# Acushnet Holdings Corp. (GOLF) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Acushnet Holdings Corp.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1672013/000167201323000011/golf-20221231.htm
Accession: 0001672013-23-000011
Filing date: 2023-03-01
Report date: 2022-12-31
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/
Previous year: /company/GOLF/mda/fy2021/ (FY 2021)
Next year: /company/GOLF/mda/fy2023/ (FY 2023)

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.

We believe 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.

Our financial results and operations continue to be impacted by the macroeconomic environment, including the ongoing COVID-19 pandemic. Global supply chain issues, the impact of inflation and the impact of changes in foreign currency exchange rates have resulted in constrained raw material, component and sourced product availability and increased raw material and other input costs, including higher freight expense. These increased costs negatively impacted cost of sales for the year ended December 31, 2022, resulting in a lower gross margin as compared to the year ended December 31, 2021. The impact of inflation, particularly in the form of higher raw material costs, as well as the impact of changes in foreign currency exchange rates, is expected to continue in 2023; however, to a lesser extent than experienced in 2022.

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.

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 as dedicated golfers took full advantage of favorable weather, hybrid work schedules and an increase in discretionary time due to the circumstances attendant to the COVID-19 pandemic. The game of golf remained in high demand in 2022, with the number of rounds played approximately 16% higher than the number of rounds played in 2019. We anticipate that rounds of golf played will remain resilient in 2023, driven by golfer demographics, dedicated golfers and economic conditions.

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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, the rate of inflation, 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 years and above, primarily “gen‑xers,” “baby boomers” and, increasingly, "millennials" 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 2022, 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.

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.

Seasonality

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. 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

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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 in even-numbered years, we launch our premium performance AVX model and most performance models in the first and second quarters. 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 now launch Phantom X models in even-numbered years and Select models in odd-numbered years.

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 represent approximately 50% of our net sales in each of the three years ended December 31, 2022. 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, 2022, 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.

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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. In each of the three years ended December 31, 2022, approximately one-half of our net sales and one-third of our total operating expenses (which amounts represent substantially all of the operating expenses incurred by our non‑U.S. subsidiaries) were denominated in foreign currencies. 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 (loss).

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 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

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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 (loss) 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)","2022","","2021","","2020"],["Net sales","$","2,270,336","","","$","2,147,930","","","$","1,612,169"],["Cost of goods sold","1,091,103","","","1,029,493","","","782,333"],["Gross profit","1,179,233","","","1,118,437","","","829,836"],["Operating expenses:"],["Selling, general and administrative","833,422","","","795,422","","","610,603"],["Research and development","56,393","","","55,335","","","48,942"],["Intangible amortization(1)","7,885","","","7,868","","","11,629"],["Restructuring charges","\u2014","","","\u2014","","","13,207"],["Income from operations","281,533","","","259,812","","","145,455"],["Interest expense, net","13,269","","","7,709","","","15,630"],["Other expense, net","8,829","","","4,280","","","16,776"],["Income before income taxes","259,435","","","247,823","","","113,049"],["Income tax expense","54,351","","","63,583","","","13,038"],["Net income","205,084","","","184,240","","","100,011"],["Less: Net income attributable to noncontrolling interests","(5,806)","","","(5,367)","","","(4,005)"],["Net income attributable to Acushnet Holdings Corp.","$","199,278","","","$","178,873","","","$","96,006"],["Adjusted EBITDA:"],["Net income attributable to Acushnet Holdings Corp.","$","199,278","","","$","178,873","","","$","96,006"],["Interest expense, net","13,269","","","7,709","","","15,630"],["Income tax expense","54,351","","","63,583","","","13,038"],["Depreciation and amortization (1)","41,706","","","41,243","","","45,429"],["Share-based compensation","24,083","","","27,639","","","16,016"],["Restructuring and transformation costs(2)","\u2014","","","2,429","","","15,589"],["Beam indemnification expense (3)","\u2014","","","\u2014","","","9,871"],["Other extraordinary, unusual or non-recurring items, net (4)(5)","(85)","","","1,494","","","17,600"],["Net income attributable to noncontrolling interests","5,806","","","5,367","","","4,005"],["Adjusted EBITDA","$","338,408","","","$","328,337","","","$","233,184"],["Adjusted EBITDA margin","14.9","%","","15.3","%","","14.5","%"]]
[[/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 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.

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Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021

Net sales by reportable segment is summarized as follows:

[[GREPCENT_TABLE]]
[["","Year ended","","","","","","Constant Currency"],["","December 31,","","Increase/(Decrease)","","Increase/(Decrease)"],["(in millions)","2022","","2021","","$ change","","% change","","$ change","","% change"],["Titleist golf balls","$","678.8","","","$","667.6","","","$","11.2","","","1.7","%","","$","37.9","","","5.7","%"],["Titleist golf clubs","609.6","","","551.5","","","58.1","","","10.5","%","","89.7","","","16.3","%"],["Titleist golf gear","204.9","","","192.6","","","12.3","","","6.4","%","","24.1","","","12.5","%"],["FootJoy golf wear","618.0","","","580.6","","","37.4","","","6.4","%","","71.1","","","12.2","%"]]
[[/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)","2022","","2021","","$ change","","% change","","$ change","","% change"],["United States","$","1,227.8","","","$","1,125.0","","","$","102.8","","","9.1","%","","$","102.8","","","9.1","%"],["EMEA(1)","321.5","","","296.0","","","25.5","","","8.6","%","","60.6","","","20.5","%"],["Japan","161.0","","","188.0","","","(27.0)","","","(14.4)","%","","4.2","","","2.2","%"],["Korea","312.7","","","322.6","","","(9.9)","","","(3.1)","%","","29.6","","","9.2","%"],["Rest of World","247.3","","","216.3","","","31.0","","","14.3","%","","43.5","","","20.1","%"],["Total net sales","$","2,270.3","","","$","2,147.9","","","$","122.4","","","5.7","%","","$","240.7","","","11.2","%"]]
[[/GREPCENT_TABLE]]

_______________________________________________________________________________

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

Segment operating income by reportable segment is summarized as follows:

[[GREPCENT_TABLE]]
[["","Year ended"],["","December 31,","","Increase/(Decrease)"],["(in millions)","2022","","2021","","$ change","","% change"],["Titleist golf balls","$","112.7","","","$","106.2","","","$","6.5","","","6.1","%"],["Titleist golf clubs","100.9","","","75.4","","","25.5","","","33.8","%"],["Titleist golf gear","11.7","","","14.7","","","(3.0)","","","(20.4)","%"],["FootJoy golf wear","37.0","","","44.2","","","(7.2)","","","(16.3)","%"]]
[[/GREPCENT_TABLE]]

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Net Sales

For the year ended December 31, 2022, net sales increased 5.7%, or 11.2% on a constant currency basis, compared to the year ended December 31, 2021. The increase was driven by growth across all reportable segments primarily as a result of higher sales volumes and higher average selling prices.

The increase in net sales in the United States was primarily as a result of increases of $51.2 million in Titleist golf clubs, $20.6 million in Titleist golf balls, $13.8 million in FootJoy golf wear and $10.1 million in Titleist golf gear. The increase in Titleist golf clubs was primarily driven by higher sales volumes of SM9 wedges, Phantom X putters, T-Series irons and our newly introduced TSR drivers and fairways. The increase in Titleist golf balls was primarily due to higher average selling prices and higher sales volumes. The increase in FootJoy golf wear was primarily driven by higher average selling prices of footwear and higher sales volumes of apparel. The increase in Titleist golf gear was primarily driven by higher average selling prices across all product categories.

Net sales in regions outside of the United States increased 1.9%, or 13.5% on a constant currency basis. In EMEA, net sales increased across all reportable segments, with the first quarter of 2022 having the largest increase due to the adverse impact of government-ordered shutdowns in this region during the first quarter of 2021. In Korea and Rest of World, net sales increased across all reportable segments. In Japan, net sales increased in FootJoy golf wear and Titleist golf clubs.

Gross Profit

Gross profit increased $60.8 million for the year ended December 31, 2022 compared to the year ended December 31, 2021. Gross margin decreased to 51.9% for the year ended December 31, 2022 compared to 52.1% for the year ended December 31, 2021. The increase in gross profit primarily resulted from an increase of $35.8 million in Titleist golf clubs and an increase of $13.9 million in FootJoy golf wear, both primarily due to sales volume increases. These increases were partially offset by increased inbound freight costs and the unfavorable impact of changes in foreign currency exchange rates across all reportable segments. The decrease in gross margin was primarily due to increased inbound freight costs across all reportable segments.

Selling, General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses increased $38.0 million for the year ended December 31, 2022 compared to the year ended December 31, 2021. This increase was primarily due to an increase of $26.5 million in selling expense due to higher sales volumes across all reportable segments and higher third party distribution expenses in FootJoy golf wear and Titleist golf gear, as well as an increase of $15.2 million in administrative expense primarily due to higher expenses related to information technology-related investments. These increases were partially offset by a decrease of $4.5 million in advertising and promotional expenses and a decrease in employee related expenses. SG&A also includes an increase of $8.5 million in foreign currency transaction losses, offset in part by an increase in gains on foreign exchange forward contracts of $2.5 million. Overall, SG&A included a favorable impact of changes in foreign currency exchange rates of $32.5 million across all expense categories and reportable segments.

Interest Expense, net

Interest expense, net increased $5.6 million for the year ended December 31, 2022 compared to the year ended December 31, 2021. This increase was primarily due to an increase in interest rates for the year ended December 31, 2022, as well as an increase in borrowings, offset in part by a decrease in losses from interest rate swaps.

Other Expense, net

Other expense, net increased $4.5 million for the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily due to an increase in the non-service cost component of net periodic benefit expense, as well as changes in the fair value of Rabbi trust assets.

Income Tax Expense

Income tax expense decreased $9.2 million for the year ended December 31, 2022 compared to the year ended December 31, 2021. Our effective tax rate ("ETR") was 20.9% for the year ended December 31, 2022 compared to 25.7% for the year ended December 31, 2021. The decrease in ETR was primarily driven by changes in our jurisdictional mix of earnings.

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Segment Results

Titleist Golf Balls Segment

Net sales in our Titleist golf balls segment increased 1.7%, or 5.7% on a constant currency basis, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase was primarily driven by higher sales volumes and average selling prices. Sales volumes were negatively impacted by certain raw material availability.

Operating income in our Titleist golf balls segment increased $6.5 million, or 6.1%, compared to the prior year period. The increase in operating income resulted from higher gross profit of $9.0 million, partially offset by higher operating expenses of $2.4 million. The increase in gross profit was primarily driven by sales volume increases and higher average selling prices, partially offset by higher manufacturing costs and higher inbound freight costs. Operating expenses increased primarily as a result of increases of $3.5 million and $1.5 million in administrative and selling expenses, respectively, partially offset by a decrease of $2.4 million in advertising and promotional expenses.

Titleist Golf Clubs Segment

Net sales in our Titleist golf clubs segment increased 10.5%, or 16.3% on a constant currency basis, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase was largely due to higher sales volumes of our SM9 wedges launched in the first quarter of 2022, Phantom X putters launched in the second quarter of 2022, T-Series irons launched in the third quarter of 2021 and TSR drivers and fairways launched in the third quarter of 2022. This increase was partially offset by lower sales volumes of second model year hybrids.

Operating income in our Titleist golf clubs segment increased $25.5 million, or 33.8%, compared to the prior year period. The increase in operating income resulted from higher gross profit of $35.8 million, partially offset by higher operating expenses of $10.2 million. The increase in gross profit was primarily due to higher sales volumes, partially offset by increased inbound freight and component costs and the unfavorable impact of changes in foreign currency exchange rates. Higher operating expenses were primarily as a result of an increase of $7.0 million in selling expense primarily due to higher distribution expenses and an increase of $4.3 million in administrative expenses, partially offset by a decrease of $2.1 million in advertising and promotional expenses.

Titleist Golf Gear Segment

Net sales in our Titleist golf gear segment increased 6.4%, or 12.5% on a constant currency basis, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase was primarily due to higher average selling prices across all product categories.

Operating income in our Titleist golf gear segment decreased $3.0 million, or 20.4%, compared to the prior year period. The decrease in operating income resulted from higher operating expenses of $4.7 million, partially offset by higher gross profit of $1.7 million. Gross profit increased due to higher average selling prices, partially offset by increased inbound freight costs. Operating expenses increased primarily as a result of an increase of $2.9 million in selling expense due to higher third party distribution expenses.

FootJoy Golf Wear Segment

Net sales in our FootJoy golf wear segment increased 6.4%, or 12.2% on a constant currency basis, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase was primarily due to increased sales volumes across all product categories.

Operating income in our FootJoy golf wear segment decreased $7.2 million, or 16.3% compared to the prior year period. The decrease in operating income resulted from higher operating expenses of $21.2 million, partially offset by higher gross profit of $13.9 million. Gross profit increased primarily as a result of sales volume increases, partially offset by increased inbound freight costs and the unfavorable impact of changes in foreign currency exchange rates. Operating expenses increased primarily as a result of an increase of $16.4 million in selling expense due to higher sales volumes and higher third party distribution expenses, as well as an increase of $4.6 million in administrative expense.

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

A detailed review of our results of operations for the year ended December 31, 2021 as compared to the year ended December 31, 2020 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, 2021, which was filed with the SEC on March 1, 2022, 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 our debt, paying dividends, pension contributions and repurchasing shares of our common stock. Additionally, from time to time, we may make strategic acquisitions and investments to complement our products, technologies or businesses, which could impact our liquidity needs. 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, 2022, we had $57.1 million of unrestricted cash and cash equivalents (including $13.7 million attributable to our FootJoy golf shoe variable interest entity). As of December 31, 2022, 96.1% of our total unrestricted cash and cash equivalents was held at our non‑U.S. subsidiaries, including our FootJoy golf shoe variable interest entity. 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.

As noted previously, the macroeconomic environment, including the ongoing COVID-19 pandemic, could impact our results of operations in ways we cannot currently predict. Nonetheless, 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 current and future economic trends and conditions, 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

On August 2, 2022, we amended our credit facility to, among other things, provide a $950.0 million multi-currency revolving credit facility and amend rates per annum at which borrowings in different denominations bear interest. On August 2, 2022, proceeds from borrowings under the multi-currency revolving credit facility were used to, among other things, prepay in full our outstanding term loans and refinance our outstanding borrowings under the revolving credit facility. Immediately prior to payment, the aggregate amounts outstanding related to the term loans and revolving credit facility were approximately $306.3 million and $72.6 million, respectively.

As of December 31, 2022, we had $416.8 million of availability under our revolving credit facility after giving effect to $6.9 million of outstanding letters of credit. Additionally, we had $25.6 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, 2022, we were in compliance with all covenants under our credit agreement.

See "Notes to Consolidated Financial Statements- Note 11- Debt and Financing Arrangements," Item 8 of Part II included elsewhere in this report, for a description of our credit facilities and related credit agreements. 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 related to our credit facilities.

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Dividends and Share Repurchase Program

During the year ended December 31, 2022, we paid dividends on our common stock of $52.2 million to our shareholders. During the first quarter of 2023, our Board of Directors declared a dividend of $0.195 per share of common stock to shareholders of record as of March 10, 2023, which is payable on March 24, 2023.

As of December 31, 2022, our Board of Directors had authorized us to repurchase up to an aggregate of $450.0 million of our issued and outstanding common stock. During 2022, we repurchased 4,114,863 shares of common stock at an average price of $46.36 for an aggregate of $190.8 million. Included in this amount were 699,819 shares of common stock repurchased on January 24, 2022 from Magnus Holdings Co., Ltd. (“Magnus”), a wholly-owned subsidiary of Fila Holdings Corp., for an aggregate of $37.5 million, in satisfaction of our obligations pursuant to our previously disclosed Magnus share repurchase agreement.

On June 16, 2022, 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 $75.0 million at the same weighted average per share price (the "2022 Agreement"). On August 30, 2022, we amended and restated the 2022 Agreement to increase the aggregate dollar amount of shares of our common stock that we will purchase from Magnus from $75.0 million to $100.0 million (the "Amended and Restated 2022 Agreement"). As a result of purchases made on the open market subsequent to entering into the 2022 Agreement, we recorded a liability of $92.6 million to repurchase an additional 2,000,839 shares of common stock from Magnus as of December 31, 2022.

As of December 31, 2022, we had $157.4 million remaining under the current share repurchase authorization, including $100.0 million related to the Amended and Restated 2022 Agreement. On February 9, 2023, our Board of Directors authorized us to repurchase up to an additional $250.0 million of our issued and outstanding common stock, bringing the total authorization up to $700.0 million since the share repurchase program was established in 2018.

Between January 1, 2023 and January 13, 2023, we purchased an additional 167,689 shares of our common stock on the open market for an aggregate of $7.4 million, bringing the cumulative total open market purchases since the inception of the 2022 Agreement to $100.0 million. As a result, on January 23, 2023, we purchased 2,168,528 shares of our common stock from Magnus for an aggregate of $100.0 million, in satisfaction of our obligation under the Amended and Restated 2022 Agreement.

See “Notes to Consolidated Financial Statements-Note 16-Common Stock,” Item 8 of Part II, included elsewhere in this report, for a description of our share repurchase program and Magnus share repurchase agreements.

Other Acquisitions

On April 1, 2022, we acquired the outstanding equity interest in PG Golf LLC for $5.0 million, including cash consideration of $3.6 million and contingent consideration of $1.4 million. On November 4, 2022, we completed the acquisition of an 80% interest in certain assets and liabilities of TPI EDU, LLC, Onbase University, LP and Racquetfit, LP for cash consideration of $18.4 million. In addition, on December 31, 2022, we separately acquired trademarks related to our putter business for $65.0 million.

In January 2023, we acquired certain trademarks, domains and products of an industry leader specializing in premium performance golf travel products for $25.0 million.

See “Notes to Consolidated Financial Statements-Note 2-Summary of Significant Accounting Policies, Note 8-Business Combinations and Note 9-Goodwill and Intangible Assets,” Item 8 of Part II, included elsewhere in this report, for additional information regarding our acquisitions during the year ended December 31, 2022.

Capital Expenditures

We made $61.4 million of capital expenditures during the year ended December 31, 2022. Capital expenditures in 2023 are expected to be approximately $75.0 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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Cash Flows

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

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[[/GREPCENT_TABLE]]

Cash Flows from Operating Activities

The change in cash flows from operating activities for the year ended December 31, 2022 compared to the year ended December 31, 2021 was driven by changes in working capital. 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. During the year ended December 31, 2022, changes in working capital were primarily related to changes in inventory driven by many factors including an increase in demand for our product, inventory build up in anticipation of 2023 product launches, and improved inventory position and supply chain as compared with 2021.

Cash Flows from Investing Activities

The increase in cash used in investing activities for the year ended December 31, 2022 as compared to the year ended December 31, 2021 was primarily driven by cash paid for business and trademark acquisitions during the year ended December 31, 2022, as well as increased capital expenditures for the same period.

Cash Flows from Financing Activities

The decrease in cash used in financing activities for the year ended December 31, 2022 as compared to the year ended December 31, 2021 was primarily due to an increase in borrowings, offset in part by an increase in purchases of our common stock.

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

A review of our cash flow activities for the year ended December 31, 2021 as compared to the year ended December 31, 2020 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, 2021, which was filed with the SEC on March 1, 2022, and is incorporated herein by reference.

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 11-Debt and Financing Arrangements", "Note 4-Leases", "Note 22-Commitments and Contingencies" and "Note 14-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, 2022, other than as discussed above, 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.

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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.

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, 2022, 2021 and 2020.

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 5.16% and 5.10%, respectively, for the year ended December 31, 2022. 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 $30.0 million and $1.2 million, respectively, for the year ended December 31, 2022.

    Our net periodic benefit cost related to our pension and other postretirement benefit plans is calculated using a weighted average discount rate of 2.93% and 2.71%, respectively, for the year ended December 31, 2022. Decreasing the discount rate by 100 basis points would decrease net periodic pension cost by approximately $0.3 million and increase other postretirement benefit cost by approximately $0.2 million for the year ended December 31, 2022. Additionally, our net periodic benefit cost related to our pension plans is calculated using an expected return on plan assets of 3.44% for the year ended December 31, 2022. Decreasing the expected return on plan assets by 100 basis points would increase net periodic pension benefit cost by approximately $2.1 million for the year ended December 31, 2022.

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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, 2022, 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, 2022 and 2021, the cumulative valuation allowance against deferred tax assets was $34.1 million and $30.0 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 Standards

We have reviewed all recently issued accounting 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 accounting standards will not have a significant impact on our consolidated financial statements or do not otherwise apply to our operations.

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