Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Note 14. Income Taxes

The Company’s income before income tax provision was subject to taxes in the following jurisdictions for the following periods (in thousands):

	Years Ended December 31,
	2021		2020		2019
United States	$	295,322	$	68,916	$	55,352
Foreign	55,320		(196,394)		40,417
	$	350,642	$	(127,478)	$	95,769

The expense (benefit) for income taxes is comprised of (in thousands):

	Years Ended December 31,
	2021		2020		2019
Current tax provision:
Federal	$	2,916	$	1,665	$	1,022
State	2,267		1,467		1,403
Foreign	14,643		5,385		9,933
	19,826		8,517		12,358
Deferred tax expense (benefit):
Federal	11,032		8,579		10,185
State	7,146		5,166		335
Foreign	(9,350)		(22,806)		(6,338)
	8,828		(9,061)		4,182
Income tax provision (benefit)	$	28,654	$	(544)	$	16,540

On March 8, 2021, the Company acquired Topgolf through a non-taxable stock acquisition in a share exchange. The purchase price of Topgolf at acquisition was $3,014,174,000. The Company recorded a deferred tax liability of $250,000,000 related to the acquired intangibles, offset by $118,000,000 of other acquired deferred tax assets, after consideration of acquired valuation allowances.

On January 4, 2019, the Company acquired Jack Wolfskin for $521,201,000 (including cash acquired of $58,096,000) in a taxable stock acquisition. The Company recorded a deferred tax liability of $88,462,000 related to the intangibles upon acquisition in addition to $11,384,000 deferred tax assets acquired (see Note 6). In the second quarter of 2020, due to a decline in projected revenues caused by the COVID-19 pandemic, the Company recognized an impairment charge of $174,269,000 to write down goodwill and trade name associated with Jack Wolfskin (see Note 9). The impaired goodwill was comprised of book basis with no corresponding deferred tax liability. The trade name impairment resulted in a tax benefit recorded for the reduction of $7,900,000 of deferred tax liability previously recorded as part of acquisition accounting.

Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2021 and 2020 are as follows (in thousands):

	December 31,
	2021		2020
Deferred tax assets:
Operating loss carryforwards	$	149,895	$	26,919
Tax credit carryforwards	64,250		49,525
ASC Topic 842 lease liability	396,378		52,785
Deemed landlord financing	115,060		—
Other	72,768		53,163
Total deferred tax assets	798,351		182,392
Valuation allowance for deferred tax assets	(120,499)		(21,032)
Deferred tax assets, net of valuation allowance	677,852		161,360
Deferred tax liabilities:
Basis difference related to fixed assets	(105,532)		—
Basis difference related to intangible assets with an indefinite life	(331,130)		(100,062)
ASC Topic 842 ROU assets	(375,697)		(49,910)
Other	(7,920)		(10,281)
Total deferred tax liabilities	(820,279)		(160,253)
Net deferred tax assets (liabilities) are shown on the accompanying consolidated balance sheets as follows:
Non-current deferred tax assets	21,164		59,735
Non-current deferred tax liabilities	(163,591)		(58,628)
Net deferred tax (liabilities)/ assets	$	(142,427)	$	1,107

The net change in net deferred taxes in 2021 of $143,534,000 is primarily comprised of net deferred tax liabilities acquired in the Topgolf transaction.

Deferred tax assets and liabilities result from temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are anticipated to be in effect at the time the differences are expected to reverse. The realization of the deferred tax assets, including loss and credit carry forwards, is subject to the Company generating sufficient taxable income during the periods in which the temporary differences become realizable. In accordance with the applicable accounting rules, the Company maintains a valuation allowance for a deferred tax asset when it is deemed to be more likely than not that some or all of the deferred tax assets will not be realized. In evaluating whether a valuation allowance is required under such rules, the Company considers all available positive and negative evidence, including prior operating results, the nature and reason for any losses, its forecast of future taxable income, and the dates on which any deferred tax assets are expected to expire. These assumptions require a significant amount of judgment, including estimates of future taxable income. These estimates are based on the Company’s best judgment at the time made based on current and projected circumstances and conditions.

The Company has evaluated all available positive and negative evidence and as a result of the Topgolf merger has determined that a portion of its U.S. deferred tax assets were not more likely than not to be realized. The valuation allowance on the Company's U.S. deferred tax assets as of December 31, 2021 and 2020 relate primarily to the definite-lived federal and state net deferred tax assets and tax credits the Company estimates it may not be able to utilize in future periods. In connection with the purchase accounting related to the merger with Topgolf, the Company also recorded a valuation allowance in goodwill of $67,000,000 against certain Topgolf deferred tax assets acquired in the merger. With respect to Jack Wolfskin and previously existing non-U.S. entities, there continues to be sufficient positive evidence to conclude that realization of its deferred tax assets is more likely than not under applicable accounting rules, and therefore no significant valuation allowances have been established.

As of December 31, 2021, the Company had federal and state income tax credit carryforwards of $56,134,000 and $25,786,000, respectively, which will expire if unused at various dates beginning on December 31, 2027. Such credit carryforwards expire as follows (in thousands):

U.S. foreign tax credit	$	3,165	2027 - 2031
U.S. research tax credit	26,568		2031 - 2041
U.S. business tax credits	26,401		2031 - 2041
State investment tax credits	2,028		Do not expire
State research tax credits - definite lived	1,563		2030 - 2034
State research tax credits - indefinite lived	$	22,195	Do not expire

The Company has recorded a deferred tax asset, before consideration of reflecting the benefit of NOL and interest expense carryforwards. The NOLs and interest expense carryforwards expire as follows (in thousands):

U.S. loss carryforwards - definite lived	$	181,549	2028 - 2037
U.S. interest expense carryforwards - indefinite lived	12,910		Do not expire
U.S. loss carryforwards - indefinite lived	213,743		Do not expire
State loss carryforwards	$	269,930	2022 - 2041

The Company’s ability to utilize its NOLs and credits to offset future taxable income and income tax liabilities may be deferred or limited significantly if the Company were to experience an “ownership change” as such term is used in Sections 382 and 383 of the Code. In general, an ownership change will occur if there is a cumulative change in ownership of the Company’s stock by “5-percent shareholders” (as defined in the Code) that exceeds 50 percentage points over a rolling three-year period. The Company determined that an ownership change with respect to each of the Company and Topgolf likely occurred on the date of the Topgolf merger. As such, each of the Company and Topgolf is likely subject under Sections 382 and 383 of the Code to a limitation on the utilization of its NOLs and credits. However, due to the high threshold of this limitation, it is not expected to have any material impact on the Company. In addition, Topgolf’s NOLs are presently expected to be subject to “separate return limitation year” limitations. Separate return limitation year NOLs can only be used in years that both the consolidated group and the entity that created such NOLs have taxable income, which may limit our ability to utilize Topgolf’s NOLs in the future. Therefore, the Company’s ability to utilize Topgolf tax attributes to offset future taxable income may be deferred or limited significantly.

A reconciliation of the effective tax rate on income or loss and the statutory tax rate is as follows:

	Years Ended December 31,
	2021		2020		2019
Statutory U.S. tax rate	21.0	%	21.0	%	21.0	%
State income taxes, net of U.S. tax benefit	2.1	%	(4.1)	%	1.6	%
Foreign income taxed at other than U.S. statutory rate	(3.3)	%	7.0	%	(5.0)	%
Federal tax credits	(2)	%	2.8	%	(3.5)	%
Goodwill impairment	—	%	(24.5)	%	—	%
Revaluation of Callaway stock attributable to Topgolf merger	(15.1)	%	—	%	—	%
Other non-deductible expenses	0.7	%	(1.7)	%	1.2	%
Non-deductible compensation	1.4	%	(0.7)	%	1.5	%
Stock compensation excess tax benefits	(1.6)	%	1.4	%	(1.5)	%
Foreign derived intangible income deduction	(2.1)	%	1.1	%	(3.2)	%
Impact of uncertain tax positions	(2.2)	%	(1.6)	%	3.7	%
Change in deferred tax valuation allowance	7.8	%	(0.7)	%	0.2	%
Other	1.5	%	0.4	%	1.3	%
Effective tax rate	8.2	%	0.4	%	17.3	%

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

	2021		2020		2019
Balance at January 1	$	28,302	$	25,993	$	11,832
Additions based on tax positions related to the current year	1,727		3,119		3,224
Additions for tax positions of prior years	526		474		593
Reductions for tax positions of prior years	(936)		(186)		(174)
Settlement of tax audits	(2,665)		—		(7)
Current year acquisitions	6,740		—		11,006
Reductions due to lapsed statute of limitations	(7,046)		(1,098)		(481)
Balance at December 31	$	26,648	$	28,302	$	25,993

As of December 31, 2021, the gross liability for income taxes associated with uncertain tax benefits was $26,648,000. This liability could be reduced by $5,273,000 of offsetting tax benefits associated with the correlative effects of potential transfer pricing adjustments, which was recorded as a long-term income tax receivable, as well as $10,359,000 of deferred taxes. The net amount of $11,016,000, if recognized, would affect the Company’s financial statements and favorably affect the Company’s effective income tax rate.

The Company does not expect changes to the unrecognized tax benefits in the next 12 months to have a material impact on its results of operations or its financial position.

The Company recognizes interest and/or penalties related to income tax matters in income tax expense. The Company recognized a tax benefit of $555,000 and $437,000, and tax expense of $9,000, for the years ended December 31, 2021, 2020, and 2019, respectively. As of December 31, 2021 and 2020, the gross amount of accrued interest and penalties included in income taxes payable in the accompanying consolidated balance sheets was $3,206,000 and $1,232,000, respectively. In connection with the purchase accounting related to the merger with Topgolf, the Company recorded penalties of $2,529,000 which is included in the gross amount of accrued interest and penalties as of December 31, 2021.

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. The Company is generally no longer subject to income tax examinations by tax authorities in its major jurisdictions as follows:

Major Tax Jurisdiction	Years No Longer Subject to Audit
U.S. Federal	2010 and prior
California (U.S.)	2008 and prior
Germany	2013 and prior
Japan	2015 and prior
South Korea	2015 and prior
United Kingdom	2017 and prior

As of December 31, 2021, the Company had $180,218,000 of undistributed foreign earnings and profits. Pursuant to the Tax Act, the Company’s undistributed foreign earnings and profits were deemed repatriated as of December 31, 2017 and subsequent foreign profits are not expected to be subject to U.S. income tax upon repatriation. The Company has not provided deferred tax liabilities for foreign withholding taxes and certain state income taxes on the undistributed earnings and profits from certain non-U.S. subsidiaries that will be permanently reinvested outside the United States, and expects the net impact of any future repatriations of permanently invested earnings on the Company’s overall tax liability to be insignificant. For jurisdictions in which the Company is not permanently reinvested, the Company has estimated and accrued $2,300,000 for the net impact on the Company’s overall tax liability.