TOPGOLF CALLAWAY BRANDS CORP. The following discussion should be read in conjunction with the Consolidated Financial Statements, the related notes and the section "Important Notice to Investors Regarding Forward-Looking Statements" that appear elsewhere in this report. This section of this Annual Report on Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Annual Report on Form 10-K can be found in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 .
Critical Accounting Estimates
The Company's discussion and analysis of its results of operations, financial condition and liquidity are based upon the Company's consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, shareholders' equity, revenues and expenses, as well as related disclosures of contingent assets and liabilities. The Company bases its estimates on historical experience and various other assumptions that management believes to be reasonable under the circumstances. Actual results may materially differ from these estimates under different assumptions or conditions. On an ongoing basis, the Company reviews its estimates to ensure that the estimates appropriately reflect changes in its business and new information as it becomes available. Management believes the critical accounting estimates discussed below affect its more significant estimates and assumptions used in the preparation of its consolidated financial statements. For a complete discussion of all of the Company's significant accounting policies, see Note 2. "Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements in this Form 10-K. Revenue Recognition
The Company accounts for revenue recognition in accordance with Accounting Standards Codification ("ASC") Topic 606, "Revenue from Contracts with Customers." See Note 4. "Revenue Recognition" in the Notes to Consolidated Financial Statements in this Form 10-K.
The amount of revenue the Company recognizes is based on the amount of consideration it expects to receive from customers. The amount of consideration is the sales price adjusted for estimates of variable consideration, including sales returns, discounts and allowances as well as sales programs, sales promotions and price concessions that are offered by the Company as described further below. These estimates are based on amounts earned or expected to be claimed by customers on the related sales, and are therefore recorded to the respective net revenue, trade accounts receivable, and sales program liability accounts. The Company offers short-term sales program incentives, which include sell-through promotions and price concessions or price reductions. Sell-through promotions are generally offered throughout the product's life cycle, which varies from two to three years. Price concessions or price reductions are generally offered at the end of the product's life cycle. The estimated variable consideration related to these programs is based on a rate that includes historical and forecasted data. The Company records a reduction to net revenues using this rate at the time of the sale. The Company monitors this rate against actual results and forecasted estimates and adjusts the rate as necessary in order to reflect the amount of consideration it expects to receive from its customers. There were no material changes to the rate during the year endedDecember 31, 2021 , and the Company's actual amount of variable consideration related to these sales programs has historically not been materially different from its estimates. However, if the actual variable consideration is significantly different than the accrued estimates, the Company may be exposed to adjustments to revenue that could be material. Assuming there had been a 10% increase over the accrued estimated variable consideration for 2021 sales program incentives, pre-tax income for the year endedDecember 31, 2021 would have decreased by approximately$2.3 million . The Company records an estimate for anticipated returns as a reduction of sales and cost of sales, and accounts receivable in the period that the related sales are recorded. The cost recovery of inventory associated with this reserve is accounted for in other current assets. Sales returns are estimated based upon historical returns, current economic trends, changes in customer demands and sell-through of products. The Company also offers certain customers sales programs that allow for specific returns. The Company records a return reserve for anticipated returns related to these sales programs at the time of the sale based on the terms of the sales program. Historically, the Company's actual sales returns have not been materially different from management's original estimates. The Company does not believe there is a reasonable likelihood 49 -------------------------------------------------------------------------------- that there will be a material change in the future estimates or assumptions used to calculate the allowance for sales returns. However, if the actual costs of sales returns are significantly different than the recorded estimated allowance, the Company may be exposed to losses or gains that could be material. Assuming there had been a 10% increase over the recorded estimated allowance for 2021 sales returns less the cost recovery of inventory, pre-tax income for the year endedDecember 31, 2021 would have decreased by approximately$4.7 million .
Inventories
Inventories are valued at the lower of cost or net realizable value, which includes a reserve for excess, obsolete and/or unmarketable inventory. The Company estimates the reserve based upon current inventory levels, sales trends and historical experience as well as management's estimates of market conditions and forecasts of future product demand, all of which are subject to change. The calculation of the Company's reserve for excess, obsolete and/or unmarketable inventory requires management to make assumptions and to apply judgment regarding inventory aging, forecasted consumer demand and pricing, regulatory (USGA and R&A) rule changes, the promotional environment and technological obsolescence. The Company does not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions used to calculate the reserve. However, if estimates regarding consumer demand are inaccurate or change, the Company may need to increase its inventory allowance, which could significantly adversely affect the Company's operating results. Assuming there had been a 10% increase in obsolete or unmarketable inventory over the 2021 recorded estimated allowance for obsolete or unmarketable inventory, pre-tax income for the year endedDecember 31, 2021 would have decreased by approximately$2.1 million .
Leases
The Company enters into complex build-to-suit arrangements in connection with its Company-operated venues operations which often results in the Company controlling the underlying ground that the venue is built on, the building, or both during the construction period. Under these arrangements, the construction terms, financing and eventual lease are agreed to prior to the construction period. In most cases, the construction is financed by a third-party real estate financing partner (the legal owner of the property). During the construction period, when the Company is deemed to be in control of the underlying assets, the Company records the asset as if owned and a corresponding construction advance. Once the construction is completed, the Company applies sale-lease back criteria to determine if control of the underlying assets is then transferred to the legal owner or whether the Company remains the accounting owner of the leased assets for accounting purposes. If control does not pass to the legal owner, it is considered a failed sale, and the assets are not derecognized while a deemed landlord liability is recognized. If control passes to the legal owner, it is considered a sale, and the assets are derecognized, and a gain or loss is recognized based on the fair value of the asset. The fair value is determined on the basis of the price that would be received to sell the asset in an orderly transaction between market participants, which is derived from real estate broker valuations and market comparatives. An operating lease is recognized upon leasing back the assets from the legal owner. The lease term for the ground lease and / or building lease for those properties controlled by the Company during the construction period depends on multiple factors, including the probability that the Company will exercise any renewal options beyond the initial lease term. When applicable, the Company uses historical practices and market trends to assess whether it is reasonably certain to exercise the renewal option. In certain Company-operated venues, the Company leases the underlying land from an independent third-party, with the Company assessing the lease classification as either an operating lease or finance lease on the basis of the relevant contract assumptions such as lease term and related payments. The Company must reassess the lease term upon the occurrence of certain discrete events that are in the control of the lessee (e.g., installing significant leasehold improvements) or if there is a lease modification. This lease term reassessment may impact the recorded right-of-use assets and lease classification, which could be material.
Impairment of
The Company evaluates the recoverability of its goodwill and indefinite-lived
intangible assets at least annually or more frequently whenever indicators are
present that the carrying amounts of these assets may not be fully recoverable.
To determine fair value, the Company uses cash flow estimates discounted at an
appropriate rate, quoted market prices, royalty rates when available and
independent appraisals as appropriate. Any required impairment loss is measured
as the amount by which the carrying amount of the asset exceeds its fair value
and is recorded as a reduction in the carrying value of the asset and a charge
to earnings. The Company uses its best judgment based on current facts and
circumstances related to its business when making these estimates. However, if
actual results are not consistent with the Company's estimates and
50
--------------------------------------------------------------------------------assumptions used in calculating future cash flows and asset fair values, the Company may be exposed to losses that could be material.
Income Taxes
Current income tax expense or benefit is the amount of income taxes expected to be payable or receivable for the current year. A deferred income tax asset or liability is established for the difference between the tax basis of an asset or liability computed and its reported amount in the financial statements that will result in taxable or deductible amounts in future years when the reported amount of the asset or liability is recovered or settled, respectively. In accordance with the applicable accounting rules, the Company maintains a valuation allowance for a deferred tax asset when it is deemed to be more likely than not that some or all of the deferred tax assets will not be realized. In evaluating whether a valuation allowance is required under such rules, the Company considers all available positive and negative evidence, including prior operating results, the nature and reason for any losses, its forecast of future taxable income, and the dates on which any deferred tax assets are expected to expire. These assumptions require a significant amount of judgment, including estimates of future taxable income, and are based on the Company's best judgment at the time made based on current and projected circumstances and conditions. For further information, see Note 14. "Income Taxes" in the Notes to Consolidated Financial Statements in this Form 10-K. The Company accrues for the estimated additional amount of taxes for uncertain tax positions if it is deemed to be more likely than not that the Company would be required to pay such additional taxes. The Company is required to file federal and state income tax returns inthe United States and various other income tax returns in foreign jurisdictions. The preparation of these income tax returns requires the Company to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by the Company. The Company accrues an amount for its estimate of additional tax liability, including interest and penalties in income tax expense, for any uncertain tax positions taken or expected to be taken in an income tax return. The Company reviews and updates the accrual for uncertain tax positions as more definitive information becomes available. Historically, additional taxes paid as a result of the resolution of the Company's uncertain tax positions have not been materially different from the Company's expectations. The Company recognizes interest and/or penalties related to income tax matters in income tax expense. For further information, see Note 14. "Income Taxes". Business Combinations The Company is required to make significant estimates and assumptions to determine the fair value of tangible and intangible assets acquired and liabilities assumed at the acquisition date, as well as the estimated useful life of those acquired intangible assets. Intangible assets may include the acquired company's trade name, existing customer relationships, developed technology, patents and goodwill. Significant estimates and assumptions used to value intangible assets include, but are not limited to, expected future revenues, growth rates, cash flows and discount rates. In addition, significant estimates and assumptions are used in determining uncertain tax positions and valuation allowances, as well as the fair value of equity awards assumed. The Company's estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is contained in Note 2
"Summary of Significant Accounting Policies" in the Notes to Consolidated
Financial Statements in this Form 10-K, which is incorporated herein by this
reference.
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Discussion of Non-GAAP Measures
In addition to the financial results contained in this report, which have been prepared and presented in accordance with GAAP, the Company has also included supplemental information concerning the Company's financial results on a non-GAAP basis. This non-GAAP information includes the following: •For the years endedDecember 31, 2021 and 2020, certain of the Company's financial results were presented on a constant currency basis, which 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. •For the year endedDecember 31, 2021 , certain financial results exclude certain non-cash charges, including a gain to step-up the Company's former investment in Topgolf to its fair value, amortization expense of intangible assets associated with the Jack Wolfskin, OGIO, TravisMathew acquisitions and more recently the merger with Topgolf, the discount amortization of the Convertible Notes issued inMay 2020 , a valuation allowance on certain deferred tax assets, in addition to other non-recurring expenses. •For the year endedDecember 31, 2020 , certain financial results exclude certain non-cash charges, including the recognition of an impairment loss to write-off goodwill and a portion of the trade name associated with Jack Wolfskin, amortization expense of intangible assets associated with the Jack Wolfskin, OGIO and TravisMathew acquisitions, amortization expense related to the discount of the Convertible Notes issued inMay 2020 , costs associated with the pending Topgolf merger, and other non-recurring expenses. 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 and may also be inconsistent with the manner in which similar measures are derived or used by other companies. Management uses such non-GAAP information for financial and operational decision-making purposes and as a means to evaluate period over period comparisons of the underlying performance of its business and in forecasting the Company's business going forward. Management 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.
Merger with Topgolf
OnMarch 8, 2021 , the Company completed its merger with Topgolf. The Company's Topgolf subsidiary operates on a 52- or 53-week fiscal year ending on the Sunday closest toDecember 31 . As such, the Topgolf financial information included in the Company's consolidated financial statements for the year endedDecember 31, 2021 is fromMarch 8, 2021 throughJanuary 2, 2022 . The venues business line is Topgolf's primary business, comprised of open-air golf and entertainment venues. Revenues from venues consists primarily of service revenues from food and beverage sales, event deposits, fees charged for gameplay, purchases of game credits and membership fees. Topgolf's other business lines primarily include theToptracer Range ball tracking technology, which is comprised of proprietary hardware and software that is licensed to driving ranges and hospitality and entertainment venues, and the digital media platform, which is primarily comprised of service revenues from advertising contracts with corporate sponsors and from the WGT digital golf game. Cost of services primarily consists of food and beverage costs and transaction fees with respect to in-app purchases within the Company's WGT digital golf game. In addition, cost of services include hardware costs with respect to Topgolf's Toptracer license agreements classified as sales-type leases. Food and beverage costs are variable by nature, change with sales volume, and are impacted by product mix and commodity pricing. Other venue expenses consist of salaries and wages, bonuses, commissions, payroll taxes, and other employee costs that directly support venue operations, rent and occupancy costs, property taxes, depreciation associated with venues, supplies, credit card fees and marketing expenses. The Company anticipates that these expenses will increase in the 52 --------------------------------------------------------------------------------
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 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.
Cost of Products
The Company's cost of products is comprised primarily of material and component costs, distribution and warehousing costs, and overhead. In addition, cost of products includes retail merchandise costs for products sold in retail shops within Topgolf venue facilities. Historically, over 85% of the Company's manufacturing costs, primarily material and component costs, are variable in nature and fluctuate with sales volumes. With respect to the Company's Golf Equipment operating segment, variable costs range between 85% to 95% for golf club products and 70% to 80% for golf ball products. Variable costs for soft goods in the Apparel, Gear and Other operating segment are generally greater than 85%. Generally, the relative significance of the components of cost of products do not vary materially from these percentages from period to period.
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. Results of Operations Executive Summary Full year 2021 represented a period of significant growth and record results for the Company from both a revenue and operating income perspective, driven by the acquisition of Topgolf, which closed onMarch 8, 2021 , faster-than-expected recovery in the Topgolf venues business, and strong demand across the Company's golf equipment and apparel businesses. Total net revenue for the year reached$3,133.4 million , an increase of$1,543.9 million , or 97.1%, compared to full year 2020. From an operating segment perspective, Topgolf performed exceptionally well, as strong walk-in traffic and improved social and corporate events business drove better-than-expected venue sales results. For the ten months of 2021 following the closing of the merger, Topgolf contributed$1,087.6 million in net revenues. The Company continues to believe in the long-term growth opportunity embedded within the Topgolf business and feels it will be a strong contributor to overall growth for the Company, and for the industry as more consumers are introduced to the sport of golf through Topgolf venues. The Company's Golf Equipment and Apparel, Gear and Other operating segments also delivered strong results, as demand increased over 2020, which was more severely impacted by the COVID-19 pandemic. Net revenues for Golf Equipment increased$246.5 million , or 25.1%, to$1,229.2 million for full year 2021, compared to the same period in 2020. In the Apparel, Gear and Other segment, net revenues for full year 2021 increased$209.8 million , or 34.6%, to$816.6 million , compared to full year 2020. Total income from operations was a record$204.7 million for full year 2021, an increase of$310.2 million , or 294.0%, compared to full year 2020, which was more severely impacted by temporary retail closures related to the COVID-19 pandemic, and also included a$174.3 million impairment charge related to the Company's Jack Wolfskin business. The increase was due in part to incremental operating income of$58.2 million from the Topgolf segment for the ten months of 2021 following the closing of the merger. The Golf Equipment segment operating income was$203.9 million for full year 2021, an increase of$55.3 million or 37.2% compared to full year 2020, as strong demand 53 -------------------------------------------------------------------------------- outweighed supply chain constraints during the year combined with improved operating leverage. The Apparel, Gear and Other segment also contributed substantially to the growth, with segment operating income of$68.5 million for full year 2021, an increase of$67.8 million compared to$0.7 million for full year 2020, resulting from strong momentum across the TravisMathew, Jack Wolfskin and Callaway brands. These increases were partially offset by an overall increase in operating expenditures in 2021 compared to 2020, as the Company gradually returns to more normal levels of 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 and is optimistic about the long-term growth prospects for the business.
Years Ended
Revenues
The Company's net revenues by operating segment are presented below (in
millions):
Years Ended
December 31, Growth
2021 2020 Dollars Percent
Net revenues:
Topgolf $ 1,087.6 $ - $ 1,087.6 n/m
Golf Equipment 1,229.2 982.7 246.5 25.1 %
Apparel, Gear and Other 816.6 606.8 209.8 34.6 %
$ 3,133.4 $ 1,589.5 $ 1,543.9 97.1 %
Net revenues for 2021 increased $1,543.9 million (97.1%) to $3,133.4 million
compared to $1,589.5 million in 2020. This increase was driven by $1,087.6
million of incremental Topgolf net revenues, which has been included in the
Company's consolidated reported net revenues since the completion of the merger
on March 8, 2021 . In addition, the increase in net revenues reflects the
strength of the Company's legacy Golf Equipment and Apparel, Gear and Other
businesses, which increased by $246.5 million (25.1%) and $209.8 million
(34.6%), respectively, compared to 2020. Net revenues from the Company's legacy
Golf Equipment and Apparel, Gear and Other businesses increased across all
product categories and in all major geographic regions. This increase reflects
the 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 during 2020 were more severely impacted by the COVID-19
pandemic including temporary store closures within the retail sector, which
impacted the Company's retail locations, and demand from wholesale customers, in
addition to the temporary closure of the Company's manufacturing facilities and
distribution centers.
For further discussion of each operating segment's results, see "Operating
Segments Results for the Years Ended
Net revenues information by region is summarized as follows (dollars in
millions):
Years Ended Constant Currency
December 31, Growth Growth
2021 2020 Dollars Percent Percent
Net revenues:
United States $ 2,067.1 $ 778.6 $ 1,288.5 165.5 % 165.5%
Europe 499.5 373.0 126.5 33.9 % 28.1%
Japan 243.8 212.1 31.7 14.9 % 17.7%
Rest of World 323.0 225.8 97.2 43.0 % 35.5%
$ 3,133.4 $ 1,589.5 $ 1,543.9 97.1 % 95.1%
Net revenues in the United States increased $1,288.5 million (165.5%) to
$2,067.1 million in 2021 compared to $778.6 million in 2020. Net revenues in
regions outside of the United States increased $255.4 million (31.5%) to
$1,066.3 million in 2021 compared to $810.9 million in 2020. The increase in
both domestic and international net revenue during
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2021 reflects the addition of the Topgolf business, as well as the continued
strength and brand momentum of the Company's Golf Equipment business, combined
with the strong rebound of the TravisMathew business in the United States and
Jack Wolfskin business in Europe and China , and an increase in apparel sales in
Korea due to the new apparel business in 2021. Net revenues across all brands in
2020 were more severely impacted by the COVID-19 pandemic than 2021.
Fluctuations in foreign currencies had a favorable impact on international net
revenues of $32.9 million for the year ended December 31, 2021 relative to the
same period in 2020.
Costs and Expenses
Cost of products in 2021 increased $204.7 million to $1,136.6 million compared
to $931.9 million in 2020. The Company's cost of products is highly variable in
nature and this increase is due to the significant increase in sales volumes for
2021, combined with an increase in freight, labor and overall commodity costs
due to inflationary pressures and the supply chain challenges experienced during
2021. During 2020, sales volumes were significantly lower due to the business
disruptions caused by the COVID-19 pandemic.
Costs of services of
Other venue expenses of
Selling, general and administrative expenses in 2021 increased$307.2 million to$849.7 million (27.1% of net revenues) compared to$542.5 million (34.1% of net revenues) in 2020. This increase reflects incremental expenses of$134.5 million related to the merger with Topgolf completed onMarch 8, 2021 , and a$33.3 million increase in non-recurring expenses, which include transaction and transition expenses incurred in connection with the merger with Topgolf, and the investment of new IT systems for Jack Wolfskin, in addition to non-cash amortization expense related to acquired intangible assets. These increases were partially offset by severance expense incurred during 2020 related to the cost reduction initiatives implemented in response to COVID-19. Excluding the addition of Topgolf expenses and non-recurring charges, selling, general and administrative expenses increased$139.4 million (26.6%) primarily to support a larger organization and bring spending levels back toward normal pre-pandemic levels during 2021, as well as fund the expansion of the TravisMathew brand and new apparel business inKorea . Overall, this resulted in a significant increase in salaries and wages due to an increase in headcount as well as employee incentive compensation, advertising and promotional expenses, tour, and professional fees primarily related to IT projects and infrastructure improvements, partially offset by a decrease in legal expenses. During 2020, spending levels 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 in 2021 increased
In 2020, due to the significant business disruption and macro-economic impact of the COVID-19 pandemic on the Company's financial results, the Company recognized an impairment charge of$174.3 million to write-down the goodwill and trade name related to Jack Wolfskin to its fair value. There were no impairment charges recognized in 2021. See Note 9. "Goodwill and Intangible Assets" in the Notes to Consolidated Financial Statements in this Form 10-K. Venue pre-opening costs of$9.4 million include costs associated with activities prior to the opening of new Company-operated Topgolf venues, as well as other costs that are not considered in the evaluation of ongoing venue performance. The Company expects to continue to incur pre-opening costs related to the addition of new Company-operated venues. These costs are expected to fluctuate based on the timing, size and location of new Company-operated venues.
Other Income and Expense
Interest expense in 2021 increased$68.8 million to$116.2 million compared to$47.4 million in 2020, primarily due to the interest expense related to the debt and deemed landlord financing lease obligations acquired as part of the Topgolf merger. See Note 3. "Leases" in the Notes to Consolidated Financial Statements in this Form 10-K.
In 2021, the Company recognized a gain of
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Other income, net in 2021 decreased $16.0 million to $9.0 million compared to
$25.0 million in 2020. This decline was primarily due to the $11.0 million gain
recognized in 2020 in connection with the settlement of a cross-currency swap,
in addition to a decline in net foreign currency gains.
Income Taxes
The provision for income taxes in 2021 increased$29.2 million to$28.7 million compared to a tax benefit of$0.5 million in 2020. The Company's effective tax rate as a percentage of pre-tax income for the year endedDecember 31, 2021 increased to 8.2%, compared to 0.4% as a percent of pre-tax loss 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 in 2020 was impacted by the recognition of a$174.3 million non-deductible impairment charge to write-down certain goodwill and intangible assets related to Jack Wolfskin. Excluding these non-recurring items from both periods, the Company's effective income tax rate would have been 11.3% in 2021 compared to 15.8% in 2020. This decline is primarily due to a shift in mix of earnings to regions with lower tax rates. For further discussion, see Note 14. "Income Taxes" in the Notes to Consolidated Financial Statements in this Form 10-K.
Net Income (Loss)
Net income in 2021 increased$448.9 million to$322.0 million compared to net loss of$126.9 million in 2020. Diluted earnings per share increased$3.17 to$1.82 on 176.9 million diluted shares outstanding in 2021 compared to a loss per share of$1.35 on 94.2 million shares outstanding in 2020. The increased share count is primarily related to the issuance of additional shares in connection with the Topgolf merger. 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 year endedDecember 31, 2021 would have been$137.9 million and$0.78 per share, respectively, compared to$64.4 million and$0.67 per share, respectively, for the comparative period in 2020. The increase in non-GAAP net income in 2021 was primarily driven by continued strong demand for the Company's golf equipment products resulting from the overall increase in popularity of the game of golf, combined with a strong rebound in revenues of the Company's apparel and soft goods product lines, and the incremental operating income attributable to Topgolf. These increases were partially offset by an increase in operating expenditures to normal pre-pandemic levels in 2021. Additionally, the Company's earnings in 2020 were more negatively impacted by the business disruptions and challenges caused by the COVID-19 pandemic. The tables below present a reconciliation of the Company's results under GAAP for the years endedDecember 31, 2021 and 2020 to the Company's non-GAAP results as defined above for the same periods (in millions, except per share information). Year Ended December 31, 2021 Non-Cash Amortization of Non-Cash Intangible Amortization of Assets and Discount on Impairment Convertible Acquisition and Tax Valuation GAAP Charges (1) Notes(2) Other Costs(3) Allowance(4) Non-GAAP Net income (loss)$ 322.0 $ (23.5) $ (8.0) $ 233.6 $ (18.0)$ 137.9 Diluted earnings (loss) per share$ 1.82 $ (0.13) $ (0.05) $ 1.32 $ (0.10)$ 0.78 Weighted-average shares outstanding 176.9 176.9 176.9 176.9 176.9 176.9 Year Ended December 31, 2020 Non-Cash Amortization of Non-Cash Intangible Amortization of Assets and Discount on Impairment Convertible Acquisition and GAAP Charges (1) Notes(2) Other Costs(3) Non-GAAP(5) Net (loss) income$ (126.9) $
(170.1)
$ (1.35) $
(1.81)
94.2 94.2 94.2 94.2 96.3
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(1)Includes non-cash amortization expense of intangible assets in connection with the acquisitions of Jack Wolfskin, TravisMathew and OGIO. In addition, the year endedDecember 31, 2021 includes non-cash amortization expense of the intangible assets acquired in the merger with Topgolf onMarch 8, 2021 , as well as amortization expense related to the market valuation adjustment on leases assumed from Topgolf and depreciation expense from the fair value step-up of Topgolf property, plant and equipment. The year endedDecember 31, 2020 includes the recognition of a$174.3 million impairment charge to write-down goodwill and a portion of the trade name related to Jack Wolfskin.
(2)Represents the non-cash amortization of the discount on the Convertible Notes
issued in
(3)Acquisitions and other non-recurring items for the year endedDecember 31, 2021 include a gain to write-up the Company's pre-merger 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. For the year endedDecember 31, 2020 , acquisitions and other non-recurring costs included costs related to the Topgolf merger announced inOctober 2020 , including legal, professional andSEC filing fees, as well as redundant costs associated with the Company's transition of itsNorth America distribution center to a new facility, IT consulting related to the implementation of new IT systems for Jack Wolfskin, and severance charges associated with workforce reductions due to the COVID-19 pandemic. (4)As Topgolf's losses exceed Callaway's income in prior years, the Company has recorded a valuation allowance against certain of its deferred tax assets until the Company can demonstrate consolidated earnings. (5)Non-GAAP diluted earnings per share for the year endedDecember 31, 2020 was calculated using diluted weighted average outstanding shares, as earnings on a non-GAAP basis resulted in net income after giving effect to pro forma adjustments.
Operating Segments Results for the Years Ended
As a result of the Topgolf merger, the Company has three operating segments, namely Topgolf; Golf Equipment; and Apparel, Gear and Other.
Topgolf
Net revenues for the Topgolf operating segment are summarized as follows
(dollars in millions):
Years Ended
December 31,
2021
Net revenues:
Venues $ 1,014.1
Other business lines 73.5
$ 1,087.6
On March 8, 2021 the Company completed its merger with Topgolf. Therefore, the
Company's results of operations include the operations of Topgolf from that date
forward. Topgolf contributed $1,087.6 million of incremental net revenues for
the year ended December 31, 2021 , which includes approximately ten months of
revenues since the completion of the merger. Net revenues of $1,014.1 million
from the venue business include the opening of seven new venues from the date of
the merger through the year ended December 31, 2021 . Net revenues of $73.5
million from other business lines were driven by incremental Toptracer bay
installations, as well as revenues from digital content creation, sponsorship
operations, and the WGT digital golf game.
Golf Equipment
Net revenues for the Golf Equipment operating segment are summarized as follows (dollars in millions):
57
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Years Ended
December 31, Growth
2021 2020 Dollars Percent
Net revenues:
Golf clubs $ 994.5 $ 787.1 $ 207.4 26.3 %
Golf balls 234.7 195.6 39.1 20.0 %
$ 1,229.2 $ 982.7 $ 246.5 25.1 %
The $246.5 million (25.1%) increase in Golf Equipment net revenue to $1,229.2
million for the year ended December 31, 2021 compared to $982.7 for the same
period in 2020 was due to increases of $207.4 million (26.3%) in golf club
revenue and $39.1 million (20.0%) in golf ball revenue. These increases were
driven by the continued growth and high demand for the game of golf and in golf
participation, combined with the successful launch of the Company's new EPIC
line of woods and APEX line of irons and the continued success of the Chrome
Soft and Super Soft lines of golf balls, which resulted in a significant
increase in sales volume across all product categories, despite supply chain
challenges during the year. Net revenues of golf equipment for 2020 were
negatively impacted by the temporary closure of retail locations, including the
Company's owned retail locations, in addition to the Company's manufacturing
facilities and distributions centers due to the COVID-19 pandemic.
Apparel, Gear and Other
Net revenues for the Apparel, Gear and Other segment are summarized as follows
(dollars in millions):
Years Ended
December 31, Growth
2021 2020 Dollars Percent
Net revenues:
Apparel $ 490.9 $ 349.3 $ 141.6 40.5 %
Gear, accessories & other 325.7 257.5 68.2 26.5 %
$ 816.6 $ 606.8 $ 209.8 34.6 %
Net revenues of Apparel, Gear and Other increased $209.8 million (34.6%) to
$816.6 million during the year ended December 31, 2021 compared to
$606.8 million for the same period in 2020, due to a $141.6 million (40.5%)
increase in sales of apparel and a $68.2 million (26.5%) increase in sales of
gear, accessories and other. These increases were due to a strong rebound across
all brands for the year ended December 31, 2021 compared to the same period in
2020, which was severely impacted by the shutdown of distribution centers and
many retail stores in all major regions due to the COVID-19 pandemic.
By brand, the increase in TravisMathew products was driven by strong brand
momentum and increases across all sales channels. Sales for the Callaway brand
increased due to a surge in demand for golf accessories driven by the heightened
popularity of the game of golf, combined with the new apparel business in Korea .
The increase in Jack Wolfskin sales was driven by an increase in the wholesale
business as many Fall/Winter 2020 orders were canceled at the onset of COVID-19
in the prior year.
58
--------------------------------------------------------------------------------Segment Profitability
The Company evaluates the performance of its operating segments based on segment
operating income. Management uses total segment operating income as a 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
Years Ended Currency Growth
December 31, Growth/(Decline) vs. 2020(1)
2021 2020 Dollars Percent Percent
Net revenues:
Topgolf $ 1,087.6 $ - $ 1,087.6 n/m n/m
Golf Equipment 1,229.2 982.7 246.5 25.1% 23.2%
Apparel, Gear and Other 816.6 606.8 209.8 34.6% 32.8%
Total net revenues $ 3,133.4 $ 1,589.5 $ 1,543.9 97.1% 95.1%
Segment operating income (loss):
Topgolf $ 58.2 $ - $ 58.2 n/m
Golf Equipment 203.9 148.6 55.3 37.2%
Apparel, Gear and Other 68.5 0.7 67.8 9685.7%
Total segment operating income 330.6 149.3 181.3 121.4%
Corporate G&A and other(2) (125.9) (80.5) (45.4) 56.4%
Goodwill and tradename impairment(3) - (174.3) 174.3 (100.0)%
Total operating income (loss) 204.7 (105.5) 310.2 294.0%
Gain on Topgolf investment(4) 252.5 - 252.5 n/m
Interest expense, net (115.6) (46.9) (68.7) 146.5%
Other income, net 9.0 24.9 (15.9) (63.9)%
Total income (loss) before income taxes
$ 478.1 375.0% ____________
(1)Calculated by applying 2020 exchange rates to 2021 reported sales in regions
outside
(2)Amount includes corporate general and administrative expenses not utilized by management in determining segment profitability, including non-cash amortization expense for intangible assets acquired in connection with the Jack Wolfskin, TravisMathew and OGIO acquisitions. In addition, the amount for 2021 includes (i)$22.3 million of non-cash amortization expense for intangible assets acquired in connection with the merger with Topgolf, combined with depreciation expense from the fair value step-up of Topgolf property, plant and equipment and amortization expense related to the fair value adjustments to Topgolf leases; (ii)$21.2 million of transaction, transition and other non-recurring costs associated with the merger with Topgolf completed onMarch 8, 2021 ; and (iii)$2.8 million of costs related to the implementation of new IT systems for Jack Wolfskin. The amount for 2020 also includes certain non-recurring costs, including (i)$8.5 million in transaction and other non-recurring costs associated with the Topgolf merger; (ii)$3.7 million of costs associated with the Company's transition to its new North America Distribution Center; (iii)$3.8 million related to cost-reduction initiatives, including severance charges associated with workforce reductions due to the COVID-19 pandemic; and (iv)$1.5 million related to the implementation of new IT systems for Jack Wolfskin. (3)Amount represents the recognition of a$174.3 million impairment charge to write down goodwill and a portion of the trade name related to Jack Wolfskin in 2020. See Note 9. "Goodwill and Intangible Assets" in the Notes to Consolidated Financial Statements included in this Form 10-K. (4)Amount represents the$252.5 million gain to step-up the Company's former investment in Topgolf to its fair value in connection with the merger. See Note 10. "Investments" in the Notes to Consolidated Financial Statements included in this Form 10-K. 59
-------------------------------------------------------------------------------- Topgolf contributed an incremental$58.2 million of operating income in 2021, which represents approximately ten months of operating results since the completion of the merger onMarch 8, 2021 and reflects the opening of seven new domestic locations combined with Toptracer bay installations. Operating income for the Golf Equipment operating segment increased$55.3 million (37.2%) to$203.9 million for the year endedDecember 31, 2021 from$148.6 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, combined with the favorable impact of foreign currency exchange rates, favorable absorption of fixed overhead due to higher sales volumes period over period, and less promotional activity. In 2020, net revenues were significantly impacted by lower sales volumes and the negative impact of idle facilities due to government mandated shutdowns during the first half of 2020 as a result of the COVID-19 pandemic. The increase in operating income was partially offset by increased freight, labor and overall commodity costs due to inflationary pressures and the supply chain challenges experienced during 2021, and a decrease in sales in the fourth quarter of 2021 due to a planned shift in production to build 2022 new launch product. Operating income for the Apparel, Gear and Other operating segment increased$67.8 million to$68.5 million for the year endedDecember 31, 2021 from$0.7 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, combined with a decrease in promotional activity and an increase in direct-to-consumer e-commerce sales, which have higher profit margins relative to wholesale, combined with improved cost and operating expense leverage. In 2020, operating income was severely impacted by the negative impact of idle facilities due to government mandated shutdowns and the temporary closure of retail locations primarily during the first half of 2020 as a result of the COVID-19 pandemic.
Financial Condition
The Company's cash and cash equivalents decreased$13.9 million to$352.2 million atDecember 31, 2021 from$366.1 million atDecember 31, 2020 . Cash and cash equivalents as ofDecember 31, 2021 reflects the combined cash positions of the Company and Topgolf as a result of the merger completed onMarch 8, 2021 . During 2021, the Company used its cash provided by operations of$278.3 million , combined with proceeds of$89.2 million from lease financing arrangements,$26.2 million from long-term borrowings,$22.3 million from the exercise of stock options and$19.1 million from the sale of a portion of the Company's investment inFull Swing Golf Holdings, Inc. , to fund capital expenditures of$322.3 million , repay$200.7 million of amounts outstanding under its long-term debt facilities, repurchase shares of its common stock for$38.1 million , and fund its investment in Five Iron Golf for$30.0 million . Management expects to fund the Company's future operations from current cash balances and cash provided by its operating activities, combined with borrowings under its 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 Financial Statements in this Form 10-K 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 ofDecember 31, 2021 , the Company's net accounts receivable decreased$33.2 million to$105.3 million from$138.5 million as ofDecember 31, 2020 primarily due to the earlier timing of product sales, which were skewed more towards the first two months of the quarter compared to the timing of fourth quarter sales in the prior year. 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 60 -------------------------------------------------------------------------------- due to the seasonal nature of the Company's Jack Wolfskin business, as many products are geared toward the fall/winter season. Topgolf 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$181.0 million to$533.5 million as ofDecember 31, 2021 compared to$352.5 million as ofDecember 31, 2020 . This increase in inventories was due to a planned shift in production to build new 2022 golf equipment products in the fourth quarter of 2021 and the earlier timing of receipt of 2022 golf bags, combined with incremental inventory from the merger with Topgolf. In addition, inventory levels during the fourth quarter of 2020 were lower due to the surge in demand for golf products during the second half of 2020.
Liquidity and Capital Resources
Liquidity
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-K. 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, price inflation, 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 in this Form 10-K). As ofDecember 31, 2021 , the Company had$752.8 million in cash and availability under its credit facilities, which is an increase of$120.6 million or 19% compared toDecember 31, 2020 . Information about the Company's credit facilities and long-term borrowings is presented in Note 7 "Financing Arrangements" in the Notes to Consolidated Financial Statements in this Form 10-K, and 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 Financial Statements in this Form 10-K). 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 ofDecember 31, 2021 , approximately 58.8% 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 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.
Share Repurchases
Information about the Company's share repurchases during 2021 is presented in
Part II, Item 5 in this Form 10-K under the heading "Purchases of
61
--------------------------------------------------------------------------------Material Cash Requirements
The table below summarizes certain material cash requirements as of
Payments Due By Period
Total 2022 2023 - 2024 2025 - 2026 Thereafter
(in millions)
Japan Term Loan Facility (1) $ 13.0 $
3.5
0.2 0.1 0.1 - -
Term Loan B Facility (2) 436.8 4.8 9.6 422.4 -
Interest on Term Loan Facility 98.0 5.2 46.3 46.5 -
Topgolf Term Loan (3) 340.4 3.5 7.0 329.9 -
Convertible Notes (4) 258.8 - - 258.8 -
Equipment Notes (5) 31.1 10.1 13.6 6.9 0.5
Interest on Equipment Notes 1.2 0.6 0.5 0.1 -
Mortgage Loans (6) 46.4 0.5 1.2 1.5 43.2
Financed Tenant Improvements 3.7 0.2 0.4 0.4 2.7
ABL Facility (7) 9.1 9.1 - - -
Finance leases, including imputed interest (8) 706.9 15.0 31.1 30.8 630.0
Operating leases, including imputed interest (9) 1,895.1 138.7 269.5 256.7 1,230.2
DLF obligations (10) 2,100.8 33.3 74.0 76.9 1,916.6
Minimum lease payments for leases signed but not
yet commenced (11) 1,518.4 30.0 59.9 59.9 1,368.6
Capital commitments (12) 66.0 61.0 5.0 - -
Unconditional purchase obligations (13) 71.9 33.9 37.7 0.3 -
Uncertain tax contingencies (14) 13.3 0.8 8.9 2.9 0.7
Total $ 7,611.1 $ 350.3 $ 571.7 $ 1,496.6 $ 5,192.5
____________
(1)In August 2020 , the Company entered into the Japan Term Loan Facility for
2,000 million Yen (or approximately U.S. $18.0 million using the exchange rate
in effect as of December 31, 2021 ). For further discussion, see Note 7.
"Financing Arrangements" in the Notes to Consolidated Financial Statements in
this Form 10-K.
(2)In January 2019 , to fund the purchase price of the Jack Wolfskin acquisition,
the Company entered into a Credit Agreement, which provides for a Term Loan B
facility in an aggregate principal of $480.0 million , which was issued less $9.6
million in an original issue discount and other transaction fees. For further
discussion, see Note 7. "Financing Arrangements" in the Notes to Consolidated
Financial Statements in this Form 10-K.
(3)In connection with the merger with Topgolf on
(4)InMay 2020 , the Company issued$258.8 million of 2.75% Convertible 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 Financial Statements in this Form 10-K. (5)BetweenDecember 2017 andDecember 2021 , the Company entered into six 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. 62 -------------------------------------------------------------------------------- The loans are secured by the underlying equipment at each facility and the IT equipment. For further discussion, see Note 7. "Financing Arrangements" in the Notes to Consolidated Financial Statements in this Form 10-K.
(6)In connection with the merger with Topgolf on
(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 Financial Statements in this Form 10-K. (8)Amounts represent future minimum payments under financing leases. AtDecember 31, 2021 , finance lease liabilities of$1.8 million were recorded in accounts payable and accrued expenses and$132.5 million were recorded in other long-term liabilities in the accompanying consolidated balance sheets. For further discussion, see Note 3. "Leases" in the Notes to Consolidated Financial Statements in this Form 10-K. (9)The Company leases venues, certain manufacturing facilities, distribution centers, warehouses, office facilities, vehicles and office equipment under operating leases. The amounts presented in this line item represent commitments for minimum lease payments under non-cancelable operating leases. AtDecember 31, 2021 , short-term and long-term operating lease liabilities of$72.3 million and$1,385.4 million , respectively, were recorded in the accompanying consolidated balance sheets. For further discussion, see Note 3. "Leases" in the Notes to Consolidated Financial Statements in this Form 10-K. (10)In connection with the merger with Topgolf onMarch 8, 2021 , the Company assumed certain deemed landlord financing obligations in connection with the construction of Topgolf venue facilities. AtDecember 31, 2021 , the short-term and long-term obligations were$0.9 million and$460.6 million , respectively. For further discussion, see Note 3. "Leases" in the Notes to Consolidated Financial Statements in this Form 10-K. (11)Amount represents the future minimum lease payments under lease agreements related to future Topgolf facilities that have not yet commenced as ofDecember 31, 2021 . For further discussion, see Note 3. "Leases" in the Notes to Consolidated Financial Statements in this Form 10-K. (12)Amount represents capital expenditure commitments, net of amounts expected to be reimbursed by third-party real estate financing partners, under lease agreements for Topgolf venues under construction that have been signed as ofDecember 31, 2021 . (13)During the normal course of its business, the Company enters into agreements to purchase goods and services, including purchase commitments for production materials, endorsement agreements with professional golfers and other endorsers, employment and consulting agreements, and intellectual property licensing agreements pursuant to which the Company is required to pay royalty fees. It is not possible to determine the amounts the Company will ultimately be required to pay under these agreements as they are subject to many variables including performance-based bonuses, severance arrangements, the Company's sales levels, and reductions in payment obligations if designated minimum performance criteria are not achieved. The amounts listed approximate minimum purchase obligations, base compensation, and guaranteed minimum royalty payments the Company is obligated to pay under these agreements. The actual amounts paid under some of these agreements may be higher or lower than the amounts included. In the aggregate, the actual amount paid under these obligations is likely to be higher than the amounts listed as a result of the variable nature of these obligations. In addition, the Company also enters into unconditional purchase obligations with various vendors and suppliers of goods and services in the normal course of operations through purchase orders or other documentation or that are undocumented except for an invoice. Such unconditional purchase obligations are generally outstanding for periods less than a year and are settled by cash payments upon delivery of goods and services and are not reflected in this line item. (14)Amount represents the current and non-current portions of uncertain income tax positions as recorded on the Company's consolidated balance sheets as ofDecember 31, 2021 . Amounts exclude uncertain income tax positions 63
--------------------------------------------------------------------------------
that the Company would be able to offset against deferred taxes. For further discussion, see Note 14. "Income Taxes" in the Notes to Consolidated Financial Statements in this Form 10-K. During its normal course of business, the Company 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 in the amount of$0.4 million 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 twelve months endedDecember 31, 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 15. "Commitments & Contingencies" in the Notes to Consolidated Financial Statements in this Form 10-K.
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