# Acushnet Holdings Corp. (GOLF) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Acushnet Holdings Corp.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1672013/000167201322000009/golf-20211231.htm
Accession: 0001672013-22-000009
Filing date: 2022-03-01
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/GOLF/
All MD&A years: /company/GOLF/mda/
Next year: /company/GOLF/mda/fy2022/ (FY 2022)

ITEM 7.              MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion contains management’s discussion and analysis of our financial condition and results of operations and should be read together with “Item 1A – Risk Factors” and our audited consolidated financial statements and the notes thereto included elsewhere in this Annual Report. This discussion contains forward‑looking statements that reflect our plans, estimates and beliefs and involve numerous risks and uncertainties, including but not limited to those described in the “Risk Factors” section of this report. Actual results may differ materially from those contained in any forward‑looking statements. You should carefully read the “Special Note Regarding Forward‑Looking Statements” section of this report following the Table of Contents.

Overview

We are the global leader in the design, development, manufacture and distribution of performance‑driven golf products, which are widely recognized for their quality excellence. Today, we are the steward of two of the most revered brands in golf—Titleist, one of golf’s leading performance equipment brands, and FootJoy, one of golf’s leading performance wearable brands.

Our target market is dedicated golfers, who are the cornerstone of the worldwide golf industry. These dedicated golfers are avid and skill‑biased, prioritize performance and commit the time, effort and money to improve their game. We seek to leverage a pyramid of influence product and promotion strategy, whereby our products are the most played by the world's best players, creating aspirational appeal for a broad range of golfers who want to emulate the performance of the game’s best players.  

Our differentiated focus on performance and quality excellence, enduring connections with dedicated golfers, and favorable and market‑differentiating mix of consumable and durable products have been the key drivers of our solid financial performance.

Impact of COVID-19 on our Business

In March 2020, the World Health Organization declared a pandemic related to the novel coronavirus (“COVID-19”), which led to government-ordered shutdowns of non-essential businesses, travel restrictions and restrictions on public gatherings and, as a result, our results of operations for the first half of 2020 were negatively impacted. As restrictions were eased, the game of golf experienced a surge in rounds of play around the world, which resulted in increased demand for our products. On a Company-wide basis, we quickly began to experience demand pressures across all brands and product categories, which challenged our supply chain and our ability to service our trade partners and golfers.

During 2021, rounds of play remained high and we continued to see an increase in demand for our products, leading to increased sales volumes across all reportable segments. However, we also continued to experience supply chain disruptions causing shortages of various raw materials and increased freight charges. These issues are expected to continue in 2022.

While government-ordered shutdowns and restrictions have eased in most regions and mass vaccination programs are underway, the emergence of virus variants and resurgences of positive cases could lead to an increase in restrictions in certain regions, which could further disrupt our supply chain. Although we have seen increased rounds of play and demand for golf-related products, over the course of the pandemic, this could change as mass vaccination programs continue to advance and restrictions are further eased on other activities. Accordingly, our business, results of operations, financial position and cash flows could be materially impacted in ways that we cannot currently predict.

Basis of Presentation

The accompanying results have been prepared in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) and include the accounts of Acushnet Holdings Corp. ("the Company"), our wholly-owned subsidiaries and less than wholly-owned subsidiaries, including a variable interest entity (“VIE”) in which we are the primary beneficiary. All intercompany balances and transactions have been eliminated in consolidation.

We have four reportable segments. These segments include Titleist golf balls, Titleist golf clubs, Titleist golf gear and FootJoy golf wear. Segment operating income includes directly attributable expenses and certain shared costs of corporate administration that are allocated to the reportable segments, but excludes interest expense, net; restructuring charges; the non-service cost component of net periodic benefit cost; transaction fees and other non-operating gains and losses as we do not allocate these to the reportable segments.

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Key Factors Affecting Our Results of Operations

Rounds of Play

We generate substantially all of our sales from the sale of golf‑related products, including golf balls, golf clubs, golf shoes, golf gloves, golf gear and golf apparel. The demand for golf‑related products in general, and golf balls in particular, is directly related to the number of golf participants and the number of rounds of golf being played by these participants. While rounds of play had been relatively stable for years, the game experienced an approximate 8% global increase in rounds in both 2021 and 2020. Many dedicated golfers took full advantage of favorable weather, an increase in discretionary time due to the circumstances attendant to the COVID-19 pandemic, including limited personal and professional travel and increased flexibility of schedules due to the remote work policies adopted by many companies, and limited other entertainment options, contributing to the increase in rounds of play. In addition, the game of golf remained in high demand in 2021 as the COVID-19 pandemic continued due to its outdoor field of play and ease of social distancing. We anticipate that rounds of golf played will remain resilient and establish a new normal as vaccinations increase, workplaces evolve and other entertainment activities resume a more normal cadence.

Weather Conditions

Weather conditions in most parts of the world, including our primary geographic markets, generally restrict golf from being played year-round, with many of our on‑course retail customers closed during the cold weather months and, to a lesser extent, during the hot weather months. Unfavorable weather conditions in our major markets, such as a particularly long winter, a cold and wet spring, or an extremely hot summer, would reduce the number of playable days and rounds played in a given year, which would result in a decrease in the amount spent by golfers and golf retailers on our products, particularly with respect to consumable products such as golf balls and golf gloves. In addition, unfavorable weather conditions and natural disasters can adversely affect the number of custom club fitting and trial events that we can perform during the key selling period. Unusual or severe weather conditions throughout the year, such as storms or droughts or other water shortages, can negatively affect golf rounds played both during the events and afterward, as weather damaged golf courses are repaired and golfers focus on repairing the damage to their homes, businesses and communities. Consequently, sustained adverse weather conditions, especially during the warm weather months, could impact our sales. Adverse weather conditions may have a greater impact on us than other golf equipment companies as we have a large percentage of consumable products in our product portfolio, and the purchase of consumable products are more dependent on the number of rounds played in a given year.

Economic Conditions

Our products are recreational in nature and are therefore discretionary purchases for consumers. Consumers are generally more willing to spend their time and money to play golf and make discretionary purchases of golf products when economic conditions are favorable and when consumers feel confident and prosperous. Discretionary spending on golf and the golf products we sell is affected by consumer spending habits as well as by many macroeconomic factors, including general business conditions, stock market prices and volatility, corporate spending, housing prices, interest rates, the availability of consumer credit, taxes and consumer confidence in future economic conditions. Consumers may reduce or postpone purchases of our products as a result of shifts in consumer spending habits as well as during periods when economic uncertainty increases, disposable income is lower, or during periods of actual or perceived unfavorable economic conditions.

Demographic Factors

Golf is a recreational activity that requires time and money. The golf industry has been principally driven by the age cohort of 30 and above, primarily “gen‑x” and “baby boomers,” who have the time and money to engage in the sport. Since a significant number of baby boomers have yet to retire, we anticipate growth in spending from this demographic, as it has been demonstrated that rounds of play increase significantly as those in this cohort reach retirement. Further, we also believe that the percentage of women golfers will continue to grow, as a higher percentage of new golfers in recent years have been women. Beyond the gen‑x and baby boomer generation, promising developments in golf include the generational shift with millennial golfers making their marks at both professional and amateur levels and, in 2021, accounting for 25% of golfers overall in the U.S., and the increase in the number of juniors (ages 6-17) who play golf in recent years.

Golf participation among younger generations and certain socioeconomic and ethnic groups may not prove to be as popular as it is among the current gen‑x and baby boomer generations. In such case, sales of our products could be negatively impacted.

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Seasonality

Weather conditions in most parts of the world, including our primary geographic markets, generally restrict golf from being played year-round, with many of our on‑course customers closed during the cold weather months. In general, during the first quarter, we begin selling our products into the golf retail channel for the new golf season. This initial sell‑in generally continues into the second quarter. Our second‑quarter sales are significantly affected by the amount of sell‑through, in particular the amount of higher value discretionary purchases made by customers, which drives the level of reorders of the products sold during the first quarter. Our third‑quarter sales are generally dependent on reorder business, and are generally lower than the second quarter as many retailers begin decreasing their inventory levels in anticipation of the end of the golf season. Our fourth‑quarter sales are generally less than the other quarters due to the end of the golf season in many of our key markets, but can also be affected by key product launches, particularly golf clubs. This seasonality, and therefore quarter to quarter fluctuations, can be affected by many factors, including weather conditions as discussed previously under “—Weather Conditions” and the timing of new product introductions as discussed below under “-Cyclicality.” This seasonality affects sales in each of our reportable segments differently. In general, however, because of this seasonality, a larger portion of our sales and profitability generally occurs during the first half of the year.

Cyclicality

Our sales can also be affected by the launch timing of new products. Product introductions generally stimulate sales as the golf retail channel takes on inventory of new products. Reorders of these new products then depend on the rate of sell‑through. Announcements of new products can often cause our customers to defer purchasing additional golf equipment until our new products are available. The varying product introduction cycles described below may cause our results of operations to fluctuate as each product line has different volumes, prices and margins.

Product Life Cycles

Titleist Golf Balls Segment

We generally launch new Titleist golf ball models on a two-year cycle. In general, in odd-numbered years, we launch our premium performance models, Pro V1 and Pro V1x, in the first quarter and our TruFeel performance model in the fourth quarter. In even-numbered years, we launch our premium performance AVX model and Velocity performance model in the first quarter and performance models Tour Speed and Tour Soft in the second quarter. For new golf ball models, sales occur at a higher rate in the year of the initial launch than in the second year. Given the Pro V1 franchise is our highest volume and our highest priced product in this product category, we typically have higher net sales in our Titleist golf ball segment in odd-numbered years.

Titleist Golf Clubs Segment

We generally launch new Titleist golf club models on a two‑year cycle using the following product launch cycle. At present, we anticipate continuing to use this product launch cycle going forward because we believe it aligns our launches with the purchase habits of dedicated golfers. In general, we launch:

•drivers and fairways in the third or fourth quarter of even‑numbered years, which typically results in an increase in sales of drivers and fairways during such quarters because retailers take on initial supplies of these products as stock inventory, with increased sales generated by such new products continuing the following spring and summer of odd‑numbered years;

•hybrids in the first or second quarter of odd-numbered years, with the majority of sales generated by such new products occurring in the spring, summer and fall of odd‑numbered years;

•irons in the third or fourth quarter of odd‑numbered years, with the majority of sales generated by such new products occurring in the following spring and summer of even‑numbered years because a higher percentage of our new irons as compared to our drivers and fairways are sold through on a custom fit basis and the spring and summer is when golfers tend to make such custom fit purchases;

•Vokey Design wedges in the first quarter of even‑numbered years, with the majority of sales generated by such new products occurring in the spring and summer of such even‑numbered years; and

•Scotty Cameron putters in the first quarter, with the majority of sales generated by such new products occurring in the spring and summer of the year in which they are launched. Historically, Select models were launched in even‑numbered years and Phantom X models launched in odd‑numbered years, however, as a result of the market disruptions caused by the COVID-19 pandemic, we plan on launching Phantom X models in even-numbered years and Select models in odd-numbered years going forward.

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As a result of this product launch cycle, we generally expect to have higher net sales in our Titleist golf clubs segment in even‑numbered years.

Titleist Golf Gear and FootJoy Golf Wear Segments

Our Titleist golf gear and FootJoy golf wear businesses are not subject to the same degree of cyclical fluctuation as our golf ball and golf club businesses as new product offerings and styles are generally introduced each year and at different times during the year.

Foreign Currency

Net sales generated outside of the United States by our non‑U.S. subsidiaries represented approximately 48% of our net sales in each of the three years ended December 31, 2021. Substantially all of these net sales generated outside of the United States were generated in the applicable local currency, which include, but are not limited to, the Japanese yen, the Korean won, the British pound sterling, the euro and the Canadian dollar. In contrast, substantially all of the purchases of inventory, raw materials or components by our non‑U.S. subsidiaries are made in U.S. dollars. For each of the three years ended December 31, 2021, approximately 85% of our cost of goods sold incurred by our non‑U.S. subsidiaries was denominated in U.S. dollars. Because our non‑U.S. subsidiaries incur substantially all of their cost of goods sold in currencies that are different from the currencies in which they generate substantially all of their sales, we are exposed to transaction risk attributable to fluctuations in such exchange rates, which can impact the gross profit of our non‑U.S. subsidiaries.

In an effort to protect against adverse fluctuations in foreign exchange rates and minimize foreign currency transaction risk, we take an active approach to currency hedging, which includes among other things, entering into various foreign exchange forward contracts, with the primary goal of providing earnings and cash flow stability. As a result of our active approach to currency hedging, we are able to take a longer term view and more flexible approach towards pricing our products and making cost‑related decisions. In taking this active approach, we coordinate with the management teams of our key non‑U.S. subsidiaries on an ongoing basis to share our views on anticipated currency movements and make decisions on securing foreign currency exchange contract positions that are incorporated into our business planning and forecasting processes. Because our hedging activities are designed to reduce volatility, they reduce not only the negative impact of a stronger U.S. dollar but could also reduce the positive impact of a weaker U.S. dollar.

Because our consolidated accounts are reported in U.S. dollars, we are also exposed to currency translation risk when we translate the financial results of our consolidated non‑U.S. subsidiaries from their local currency into U.S. dollars. For the year ended December 31, 2021, 48% of our net sales were denominated in foreign currencies. In addition, for the year ended December 31, 2021, approximately 33% of our total operating expenses were denominated in foreign currencies (which amounts represent substantially all of the operating expenses incurred by our non‑U.S. subsidiaries). Fluctuations in foreign currency exchange rates may positively or negatively affect our reported financial results and can significantly affect period‑over‑period comparisons. A strengthening of the U.S. dollar relative to our foreign currencies could materially adversely affect our business, financial condition and results of operations.

Key Performance Measures

We use various financial metrics to measure and evaluate our business, including, among others: (i) net sales on a constant currency basis, (ii) Adjusted EBITDA on a consolidated basis, (iii) Adjusted EBITDA margin on a consolidated basis and (iv) segment operating income.

Since a significant percentage of our net sales are generated outside of the United States, we use net sales on a constant currency basis to evaluate the sales performance of our business in period over period comparisons and for forecasting our business going forward. Constant currency information allows us to estimate what our sales performance would have been without changes in foreign currency exchange rates. This information is calculated by taking the current period local currency sales and translating them into U.S. dollars based upon the foreign currency exchange rates for the applicable comparable prior period. This constant currency information should not be considered in isolation or as a substitute for any measure derived in accordance with U.S. GAAP. Our presentation of constant currency information may not be consistent with the manner in which similar measures are derived or used by other companies.

We primarily use Adjusted EBITDA on a consolidated basis to evaluate the effectiveness of our business strategies, assess our consolidated operating performance and make decisions regarding pricing of our products, go to market execution and costs to incur across our business. We present Adjusted EBITDA as a supplemental measure of our operating performance because it excludes the impact of certain items that we do not consider indicative of our ongoing operating performance. We define Adjusted EBITDA in a manner consistent with the term “Consolidated EBITDA” as it is defined in our credit agreement. Adjusted EBITDA represents net income (loss) attributable to Acushnet Holdings Corp. plus interest expense, net, income tax

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expense (benefit), depreciation and amortization and other items defined in the agreement, including: share-based compensation expense; restructuring and transformation costs; certain transaction fees; extraordinary, unusual or non-recurring losses or charges; indemnification expense (income); certain pension settlement costs; certain other non-cash (gains) losses, net and the net income relating to noncontrolling interests. Adjusted EBITDA is not a measurement of financial performance under U.S. GAAP. It should not be considered an alternative to net income (loss) attributable to Acushnet Holdings Corp. as a measure of our operating performance or any other measure of performance derived in accordance with U.S. GAAP. In addition, Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non‑recurring items, or affected by similar non‑recurring items. Adjusted EBITDA has limitations as an analytical tool, and you should not consider such measure either in isolation or as a substitute for analyzing our results as reported under U.S. GAAP. Our definition and calculation of Adjusted EBITDA is not necessarily comparable to other similarly titled measures used by other companies due to different methods of calculation. For a reconciliation of Adjusted EBITDA to net income (loss) attributable to Acushnet Holdings Corp., see “—Results of Operations” below.

We also use Adjusted EBITDA margin on a consolidated basis, which measures our Adjusted EBITDA as a percentage of net sales, because our management uses it to evaluate the effectiveness of our business strategies, assess our consolidated operating performance and make decisions regarding pricing of our products, go to market execution and costs to incur across our business. We present Adjusted EBITDA margin as a supplemental measure of our operating performance because it excludes the impact of certain items that we do not consider indicative of our ongoing operating performance. Adjusted EBITDA margin is not a measurement of financial performance under U.S. GAAP. It should not be considered an alternative to any measure of performance derived in accordance with U.S. GAAP. In addition, Adjusted EBITDA margin should not be construed as an inference that our future results will be unaffected by unusual or non‑recurring items, or affected by similar non‑recurring items. Adjusted EBITDA margin has limitations as an analytical tool, and you should not consider such measure either in isolation or as a substitute for analyzing our results as reported under U.S. GAAP. Our definition and calculation of Adjusted EBITDA margin is not necessarily comparable to other similarly titled measures used by other companies due to different methods of calculation.

Lastly, we use segment operating income to evaluate and assess the performance of each of our reportable segments and to make budgeting decisions.

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Results of Operations

The following table sets forth, for the periods indicated, our results of operations.

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["(in thousands)","2021","","2020","","2019"],["Net sales","$","2,147,930","","","$","1,612,169","","","$","1,681,357"],["Cost of goods sold","1,029,493","","","782,333","","","809,122"],["Gross profit","1,118,437","","","829,836","","","872,235"],["Operating expenses:"],["Selling, general and administrative","795,422","","","610,603","","","627,503"],["Research and development","55,335","","","48,942","","","51,601"],["Intangible amortization(1)","7,868","","","11,629","","","7,478"],["Restructuring charges","\u2014","","","13,207","","","\u2014"],["Income from operations","259,812","","","145,455","","","185,653"],["Interest expense, net","7,709","","","15,630","","","19,613"],["Other expense, net","4,280","","","16,776","","","875"],["Income before income taxes","247,823","","","113,049","","","165,165"],["Income tax expense","63,583","","","13,038","","","40,600"],["Net income","184,240","","","100,011","","","124,565"],["Less: Net income attributable to noncontrolling interests","(5,367)","","","(4,005)","","","(3,495)"],["Net income attributable to Acushnet Holdings Corp.","$","178,873","","","$","96,006","","","$","121,070"],["Adjusted EBITDA:"],["Net income attributable to Acushnet Holdings Corp.","$","178,873","","","$","96,006","","","$","121,070"],["Interest expense, net","7,709","","","15,630","","","19,613"],["Income tax expense","63,583","","","13,038","","","40,600"],["Depreciation and amortization (1)","41,243","","","45,429","","","43,002"],["Share-based compensation","27,639","","","16,016","","","10,975"],["Restructuring and transformation costs(2)","2,429","","","15,589","","","\u2014"],["Beam indemnification expense (income) (3)","\u2014","","","9,871","","","(498)"],["Other extraordinary, unusual or non-recurring items, net (4)(5)(6)","1,494","","","17,600","","","1,869"],["Net income attributable to noncontrolling interests","5,367","","","4,005","","","3,495"],["Adjusted EBITDA","$","328,337","","","$","233,184","","","$","240,126"],["Adjusted EBITDA margin","15.3","%","","14.5","%","","14.3","%"]]
[[/GREPCENT_TABLE]]

___________________________________

(1)     The year ended December 31, 2020 includes a goodwill impairment loss of $3.8 million related to KJUS.

(2)    Relates to severance and other costs associated with management's program to refine our business model and improve operational efficiencies.

(3)    Includes non-cash indemnification expense (income) related to tax audits for the periods in which we were owned by Beam Suntory, Inc. (“Beam”).

(4)    The year ended December 31, 2021 includes pension settlement costs of $2.1 million related to lump-sum distributions to participants in our defined benefit plans as a result of the voluntary retirement program as part of management’s approved restructuring program, as well as other immaterial unusual or non-recurring items, net.

(5)    The year ended December 31, 2020 includes salaries and benefits paid for associates who could not work due to government mandated shutdowns, fringe benefits paid for furloughed associates, spoiled raw materials, incremental costs to support remote work and the cost of additional health and safety equipment of $13.5 million. The year ended December 31, 2020 also includes pension settlement costs of $7.2 million related to lump-sum distributions to participants in our defined benefit plans as a result of the voluntary retirement program as part of management’s approved restructuring program, as well as other immaterial unusual or non-recurring items, net.

(6)     Items recorded during the year ended December 31, 2019 include transaction fees of $2.7 million, as well as other immaterial unusual or non-recurring     items, net.

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Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020

Net sales by reportable segment is summarized as follows:

[[GREPCENT_TABLE]]
[["","Year ended","","","","","","Constant Currency"],["","December 31,","","Increase/(Decrease)","","Increase/(Decrease)"],["(in millions)","2021","","2020","","$ change","","% change","","$ change","","% change"],["Titleist golf balls","$","667.6","","","$","507.8","","","$","159.8","","","31.5","%","","$","148.2","","","29.2","%"],["Titleist golf clubs","551.5","","","418.4","","","133.1","","","31.8","%","","124.0","","","29.6","%"],["Titleist golf gear","192.6","","","149.4","","","43.2","","","28.9","%","","38.6","","","25.8","%"],["FootJoy golf wear","580.6","","","415.3","","","165.3","","","39.8","%","","152.0","","","36.6","%"]]
[[/GREPCENT_TABLE]]

Segment operating income by reportable segment is summarized as follows:

[[GREPCENT_TABLE]]
[["","Year ended"],["","December 31,","","Increase/(Decrease)"],["(in millions)","2021","","2020","","$ change","","% change"],["Titleist golf balls","$","106.2","","","$","71.8","","","$","34.4","","","47.9","%"],["Titleist golf clubs","75.4","","","40.0","","","35.4","","","88.5","%"],["Titleist golf gear","14.7","","","20.0","","","(5.3)","","","(26.5)","%"],["FootJoy golf wear","44.2","","","18.3","","","25.9","","","141.5","%"]]
[[/GREPCENT_TABLE]]

Net sales information by region is summarized as follows:

[[GREPCENT_TABLE]]
[["","Year ended","","","","","","Constant Currency"],["","December 31,","","Increase/(Decrease)","","Increase/(Decrease)"],["(in millions)","2021","","2020","","$ change","","% change","","$ change","","% change"],["United States","$","1,125.0","","","$","839.4","","","$","285.6","","","34.0","%","","$","285.6","","","34.0","%"],["EMEA(1)","296.0","","","219.0","","","77.0","","","35.2","%","","57.1","","","26.1","%"],["Japan","188.0","","","151.8","","","36.2","","","23.8","%","","40.2","","","26.5","%"],["Korea","322.6","","","246.2","","","76.4","","","31.0","%","","64.6","","","26.2","%"],["Rest of world","216.3","","","155.8","","","60.5","","","38.8","%","","45.9","","","29.5","%"],["Total net sales","$","2,147.9","","","$","1,612.2","","","$","535.7","","","33.2","%","","$","493.4","","","30.6","%"]]
[[/GREPCENT_TABLE]]

_______________________________________________________________________________

(1) Europe, the Middle East and Africa ("EMEA")

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Net Sales

Net sales increased by $535.7 million, or 33.2%, to $2,147.9 million for the year ended December 31, 2021 compared to $1,612.2 million for the year ended December 31, 2020. On a constant currency basis, net sales increased by $493.4 million, or 30.6%, to $2,105.6 million. The increase in net sales on a constant currency basis was largely due to sales volume increases across all reportable segments, as rounds of play and consumer demand for golf-related products remained elevated during 2021, coupled with the adverse impact of government-ordered shutdowns in the second quarter of 2020. Sales volume growth of products that are not allocated to one of our four reportable segments also contributed to the increase in net sales.

The increase in net sales in the United States was driven by an increase of $104.8 million in Titleist golf balls, an increase of $76.4 million in Titleist golf clubs, an increase of $76.0 million in FootJoy golf wear and an increase of $21.3 million in Titleist golf gear, all driven by the same factors discussed previously.

Net sales in regions outside of the United States increased by $250.1 million, or 32.4%, to $1,022.9 million for the year ended December 31, 2021 compared to $772.8 million for the year ended December 31, 2020. On a constant currency basis, net sales in such regions increased by $207.8 million, or 26.9%, to $980.6 million. The increase in net sales in all regions was primarily driven by increased sales across all reportable segments, also driven by the same factors discussed previously.

Gross Profit

Gross profit increased by $288.6 million to $1,118.4 million for the year ended December 31, 2021 compared to $829.8 million for the year ended December 31, 2020. Gross margin increased to 52.1% for the year ended December 31, 2021 compared to 51.5% for the year ended December 31, 2020. The increase in gross profit primarily resulted from an increase of $88.3 million in Titleist golf balls, an increase of $83.4 million in Titleist golf clubs, an increase of $81.4 million in FootJoy golf wear and an increase of $14.9 million in Titleist golf gear, each primarily due to the sales volume increases discussed previously and higher average selling prices, partially offset by higher inbound freight costs across all reportable segments.

The increase in gross margin was primarily driven by higher gross margins in Titleist golf clubs, FootJoy golf wear and Titleist golf balls. The increases in Titleist golf clubs and Titleist golf balls were primarily due to favorable product mix shifts and higher average selling prices. The increase in FootJoy golf wear was primarily due to higher average selling prices and higher retail sales in Korea. Higher inbound freight costs across all reportable segments partially offset gross margin increases.

Selling, General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses increased by $184.8 million to $795.4 million for the year ended December 31, 2021 compared to $610.6 million for the year ended December 31, 2020. This increase was largely driven by lower SG&A in 2020 due to expense reduction measures taken across all reportable segments as a result of the COVID-19 pandemic and also by higher expenditures in 2021 required to support the continued high levels of demand across all our reportable segments. This increase was comprised of an increase of $90.9 million in selling expense due to higher sales volumes as described above including higher retail commission expense in Korea, an increase of $54.3 million in advertising and promotional expenses and an increase of $36.4 million in administrative expense primarily due to higher employee-related costs and information technology related consulting expenses. Overall, SG&A included an unfavorable impact of changes in foreign currency exchange rates of $8.1 million across all expense categories and reportable segments.

Research and Development

Research and development ("R&D") expenses increased by $6.4 million to $55.3 million for the year ended December 31, 2021 compared to $48.9 million for the year ended December 31, 2020 primarily related to an increase in employee-related costs.

Intangible Amortization

Intangible amortization expense decreased $3.7 million to $7.9 million for the year ended December 31, 2021 compared to $11.6 million for the year ended December 31, 2020 primarily as a result of a goodwill impairment loss of $3.8 million recorded in 2020 related to KJUS.

Interest Expense, net

Interest expense, net decreased by $7.9 million to $7.7 million for the year ended December 31, 2021 compared to $15.6 million for the year ended December 31, 2020. This decrease was primarily due to decreases in interest rates and borrowings during the year ended December 31, 2021, as well as, a decrease in losses from interest rate swaps.

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Other Expense, net

Other expense, net decreased by $12.5 million to $4.3 million for the year ended December 31, 2021 compared to $16.8 million for the year ended December 31, 2020. This decrease was primarily due to expense recorded in 2020 resulting from the reversal of an indemnification receivable of $10.4 million related to income taxes indemnified by Beam, for which there was a corresponding tax benefit recognized during the year ended December 31, 2020, and a $4.7 million decrease in the non-service cost component of net periodic benefit costs primarily driven by a decrease in settlement costs.

Income Tax Expense

Income tax expense increased by $50.6 million to $63.6 million for the year ended December 31, 2021 compared to $13.0 million for the year ended December 31, 2020. Our effective tax rate ("ETR") was 25.7% for the year ended December 31, 2021 compared to 11.5% for the year ended December 31, 2020. The increase in ETR was primarily driven by the impact of the COVID-19 pandemic on our geographic mix of earnings, as well as, the income tax benefits for the year ended December 31, 2020 pertaining to both a reduction of tax expense associated with the U.S. taxation of foreign earnings and our change in unrecognized tax benefits resulting from an audit settlement for the periods in which we were owned by Beam.

Segment Results

Titleist Golf Balls Segment

Net sales in our Titleist golf balls segment increased by $159.8 million, or 31.5%, to $667.6 million for the year ended December 31, 2021 compared to $507.8 million for the year ended December 31, 2020. On a constant currency basis, net sales in our Titleist golf balls segment increased by $148.2 million, or 29.2%, to $656.0 million. This increase was largely due to higher sales volumes of our latest generation Pro V1 and Pro V1x golf balls launched in the first quarter of 2021 combined with the adverse impact of government-ordered shutdowns in the second quarter of 2020.

Operating income in our Titleist golf balls segment increased by $34.4 million, or 47.9%, to $106.2 million for the year ended December 31, 2021 compared to $71.8 million for the year ended December 31, 2020. The increase in operating income resulted from higher gross profit of $88.3 million, partially offset by higher operating expenses. The increase in gross profit was primarily driven by the sales volume increase discussed previously, as well as higher average selling prices. This increase was partially offset by higher manufacturing costs and increased inbound freight costs. Operating expenses increased primarily as a result of increases of $20.9 million, $15.9 million and $14.0 million in advertising and promotional, selling and administrative expenses, respectively, as discussed previously.

Titleist Golf Clubs Segment

Net sales in our Titleist golf clubs segment increased by $133.1 million, or 31.8%, to $551.5 million for the year ended December 31, 2021 compared to $418.4 million for the year ended December 31, 2020. On a constant currency basis, net sales in our Titleist golf clubs segment increased by $124.0 million, or 29.6%, to $542.4 million. This increase was largely due to higher average selling prices across all product categories and higher sales volumes in all product categories except wedges. The decrease in sales volumes of wedges was primarily due to supply chain constraints. Also contributing to the increase was the adverse impact of government-ordered shutdowns in the second quarter of 2020.

Operating income in our Titleist golf clubs segment increased by $35.4 million, or 88.5%, to $75.4 million for the year ended December 31, 2021 compared to $40.0 million for the year ended December 31, 2020. The increase in operating income resulted from higher gross profit of $83.4 million driven by the sales volume increase and higher average selling prices discussed previously, partially offset by increased inbound freight costs and higher operating expenses. Higher operating expenses were primarily as a result of increases of $18.1 million, $17.0 million and $10.3 million in advertising and promotional, selling and administrative expenses, respectively, as discussed previously.

Titleist Golf Gear Segment

Net sales in our Titleist golf gear segment increased by $43.2 million, or 28.9%, to $192.6 million for the year ended December 31, 2021 compared to $149.4 million for the year ended December 31, 2020. On a constant currency basis, net sales in our Titleist golf gear segment increased by $38.6 million, or 25.8% to $188.0 million. This increase was largely due to sales volume increases across all product categories combined with the adverse impact of government-ordered shutdowns in the second quarter of 2020.

Operating income in our Titleist golf gear segment decreased by $5.3 million, or 26.5%, to $14.7 million for the year ended December 31, 2021 compared to $20.0 million for the year ended December 31, 2020. This decrease resulted from higher operating expenses, partially offset by higher gross profit of $14.9 million. The higher gross profit was driven by the

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sales volume increase discussed previously offset, in part, by increased inbound freight cost. Operating expenses increased primarily as a result of increases of $13.1 million, $4.0 million and $2.8 million in selling, administrative, and advertising and promotional expenses, respectively, as discussed previously.

FootJoy Golf Wear Segment

Net sales in our FootJoy golf wear segment increased by $165.3 million, or 39.8%, to $580.6 million for the year ended December 31, 2021 compared to $415.3 million for the year ended December 31, 2020. On a constant currency basis, net sales in our FootJoy golf wear segment increased by $152.0 million, or 36.6%, to $567.3 million. This increase was largely due to increased sales volumes and higher average selling prices across all product categories. Also contributing to the increase was the adverse impact of government-ordered shutdowns in the second quarter of 2020.

Operating income in our FootJoy golf wear segment increased by $25.9 million, or 141.5%, to $44.2 million for the year ended December 31, 2021 compared to $18.3 million for the year ended December 31, 2020. The increase in operating income resulted from higher gross profit of $81.4 million, partially offset by higher operating expenses. The increase in gross profit was primarily as a result of the sales volume increase and higher average selling prices discussed previously and a higher percentage of retail sales in Korea and global eCommerce sales, partially offset by increased inbound freight costs. Operating expenses increased primarily as a result of increases of $36.4 million in selling expense primarily due to higher sales volumes as discussed previously including higher Korea retail commission expense, as well as, $10.3 million and $7.7 million in advertising and promotional, and administrative expenses, respectively, as discussed previously.

Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019

A detailed review of our results of operations for the year ended December 31, 2020 as compared to the year ended December 31, 2019 can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Annual Report for the year ended December 31, 2020, which was filed with the SEC on February 25, 2021, and is incorporated herein by reference.

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Liquidity and Capital Resources

Our primary cash needs relate to working capital, capital expenditures, servicing of our debt, paying dividends, pension contributions and repurchasing shares of our common stock. We expect to rely on cash flows from operations and borrowings under our revolving credit facility and local credit facilities as our primary sources of liquidity.

Our liquidity is impacted by our level of working capital, which is cyclical as a result of the general seasonality of our business. Our accounts receivable balance is generally at its highest starting at the end of the first quarter and continuing through the second quarter, and declines during the third and fourth quarters as a result of both an increase in cash collections and lower sales. Our inventory balance also fluctuates as a result of the seasonality of our business. Generally, our buildup of inventory starts during the fourth quarter and continues through the first quarter and into the beginning of the second quarter in order to meet demand for our initial sell‑in during the first quarter and reorders in the second quarter. Both accounts receivable and inventory balances are impacted by the timing of new product launches.

As of December 31, 2021, we had $279.8 million of unrestricted cash and cash equivalents (including $14.9 million attributable to our FootJoy golf shoe variable interest entity). As of December 31, 2021, 23.5% of our total unrestricted cash and cash equivalents was held at our non‑U.S. subsidiaries. We manage our worldwide cash requirements by monitoring the funds available among our subsidiaries and determining the extent to which we can access those funds on a cost effective basis. We are not aware of any restrictions on repatriation of these funds and, subject to foreign withholding taxes, those funds could be repatriated, if necessary. We have repatriated, and intend to repatriate, funds to the United States from time to time to satisfy domestic liquidity needs arising in the ordinary course of business, including liquidity needs related to debt service requirements.

As noted previously, the COVID-19 pandemic could impact our results of operations in ways we cannot currently predict. Subject to the length and severity of the COVID-19 pandemic, we believe that cash expected to be provided by operating activities, together with our cash on hand and the availability of borrowings under our revolving credit facility and our local credit facilities (subject to customary borrowing conditions) will be sufficient to meet our liquidity requirements for at least the next 12 months. Our ability to generate sufficient cash flows from operations is, however, subject to many risks and uncertainties, including future economic trends and conditions (such as the current COVID-19 pandemic), demand for our products, availability and cost of our raw materials and components, foreign currency exchange rates and other risks and uncertainties applicable to our business, as described in "Risk Factors," Item 1A of Part I included elsewhere in this report.

Debt and Financing Arrangements

As of December 31, 2021, we had $386.2 million of availability under our revolving credit facility after giving effect to $13.8 million of outstanding letters of credit. Additionally, we had $51.0 million available under our local credit facilities.

Our credit agreement contains customary affirmative and restrictive covenants, including, among others, financial covenants based on our leverage and interest coverage ratios. The credit agreement also includes customary events of default, the occurrence of which, following any applicable cure period, would permit the lenders to, among other things, declare the principal, accrued interest and other obligations to be immediately due and payable. As of December 31, 2021, we were in compliance with all covenants under the credit agreement.

See "Notes to Consolidated Financial Statements- Note 10- Debt and Financing Arrangements," Item 8 of Part II included elsewhere in this report, for a description of our credit facilities and related credit agreement. Additionally, see "Risk Factors - Risks Related to Our Indebtedness" Item 1A of Part I included elsewhere in this report for further discussion surrounding the risks and uncertainties of our credit facilities.

Capital Expenditures

We made $37.6 million of capital expenditures during the year ended December 31, 2021. Capital expenditures in 2022 are expected to be approximately $60.0 million, although the actual amount may vary depending upon a variety of factors, including the timing of certain capital project implementations and receipt of capital purchases due to supply chain challenges. Capital expenditures generally relate to investments to support the manufacturing and distribution of products, our go to market activities and continued investments in information technology to support our global strategic initiatives.

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Dividends and Share Repurchase Program

The Board of Directors has authorized us to repurchase up to an aggregate of $200.0 million of our issued and outstanding common stock. During 2021, we repurchased 1,404,863 shares of common stock at an average price of $46.62 for an aggregate of $65.5 million. Included in this amount were 355,341 shares of common stock repurchased from Magnus for an aggregate of $11.1 million on April 2, 2021, in satisfaction of our obligations pursuant to our previously disclosed Magnus share repurchase agreement.

On November 8, 2021, we entered into a new agreement with Magnus to purchase from Magnus an equal amount of our common stock as we purchase on the open market, up to an aggregate of $37.5 million (the "2021 Agreement"), at the same weighted average per share price. As a result of purchases made on the open market subsequent to entering into the 2021 Agreement, we recorded a liability of $29.2 million to repurchase an additional 537,839 shares of common stock from Magnus as of December 31, 2021.

Excluding the impact of the share repurchase liability, as of December 31, 2021, we had $98.2 million remaining under the current share repurchase program, including $37.5 million related to the 2021 Agreement.

Between January 1, 2022 and January 14, 2022, we repurchased an additional 161,980 shares of common stock on the open market for an aggregate of $8.3 million, bringing the cumulative total open market purchases since the execution of the 2021 agreement to $37.5 million. As a result, on January 24, 2022, we repurchased 699,819 shares of common stock for an aggregate of $37.5 million from Magnus, in satisfaction of the 2021 Agreement obligations. See “Notes to Consolidated Financial Statements-Note 15-Common Stock,” Item 8 of Part II, included elsewhere in this report, for disclosures related to our share repurchase program and the Magnus share repurchase liability.

During the year ended December 31, 2021, we paid dividends on our common stock of $49.2 million to our shareholders. During the first quarter of 2022, our Board of Directors declared a dividend of $0.18 per share of common stock to shareholders of record as of March 11, 2022 and payable on March 25, 2022.

Cash Flows

The following table presents the major components of net cash flows provided by and used in operating, investing and financing activities for the periods indicated:

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[[/GREPCENT_TABLE]]

Cash Flows From Operating Activities

Net cash provided by operating activities increased $49.7 million to $314.1 million for the year ended December 31, 2021 as compared to $264.4 million for the year ended December 31, 2020. The increase in cash provided by operating activities was primarily driven by an increase in net income, offset in part by changes in working capital, both as a result of an increase in rounds of play and related consumer demand for golf-related products. Working capital at any specific point in time is subject to many variables, including seasonality and inventory management, the timing of cash receipts and payments, vendor payment terms, and fluctuations in foreign exchange rates.

Net cash provided by operating activities increased $130.1 million to $264.4 million for the year ended December 31, 2020 as compared to $134.3 million for the year ended December 31, 2019. The increase in cash provided by operating activities was primarily driven by higher cash collections, lower inventory levels due to government-ordered shutdowns and the subsequent increase in demand for golf and golf-related products, and other changes in working capital, partially offset by lower net income.

Cash Flows From Investing Activities

Net cash used in investing activities increased $12.9 million to $37.6 million for the year ended December 31, 2021 as compared to $24.7 million for the year ended December 31, 2020, as a result of an increase in capital expenditures.

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Net cash used in investing activities decreased $36.4 million to $24.7 million for the year ended December 31, 2020 as compared to $61.1 million for the year ended December 31, 2019, primarily related to a decrease in cash used for business acquisitions, as well as a decrease in capital expenditures.

Cash Flows From Financing Activities

Net cash used in financing activities increased $11.7 million to $140.3 million for the year ended December 31, 2021 as compared to $128.6 million for the year ended December 31, 2020. This increase was primarily due to an increase in purchases of common stock, offset in part by a decrease in repayments of borrowings.

Net cash used in financing activities increased $58.3 million to $128.6 million for the year ended December 31, 2020 as compared to $70.3 million for the year ended December 31, 2019. This increase was primarily due to an increase in repayments of borrowings, offset in part by a decrease in purchases of common stock and payments for employee restricted stock tax withholdings.

Contractual Obligations

Our principal contractual obligations and commitments consist of long term debt obligations, interest on debt obligations (including unused commitment fees related to our revolving credit facility), operating and finance lease obligations, purchase obligations and pension and other postretirement benefit obligations.

See "Notes to Consolidated Financial Statements-Note 10-Debt and Financing Arrangements", "Note 4-Leases", "Note 22-Commitments and Contingencies" and "Note 13-Pension and Other Postretirement Benefits" in Item 8 of Part II of this Annual Report for more information on the nature and timing of obligations for debt, leases, purchase obligations and pension and postretirement benefit plans, respectively. The future amount of interest expense payments are expected to vary as discussed in "Interest Rate Risk," Item 7A of Part II, included elsewhere in this Annual Report.

Off‑Balance Sheet Arrangements

As of December 31, 2021, we did not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

Critical Accounting Estimates

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

    A summary of significant accounting policies is included in Note 2, "Summary of Significant Accounting Policies," to the Consolidated Financial Statements in Item 8 of Part II, which is incorporated herein by reference. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably possible could materially impact the financial statements. We believe the following judgments and estimates are critical in the preparation of our consolidated financial statements.

Goodwill

We evaluate goodwill for impairment annually and whenever events or circumstances indicate that the carrying amount of this asset may not be recoverable. We test goodwill for impairment by comparing the fair value of the reporting unit to its carrying value. The fair value of our reporting units is determined using the income approach. Under the income approach, we estimate the fair value of a reporting unit based on the present value of estimated future cash flows. Cash flow projections are based on management’s estimates of revenue growth rates, taking into consideration industry and market conditions. The discount rate is the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the reporting unit’s ability to execute on the projected cash flows. This analysis contains uncertainties related to estimating revenue growth as it requires us to make assumptions and apply judgments to estimate industry economic factors and the profitability of future business strategies. If actual results are not consistent with our estimates and assumptions, we may be exposed to future impairment losses that could be material.

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If the fair value of a reporting unit exceeds the carrying value of the net assets assigned to that reporting unit, goodwill is not impaired. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we would record an impairment loss equal to the difference, not to exceed the total amount of goodwill allocated to the reporting unit.

We perform our annual impairment test of goodwill during the fourth quarter of our fiscal year. We recorded a goodwill impairment loss of $3.8 million for the year ended December 31, 2020 related to KJUS. There were no other impairment losses recorded for the years ended December 31, 2021, 2020 and 2019.

Pension and Other Postretirement Benefit Plans

We provide various post-employment plans including defined benefit plans (or "pension plans") and postretirement benefit plans which provide benefits to certain eligible U.S. and foreign employees. Projected benefit obligations are measured using various actuarial assumptions, such as discount rate, rate of compensation increase, mortality rate, turnover rate and health care cost trend rates, as determined at each year end measurement date. The measurement of net periodic benefit cost is based on various actuarial assumptions, including discount rate, expected return on plan assets and rate of compensation increase, which are determined as of the prior year measurement date. Our actuarial assumptions are reviewed on an annual basis and modified when appropriate.

Our projected benefit obligations related to our pension and other postretirement benefit plans are valued using a weighted‑average discount rate of 2.93% and 2.71%, respectively, for the year ended December 31, 2021. Decreasing the discount rate by 100 basis points would have increased the projected benefit obligations of our pension and other postretirement benefit plan by approximately $58.8 million and $1.6 million, respectively, for the year ended December 31, 2021.

    Our net periodic benefit cost related to our pension and other postretirement benefit plans is calculated using a weighted average discount rate of 2.66% and 2.34%, respectively, for the year ended December 31, 2021. Decreasing the discount rate by 100 basis points would increase net periodic pension and other postretirement benefit cost by approximately $4.8 million and $0.2 million, respectively, for the year ended December 31, 2021. Additionally, our net periodic benefit cost related to our pension plans is calculated using an expected return on plan assets of 4.28% for the year ended December 31, 2021. Decreasing the expected return on plan assets by 100 basis points would increase net periodic pension benefit cost by approximately $2.5 million for the year ended December 31, 2021.

Income Taxes

Deferred tax assets represent amounts available to reduce income taxes payable on taxable income in future years. Such assets arise because of temporary differences between the financial reporting and tax basis of assets and liabilities, as well as from net operating losses and tax credit carryforwards. We evaluate the recoverability of these future tax deductions and credits by assessing the adequacy of future expected taxable income from all sources, including reversal of temporary differences, forecasted operating earnings and available tax planning strategies. These sources of income rely heavily on estimates that are based on a number of factors, including historical experience and short-range and long-range business forecasts. As of December 31, 2021, we had a valuation allowance on certain net operating loss and tax credit carryforwards based on our assessment that it is more likely than not that the deferred tax assets will not be recognized. As of December 31, 2021 and 2020, the cumulative valuation allowance against deferred tax assets was $30.0 million and $20.4 million, respectively.

We are subject to income taxes in the U.S. and foreign jurisdictions. We account for uncertain tax positions using a more likely than not threshold for recognizing and resolving uncertain tax matters. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the outcome of these matters will not be different. We adjust these reserves in light of changing facts and circumstances, such as the closing of tax audits or refinement of an estimate. To the extent the outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes and the effective tax rate in the period in which the determination is made.

Recently Issued Accounting Pronouncements

We have reviewed all recently issued standards and have determined that, other than as disclosed in “Notes to Consolidated Financial Statements – Note 2 – Summary of Significant Accounting Policies”, Item 8 of Part II, included elsewhere in this report, such standards will not have a significant impact on our consolidated financial statements or do not otherwise apply to our operations.

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