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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.

Critical Accounting Policies and 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 accounting principles generally accepted in the United States ("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, sales and expenses, as well as related disclosures of contingent assets and liabilities. The Company bases its estimates on historical experience and on 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 policies 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 2 "Summary of Significant Accounting Policies" and Note 4 “Revenue Recognition” in the Notes to Consolidated Financial Statements in this Form 10-K.

The Company recognizes revenue from the sale of its products when it satisfies the terms of a sales order from a customer, and transfers control of the products ordered to the customer. Control transfers at a point in time when products are shipped, and in certain cases, when products are received by customers. In addition, the Company recognizes revenue at the point of sale on transactions with consumers at its retail locations. The Company receives a royalty from the licensing of its trademarks and service marks to third parties for certain apparel, gear and golf accessories. Royalty income is recognized over time in net sales as underlying product sales occur, subject to certain minimum royalties, in accordance with the related licensing arrangements and is included in the Company's Apparel, Gear and Other operating segment. Revenues from gift cards are deferred and recognized when the cards are redeemed. The Company’s gift cards have no expiration date. The Company recognizes revenue from unredeemed gift cards, otherwise known as breakage, when the likelihood of redemption becomes remote and under circumstances that comply with any applicable state escheatment laws.

The amount of revenue the Company recognizes is based on the amount of consideration it expects to receive from customers. The amount of consideration is the sales price adjusted for estimates of variable consideration, including sales returns, discounts and allowances as well as sales programs, sales promotions and price concessions that are offered by the Company as described below. These estimates are based on the amounts earned or expected to be claimed by customers on the related sales, and are therefore recorded as reductions to sales and trade accounts receivable.

The Company’s primary sales program, the “Preferred Retailer Program,” offers potential rebates and discounts for participating retailers in exchange for providing certain benefits to the Company, including the maintenance of agreed upon inventory levels, prime product placement and retailer staff training. Under this program, qualifying retailers can earn either discounts or rebates based upon the amount of product purchased. Discounts are applied and recorded at the time of sale. For rebates, the Company estimates the amount of variable consideration related to the rebate at the time of sale based on the customer’s estimated qualifying current year product purchases. The estimate is based on the historical level of purchases, adjusted for any factors expected to affect the current year purchase levels. The estimated year-end rebate is adjusted quarterly based on actual purchase levels, as necessary. The Preferred Retailer Program is generally short-term in nature and the actual amount of rebate to be paid under this program is known as of the end of the year and paid to customers shortly after year-end. Historically, the Company's actual amount of variable consideration related to its Preferred Retailer Program has not been materially different from its estimates.

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The Company also offers short-term sales program incentives, which include sell-through promotions and price concessions or price reductions. Sell-through promotions are generally offered throughout the product's life cycle, which varies from two to three years, and price concessions or price reductions are generally offered at the end of the product's life cycle. The estimated variable consideration related to these programs is based on a rate that includes historical and forecasted data. The Company records a reduction to net sales using this rate at the time of the sale. The Company monitors this rate against actual results and forecasted estimates and adjusts the rate as deemed necessary in order to reflect the amount of consideration it expects to receive from its customers. There were no material changes to the rate during the year ended December 31, 2020, 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 2020 sales program incentives, pre-tax income for the year ended December 31, 2020 would have decreased by approximately $2.5 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 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 2020 sales returns less the cost recovery of inventory, pre-tax income for the year ended December 31, 2020 would have decreased by approximately $4.4 million.

Allowance for Estimated Credit Losses

The Company maintains an allowance for estimated credit losses resulting from the failure of its customers to make required payments. As of January 1, 2020, the Company accounts for these estimated losses in accordance with ASC Topic 326, "Measurement of Credit Losses on Financial Instruments," which replaced the "expected credit loss" model with the "incurred loss" model and requires consideration of a broader range of information to estimate expected credit losses over the life of the asset. The Company's prior methodology for estimating credit losses on trade accounts receivable did not differ significantly from the new requirements of ASC 326. Specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. An estimate of credit losses for the remaining customers in the aggregate is based upon historical bad debts, current customer receivable balances, age of customer receivable balances, and the customers' financial condition, all of which are subject to change. Additionally, the Company’s monitoring activities now consider future reasonable and supportable forecasts of economic conditions to adjust all general reserve percentages as necessary. Balances are written off when determined to be uncollectible. Assuming there had been a 10% increase in uncollectible accounts over the 2020 recorded estimated allowance for doubtful accounts, pre-tax income for the year ended December 31, 2020 would have decreased by approximately $1.7 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 2020 recorded

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estimated allowance for obsolete or unmarketable inventory, pre-tax income for the year ended December 31, 2020 would have decreased by approximately $2.5 million.

Impairment of Goodwill and Intangible Assets

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 assumptions used in calculating future cash flows and asset fair values, the Company may be exposed to losses that could be material.

During the second quarter of 2020, due to the significant disruptions caused by the COVID-19 pandemic on the Company's operations, the Company performed a qualitative assessment considering the macroeconomic conditions caused by the COVID-19 pandemic, and the potential impact on the Company's sales and operating income for the remainder of fiscal 2020 and potentially beyond. Based on this assessment, the Company determined that there were indicators of impairment, and proceeded with a quantitative assessment of goodwill for all reporting units as well as for its indefinite-lived intangible assets. As a result, the Company recognized impairment losses of $148.4 million to write-off the goodwill associated with the Jack Wolfskin reporting unit, and $25.9 million to write-down the trade name associated with Jack Wolfskin to its new estimated fair value. The Company did not record further impairments in the second half of 2020. For further information, see Note 9 “Goodwill and Intangible Assets” in the Notes to Consolidated Financial Statements in this Form 10-K.

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 pursuant to ASC Topic 740 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. These estimates 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 13 “Income Taxes” in the Notes to Consolidated Financial Statements in this Form 10-K.

Pursuant to ASC Topic 740-25-6, the Company is required to accrue 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 in the 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 13 “Income Taxes.”

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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.

Derivatives and Hedging

In the normal course of business, the Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to transactions of its international subsidiaries. As part of its strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates, the Company uses designated cash flow hedges and non-designated hedges in the form of foreign currency forward contracts to mitigate the impact of foreign currency translation on transactions that are denominated primarily in Japanese Yen, British Pounds, Euros, Canadian Dollars, Australian Dollars and Korean Won, and designated interest rate hedge contracts to mitigate the impact of variable interest rates on long-term debt.

The Company accounts for its foreign currency forward contracts, cross-currency debt swap contracts and interest rate hedge contracts in accordance with ASC Topic 815, "Derivatives and Hedging" ("ASC Topic 815"). ASC Topic 815 requires the recognition of all derivative instruments as either assets or liabilities on the balance sheet, the measurement of those instruments at fair value and the recognition of changes in the fair value of derivatives in earnings in the period of change, unless the derivative qualifies as a designated cash flow hedge that offsets certain exposures. Certain criteria must be satisfied in order for derivative financial instruments to be classified and accounted for as a cash flow hedge. Gains and losses from the remeasurement of qualifying cash flow hedges are recorded as a component of accumulated other comprehensive income (loss) and released into earnings as a component of cost of goods sold or net sales, other income (expense) and interest expense during the period in which the hedged transaction takes place. Remeasurement gains or losses of derivatives that are not elected for hedge accounting treatment are recorded in earnings immediately as a component of other income (expense).

Foreign currency forward contracts and interest rate hedge contracts are used only to meet the Company’s objectives of minimizing variability in the Company’s operating results arising from foreign exchange rate movements and changes in interest rates. The Company does not enter into foreign currency forward contracts, cross-currency debt swap contracts and interest rate hedge contracts for speculative purposes. The Company utilizes counterparties for its derivative instruments that it believes are credit-worthy at the time the transactions are entered into and the Company closely monitors the credit ratings of these counterparties.

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.

Discussion of Non-GAAP Measures

In addition to the financial results contained in this report, which have been prepared and presented in accordance with the accounting principles generally accepted in the United States, 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:

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•For the years ended December 31, 2020, 2019 and 2018, 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 into U.S. dollars based upon the foreign currency exchange rates for the applicable comparable prior period.

•For the year ended December 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 in May 2020, costs associated with the pending Topgolf merger, and other non-recurring expenses.

•For the year ended December 31, 2019, certain financial results exclude certain non-cash charges, including the amortization of purchase accounting adjustments associated with the Jack Wolfskin acquisition, amortization expense of intangible assets associated with the Jack Wolfskin, OGIO and TravisMathew acquisitions, and transaction and transition costs in connection with the Jack Wolfskin acquisition.

•For the year ended December 31, 2018, certain financial results exclude non-cash amortization expense of intangible assets associated with the OGIO and TravisMathew acquisitions.

The Company has included in this report information to reconcile this non-GAAP information to the most directly comparable GAAP information. The non-GAAP information presented in this report should not be considered in isolation or as a substitute for any measure derived in accordance with GAAP. The non-GAAP information may also be inconsistent with the manner in which similar measures are derived or used by other companies. Management uses such non-GAAP information for financial and operational decision-making purposes and as a means to evaluate period over period comparisons of the underlying performance of its business and in forecasting the Company’s business going forward. Management believes that the presentation of such non-GAAP information, when considered in conjunction with the most directly comparable GAAP information, provides additional useful comparative information for investors in their assessment of the underlying performance of the Company’s business.

Results of Operations

Overview of Business, Seasonality and Foreign Currency

Business and Products

The Company designs, manufactures and sells a full line of high quality golf equipment, including golf clubs and golf balls, and apparel, gear and other products. The Company designs its golf products to be technologically advanced and in this regard invests a considerable amount in research and development each year. The Company designs its golf products for golfers of all skill levels, both amateur and professional. In addition, the Company designs and develops a full line of high quality soft goods, including golf bags, apparel, footwear and other golf accessories. In 2017, the Company expanded its soft goods lines with the acquisitions of OGIO and TravisMathew. Under the OGIO brand, the Company offers a full line of premium personal storage gear for sport and personal use, a line of performance outerwear for men, and golf and apparel accessories. TravisMathew offers a full line of premium golf and lifestyle apparel as well as footwear and accessories. In January 2019, the Company completed the acquisition of JW Stargazer Holding GmbH, the owner of the international, premium outdoor apparel, gear and accessories brand, Jack Wolfskin. This acquisition further enhanced the Company's lifestyle category and provides a platform for future growth in the active outdoor and urban outdoor categories. The Company's soft goods under the Callaway, OGIO, TravisMathew and Jack Wolfskin brands are largely designed and developed internally.

Pending Merger with Topgolf

In October 2020, the Company entered into an agreement to acquire Topgolf in an all-stock transaction, pursuant to a Merger Agreement by and among the Company, Topgolf and the Merger Sub. The Merger is expected to close during the first quarter of 2021, after which the former Topgolf stockholders (other than the Company) are expected to own approximately 48.5% of the combined company on a fully diluted basis. This Merger is expected to enable the combined company to accelerate innovation, develop exciting new products and experiences, and create compelling value for shareholders.

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The Company currently estimates that it will issue approximately 90 million shares of its common stock to the stockholders of Topgolf (excluding the Company) for 100% of the outstanding equity of Topgolf, using an exchange ratio based on an equity value of Topgolf of approximately $1,986.0 million (or approximately $1,745.0 million excluding Topgolf shares currently held by the Company) and a price per share of the Company’s common stock fixed at $19.40 per share. The actual purchase consideration upon the close of the Merger will be based on the estimated number of shares of the Company's common stock as discussed above, multiplied by the closing price of Company's common stock as of that day. As of December 31, 2020, the Company held approximately 14.3% of Topgolf's outstanding shares, which will be contributed towards that total purchase consideration. The Company will also recognize a gain, which is expected to be in excess of $200.0 million to write-up its pre-merger investment in Topgolf to its fair value, based on the closing price of the Company's common stock on the date of the Merger. Upon completion of the Merger, the former Topgolf stockholders (other than the Company) are expected to own approximately 48.5% of the combined company on a fully diluted basis. Outstanding Topgolf stock options will be converted into options to purchase the Company’s common stock, generally using the same exchange ratio. Additionally, the Company currently expects to acquire significant deferred tax assets related to tax carryforwards in the Proposed Merger. As a result of the propose merger it is possible a significant amount of the combined Company’s deferred tax assets could expire unused and therefore the Company may be required to record a valuation allowance against all or a substantial portion of its net deferred tax assets, which could have a significant impact on the Company’s tax provision in 2021. The analysis of this is complex and is subject to judgment based on information not yet available to the Company. The Company will make a more complete assessment of this following the merger and will record a valuation allowance, if appropriate.

The Merger Agreement further provides that, upon termination of the Merger Agreement under specified circumstances, either party may be required to pay the other party a termination fee of $75.0 million. The Merger is expected to close on or around March 8, 2021, subject to shareholder approval and other customary conditions (see Note 6 “Business Combinations” in the Notes to Consolidated Financial Statements in this Form 10-K).

Operating and Reportable Segments

The Company has two operating and reportable segments, namely Golf Equipment and Apparel, Gear and Other.

The Golf Equipment operating segment, which is comprised of golf club and golf ball products, includes Callaway Golf-branded woods, hybrids, irons, wedges, Odyssey putters, including Toulon Design putters by Odyssey, packaged sets, Callaway Golf and Strata branded golf balls and sales of pre-owned golf clubs.

The Apparel, Gear and Other operating segment includes the Jack Wolfskin outdoor apparel, gear and accessories business, the TravisMathew golf and lifestyle apparel and accessories business, and the Callaway soft goods business and the OGIO business, which consists of golf apparel and accessories (including golf bags and gloves), storage gear for sport and personal use, and royalties from licensing of the Company’s trademarks and service marks for various soft goods products.

In connection with the pending Merger with Topgolf discussed above, the Company will reassess its operating and reportable segments at the time the Merger becomes final.

Cost of Sales

The Company’s cost of sales is comprised primarily of material and component costs, distribution and warehousing costs, and overhead. Historically, over 85% of the Company's manufacturing costs, primarily material and component costs, are variable in nature and fluctuate with sales volumes. With respect to the Company's Golf Equipment operating segment, variable costs as a percentage of cost of sales range between 85% to 95% for golf club products and 70% to 80% for golf ball products. Variable costs for soft goods in the Apparel, Gear and Other operating segment are generally greater than 85% as fewer fixed costs are used in the manufacturing of soft goods products. Generally, the relative significance of the components of cost of sales does not vary materially from these percentages from period to period. See "Years Ended December 31, 2020 and 2019—Segment Profitability" and "Years Ended December 31, 2019 and 2018—Segment Profitability" below for further discussion of gross margins.

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Seasonality

Golf Equipment

In most of the regions where the Company conducts business, the game of golf is played primarily on a seasonal basis. Weather conditions generally restrict golf from being played year-round, except in a few markets, with many of the Company’s on-course customers closing for the cold weather months. The Company’s golf equipment business is therefore subject to seasonal fluctuations. In general, during the first quarter, the Company begins selling its golf club and golf ball products into the golf retail channel for the new golf season. This initial sell-in generally continues into the second quarter. Second-quarter sales are significantly affected by the amount of reorder business of the products sold during the first quarter. Third-quarter sales are generally dependent on reorder business but can also include smaller new product launches, typically resulting in lower sales than the second quarter as many retailers begin decreasing their inventory levels in anticipation of the end of the golf season. Fourth-quarter sales are generally less than the other quarters due to the end of the golf season in many of the Company’s key regions. However, third-quarter sales can be affected by a mid-year product launch, and fourth-quarter sales can be affected from time to time by the early launch of product introductions related to the new golf season of the subsequent year. This seasonality, and therefore quarter-to-quarter fluctuations, can be affected by many factors, including the timing of new product introductions as well as weather conditions. In general, because of this seasonality, a majority of the Company’s sales from its Golf Equipment operating segment and most, if not all, of its profitability from this segment generally occurs during the first half of the year.

Apparel, Gear and Other

Sales of the Company's golf and lifestyle apparel, gear and accessories generally follow the same seasonality as golf equipment, and are therefore generally higher during the first half of the year. Sales of outdoor apparel, footwear and equipment related to the Jack Wolfskin business focuses primarily on outerwear and consequently experiences stronger sales for such products during the cold-weather months and the corresponding prior sell-in periods. Therefore, sales of Jack Wolfskin products are generally greater during the second half of the year.

Foreign Currency

A significant portion of the Company’s business is conducted outside of the United States in currencies other than the U.S. dollar. As a result, changes in foreign currency rates can have a significant effect on the Company’s financial results. The Company enters into foreign currency forward contracts to mitigate the effects of changes in foreign currency rates. While these foreign currency forward contracts can mitigate the effects of changes in foreign currency rates, they do not eliminate those effects, which can be significant. These effects include (i) the translation of results denominated in foreign currency into U.S. dollars for reporting purposes, (ii) the mark-to-market adjustments of certain intercompany balance sheet accounts denominated in foreign currencies and (iii) the mark-to-market adjustments of the Company’s foreign currency forward contracts. In general, the Company’s overall financial results are affected positively by a weaker U.S. dollar and are affected negatively by a stronger U.S. dollar as compared to the foreign currencies in which the Company conducts its business.

Executive Summary of Results of Operations

Net sales for the full year in 2020 decreased $111.6 million or 6.6% to $1,589.5 million compared to $1,701.1million in 2019. This decrease reflects a $115.1 million or 15.9% decline in net sales of apparel, gear and other, offset by an increase of $3.5 million or 0.4% in net sales of golf equipment, compared to 2019. The overall decline in net sales in 2020 reflects the challenges the Company faced as the result of the COVID-19 pandemic, primarily during the first half of 2020 at the height of the worldwide regulatory restrictions, which resulted in the temporary closure of the Company’s retail locations, manufacturing facilities and distribution centers at varying times. The Company began to see signs of improvement coming out of the second quarter of 2020, and in the third and fourth quarters of 2020, the Company experienced record sales due to an unprecedented demand for golf equipment, particularly in the United States and Europe, due to an increased interest in the game of golf, as it supports an active and healthy way of life that is compatible with social distancing. This surge in golf equipment sales also reflects the strength of the Company’s product offerings across all skill levels. Additionally, although sales of apparel, gear and other were down substantially for the full year, these soft goods sales rebounded faster than anticipated during the second half of the year, led by the TravisMathew and Jack Wolfskin apparel businesses, which have benefited from strong brand momentum combined with increased outdoor consumer activity. In addition, as government mandated restrictions and retail store closures limited consumers' ability to shop in-store, the Company experienced a higher mix of e-commerce sales in 2020, which increased overall by 34.5%

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compared to e-commerce sales in 2019. The Company anticipates this trend will continue into 2021. Overall, the Company is encouraged that sales in all of its businesses are improving since the start of the COVID-19 pandemic.

COVID-19 also negatively impacted the Company's gross margin. More specifically, the Company's 2020 full year gross margin compared to 2019 declined 370 basis points primarily due to the decrease in sales, the shutdown of its manufacturing plants during the year and the Company's proactive inventory reduction initiatives. To mitigate the effects of COVID-19 on the Company’s business, the Company took proactive actions to protect its employees, reduce costs, maximize liquidity, and conserve cash. Reductions in discretionary spending and infrastructure costs, including a reduction in workforce, reduced marketing and travel expenses, and voluntary reductions in compensation by the Board of Directors, the Chief Executive Officer and other members of senior management, have resulted in a significant reduction in planned operating expenses and capital expenditures. As a result of these cost reduction initiatives, the Company realized net savings in operating expenses of $45.3 million (7.1%) (excluding impairment charges of $174.3 million) for the full year in 2020 compared to 2019.

After COVID-19 began, the Company also focused on maximizing cash and liquidity, including the inventory reduction initiatives to generate cash and tight management of working capital generally, combined with the suspension of open market stock repurchases and the cessation of the Company’s quarterly dividend. Due to these efforts to maximize cash and liquidity, reduced discretionary spending, and overall business improvement, at December 31, 2020, the Company’s liquidity, consisting of cash, including proceeds from the convertible senior notes issued in May 2020, combined with availability under its credit facilities, increased to $632.4 million compared to $303.3 million at December 31, 2019.

Looking forward, the Company anticipates that COVID-19 will continue to negatively impact its business in 2021 as a result of the continued government shutdown orders and other restrictions around the world, although to a lesser degree than in 2020. All of the Company’s business segments, as well as the Topgolf business, support an active outdoor lifestyle that is compatible with a world of social distancing and the Company anticipates that its continued brand momentum, increased demand for golf equipment and recovery in its soft goods business will continue into 2021, and therefore help mitigate the impact of COVID-19.

Years Ended December 31, 2020 and 2019

Net sales for the year ended December 31, 2020 decreased $111.6 million (6.6%) to $1,589.5 million compared to $1,701.1 million for the year ended December 31, 2019. This decrease reflects a $115.1 million or 15.9% decline in sales of apparel, gear and other resulting from the negative impact of the COVID-19 pandemic, including the temporary closure of most of the Company's operations and retail doors during the second quarter of 2020, with additional closures in the fourth quarter of 2020. This decrease was partially offset by the golf equipment segment, which saw strong momentum during the second half of the year and resulted in a $3.5 million or 0.4% increase in sales of golf equipment. In addition, due to government mandated restrictions and retail store closures, the Company experienced a higher mix of e-commerce sales, which increased overall by 34.5% in 2020 compared to 2019. The increase in net sales also reflects the favorable impact of $10.8 million due to fluctuations in foreign currencies for the year ended December 31, 2020.

The Company’s net sales by operating segment are presented below (dollars in millions):

Years EndedDecember 31, Growth/(Decline)

Net sales:

For further discussion of each operating segment’s results, see "Operating Segments Results for the Years Ended December 31, 2020 and 2019" below.

Net sales information by region is summarized as follows (dollars in millions):

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Years EndedDecember 31, Decline Constant CurrencyDecline vs. 2019

Net sales:

Net sales in the United States decreased $9.6 million (1.2%) to $778.6 million during 2020 compared to $788.2 million in 2019. Net sales in regions outside of the United States decreased $102.0 million (11.2%) to $810.9 million in 2020 compared to $912.9 million in 2019. Fluctuations in foreign currencies had a favorable impact on international net sales of $10.8 million in 2020 relative to the prior year.The general decrease in net sales by region was primarily due to the business disruptions caused by the COVID-19 pandemic, as discussed above, partially offset by increased sales of golf equipment resulting from the popularity of golf as a social-distancing activity. The significant decline in Europe was primarily due to a decline in sales of soft goods in that region as the result of the temporary closure of retail stores during the second quarter of 2020, and again, to a lesser extent in the fourth quarter of 2020. The decline in Japan was due to a region specific product launch in 2019 and no similar launch in 2020, combined with a slower recovery of their apparel business, which was more heavily impacted by the pandemic.

Gross profit decreased $109.2 million to $657.6 million in 2020 from $766.8 million in 2019. Gross profit as a percent of net sales ("gross margin") decreased 370 basis points to 41.4% in 2020 from 45.1% in 2019. The decline in gross profit was primarily due to the overall decline in sales related to the COVID-19 pandemic, proactive soft goods inventory reduction initiatives, costs associated with idle facilities during the government mandated shutdown and increased freight expense in the back-half of 2020. These declines were partially offset by favorable changes in foreign currency as well as a higher mix of e-commerce sales, which have higher gross margins. For a further discussion of gross margin, see "Segment Profitability" below.

Selling expenses decreased by $46.4 million to $391.8 million (24.7% of net sales) in 2020 compared to $438.2 million (25.8% of net sales) in 2019. This 10.6% decrease was primarily due to the Company's planned reduction in operating expenses in response to the decline in sales caused by the COVID-19 pandemic. These reductions consisted of a $23.6 million decline in marketing and tour expenses due to the cancellation of golf events, a $11.5 million decline in employee costs as a result of the Company's cost reduction initiatives in response to COVID-19, and a $8.3 million decline in employee travel expenses due to COVID-19 travel restrictions, as well as an overall decline in variable expenses.

General and administrative expenses increased by $5.4 million to $150.7 million (9.5% of net sales) in 2020 compared to $145.3 million (8.5% of net sales) in 2019. This 3.7% increase was primarily due to a $10.9 million increase in legal expenses and professional fees, and a $2.8 million increase in depreciation and amortization expense. These increases were partially offset by a $6.5 million decline in employee costs as a result of the Company's cost reduction initiatives in response to COVID-19, and a $2.1 million decline in travel expenses due to COVID-19 travel restrictions.

Research and development expenses decreased by $4.3 million to $46.3 million (2.9% of net sales) in 2020 compared to $50.6 million (3.0% of net sales) in 2019. This 8.5% decrease was primarily due to a $4.1 million decline in employee costs resulting from the Company's cost reduction initiatives, and a $1.2 million decline in travel and entertainment as a result of travel restrictions related to the COVID-19 pandemic.

Due to the significant business disruption and macro-economic impact of the COVID-19 pandemic, the Company recognized an impairment charge of $174.3 million to write-off goodwill and a portion of the trade name associated with Jack Wolfskin. For further discussion, see Note 9 "Goodwill and Intangible Assets" to the Notes to Consolidated Financial Statements in this Form 10-K.

Interest expense increased by $8.1 million to $47.4 million in 2020 compared to $39.3 million in 2019 primarily due to the issuance of $258.8 million in Convertible Notes in May 2020 partially offset by a decrease resulting from repayments on the Term Loan Facility and lower outstanding borrowings on the Company's credit facilities (see Note 7

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"Financing Arrangements" and Note 19 "Derivatives and Hedging" to the Notes to Consolidated Financial Statements in this Form 10-K).

Other income increased by $23.4 million to $25.0 million in 2020 compared to $1.6 million in 2019. This increase was due to a $14.8 million increase in net foreign currency transaction gains, combined with the recognition of an $11.0 million net gain in connection with the settlement of a cross-currency swap contract. These increases were partially offset by a net decrease of $4.0 million on gains related to hedging contracts.

The provision for income taxes decreased by $17.0 million to a tax benefit of $0.5 million in 2020, compared to a tax provision of $16.5 million in 2019.The Company's effective tax rate as a percentage of pre-tax loss for the year ended December 31, 2020 decreased to 0.4%, compared to 17.3% as a percent of pre-tax income in the comparable period of 2019. This decrease was primarily due to the goodwill impairment charge recorded during the second quarter of 2020, which is non-deductible for tax purposes combined with an overall decline in pre-tax earnings in 2020 compared to 2019. For further discussion, see Note 13 "Income Taxes" to the Notes to Consolidated Financial Statements in this Form 10-K.

Net income/loss in 2020 decreased to a net loss of $126.9 million compared to net income of $79.4 million in 2019. Diluted earnings/loss per share decreased $2.17 to a loss per share of $1.35 in 2020 compared to earnings per share of $0.82 in 2019.

On a non-GAAP basis, excluding the items described in the table following this paragraph, the Company's net income and diluted earnings per share for the year ended December 31, 2020 would have been $64.4 million and $0.67 per share, respectively, compared to $105.7 million and $1.10 per share, respectively, for the comparative period in 2019.The decrease in non-GAAP earnings in 2020 was primarily due to the business disruptions and challenges caused by the COVID-19 pandemic during 2020, which resulted in a significant decline in net sales and operating income compared to 2019, partially offset by the Company's planned cost reduction initiatives in response to the COVID-19 pandemic, as well as decreased travel and entertainment expenses, lower variable expenses due to lower sales, and reduced spending in marketing and tour expenses. In addition, non-GAAP net income for 2020 includes a net gain that was recognized in connection with the settlement of a cross-currency swap contract as well as the favorable impact of changes in foreign currencies. All the foregoing was offset by the Company's continued investments in its new businesses.

The table below presents a reconciliation of the Company's results under GAAP for the year ended December 31, 2020 and 2019 to the Company's non-GAAP results as defined above for the same periods (in millions, except per share information).

Diluted earnings (loss) per share $ (1.35) $ (1.81) $ (0.05) $ (0.17) $ 0.67

Diluted earnings (loss) per share $ 0.82 $ (0.15) $ (0.13) $ 1.10

(1)Includes the non-cash amortization expense of intangible assets in connection with the acquisitions of Jack Wolfskin, TravisMathew and OGIO. In addition, the year ended December 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, and the year

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ended December 31, 2019 includes the amortization of the inventory valuation step-up in connection with the Jack Wolfskin acquisition.

(2)Represents the non-cash amortization of the discount on the Convertible Notes issued in May 2020.

(3)Represents transaction costs related to the Topgolf merger announced in October 2020, including legal, professional and SEC filing fees, redundant costs associated with the Company's transition of its North 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)Total diluted earnings per share on a non-GAAP basis for the year ended December 31, 2020 was calculated using diluted weighted average shares outstanding, as earnings on a non-GAAP basis resulted in net income after giving effect to the non-recurring and non-cash charges discussed above.

(5)Represents non-recurring transaction fees associated with the Jack Wolfskin acquisition completed in January 2019, including banker's fees, legal fees, consulting and travel expenses; costs associated with transitioning and reporting on the Jack Wolfskin business, including audit fees for SEC reporting requirements, recruiting fees, and valuation services associated with preparing Jack Wolfskin's opening balance sheet; consulting fees to address an activist investor; and a net loss from the remeasurement of a foreign currency forward contract in connection with the acquisition of Jack Wolfskin, which was denominated in Euros.

Operating Segments Results for the Years Ended December 31, 2020 and 2019

Golf Equipment

Golf Equipment sales increased $3.5 million (0.4%) to $982.7 million in 2020 compared to $979.2 million in 2019 as a result of an increase of $18.8 million or 2.4% in golf club sales, partially offset by a $15.3 million or 7.2% decrease in golf ball sales. Net sales information for the Golf Equipment segment by product category is summarized as follows (dollars in millions):

Years EndedDecember 31, Growth/(Decline)

Net sales:

Net sales of Golf Clubs increased $18.8 million (2.4%) to $787.1 million in 2020 compared to 2019 primarily due to an increase in sales volume, partially offset by a decline in average selling prices. The increase in sales volume was driven by an increase in the popularity of golf as a result of the heightened demand for outdoor, socially-distanced activities during the COVID-19 pandemic. Also due to the pandemic, sales of golf equipment through the Company's e-commerce channel increased by approximately 24.0% in 2020 compared to 2019. The decline in average selling prices was primarily due to the current year launch of the Mavrik line of drivers and irons, which have a lower average selling price compared to the Epic Flash drivers and Apex irons launched in 2019, combined with a shift in sales mix to lower margin pre-owned products.

Net sales of Golf Balls decreased $15.3 million (7.3%) to $195.6 million in 2020 compared to 2019, primarily due to a decline in sales volume and flat average selling prices. The decline in sales volume was due to the business disruptions caused by the COVID-19 pandemic during the first half of 2020, including the delayed launch of the Chrome Soft X golf balls, which occurred later in the second quarter of 2020 than originally anticipated. This decline was partially offset by an increase in sales in the third and fourth quarters due to the popularity of golf as a socially-distanced activity.

Apparel, Gear and Other

Apparel, Gear and Other sales decreased $115.1 million (15.9%) to $606.8 million in 2020 compared to $721.9 million in 2019 primarily due to the business disruptions and challenges caused by the COVID-19 pandemic. This decrease was partially offset by an increase in e-commerce sales, which increased by approximately 56.0% in 2020 compared to 2019. Net sales information for the Apparel, Gear and Other segment is summarized as follows (dollars in millions):

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Years EndedDecember 31, Decline

Net sales:

Net sales of Apparel decreased $61.4 million (15.0%) to $349.3 million in 2020 compared to 2019 due to a decline in sales across all apparel brands as a result of the business challenges caused by the COVID-19 pandemic, including the temporary closure of retail stores in most major markets, primarily during the second quarter of 2020, combined with additional closures during the fourth quarter of 2020.

Net sales of Gear, Accessories & Other decreased $53.7 million (17.3%) to $257.5 million in 2020 compared to 2019, primarily due to a decline in sales of OGIO-branded bags and Callaway-branded golf bags resulting from the business challenges caused by the COVID-19 pandemic. Additionally, the Company moved a portion of the OGIO business to a licensing arrangement during the current year.

Segment Profitability

Profitability by operating segment is summarized as follows (dollars in millions):

Years EndedDecember 31, Growth/(Decline)

Income before income taxes:

(1)Reconciling items represent corporate general and administrative expenses and other income (expense) not included by management in determining segment profitability. The $156.8 million increase in reconciling items in 2020 compared to 2019 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 in 2020 (see Note 9 "Goodwill and Intangible Assets" to the Notes to Consolidated Financial Statements in this Form 10-K), $5.5 million in expenses related to the Company's transition to its new North America distribution center in 2020, and an $8.1 million increase in net interest expense. These increases were partially offset by a $23.4 million increase in other income primarily due to foreign currency and hedging contract gains, and a $10.9 million decrease in amortization expense recognized in 2019 related to the inventory valuation step-up from the Jack Wolfskin acquisition (see Note 6 "Business Combinations" in the Notes to Consolidated Financial Statements in this Form 10-K).

Pre-tax income in the Company’s Golf Equipment operating segment improved to $148.6 million in 2020 from $140.3 million in 2019. This improvement was primarily due to a $36.0 million decrease in operating expenses, partially offset by a $27.7 million decline in gross profit (a decline of 300 basis points in gross margin). The decrease in operating expenses was primarily due to decreases in marketing expenses and employee costs resulting from the Company's cost reduction initiatives in response to the COVID-19 pandemic, in addition to decreases in employee travel costs and tour expense resulting from travel restrictions and canceled golf tournaments caused by the COVID-19 pandemic. The decline in gross margin was largely due to lower sales and the negative impact of idle facilities during the government mandated shutdown during the first half of 2020 as a result of the COVID-19 pandemic and increased freight expense in the back-half of 2020. This decline was partially offset by a higher mix of direct-to-consumer e-commerce sales, which have higher margins relative the Company's wholesale business.

Pre-tax income in the Company's Apparel, Gear and Other operating segment decreased to $0.7 million in 2020 from $75.5 million in 2019. This decrease was primarily due to a $86.9 million decrease in gross profit (a decline of 540 basis points in gross margin), partially offset by a $12.1 million decrease in operating expenses. The decline in gross margin was

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primarily due to the Company's proactive soft goods inventory reduction initiatives combined with the negative impact of idle facilities during the government mandated shutdown, fixed costs on the lower sales base caused by the temporary shut-down of the Company's distribution centers and retail locations primarily during the first half of 2020 as a result of the COVID-19 pandemic. These declines were partially offset by a higher mix of direct to consumer e-commerce sales, which have higher gross margins relative to the Company's wholesale business. The decrease in operating expenses was primarily due to decreases in marketing expenses and employee costs resulting from the Company's cost reduction initiatives in response to the COVID-19 pandemic, in addition to a decrease in employee travel costs as the result of travel restrictions caused by the COVID-19 pandemic.

Years Ended December 31, 2019 and 2018

Net sales for the year ended December 31, 2019 increased $458.3 million (36.9%) to $1,701.1 million compared to $1,242.8 million for the year ended December 31, 2018 primarily due to the Company's acquisition of the outdoor apparel, gear and accessories company, Jack Wolfskin, which added incremental sales of $356.2 million to the Company's Apparel, Gear and Other operating segment. Excluding this acquisition, net sales increased $102.0 million (8.2%) for the year ended December 31, 2019, compared to 2018, primarily due to a 7.3% increase in the Golf Equipment segment as well as the continued success of the TravisMathew apparel business. Net sales for the year ended December 31, 2019 would have been $31.2 million higher using average foreign exchange rates in effect in 2018.

The Company’s net sales by operating segment are presented below (dollars in millions):

Years EndedDecember 31, Growth

Net sales:

(1)The Company changed its operating segments as of January 1, 2019. Accordingly, prior period amounts have been reclassified to conform with the current period presentation.

For further discussion of each operating segment’s results, see "Operating Segments Results for the Years Ended December 31, 2019 and 2018" below.

Net sales information by region is summarized as follows (dollars in millions):

Years EndedDecember 31, Growth Constant Currency Growth/(Decline) vs. 2018

Net sales:

(1) In connection with the Company's assessment of its operating and reportable segments the Company also reassessed its reportable regions. As a result, starting on January 1, 2019, the Company began to report regional sales previously reported in rest of Asia and other foreign countries in rest of world. Accordingly, the prior period amounts have been reclassified to conform to current year presentation of regional sales.

Net sales in the United States increased $79.7 million (11.2%) to $788.2 million during 2019 compared to $708.5 million in 2018. Net sales in regions outside of the United States increased $378.6 million (70.9%) to $912.9 million in 2019 compared to $534.3 million in 2018. Fluctuations in foreign currencies had an unfavorable impact on international net sales of $31.2 million in 2019 relative to the prior year. The increase in net sales by region includes the following:

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•In the United States, the increase was primarily due to an increase in sales of golf equipment combined with an increase in apparel sales due to the continued growth of the Travis Mathew business.

•In Europe, the increase was primarily due to incremental apparel sales resulting from the Jack Wolfskin acquisition completed in January 2019, combined with an increase in sales of golf equipment, partially offset by the unfavorable impact of foreign currency fluctuations on sales.

•The increase in Japan was primarily due to an increase in sales of golf equipment.

•The increase in Rest of World was primarily driven by incremental apparel sales in China resulting from the Jack Wolfskin acquisition completed in January 2019, partially offset by the unfavorable impact of foreign currency fluctuations on sales.

Gross profit increased $188.4 million to $766.8 million in 2019 from $578.4 million in 2018. Gross profit as a percent of net sales ("gross margin") decreased 140 basis points to 45.1% in 2019 from 46.5% in 2018. This decrease was primarily due to amortization charges of $10.9 million related to a fair value adjustment to Jack Wolfskin's inventory recorded as part of the Company's purchase price allocation, which resulted in a negative impact to gross margin of 60 basis points. The remaining decrease in margin of 80 basis points was due to a shift in current year product mix in the golf equipment segment to sales of more premium products, which generally have lower margins due to more advanced technology, combined with the negative impact of increased tariff expense and unfavorable changes in foreign currency rates. These decreases were partially offset by sales growth from the Company's TravisMathew business, which is accretive to gross margin. For a further discussion of gross margin, see "Segment Profitability" below.

Selling expenses increased by $129.5 million to $438.2 million (25.8% of net sales) in 2019 compared to $308.7 million (24.8% of net sales) in 2018. This increase reflects $114.4 million of incremental costs resulting from the addition of the Jack Wolfskin business, a $5.9 million increase in employee costs, and a $3.8 million increase in professional fees as a result of additional investments in the business to sustain the Company's growth.

General and administrative expenses increased by $44.8 million to $145.3 million (8.5% of net sales) in 2019 compared to $100.5 million (8.1% of net sales) in 2018. This increase was primarily due to $30.1 million of incremental costs resulting from the addition of the Jack Wolfskin business, in addition to increases of $10.6 million in transaction and transition costs related to the Jack Wolfskin acquisition combined with expense from the purchase accounting amortization of intangible assets, and $3.6 million in legal expense.

Research and development expenses increased by $9.8 million to $50.6 million (3.0% of net sales) in 2019 compared to $40.8 million (3.3% of net sales) in 2018. This increase was primarily due to $9.3 million of incremental costs resulting from the addition of the Jack Wolfskin business.

Interest expense increased by $33.8 million to $39.3 million in 2019 compared to $5.5 million in 2018 primarily due to $31.7 million of incremental interest expense recognized from the Term Loan Facility and related debt issuance costs in connection with the Jack Wolfskin acquisition completed in January 2019 (see Note 6 "Business Combinations" and Note 7 "Financing Arrangements" to the Notes to Consolidated Financial Statements in this Form 10-K).

Other income decreased by $6.2 million to $1.6 million in 2019 compared to $7.8 million in 2018 primarily due to the recognition of a net loss of $3.9 million from the remeasurement of a foreign currency forward contract that was put in place to mitigate the risk of foreign currency fluctuations on the acquisition of Jack Wolfskin, combined with a decline in net foreign currency gains from non-designated foreign currency hedging contracts, and an increase in net foreign currency transaction losses year over year.

The provision for income taxes decreased by $9.5 million to $16.5 million in 2019, compared to $26.0 million in 2018 primarily due to the decline in pre-tax income. As a percentage of pre-tax income, the Company's effective tax rate during 2019 declined to 17.3% compared to 19.8% in 2018 primarily due to a shift in the mix of foreign earnings relative to the prior year. For further discussion, see Note 13 "Income Taxes" to the Notes to Consolidated Financial Statements in this Form 10-K.

Net income in 2019 decreased 24.2% to $79.4 million compared to $104.7 million in 2018. Diluted earnings per share decreased to $0.82 in 2019 compared to $1.08 in 2018. On a non-GAAP basis, excluding after-tax acquisition related costs as well as certain hedging losses associated with the purchase price of Jack Wolfskin, and excluding after-tax purchase accounting amortization expenses related to the Jack Wolfskin, TravisMathew and OGIO acquisitions, the Company's net income and diluted earnings per share for the year ended December 31, 2019 would have been $105.7 million and $1.10

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per share compared to $104.9 million and $1.08 per share for the comparative period in 2018. The increased non-GAAP earnings in 2019 is primarily due to the new Jack Wolfskin business combined with growth in the TravisMathew business, the success of the golf equipment product lines launched in 2019, in addition to a lower tax rate, partially offset by a $33.8 million increase in interest expense primarily as a result of the new Term Loan Facility to fund the purchase of Jack Wolfskin.

The table below presents a reconciliation of the Company's results under GAAP for the year ended December 31, 2019 and 2018 to the Company's non-GAAP results as defined above for the same periods (in millions, except per share information).

(1)Represents non-recurring transaction fees, including banker’s fees, legal fees, consulting and travel, and transition costs, including consulting, audit fees and valuations services associated with the acquisition of Jack Wolfskin completed in January 2019, as well as other non-recurring advisory fees. In addition, 2019 includes a net loss and 2018 includes a net gain due to the remeasurement of a foreign currency forward contract to mitigate the risk of foreign currency fluctuations on the acquisition of Jack Wolfskin.

(2)Represents the amortization of intangible assets related to the Company's OGIO and TravisMathew acquisitions in January 2017 and August 2017, respectively, as well as the amortization of intangible assets and the cost impact associated with a change in valuation of inventory (inventory step-up) related to the Company's Jack Wolfskin acquisition in January 2019.

Operating Segments Results for the Years Ended December 31, 2019 and 2018

Golf Equipment

Golf Equipment sales increased $66.3 million (7.3%) to $979.2 million in 2019 compared to $912.9 million in 2018 as a result of increases of $51.0 million or 7.1% in golf club sales and $15.3 million or 7.8% in golf ball sales. Net sales for Golf Equipment in 2019 reflect $11.6 million of unfavorable fluctuations in foreign currency rates.

Net sales information for the Golf Equipment segment by product category is summarized as follows (dollars in millions):

Years EndedDecember 31, Growth

Net sales:

Net sales of Golf Clubs increased $51.0 million (7.1%) to $768.3 million in 2019 compared to 2018 primarily due to increases in sales of irons and putters, partially offset by a decline in sales of woods. Net sales of irons and wedges increased due to the successful launch of the Apex and Big Bertha premium lines of irons in 2019 in addition to the 2019 launch of the Epic Forged premium line of irons and MD5 Jaws wedges with no comparable models launched in 2018, combined with the continued success of the prior year Rogue line of irons and MD4 wedges. The increase in putter sales was due to the success of the new platform of Stroke Lab putters launched in 2019. Net sales of woods declined due to the wide success of the Rogue line of fairway woods in 2018, which was a larger core product launch targeted toward a larger

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segment of the market compared to the premium Epic Flash line of fairway woods launched in 2019. Net sales of golf clubs were negatively impacted by $9.2 million of unfavorable foreign currency fluctuations period over period.

Net sales of Golf Balls increased $15.3 million (7.8%) to $210.9 million in 2019 compared to 2018, primarily due to the successful launch of the new ERC and Chrome Soft X Triple Track and Supersoft lines of golf balls in 2019, combined with the continued success of the 2018 Truvis and Chrome Soft golf balls, which resulted in an overall increase in market share period over period. Net sales of golf balls were negatively impacted by $2.5 million of unfavorable foreign currency fluctuations period over period.

Apparel, Gear and Other

Net sales information for the Apparel, Gear and Other segment is summarized as follows (dollars in millions):

Years EndedDecember 31, Growth

Net sales:

Net sales of Apparel increased $298.5 million (266.0%) to $410.7 million in 2019 compared to 2018. This increase was primarily due to incremental sales of outdoor apparel, gear and accessories as a result of the acquisition of Jack Wolfskin in January 2019, combined with the continued success of the TravisMathew apparel business. This increase in TravisMathew sales resulted from brand momentum, an increase in their wholesale business and an increase in direct-to-consumer sales due in part to the opening of five new retail stores in 2019 and six new retail stores in 2018. Net sales of apparel were negatively impacted by $12.4 million of unfavorable foreign currency fluctuations period over period.

Net sales of Gear, Accessories & Other increased $93.5 million (42.9%) to $311.2 million in 2019 compared to 2018. This increase was primarily due to the addition of Jack Wolfskin, combined with an increase in sales of Callaway-branded golf gloves. Net sales of gear, accessories and other were negatively impacted by $7.3 million of unfavorable foreign currency fluctuations period over period.

Segment Profitability

Profitability by operating segment is summarized as follows (dollars in millions):

Years EndedDecember 31, Growth

Income before income taxes:

(1)Reconciling items represent corporate general and administrative expenses and other income (expense) not included by management in determining segment profitability. The $67.8 million increase in reconciling items in 2019 compared to 2018 includes incremental corporate general and administrative expenses associated with the addition of the Jack Wolfskin business in January 2019, in addition to $34.1 million in non-recurring charges that include (i) transition costs associated with the acquisition of Jack Wolfskin, (ii) the amortization of intangible assets and the cost impact associated with a change in valuation of inventory (inventory step-up) related to the Company's Jack Wolfskin acquisition, and (iii) amortization charges of intangible assets related to the Company's OGIO and TravisMathew acquisitions. Reconciling items in 2019 also include incremental interest expense of $31.7 million related to the Term Loan Facility used for the Jack Wolfskin acquisition as well as $3.9 million of net foreign currency exchange losses associated with the Jack Wolfskin acquisition. In 2018, reconciling items include $7.3 million of net foreign currency exchange gains, and $3.7 million of transaction costs associated with the Jack Wolfskin acquisition. For information

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on the acquisition of Jack Wolfskin and the Company's credit facilities and long-term debt obligations see Note 6 "Business Combinations" and Note 7 "Financing Arrangements" in the Notes to Consolidated Financial Statements in this Form 10-K .

Pre-tax income in the Company’s Golf Equipment operating segment improved to $140.3 million in 2019 from $128.6 million in 2018. This improvement was primarily due to a $13.3 million increase in gross profit as a result of the increase in net sales as discussed above, partially offset by a decline in gross margin due to a more premium mix of products sold in 2019 compared to 2018, which generally have lower margins due to the higher cost of more advanced technology, in addition to the recognition of higher golf ball manufacturing costs in 2019 associated with the complexity of managing production while completing major capital improvements on the golf ball manufacturing facility. The increase in gross profit was offset by a $1.6 million increase in operating expenses primarily to support the revenue growth period over period, combined with the negative impact from unfavorable changes in foreign currency rates.

Pre-tax income in the Company's Apparel, Gear and Other operating segment increased to $75.5 million in 2019 from $54.9 million in 2018 primarily due to the addition of the Jack Wolfskin business in January 2019, combined with an improvement in gross margin as a result of the continued success of the TravisMathew apparel business, partially offset by the negative impact of unfavorable changes in foreign currency rates.

Financial Condition

The Company’s cash and cash equivalents increased $259.5 million to $366.1 million at December 31, 2020, from $106.7 million at December 31, 2019, primarily due to proceeds of $258.8 million from the Convertible Notes issued in May 2020 combined with tight working capital management and the Company's cost reduction actions taken in response to COVID-19. This improvement in liquidity was partially offset by the overall decline in earnings period over period due to the adverse effects of the COVID-19 pandemic on the Company's business during 2020. During the twelve months ended December 31, 2020, the Company used its cash and cash equivalents combined with the proceeds from the issuance of the Convertible Notes to fund its operations, repay $134.9 million of amounts outstanding under its credit and long-term debt facilities, fund capital expenditures of $39.3 million, primarily for the Company's transition of its North America distribution center to a new facility, investments in its golf ball manufacturing plant and for the implementation of new IT systems. The Company further invested $20.0 million in Topgolf, and repurchased shares of its common stock for $22.2 million. In addition, in connection with the Convertible Notes, the Company paid a premium of $31.8 million for capped call transactions, which are expected to generally reduce the potential dilution to the Company’s common stock upon any conversion of the notes. 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, Term Loan Facility and Convertible Notes.

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/winter season. As of December 31, 2020, the Company’s net accounts receivable decreased to $138.5 million from $140.5 million as of December 31, 2019. This $2.0 million decrease was primarily driven by an increase in the reserves for bad debt for certain slow-paying customers impacted by COVID-19, partially offset by an increase in trade receivables resulting from the overall increase in sales of both golf equipment and apparel during the fourth quarter of 2020 compared to the same period in 2019.

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

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due to the seasonal nature of the Jack Wolfskin business, as many of its products are geared toward the fall/winter season. The Company’s inventories decreased to $352.5 million as of December 31, 2020 from $456.6 million as of December 31, 2019. This $104.1 million decrease was primarily due to the Company's working capital management, including the Company's proactive soft goods inventory reduction initiatives, combined with an increase in demand for golf equipment as the result of the increased popularity of golf in the current COVID-19 environment. Inventories as a percentage of trailing 12 months net sales decreased to 22.0% as of December 31, 2020 compared to 27.9% as of December 31, 2019.

Liquidity and Capital Resources

Liquidity

The Company’s principal sources of liquidity consist of its existing cash balances, including cash from the issuance of the Convertible Notes in May 2020, funds expected to be generated from operations and funds from its credit facilities. Based upon the Company’s current cash balances, its estimates of funds expected to be generated from operations in 2021, 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 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, foreign currency exchange rates, as well as the Company's pending merger with Topgolf, which was announced in October 2020, in addition to 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). Given the uncertain duration of the COVID-19-related impact, the Company has proactively taken actions to significantly reduce costs, maximize liquidity and conserve cash for as long as may be required in light of current conditions. During the year ended December 31, 2020, the Company achieved significant planned reductions in operating expenses and capital expenditures by reducing discretionary spending and infrastructure costs on a worldwide basis, which included reductions in workforce, marketing and travel expenses, as well as voluntary reductions in compensation by the Board of Directors, the Chief Executive Officer and other members of senior management. As of December 31, 2020, the Company had $632.2 million in cash and availability under its credit facilities, which is an increase of $329.1 million compared to December 31, 2019. 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.

In October 2020, the Company entered into a Merger Agreement to acquire 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 anticipates it will assume long-term debt, net of cash, of approximately $550.0 million to $600.0 million. The Company believes that with its continued strong cash generation and increased available liquidity on its debt facilities, its geographic diversity and the strength of its brands, it will be able to fund Topgolf's growth while simultaneously paying its other obligations.

In order to permit the consummation of the Merger with Topgolf, in October 2020, the Company also amended its ABL and Term Loan facilities. The ABL Facility amendment designates Topgolf and its subsidiaries as excluded subsidiaries under the ABL Facility and amends certain covenants and other provisions to allow the Company to make certain investments in, and enter into certain transactions with Topgolf, among other things. The amendment to the Term Loan Facility permits the consummation of the Merger with Topgolf and certain other transactions contemplated in the Merger Agreement.

As of December 31, 2020, approximately 50% of the Company's cash was held in regions outside of the United States. Due to changes enacted by the Tax Act in December 2017, incremental U.S. federal income tax is no longer a consideration if the Company were to repatriate cash to the United States outside of settling intercompany balances. However, if the Company were to repatriate such cash, it may need to pay incremental foreign withholding taxes which, subject to certain limitations, generate foreign tax credits for use against the Company's U.S. tax liability, if any. Additionally, the Company may need to pay certain state income taxes. The Company continues to maintain its indefinite reinvestment assertion with respect to most jurisdictions in which it operates because of local cash requirements to operate its business.

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Share Repurchases

Information about the Company's share repurchases during 2020 is presented in Part II, Item 5 in this Form 10-K under the heading "Purchases of Equity Securities by the Issuer and Affiliated Purchasers," which is incorporated herein by this reference.

Other Significant Cash and Contractual Obligations

The following table summarizes certain significant cash obligations as of December 31, 2020 that will affect the Company’s future liquidity (in millions):

Payments Due By Period

Total Less than1 Year 1-3 Years 3-5 Years More than5 Years

Interest on Japan Term Loan Facility 0.4 0.1 0.2 0.1 —

Interest on equipment notes 2.0 0.9 0.9 0.2 —

Interest on tenant improvements 2.6 0.3 0.6 0.5 1.2

Other long term liabilities(9) 6.1 4.5 1.5 0.1 —

(1)In January 2019, to fund the purchase price of the Jack Wolfskin acquisition, the Company entered into a Credit Agreement which provided for a Term Loan Facility in an aggregate principal of $480.0 million, which was issued less $9.6 million in original issue discount and other transaction fees. As of December 31, 2020, the Company had $441.6 million outstanding under the Term Loan Facility, which is offset by unamortized debt issuance costs of $13.5 million as presented on the Company's consolidated balance sheet as of December 31, 2020. The Term Loan Facility is due in January 2026. For further discussion, see Note 7 "Financing Arrangements" in the Notes to Consolidated Financial Statements in this Form 10-K.

(2)In August 2020, the Company entered into the Japan Term Loan Facility for $2,000.0 million Yen (or approximately U.S. $19.4 million using the exchange rate in effect as of December 31, 2020). The Company had $1,900.0 million Yen (or approximately U.S. $18.4 million using the exchange rate in effect as of December 31, 2020) outstanding under the Japan Term Loan Facility on the Company's consolidated balance sheet as of December 31, 2020. The Japan Term Loan Facility is due in August 2025. For further discussion, see Note 7 "Financing Arrangements" in the Notes to Consolidated Financial Statements in this Form 10-K.

(3)In May 2020, the Company issued $258.8 million of 2.75% Convertible Notes, which mature on May 1, 2026 unless earlier redeemed or repurchased by the Company or converted. As of December 31, 2020, the Company had $183.1 million outstanding under the Convertible Notes, net of unamortized debt issuance costs of $5.5 million and debt discount of $70.1 million, as presented on the Company's consolidated balance sheet as of December 31, 2020. The Convertible Notes will mature on May 1, 2026. For further discussion, see Note 7 "Financing Arrangements" in the Notes to Consolidated Financial Statements in this Form 10-K.

(4)In August 2020, the Company entered into two new long-term financing agreements in connection with the Company's investment initiatives at its North American distribution center in Fort Worth, Texas, and in addition, to improve its manufacturing capabilities at its golf ball manufacturing facility in Chicopee, Massachusetts, the Company entered into a series of long-term financing agreements (collectively, the "Equipment Notes") between 2017 and 2020 that are

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secured by certain equipment at this facility. As of December 31, 2020, the Company had an aggregate of $31.8 million outstanding under these notes. The Equipment Notes have maturity dates between December 2022 and March 2027. For further discussion, see Note 7 "Financing Arrangements" in the Notes to Consolidated Financial Statements in this Form 10-K.

(5)In connection with lease of the Company's North American distribution Center, the Company financed certain building improvements of $3.8 million, of which $0.2 million was recorded in accounts payable and accrued expenses, and $3.6 million was recorded in other long-term liabilities in the accompanying consolidated balance sheets. This financing arrangement is due in February 2035.

(6)The Company leases certain warehouse, distribution and 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, 2020, short-term and long-term operating lease liabilities of $29.6 million and $178.0 million, respectively, were recorded in the accompanying consolidated balance sheets. For further discussion, see Note 3 "Leases" in Notes to the Consolidated Financial Statements in this Form 10-K.

(7)During the normal course of its business, the Company enters into agreements to purchase goods and services, including purchase commitments for production materials, endorsement agreements with professional golfers and other endorsers, employment and consulting agreements, and intellectual property licensing agreements pursuant to which the Company is required to pay royalty fees. It is not possible to determine the amounts the Company will ultimately be required to pay under these agreements as they are subject to many variables including performance-based bonuses, severance arrangements, the Company’s sales levels, and reductions in payment obligations if designated minimum performance criteria are not achieved. The amounts listed approximate minimum purchase obligations, base compensation, and guaranteed minimum royalty payments the Company is obligated to pay under these agreements. The actual amounts paid under some of these agreements may be higher or lower than the amounts included. In the aggregate, the actual amount paid under these obligations is likely to be higher than the amounts listed as a result of the variable nature of these obligations. In addition, the Company also enters into unconditional purchase obligations with various vendors and suppliers of goods and services in the normal course of operations through purchase orders or other documentation or that are undocumented except for an invoice. Such unconditional purchase obligations are generally outstanding for periods less than a year and are settled by cash payments upon delivery of goods and services and are not reflected in this line item.

(8)Amount represents the current and non-current portions of uncertain income tax positions as recorded on the Company's consolidated balance sheet as of December 31, 2020. Amounts exclude uncertain income tax positions that the Company would be able to offset against deferred taxes. For further discussion, see Note 13 “Income Taxes” in Notes to Consolidated Financial Statements in this Form 10-K.

(9)Amount represents other long-term liabilities included on the Company's consolidated balance sheet as of December 31, 2020, primarily related to government deferrals of $2.3 million allowed under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) in the United States. Amount also includes the future minimum payments under finance leases of $0.7 million, of which $0.3 million were recorded in accounts payable and accrued expenses, and $0.4 million were recorded in other long-term liabilities in the accompanying consolidated balance sheets. For further discussion, see Note 3 "Leases" in 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

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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 ended December 31, 2020 was not material to the Company’s financial position, results of operations or cash flows.

In addition to the contractual obligations listed above, the Company’s liquidity could also be adversely affected by an unfavorable outcome with respect to claims and litigation that the Company is subject to from time to time. See Note 14 “Commitments & Contingencies” in Notes to Consolidated Financial Statements in this Form 10-K.

Capital Resources

The Company does not currently have any material commitments for capital expenditures.

Off-Balance Sheet Arrangements

The Company has no material off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K .

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

The Company uses derivative financial instruments to mitigate its exposure to changes in foreign currency exchange rates and interest rates. Transactions involving these financial instruments are with creditworthy banks, primarily banks that are party to the Company's credit facilities (see Note 7 “Financing Arrangements” in the Notes to Consolidated Financial Statements in this Form 10-K). The use of these instruments exposes the Company to market and credit risk which may at times be concentrated with certain counterparties, although counterparty nonperformance is not anticipated.

Foreign Currency Fluctuations

Information about the Company's foreign currency hedging activities is set forth in Note 19 "Derivatives and Hedging" in the Notes to Consolidated Financial Statements in this Form 10-K, which is incorporated herein by this reference.

As part of the Company’s risk management procedure, a sensitivity analysis model is used to measure the potential loss in future earnings of market-sensitive instruments resulting from one or more selected hypothetical changes in interest rates or foreign currency values. The sensitivity analysis model quantifies the estimated potential effect of unfavorable movements of 10% in foreign currencies to which the Company was exposed at December 31, 2020 through its foreign currency forward contracts.

The estimated loss from the Company’s foreign currency forward contracts, calculated using the sensitivity analysis model described above, is $11.6 million at December 31, 2020. The Company believes that such a hypothetical loss from its foreign currency forward contracts would be partially offset by increases in the value of the underlying transactions being hedged.

The sensitivity analysis model is a risk analysis tool and does not purport to represent actual losses in earnings that will be incurred by the Company, nor does it consider the potential effect of favorable changes in market rates. It also does not represent the maximum possible loss that may occur. Actual future gains and losses will differ from those estimated because of changes or differences in market rates and interrelationships, hedging instruments and hedge percentages, timing and other factors.

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Interest Rate Fluctuations

The Company is exposed to interest rate risk from its credit facilities and long-term borrowing commitments. Outstanding borrowings under these credit facilities and long-term borrowing commitments accrue interest as described in Note 7 “Financing Arrangements” in the Notes to Consolidated Financial Statements in this Form 10-K. The Company's long-term borrowing commitments are subject to interest rate fluctuations, which could be material to the Company's cash flows and results of operations. In order to mitigate this risk, the Company enters into interest rate hedges as part of its interest rate risk management strategy. Information about the Company's interest rate hedges is provided in Note 19 "Derivatives and Hedging in the Notes to Consolidated Financial Statements in this Form 10-K. In order to determine the impact of unfavorable changes in interest rates on the Company's cash flows and results of operations, the Company performed a sensitivity analysis as part of its risk management procedures. The sensitivity analysis quantified that the incremental expense incurred by a 10% increase in interest rates would be $2.5 million over the 12-month period ending on December 31, 2020.

Item 8. Financial Statements and Supplementary Data

The Company’s Consolidated Financial Statements as of December 31, 2020 and 2019 and for each of the three years in the period ended December 31, 2020, together with the report of the Company's independent registered public accounting firm, are included in this Annual Report on Form 10-K beginning on page F-1.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Disclosure Controls and Procedures. The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness, as of December 31, 2020, of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2020.

Management’s Report on Internal Control over Financial Reporting. The Company’s management is responsible for establishing and maintaining effective internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in its report entitled Internal Control—Integrated Framework (2013). Based on that assessment, management concluded that as of December 31, 2020, the Company’s internal control over financial reporting was effective based on the COSO criteria.

Changes in Internal Control over Financial Reporting. During the fourth quarter ended December 31, 2020, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2020 has been audited by Deloitte & Touche LLP, the Company’s independent registered public accounting firm, as stated in its report which is included herein.

Item 9B. Other Information

None.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Callaway Golf Company

Carlsbad, California

Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of Callaway Golf Company and its subsidiaries (the “Company”) as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2020, of the Company and our report dated March 1, 2021 expressed an unqualified opinion on those financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ DELOITTE & TOUCHE LLP

Costa Mesa, California

March 1, 2021

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PART III

Item 10. Directors, Executive Officers and Corporate Governance

Certain information concerning the Company’s executive officers is included under the caption “Information About the Company's Executive Officers” following Part I, Item 1 of this Form 10-K. The other information required by Item 10 will be included in the Company’s definitive Proxy Statement under the captions "Proposal No. 1 - Election of Directors," “Delinquent Section 16(a) Reports” and “Board of Directors and Corporate Governance,” to be filed with the Commission within 120 days after the end of calendar year 2020 pursuant to Regulation 14A, which information is incorporated herein by this reference.

Item 11. Executive Compensation

The Company maintains employee benefit plans and programs in which its executive officers are participants. Copies of certain of these plans and programs are set forth or incorporated by reference as Exhibits to this report. Information required by Item 11 will be included in the Company’s definitive Proxy Statement under the captions “Executive Officer Compensation,” “Executive Officer Compensation - Compensation Committee Report” and “Board of Directors and Corporate Governance,” to be filed with the Commission within 120 days after the end of calendar year 2020 pursuant to Regulation 14A, which information is incorporated herein by this reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

The information required by Item 12 will be included in the Company’s definitive Proxy Statement under the caption “Beneficial Ownership of the Company’s Securities,” to be filed with the Commission within 120 days after the end of calendar year 2020 pursuant to Regulation 14A, which information is incorporated herein by this reference.

Securities Authorized for Issuance under Equity Compensation Plans

The following table provides information about the number of stock options and shares underlying restricted stock units and performance share units outstanding and authorized for issuance under all equity compensation plans of the Company as of December 31, 2020. See Note 16 “Share-Based Employee Compensation” in the Notes to Consolidated Financial Statements in this Form 10-K for further discussion of the equity plans of the Company.

Equity Compensation Plan Information

(In thousands, except dollar amounts)

Equity Compensation Plans Approved by Shareholders(1) 2,336(2) $ 6.52 9,218

(1)Consists of the following plans: Callaway Golf Company Amended and Restated 2004 Incentive Plan ("2004 Incentive Plan") and 2013 Non-Employee Directors Stock Incentive Plan ("2013 Directors Plan"). The 2004 Incentive Plan permits the award of stock options, restricted stock awards, restricted stock units, performance share units and various other stock-based awards. The 2013 Directors Plan permits the award of stock options, restricted stock and restricted stock units.

(2)Includes 74,059 shares underlying restricted stock units issuable under the 2013 Directors Plan, and 597,892 shares underlying stock options, 829,497 shares underlying restricted stock units and 834,614 shares underlying performance share units issuable under the 2004 Incentive Plan.

(3)Outstanding shares underlying restricted stock units granted under the 2004 Incentive Plan and 2013 Directors Plan include 3,064 shares of accrued incremental stock dividend equivalent rights.

(4)Does not include shares underlying restricted stock units and performance share units, which do not have an exercise price.

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Item 13. Certain Relationships, Related Transactions and Director Independence

The information required by Item 13 will be included in the Company’s definitive Proxy Statement under the captions “Transactions with Related Persons” and “Board of Directors and Corporate Governance,” to be filed with the Commission within 120 days after the end of calendar year 2020 pursuant to Regulation 14A, which information is incorporated herein by this reference.

Item 14. Principal Accountant Fees and Services

The information included in Item 14 will be included in the Company’s definitive Proxy Statement under the caption “Information Concerning Independent Registered Public Accounting Firm” to be filed with the Commission within 120 days after the end of calendar year 2020 pursuant to Regulation 14A, which information is incorporated herein by this reference.

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PART IV

Item 15. Exhibits and Financial Statement Schedules

Documents filed as part of this report:

1. Financial Statements. The following consolidated financial statements of Callaway Golf Company and its subsidiaries required to be filed pursuant to Part II, Item 8 of this Form 10-K, are included in this Annual Report on Form 10-K beginning on page F-1:

•Report of Independent Registered Public Accounting Firm;

•Consolidated Balance Sheets as of December 31, 2020 and 2019;

•Consolidated Statements of Operations for the years ended December 31, 2020, 2019 and 2018;

•Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 2020, 2019 and 2018;

•Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018;

•Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2020, 2019 and 2018; and

•Notes to Consolidated Financial Statements.

2. Financial statement schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or notes thereto.

3. Exhibits.

A copy of any of the following exhibits will be furnished to any beneficial owner of the Company’s common stock, or any person from whom the Company solicits a proxy, upon written request and payment of the Company’s reasonable expenses in furnishing any such exhibit. All such requests should be directed to the Company’s Investor Relations Department at Callaway Golf Company, 2180 Rutherford Road, Carlsbad, CA 92008.

Executive Compensation Contracts/Plans

71

72

Other Contracts

73

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21.1 List of Subsidiaries.†

23.1 Consent of Deloitte & Touche LLP.†

24.1 Limited Power of Attorney.†

† Included in this report

Item 16. Form 10-K Summary

None.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

CALLAWAY GOLF COMPANY

By: /S/ OLIVER G. BREWER III

Oliver G. Brewer III

President and Chief Executive Officer

Date: March 1, 2021

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and as of the dates indicated.

Signature Title Dated as of

Principal Executive Officer:

Oliver G. Brewer III

Principal Financial Officer:

Brian P. Lynch

Principal Accounting Officer:

/S/ JENNIFER THOMAS Vice President and Chief Accounting Officer March 1, 2021

Jennifer Thomas

Non-Management Directors:

Samuel H. Armacost

Scott H. Baxter

John C. Cushman, III

Laura J. Flanagan

Russell L. Fleischer

* Chairman of the Board March 1, 2021

John F. Lundgren

Adebayo O. Ogunlesi

Linda B. Segre

Anthony S. Thornley

*By: /S/ BRIAN P. LYNCH

Brian P. Lynch

Attorney-in-fact

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm F-2

Consolidated Balance Sheets as of December 31, 2020 and 2019 F-5

Notes to Consolidated Financial Statements F-10

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of

Callaway Golf Company

Carlsbad, California

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Callaway Golf Company and subsidiaries (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive (loss) income, cash flows and shareholders’ equity, for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting.

Change in Accounting Principle

The Company changed its method of accounting for leases in 2019 due to the adoption of Accounting Standards Update No. 2016-02, Leases (Topic 842).

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Goodwill and Intangible Asset Impairment -Refer to Notes 2 and 9 to the financial statements

Critical Audit Matter Description

The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. Similarly, the Company’s evaluation of indefinite-lived intangibles involves comparison of the fair value

F2

of the trade name intangible asset to its carrying value. The Company conducts its goodwill and indefinite-lived intangible asset impairment test in the fourth quarter of each year, and whenever adverse events or changes in circumstances indicate a possible impairment. Fair value of each reporting unit is estimated based on a combination of discounted cash flows and the use of pricing multiples derived from an analysis of comparable public companies multiplied against historical and/or anticipated financial metrics of each reporting unit. These calculations contain uncertainties as they require management to make significant estimates and assumptions including, but not limited to, market comparable data, future cash flows of the reporting units and tradename, and appropriate discount and long-term growth rates. The goodwill balance was $56.7 million as of December 31, 2020. During the year ended December 31, 2020 the Company recorded an impairment charge of $148.4 million attributable to a full impairment of Goodwill historically allocated to the Jack Wolfskin reporting unit. The indefinite-lived intangibles balance was $446.8 million as of December 31, 2020 of which $229.7 million is allocated to the Jack Wolfskin trade name after the impairment loss of $25.9 million recorded during the year ended December 31, 2020.

Given the significant estimates and assumptions management makes to estimate the fair value of the Jack Wolfskin reporting unit and trade name and the sensitivity of the Jack Wolfskin reporting unit and trade name operations to changes in demand, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to forecasts of future revenues, EBITDA margins, and the selection of the discount and royalty rates for the Jack Wolfskin reporting unit and trade name required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the selection of the discount and royalty rates and forecasts of future revenues and EBITDA margins for the Jack Wolfskin goodwill and trade name impairment included the following, among others:

•We obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls over management’s goodwill and trade name asset impairment evaluations, including those over the determination of the fair value of goodwill and the trade name assets, including controls related to management’s forecasts of sales and EBITDA margin growth rates and determination of discount and royalty rates

•We evaluated the reasonableness of management’s forecasts by comparing the forecasts to (1) historical results, (2) wholesale purchase orders and deliveries, (3) forecasted information included in analyst and industry reports for the Company and its peer companies, including the impact of economic factors on Jack Wolfskin, (4) and retrospective review of forecasted versus actual results.

•With the assistance of our fair value specialists, we evaluated the reasonableness of the discount and royalty rates by (1) testing the source information underlying the determination of the discount and royalty rates; (2) testing the mathematical accuracy of the calculations; and (3) developing a range of independent estimates and comparing those to the discount and royalty rates selected by management.

Valuation of and Accounting for Convertible Notes at Issuance — Refer to Notes 7 and 8 to the financial statements

Critical Audit Matter Description

In May 2020, the Company issued $258.8 million of 2.75% Convertible Notes (the “Convertible Notes”). In accounting for the issuance of the Convertible Notes, management allocated the total proceeds into liability and equity components. The carrying amount of the liability component was calculated by estimating the fair value of the Convertible Notes as if there were no associated convertible features. The carrying amount of the equity component, representing the conversion option was determined by deducting the fair value of the liability component from the principal amount of the Convertible Notes.

Given the determination of the fair value of the liability component required management to make significant estimates and assumptions regarding the relevant valuation assumptions, auditing the valuation of the liability component required a high degree of auditor judgement and audit effort due to the inherent complexity, including the need to involve professionals in our firm having expertise in the valuation of financial instruments, when performing audit procedures to evaluate management’s judgments and conclusions.

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How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the valuation and accounting for the Convertible Notes included the following, among others:

•We obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls in respect of the Company’s Convertible Notes, including controls over relevant assumptions.

•To test the Company’s initial accounting for the Convertible Notes, we inspected the underlying agreements and evaluated the Company’s analysis of the initial accounting of the Convertible Notes, including the identification of any derivatives included in the arrangements.

•With the assistance of our fair value specialists, we evaluated the Company's selection of the valuation methodology used by the Company, including significant inputs which included, but was not limited to, debt yield. Additionally we tested the source information underlying the valuation assumptions used in the model to determine fair value and tested the mathematical accuracy of the valuation model.

Revenue - Estimate of variable consideration related to future sales programs — Refer to Note 4 to the financial statements

Critical Audit Matter Description

The Company records an estimate of variable consideration for certain future sales program incentives, which include sell-through promotions and price concessions or price reductions that it offers to its customers. The estimate of variable consideration to be offered in the future is recorded as a reduction of revenue and a reserve against receivables at the time of the original sale based on a rate that includes historical and forecasted data. The Company’s reserve for variable consideration related to future sales programs as of December 31, 2020 was $24.3 million. Due to the judgment required to estimate future sales promotions and price concessions, auditing management’s estimates of the amount of related variable consideration required a high degree of auditor judgment.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the estimate of variable consideration for certain future sales program incentives included the following, among others:

•We obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls over the estimated future promotions and price concessions or price reductions.

•We compared the estimated future promotions and price concessions or price reductions to trends in past promotions, price concessions and price reductions by product category based on historical concession levels and the timing of sales of products.

•We selected a sample of variable consideration by product and tested the estimated reserve by comparing historical concession levels for similar products and actual product revenues to the reserve.

•We evaluated management’s ability to accurately forecast sales and planned future promotions and price concessions or price reductions by comparing actual results to management’s historical forecasts for the same or similar products.

/s/ DELOITTE & TOUCHE LLP

Costa Mesa, California

March 1, 2021

We have served as the Company’s auditor since 2002.

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CALLAWAY GOLF COMPANY

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

December 31,

ASSETS

Current assets:

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Accrued employee compensation and benefits 30,937 46,891

Operating lease liabilities, short-term 29,579 26,418

Current portion of long-term debt 14,599 7,317

Long-term liabilities:

Commitments & contingencies (Note 14)

Shareholders’ equity:

Accumulated other comprehensive loss (6,546) (22,422)

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

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CALLAWAY GOLF COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

Year Ended December 31,

Operating expenses:

Goodwill and trade name impairment 174,269 — —

Less: Net (loss) income attributable to non-controlling interests — (179) 514

(Loss) earnings per common share:

Weighted-average common shares outstanding:

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

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CALLAWAY GOLF COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(In thousands)

Year Ended December 31,

Other comprehensive (loss) income:

Income tax provision on derivative instruments 2,916 1,275 282

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

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CALLAWAY GOLF COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Year Ended December 31,

Cash flows from operating activities:

Amortization of debt issuance costs 4,200 3,262 —

Debt discount amortization 6,331 — —

Inventory step-up on acquisition — 10,885 —

Loss (gain) on disposal of long-lived assets 336 218 (13)

Gain on conversion of note receivable (1,252) — —

Changes in assets and liabilities, net of effects of acquisitions:

Change in operating leases, net (29,372) (29,874) —

Income taxes receivable/payable, net 1,979 1,414 82

Cash flows from investing activities:

Acquisitions, net of cash acquired — (463,105) —

Proceeds from sales of property and equipment 49 38 43

Cash flows from financing activities:

Proceeds from issuance of convertible notes 258,750 — —

Proceeds from issuance of long-term debt 37,728 493,167 —

Premium paid for capped call confirmations (31,775) — —

Repayments of financing leases (792) (706) —

Distributions to non-controlling interest — — (821)

Purchase of non-controlling interest — (18,538) —

Effect of exchange rate changes on cash and cash equivalents (5,639) (715) (380)

Supplemental disclosures:

Noncash investing and financing activities:

Accrued capital expenditures at period-end $ 1,497 $ 3,128 $ 2,672

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

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CALLAWAY GOLF COMPANY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(In thousands)

Callaway Golf Shareholders

Shares Amount Shares Amount

Compensatory awards released from restriction 606 6 (5,744) — — 451 5,738 — — —

Stock dividends — — (33) (49) — 3 82 — — —

Distributions to non-controlling interests — — — — — — — — (821) (821)

Stock dividends — — 1 (49) — 3 48 — — —

Stock dividends — — 3 (40) — 5 37 — — —

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

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CALLAWAY GOLF COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. The Company

Callaway Golf Company (“Callaway Golf” or the “Company”), a Delaware corporation, together with its subsidiaries, designs, manufactures and sells high quality golf clubs (woods, irons and putters), golf balls and a full line of apparel, gear and accessories. Since 2017, the Company completed a series of acquisitions (see Note 6) targeted at expanding and diversifying its soft goods product lines to include premium, active lifestyle brands. As of December 31, 2019, the Company's soft goods product lines expanded to include premium storage gear for sport and personal use under the OGIO brand, which was acquired in January 2017; premium active lifestyle and golf apparel, as well as gear and accessories under the TravisMathew brand, which was acquired in August 2017; and premium active and urban outdoor apparel as well as equipment and accessories under the Jack Wolfskin brand, which was acquired in January 2019. These acquisitions have transformed the way the Company views its business as it continues to invest strategically in areas complementary to golf, with a focus on establishing synergies and realizing efficiencies for the benefit of all of the Company's brands.

In October 2020, the Company entered into a definitive agreement to acquire Topgolf International, Inc. (“Topgolf”) in an all-stock transaction (the "Merger"), pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, Topgolf and 51 Steps, Inc., a Delaware corporation and wholly-owned subsidiary of Callaway (“Merger Sub”). The Merger is expected to close during the first quarter of 2021, after which the former Topgolf stockholders (other than the Company) are expected to own approximately 48.5% of the combined company on a fully diluted basis.

The Company sells its products in the United States and internationally in over 120 countries around the world to golf retailers (including pro-shops at golf courses and off-course retailers), sporting goods retailers, premium department stores, Internet retailers and mass merchants, directly and through its wholly owned subsidiaries and third party distributors, as well as directly to consumers through its retail and outlet locations in the United States, Europe and Japan, and through its e-commerce channel. The Company also sells pre-owned Callaway and non-Callaway-branded golf products through its website www.callawaygolfpreowned.com, and licenses its trademarks and service marks to third parties in exchange for a royalty fee for use on golf related accessories including golf apparel and footwear, golf gloves, prescription eyewear and practice aids.

The Company's products and brands are reported under two operating segments: Golf Equipment and Apparel, Gear and Other. Sales of Callaway golf clubs, Odyssey putters and Callaway and Strata golf balls are reported in the Golf Equipment operating segment, and sales of Callaway, Odyssey, OGIO, TravisMathew and Jack Wolfskin apparel, gear, equipment and accessories are reported in the Apparel, Gear and Other operating segment. For the year ended December 31, 2020, approximately 38% of the Company's net sales were included in the Apparel, Gear and Other operating segment, and 62% of net sales were included in the Golf Equipment operating segment. For more information about the Company's operating segments see Note 20.

Note 2. Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its domestic and foreign subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("GAAP") requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Examples of such estimates include provisions for warranty, uncollectible accounts receivable, inventory obsolescence, sales returns, future price concessions, tax contingencies and estimates on the valuation of share-based awards and recoverability of long-lived assets

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and investments. Actual results may materially differ from these estimates. On an ongoing basis, the Company reviews its estimates to ensure that these estimates appropriately reflect changes in its business or as new information becomes available.

Recent Accounting Standards

In August 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2020-06, "Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity." This ASU simplifies the accounting for convertible instruments by removing the separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature. As a result, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost. These changes will reduce reported interest expense and increase reported net income for entities that have issued a convertible instrument that was bifurcated according to previously existing rules. Also, this ASU requires the application of the if-converted method for calculating diluted earnings per share and the treasury stock method will be no longer available. The new guidance is effective for fiscal years beginning after December 15, 2021, with early adoption permitted no earlier than fiscal years beginning after December 15, 2020. Entities may adopt the guidance through either a modified retrospective method of transition or a fully retrospective method of transition. In applying the modified retrospective method, entities should apply the guidance to transactions outstanding as of the beginning of the fiscal year in which the amendments are adopted. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements and disclosures.

In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." This ASU removes specific exceptions to the general principles in Accounting Standards Codification ("ASC") Topic 740, "Accounting for Income Taxes" ("Topic 740") and simplifies certain GAAP requirements. ASU 2019-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Depending on the amendment, adoption may be applied on a retrospective, modified retrospective or prospective basis. Based on the Company's preliminary assessment of this ASU, the Company does not anticipate it will have a material impact on the accounting and disclosures for income taxes. However, once the merger with Topgolf becomes final, the Company will reassess the impact of this ASU on the combined entity.

Adoption of New Accounting Standards

On January 1, 2020, the Company adopted ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" ("Topic 326") utilizing the modified retrospective approach. This new standard is intended to improve financial reporting by requiring timelier recording of credit losses on the Company's trade accounts receivable and requires the measurement of all expected credit losses based on historical experience, current conditions, and reasonable and supportable forecasts. Upon the completion of the Company's assessment of Topic 326, the Company concluded that its prior methodology of estimating credit losses on its trade accounts receivable closely aligns with the requirements of the new standard, and therefore, the adoption of this ASU did not have a material impact on the Company consolidated financial statements. For further information, see Note 5. Upon adoption of Topic 326, the Company recorded a cumulative adjustment to beginning retained earnings of $289,000, which reflected an increase to the allowance for doubtful accounts. As the impact to the Company's consolidated financial statements for the year ended December 31, 2020 was not material, prior period information that is presented for comparative purposes has not been restated and continues to be reported under the accounting standards that were in effect during those periods.

On January 1, 2020, the Company adopted ASU No. 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement." The amendments in this ASU removed, modified or added to the disclosure requirements for fair value measurements in ASC Topic 820, "Fair Value Measurement." The adoption of this ASU did not have a material impact on the Company's consolidated financial statements and disclosures.

The Company adopted ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." This ASU provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Inter-bank Offered Rate ("LIBOR") or another reference rate expected to be discontinued. The Company has elected to apply the hedge accounting expedients related to the probability and the assessments of effectiveness of LIBOR-indexed

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cash flow hedges upon a change in the critical terms of the derivative or the hedged transactions, and upon the end of relief under Topic 848. The Company elects to continue the method of assessing effectiveness as documented in the original hedge documentation and elects to apply the expedient in ASC 848-50-35-17 (through 35-18) which allows the reference rate on the hypothetical derivative to match the reference rate on the hedging instrument. The adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements and disclosures.

Significant Accounting Policies

Warranty Policy

The Company has a stated two-year warranty policy for its golf clubs and certain Jack Wolfskin gear, as well as a limited lifetime warranty for its OGIO line of products. The Company’s policy is to accrue the estimated cost of satisfying future warranty claims at the time the sale is recorded. In estimating its future warranty obligations, the Company considers various relevant factors, including the Company’s stated warranty policies and practices, the historical frequency of claims, and the cost to replace or repair its products under warranty.

The Company’s estimates for calculating the warranty reserve are principally based on assumptions regarding the warranty costs of each product line over the expected warranty period. Where little or no claims experience may exist, the Company’s warranty obligation calculation is based upon long-term historical warranty rates of similar products until sufficient data is available. As actual model-specific rates become available, the Company’s estimates are modified to reflect the range of likely outcomes.

The warranty provision for the year ended December 31, 2019 includes the warranty reserves assumed in connection with the Jack Wolfskin acquisition (see Note 6).

The following table provides a reconciliation of the activity related to the Company’s accrued warranty expense:

Years Ended December 31,

(In thousands)

Provision liability assumed from acquisition — 2,208 —

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or the price paid to transfer a liability (the exit price) in the principal and most advantageous market for the asset or liability in an orderly transaction between market participants. The Company measures and discloses the fair value of nonfinancial and financial assets and liabilities utilizing a hierarchy of valuation techniques based on whether the inputs to a fair value measurement are considered to be observable or unobservable in a marketplace. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. This hierarchy requires the use of observable market data when available. The measurement of assets and liabilities at fair value are classified using the following three-tier hierarchy:

Level 1: Quoted market prices in active markets for identical assets or liabilities;

Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and

Level 3: Fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

The Company measures fair value using a set of standardized procedures that are outlined herein for all assets and liabilities which are required to be measured at fair value. When available, the Company utilizes quoted market prices from an independent third-party source to determine fair value and classifies such items in Level 1. In some instances where a market price is available, but the instrument is in an inactive or over-the-counter market, the Company consistently applies

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the dealer (market maker) pricing estimate and uses a midpoint approach on bid and ask prices from financial institutions to determine the reasonableness of these estimates. Assets and liabilities subject to this fair value valuation approach are typically classified as Level 2.

Items valued using internally-generated valuation techniques are classified according to the lowest level input that is significant to the fair value measurement. As a result, the asset or liability could be classified in either Level 2 or Level 3 even though there may be some significant inputs that are readily observable. The Company utilizes a discounted cash flow valuation model whenever applicable to derive a fair value measurement on long-lived assets and goodwill and intangible assets. The Company uses its internal cash flow estimates discounted at an appropriate rate, quoted market prices, royalty rates when available and independent appraisals as appropriate. The Company also considers its counterparty’s and own credit risk on derivatives and other liabilities measured at their fair value.

Business Combinations

The Company uses its best estimates and assumptions to determine the fair value of tangible and intangible assets acquired and liabilities assumed, as well as the uncertain tax positions and tax-related valuation allowances that are initially recorded in connection with a business combination. These estimates and assumptions are uncertain and may require adjustment. During the measurement period of one year from the acquisition date, the Company continues to collect information and reevaluate these estimates and assumptions, and records adjustments to these estimates to goodwill. Any adjustments to the acquired assets and liabilities assumed that are identified subsequent to the measurement period are recorded in earnings.

Cost of Goods Sold

The Company’s cost of goods sold is comprised primarily of variable costs that fluctuate with sales volumes, including raw materials and component costs, merchandise from third parties, conversion costs including direct labor and manufacturing overhead, and inbound freight, duties and shipping charges. Fixed overhead expenses include warehousing costs, indirect labor and supplies, as well as depreciation expense associated with assets used to manufacture and distribute products. In addition, cost of goods sold includes adjustments to reflect inventory at its net realizable value, as well as adjustments for obsolescence and product warranties.

Selling, General and Administrative Expenses (SG&A)

SG&A expenses are comprised primarily of employee costs, advertising and promotional costs, tour expenses, legal and professional fees, travel expenses, building and rent expenses, depreciation charges (excluding those related to manufacturing and distribution operations), amortization of intangible assets, and other miscellaneous expenses.

Advertising Costs

The Company's primary advertising costs include television, print, Internet, and media placement. The Company’s policy is to expense advertising costs, including production costs, as incurred. Advertising expenses for 2020, 2019 and 2018 were $83,361,000, $93,331,000 and $72,164,000, respectively, which is recognized within selling expenses on the accompanying consolidated statement of operations.

Research and Development Costs

Research and development costs are expensed as incurred. Research and development costs for 2020, 2019 and 2018 were $46,300,000, $50,579,000 and $40,752,000, respectively.

Foreign Currency Translation and Transactions

A significant portion of the Company’s business is conducted outside of the United States in currencies other than the U.S. dollar. As a result, changes in foreign currency exchange rates can have a significant effect on the Company’s financial results. Revenues and expenses that are denominated in foreign currencies are translated using the average exchange rate for the period. Assets and liabilities are translated at the rate of exchange on the balance sheet date. Gains and losses from assets and liabilities denominated in a currency other than the functional currency of the entity in which they reside are generally recognized currently in the Company's statements of operations. Gains and losses from the translation of foreign subsidiary financial statements into U.S. dollars are included in accumulated other comprehensive income or loss (see Accumulated Other Comprehensive (Loss) Income policy below).

F-13

The Company recorded a net gain in foreign currency transactions of $9,024,000 for 2020 and net losses in foreign currency translations of $5,838,000 and $2,824,000 for 2019 and 2018, respectively, in other income (expense) on the accompanying consolidated statement of operations.

Derivatives and Hedging

In order to mitigate the impact of foreign currency translation on transactions and changes in interest rates, the Company uses foreign currency forward contracts and interest rate hedge contracts that are accounted for as designated and non-designated hedges pursuant to ASC Topic 815. ASC Topic 815 requires that an entity recognize all derivatives as either assets or liabilities on the balance sheet, measure those instruments at fair value and recognize changes in fair value in earnings in the period of change unless the derivative qualifies as designated cash flow hedge that offsets certain exposures. Certain criteria must be satisfied in order for derivative financial instruments to be classified and accounted for as a cash flow hedge. Derivatives that are not elected for hedge accounting treatment are recorded immediately in earnings.

The Company would discontinue hedge accounting prospectively (i) if it is determined that the derivative is no longer effective in offsetting changes in the cash flows of a hedged item, (ii) when the derivative expires or is sold, terminated, or exercised, (iii) if it becomes probable that the forecasted transaction being hedged by the derivative will not occur, (iv) if a hedged firm commitment no longer meets the definition of a firm commitment, or (v) if it is determined that designation of the derivative as a hedge instrument is no longer appropriate. The Company estimates the fair value of its foreign currency forward contracts based on pricing models using current market rates. These contracts are classified under Level 2 of the fair value hierarchy (see Note 18).

Cash and Cash Equivalents

Cash equivalents are highly liquid investments purchased with original maturities of three months or less.

Inventories

The Company's inventory is recorded at the lower of cost or net realizable value, which includes a reserve for excess, obsolete and/or unmarketable inventory. This reserve is regularly assessed based on current inventory levels, sales trends and historical experience, as well as management’s estimates of market conditions and forecasts of future product demand, all of which are subject to change. The Company utilizes the standard costing method, determined on the first-in, first-out basis, for its golf equipment inventory and soft goods inventory sold under the TravisMathew, OGIO and Callaway brands, and the weighted average costing method for soft goods inventory sold under the Jack Wolfskin brand. Golf equipment inventory, which is directly manufactured by the Company, includes finished goods, raw materials, labor and manufacturing overhead costs and work in process. The Company's soft goods product lines, which are manufactured by third-party contractors, primarily include finished good products.

Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over estimated useful lives generally as follows:

Buildings and improvements 10-30 years

Machinery and equipment 5-10 years

Furniture, computers and equipment 3-5 years

Internal-use software 3-5 years

Production molds 2-5 years

During the years ended December 31, 2020, 2019 and 2018, the Company recorded depreciation expense of $34,388,000, $30,085,000 and $18,882,000, respectively, on the accompanying consolidated statements of operations.

Normal repairs and maintenance costs are expensed as incurred. Expenditures that materially increase values, change capacities or extend useful lives are capitalized. The related costs and accumulated depreciation of disposed assets are eliminated and any resulting gain or loss on disposition is recognized in earnings. Construction in-process consists primarily of costs associated with building improvements, machinery and equipment that have not yet been placed into service, unfinished molds as well as in-process internal-use software.

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In accordance with ASC Topic 350-40, “Internal-Use Software,” the Company capitalizes certain costs incurred in connection with developing or obtaining internal use software. Costs incurred in the preliminary project stage are expensed. All direct external costs incurred to develop internal-use software during the development stage are capitalized and depreciated using the straight-line method over the remaining estimated useful lives. Costs such as maintenance and training are expensed as incurred.

Long-Lived Assets and Finite-Lived Intangible Assets

The Company assesses potential impairments of its long-lived assets, namely property, plant and equipment and Right-Of-Use assets, and acquired intangible assets that are subject to amortization, such as acquired customer and distributor relationships, in accordance with ASC Topic 360-10-35, “Impairment or Disposal of Long-Lived Assets,” whenever events or changes in circumstances indicate that the asset’s carrying value may not be recoverable. An impairment charge would be recognized when the carrying amount of a long-lived asset or asset group is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset or asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group.

Goodwill and Intangible Assets

The Company's intangible assets, which are comprised of goodwill, trade names, trademarks, service marks, trade dress, and customer and distributor relationships, were acquired in connection with the acquisitions of Odyssey Sports, Inc., FrogTrader, Inc., OGIO, TravisMathew, Jack Wolfskin, and certain foreign distributors.

In accordance with ASC Topic 350, “Intangibles—Goodwill and Other,” goodwill and intangible assets with indefinite lives are not amortized but instead are measured for impairment at least annually or more frequently when events indicate that an impairment exists. The Company calculates impairment as the excess of the carrying value of goodwill and other indefinite-lived intangible assets over their estimated fair value. If the carrying value exceeds the estimate of fair value a write-down is recorded. To determine fair value, the Company uses discounted cash flow estimates, quoted market prices, royalty rates when available and independent appraisals when appropriate.

During the second quarter of 2020, due to the significant disruptions caused by the COVID-19 pandemic on the Company's operations, the Company performed a qualitative assessment considering the macroeconomic conditions caused by the COVID-19 pandemic, and the potential impact on the Company's sales and operating income for the remainder of fiscal 2020 and potentially beyond. As a result, the Company determined that there were indicators of impairment, and proceeded with a quantitative assessment to test the recoverability of goodwill for all of its reporting units, in addition to the recoverability of indefinite-lived intangible assets, consisting primarily of the trade names and trade marks associated with the Company's brands. Based on this assessment, the Company determined that the fair values of the Jack Wolfskin reporting unit and the Jack Wolfskin trade name were less than their carrying values. As a result, during the second quarter of 2020, the Company recognized impairment losses to write-off the goodwill associated with the Jack Wolfskin reporting unit and write-down the trade name associated with the Jack Wolfskin brand name to its new estimated fair value. There were no further impairments recognized over the remainder of 2020. For further discussion, see Note 9.

Intangible assets that are determined to have definite lives are amortized over their estimated useful lives and are measured for impairment in accordance with ASC Topic 360-10-35, “Impairment or Disposal of Long-Lived Assets” as discussed above, only when events or circumstances indicate the carrying value may be impaired. See Note 9 for further discussion of the Company’s intangible assets.

Costs related to the development, maintenance or renewal of internally developed intangible assets that are inherent in the Company's continuing business and relate to the Company as a whole, that were not acquired as a part of a business combination or asset acquisition, are expensed as incurred.

Investments