4 million in Titleist golf balls, an increase of$76.6 million in FootJoy golf wear and an increase of$17.9 million in Titleist golf gear, each primarily due to the sales volume increases discussed above, partially offset by higher inbound freight costs across all reportable segments. The increase in gross margin was primarily driven by higher gross margins in Titleist golf clubs, Titleist golf balls and FootJoy golf wear. The increases in Titleist golf clubs and Titleist golf balls was primarily due to favorable manufacturing overhead absorption primarily driven by sales volume increases, favorable product mix shifts and higher average selling prices. The second quarter of 2020 included nonrecurring period costs related to the temporary closure of ourUnited States -based golf club assembly and golf ball manufacturing facilities. The increase in FootJoy golf wear was primarily due to a higher percentage of global eCommerce sales and retail sales inKorea . Higher inbound freight costs partially offset the gross margin increases across all reportable segments. Selling, General and Administrative Expenses SG&A expenses increased by$149.4 million to$586.4 million for the nine months endedSeptember 30, 2021 compared to$437.0 million for the nine months endedSeptember 30, 2020 . This increase was largely driven by lower SG&A in 2020 due to expense reduction measures taken across all reportable segments as a result of the COVID-19 pandemic and also by higher expenditures required to support the continued high levels of demand across all our reportable segments. This increase was comprised of an increase of$77.6 million in selling expense due to higher sales volumes as described above, an increase of$40.8 million in advertising and promotional expenses and an increase of$27.9 million in administrative expense primarily due to higher employee-related and consulting expenses. Overall, SG&A included a$11.1 million unfavorable impact of changes in foreign currency exchange rates across all expense categories and reportable segments. Research and Development R&D expenses increased by$4.9 million to$39.9 million for the nine months endedSeptember 30, 2021 compared to$35.0 million for the nine months endedSeptember 30, 2020 , primarily related to an increase in employee-related costs. Interest Expense, net Interest expense, net decreased by$5.8 million to$6.6 million for the nine months endedSeptember 30, 2021 compared to$12.4 million for the nine months endedSeptember 30, 2020 . This decrease was primarily due to a decrease in borrowings and interest rates for the nine months endedSeptember 30, 2021 . Other Expense, net Other expense, net decreased by$4.9 million to$3.2 million for the nine months endedSeptember 30, 2021 compared to$8.1 million for the nine months endedSeptember 30, 2020 . This decrease was primarily due to a decrease in the pension settlement costs recorded related to lump-sum distributions to participants in our defined benefit plans as a result of the voluntary retirement program associated with management's approved restructuring program. Income Tax Expense Income tax expense increased by$41.7 million to$62.9 million for the nine months endedSeptember 30, 2021 compared to$21.2 million for the nine months endedSeptember 30, 2020 . Our ETR was 23.1% for the nine months endedSeptember 30, 2021 compared to 21.6% for the nine months endedSeptember 30, 2020 . The change in the ETR was primarily driven by the impact of the COVID-19 pandemic on our jurisdictional mix of earnings. Segment Results Titleist Golf Balls Segment Net sales in our Titleist golf balls segment increased by$154.6 million , or 39.8%, to$543.1 million for the nine months endedSeptember 30, 2021 compared to$388.5 million for the nine months endedSeptember 30, 2020 . On a constant currency basis, net sales in our Titleist golf balls segment increased by$142.0 million , or 36.6%, to$530.5 million . This increase was largely due to higher sales volumes of our latest generation Pro V1 and Pro V1x golf balls launched in the first quarter of 2021 combined with the adverse impact of government-ordered shutdowns in the second quarter of 2020. 34
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Table of Contents Operating income in our Titleist golf balls segment increased by$45.8 million , or 75.1%, to$106.8 million for the nine months endedSeptember 30, 2021 compared to$61.0 million for the nine months endedSeptember 30, 2020 . The increase in operating income resulted from higher gross profit of$90.4 million , partially offset by higher operating expenses. The increase in gross profit was primarily driven by the sales volume increase discussed above, as well as higher average selling prices. Also contributing to the increase in gross profit was favorable manufacturing overhead absorption due to higher production volumes coupled with nonrecurring period costs related to the temporary closure of ourUnited States -based golf ball manufacturing facilities incurred during the second quarter of 2020. This increase was partially offset by increased inbound freight costs. Operating expenses increased primarily as a result of increases of$17.1 million ,$13.9 million and$10.8 million in advertising and promotional, selling and administrative expenses, respectively, as discussed above. Titleist Golf Clubs Segment Net sales in our Titleist golf clubs segment increased by$157.9 million , or 55.1%, to$444.3 million for the nine months endedSeptember 30, 2021 compared to$286.4 million for the nine months endedSeptember 30, 2020 . On a constant currency basis, net sales in our Titleist golf clubs segment increased by$147.6 million , or 51.5%, to$434.0 million . This increase was largely due to higher sales volumes in all product categories except wedges and higher average selling prices across all product categories. The decrease in sales volumes of wedges was primarily due to supply chain constraints. Also contributing to the increase was the adverse impact of government-ordered shutdowns in the second quarter of 2020. Operating income in our Titleist golf clubs segment increased by$63.4 million to$84.7 million for the nine months endedSeptember 30, 2021 compared to$21.3 million for the nine months endedSeptember 30, 2020 . The increase in operating income resulted from higher gross profit of$101.8 million driven by the sales volume increase discussed above and higher average selling prices, partially offset by increased inbound freight costs and higher operating expenses. Higher operating expenses were primarily as a result of increases of$14.6 million ,$13.8 million and$7.9 million in selling, advertising and promotional, and administrative expenses, respectively, as discussed above. Titleist Golf Gear Segment Net sales in our Titleist golf gear segment increased by$44.5 million , or 37.0%, to$164.7 million for the nine months endedSeptember 30, 2021 compared to$120.2 million for the nine months endedSeptember 30, 2020 . On a constant currency basis, net sales in our Titleist golf gear segment increased by$39.5 million , or 32.9%, to$159.7 million . This increase was largely due to sales volume increases across all product categories combined with the adverse impact of government-ordered shutdowns in the second quarter of 2020. Operating income in our Titleist golf gear segment increased by$2.0 million , or 9.7%, to$22.7 million for the nine months endedSeptember 30, 2021 compared to$20.7 million for the nine months endedSeptember 30, 2020 . The increase in operating income resulted from higher gross profit of$17.9 million driven by the sales volume increase discussed above, partially offset by higher operating expenses and increased inbound freight costs. Operating expenses increased primarily as a result of increases of$10.6 million ,$2.9 million and$2.2 million in selling, administrative, and advertising and promotional expenses, respectively, as discussed above. FootJoy Golf Wear Segment Net sales in our FootJoy golf wear segment increased by$147.3 million , or 46.8%, to$462.0 million for the nine months endedSeptember 30, 2021 compared to$314.7 million for the nine months endedSeptember 30, 2020 . On a constant currency basis, net sales in our FootJoy golf wear segment increased by$132.2 million , or 42.0%, to$446.9 million . This increase was largely due to increased sales volumes and higher average selling prices across all product categories. Also contributing to the increase was the adverse impact of government-ordered shutdowns in the second quarter of 2020. Operating income in our FootJoy golf wear segment increased by$34.7 million , or 183.6%, to$53.6 million for the nine months endedSeptember 30, 2021 compared to$18.9 million for the nine months endedSeptember 30, 2020 . The increase in operating income resulted from higher gross profit of$76.6 million primarily as a result of the sales volume increase and higher average selling prices discussed above and a higher percentage of global eCommerce sales and retail sales inKorea , partially offset by increased inbound freight costs and higher operating expenses. Operating expenses increased primarily as a result of increases of$29.0 million ,$6.4 million and$6.1 million in selling, advertising and promotional, and administrative expenses, respectively, as discussed above. 35
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Table of Contents Liquidity and Capital Resources Our primary cash needs relate to working capital, capital expenditures, servicing of our debt, paying dividends, pension contributions and repurchasing shares of our common stock. We expect to rely on cash flows from operations and borrowings under our revolving credit facility and local credit facilities as our primary sources of liquidity. Our liquidity is impacted by our level of working capital, which is cyclical as a result of the general seasonality of our business. Our accounts receivable balance is generally at its highest starting at the end of the first quarter and continuing through the second quarter, and declines during the third and fourth quarters as a result of both an increase in cash collections and lower sales. Our inventory balance also fluctuates as a result of the seasonality of our business. Generally, our buildup of inventory starts during the fourth quarter and continues through the first quarter and into the beginning of the second quarter in order to meet demand for our initial sell-in during the first quarter and reorders in the second quarter. Both accounts receivable and inventory balances are impacted by the timing of new product launches. As ofSeptember 30, 2021 , we had$318.6 million of unrestricted cash and cash equivalents (including$11.4 million attributable to our FootJoy golf shoe variable interest entity). As ofSeptember 30, 2021 , 44.0% of our total unrestricted cash and cash equivalents was held at our non-U.S. subsidiaries. We manage our worldwide cash requirements by monitoring the funds available among our subsidiaries and determining the extent to which we can access those funds on a cost effective basis. We are not aware of any restrictions on repatriation of these funds and, subject to foreign withholding taxes, those funds could be repatriated, if necessary. We have repatriated, and intend to repatriate, funds tothe United States from time to time to satisfy domestic liquidity needs arising in the ordinary course of business, including liquidity needs related to debt service requirements. As noted previously, the COVID-19 pandemic could impact our results of operations in ways we cannot currently predict. Subject to the length and severity of the COVID-19 pandemic, we believe that cash expected to be provided by operating activities, together with our cash on hand and the availability of borrowings under our revolving credit facility and our local credit facilities (subject to customary borrowing conditions) will be sufficient to meet our liquidity requirements for at least the next 12 months. Our ability to generate sufficient cash flows from operations is, however, subject to many risks and uncertainties, including future economic trends and conditions (such as the current COVID-19 pandemic), demand for our products, availability and cost of our raw materials and components, foreign currency exchange rates and other risks and uncertainties applicable to our business, as described in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . Debt and Financing Arrangement As ofSeptember 30, 2021 , we had$385.7 million of availability under our revolving credit facility after giving effect to$14.3 million of outstanding letters of credit. Additionally, we had$59.8 million available under our local credit facilities. Our credit agreement contains customary affirmative and restrictive covenants, including, among others, financial covenants based on our leverage and interest coverage ratios. OnMarch 5, 2021 , we issued a notice exercising our right to an early termination of the covenant relief period under our credit agreement and as such we are now required to comply with the previous maximum net average total leverage ratio, and the interest rate margins, commitment fee and covenant baskets in effect prior to theJuly 23, 2020 amendment of our credit agreement. See "Notes to Unaudited Condensed Consolidated Financial Statements-Note-5-Debt and Financing Arrangements," Item 1 of Part I included elsewhere in this report for a description of our credit agreement. The credit agreement also includes customary events of default, the occurrence of which, following any applicable cure period, would permit the lenders to, among other things, declare the principal, accrued interest and other obligations to be immediately due and payable. As ofSeptember 30, 2021 , we were in compliance with all covenants under the credit agreement. See "Notes to Consolidated Financial Statements-Note-10-Debt and Financing Arrangements" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 for a further description of our credit facilities. Additionally, see "Risk Factors - Risks Related to Our Indebtedness" as described in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . 36
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Table of Contents Capital Expenditures We made$19.2 million of capital expenditures during the nine months endedSeptember 30, 2021 . Capital expenditures for the full year are expected to be in the range of$40 to$45 million , although the actual amount may vary depending upon a variety of factors, including the timing of certain capital project implementations and receipt of capital purchases due to supply chain challenges. Capital expenditures generally relate to investments to support the manufacturing and distribution of products, our go-to-market activities and continued investments in information technology to support our global strategic initiatives. Our projected capital expenditures in 2021 are primarily related to key strategic investments in our golf ball operations and precision manufacturing capabilities. Dividends and Share Repurchase Program As ofSeptember 30, 2021 , the Board of Directors had authorized us to repurchase up to an aggregate of$100.0 million of our issued and outstanding common stock. Share repurchases may be effected from time to time in open market or privately negotiated transactions, including transactions with affiliates, with the timing of purchases and the amount of stock purchased generally determined at our discretion consistent with our general working capital needs and within the constraints of our credit agreement. This program will remain in effect until completed or until terminated by the Board of Directors. InMarch 2021 , we resumed share repurchases under our share repurchase program, which we had temporarily suspended inApril 2020 in light of the COVID-19 pandemic. During the nine months endedSeptember 30, 2021 , we repurchased 387,076 shares of common stock on the open market at an average price of$49.14 for an aggregate of$19.0 million . In connection with the share repurchase program, we entered into an agreement withMagnus Holdings Co., Ltd. ("Magnus"), a wholly-owned subsidiary ofFila Holdings Corp. , to purchase from Magnus an equal amount of our common stock as we purchase on the open market, up to an aggregate of$24.9 million , at the same weighted average per share price. In relation to this share repurchase agreement, onApril 2, 2021 , we repurchased 355,341 shares of common stock for an aggregate of$11.1 million from Magnus, in completion of our previously discussed share repurchase obligations. See "Notes to Unaudited Condensed Consolidated Financial Statements-Note-10-Common Stock," Item 1 of Part I included elsewhere in this report for a description of our Magnus share repurchase agreement. As ofSeptember 30, 2021 , we had$33.5 million remaining under the current share repurchase authorization. OnOctober 20, 2021 , the Board of Directors authorized us to repurchase up to an additional$100.0 million of our issued and outstanding common stock, bringing the total authorization up to$200.0 million . During the nine months endedSeptember 30, 2021 , we paid dividends on our common stock of$37.1 million to our shareholders. During the fourth quarter of 2021, our Board of Directors declared a dividend of$0.165 per share of common stock to shareholders of record as ofDecember 3, 2021 and payable onDecember 17, 2021 . Cash Flows The following table presents the major components of net cash flows provided by (used in) operating, investing and financing activities for the periods indicated:
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