Callaway Golf Co (CALY) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Consolidated Financial Statements, the related notes and the section “Important Notice to Investors Regarding Forward-Looking Statements” that appear herein. This section of this Annual Report on Form 10-K generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022. Discussions related to 2021 items and year-to-year comparisons between 2022 and 2021 that are not included in this Annual Report on Form 10-K can be found in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on March 1, 2023.
Critical Accounting Estimates
Our discussion and analysis of our results of operations, financial condition and liquidity are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, shareholders’ equity, revenues and expenses, as well as related disclosures of contingent assets and liabilities. We base our estimates and assumptions on historical experience and other assumptions that we believe are reasonable under the circumstances at that time. Actual results may differ from these estimates under different assumptions or circumstances. We review our estimates on an ongoing basis to ensure that changes in our business and new information is appropriately reflected as it becomes available.
We believe the critical accounting estimates discussed below affect our more significant estimates and assumptions used in the preparation of our consolidated financial statements. For a complete discussion of all of our significant accounting policies, see Note 2. “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements in this Form 10-K.
Sales Programs
The amount of revenue we recognize is based on the amount of consideration we ultimately expect to receive from customers, which involves certain estimates and assumptions, including estimates for sales returns as well as estimates for our short-term sales programs, sales promotions and price concessions. These estimates are based on amounts earned or expected to be claimed by customers on the related sales.
We record an estimate for anticipated returns at the time the sale is recognized. This estimate is based on historical returns data as well as current economic trends, changes in customer demands and the sell-through of products. If actual sales returns are significantly different than the recorded estimated amount, we may be exposed to material losses or gains. Assuming there had been a 10% increase over the recorded estimated sales returns reserve for the year ended December 31, 2023, pre-tax income would have decreased by approximately $5.6 million, net of the cost recovery of inventory.
Sell-through promotions such as price reductions and price concessions are short-term sales programs that are generally offered throughout the product’s life cycle, which is approximately two years, and are generally offered at the end of the product’s life cycle. We calculate an estimated rate related to these programs which is based on a combination of historical and forecasted data. We record a reduction to net revenues using this rate at the time of the sale and monitor this rate against actual results and forecasted estimates. Adjustments to the rate are made as necessary in order to reflect the amount of consideration we expect to receive from our customers. If the actual amount of variable consideration is significantly different than our accrued estimates, we may be exposed to adjustments to revenue that could be material. Assuming there had been a 10% increase in the rate used to record sales program incentives, pre-tax income for the year ended December 31, 2023 would have decreased by approximately $2.2 million.
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Excess and Obsolescence Reserves
Inventories are recorded at the lower of cost or net realizable value, which includes a reserve for excess, obsolete and/or unmarketable inventory. We estimate this reserve based upon current inventory levels, sales trends and historical experience as well as our estimates of market conditions and forecasts of future product demand, all of which are subject to change. In addition, we consider inventory aging, forecasted consumer demand and pricing, regulatory (USGA and R&A) rule changes, the promotional environment and technological obsolescence, all of which require a significant amount of assumptions and judgment. If these estimates are inaccurate or change, we may be exposed to adjustments to our inventory reserve which could materially impact our operating results. Assuming there had been a 10% increase in the inventory reserve for the year ended December 31, 2023, pre-tax income would have decreased by approximately $2.3 million.
Business Combinations
We apply the guidance within Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations, when accounting for our acquisitions to determine whether a transaction is the acquisition of assets, or the acquisition of a business on the date of the acquisition. Asset acquisitions are accounted for by allocating the cost of the acquisition to the individual assets and liabilities assumed on a relative fair value basis; whereas the acquisition of a business requires us to recognize separately from goodwill the assets acquired and the liabilities assumed at the acquisition date fair values. Additionally, the acquisition of a business requires us to make significant estimates and judgements when assigning fair value to any assets and liabilities assumed. We may use, amongst other things, certain estimates related to expected future revenues, growth rates, cash flows, discount rates and uncertain tax positions and valuation allowances to assign a value to certain acquired assets. If we receive new information within the twelve month allowable measurement period about facts and circumstances that existed as of the acquisition date that, if known, would have affected the amounts recognized as of that date, we may adjust the purchase price allocation in the reporting period in which the amounts are determined. Any subsequent adjustments recorded after the conclusion of the allowable twelve month measurement period or final determination of the values of assets acquired or liabilities assumed are recorded to our consolidated statements of operations.
Our estimates of fair value are based upon assumptions we believe to be reasonable at that time, but which are inherently uncertain and unpredictable. As a result, actual results may differ from estimates.
Impairment of Goodwill and Intangible Assets
In accordance with FASB ASC 350, Intangibles—Goodwill and Other, we evaluate the recoverability of our goodwill and indefinite-lived intangible assets at least annually or more frequently whenever indicators are present that the carrying amounts of these assets may not be fully recoverable. To determine fair value, we use discounted cash flow estimates, quoted market prices, royalty rates when available and independent appraisals as appropriate. These estimates are subjective in nature and involve significant uncertainties and judgements. We use our best judgment based on current facts and circumstances related to our business when making these estimates, however, if actual results are not consistent with our estimates and assumptions used in calculating future cash flows and asset fair values, we may be exposed to impairment losses that could be material. An impairment loss is measured as the excess of the carrying amount of the asset over its estimated fair value. An impairment loss is recorded as a reduction to the carrying value of the asset and a charge to earnings in the period in which the impairment loss occurred.
We perform our goodwill impairment assessment at the reporting unit level using a combination of an income approach and a market approach. The income approach valuation method requires us to make projections of revenue, gross margin, operating expenses, and working capital over a multi-year period, and also includes weighted average cost of capital estimates, which reflect the relative risk of an investment. The market approach valuation method determines fair value by utilizing earnings multiples of comparable public companies or interests, which reflect the market in which each relative reporting unit operates, as well as recent comparable market transactions.
As a result of our goodwill impairment assessment performed as of December 31, 2023, no goodwill impairments were necessary during 2023, and there was a significant cushion between the fair value of our goodwill and its related carrying value. We will continuously monitor each of our reporting units for any risk of future impairments which may occur if our current expectations of prospective results of operations, which may be influenced by market conditions and other factors, change.
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For our indefinite-lived intangible assets, which primarily consist of our trade names, we estimate fair value based on an income approach using the relief-from-royalty method which assumes that, in lieu of ownership, a third-party would be willing to pay a royalty in order to derive a benefit from the trade name. This approach includes reviewing current licensing agreements, market benchmarking and performing branded product profitability assessments, among other factors, to assign an estimated royalty rate. Once a royalty rate is assigned, a discount rate is applied to the estimated future cash flows of the asset in order to determine the fair value of the trade names. As a result of our intangible asset impairment assessment performed as of December 31, 2023, we determined that the fair value of our intangible assets exceeded their relative carrying values, therefore, no intangible asset impairments were necessary during the current year.
Income Taxes
Our income tax provision/benefit and related income tax assets and liabilities are based on a combination of actual and expected future income, U.S. federal and foreign statutory income tax rates, and tax regulations and planning opportunities in the jurisdictions in which we operate. Significant judgement is required when interpreting the applicable tax laws and regulations in such jurisdictions, evaluating our uncertain tax positions, and assessing the likelihood of realizing tax benefits. We accrue an amount for our estimate of additional tax liability, including interest and penalties in income tax provision, for any uncertain tax positions taken or expected to be taken in an income tax return. We review and update the accrual for uncertain tax positions as more definitive information becomes available. Actual results could differ from those judgements, and changes in judgements could materially affect our consolidated financial statements.
Certain income and expense items are accounted for differently for financial reporting and income tax purposes where tax regulations may require certain items to be included in our tax return at different times than when these items may be reflected in our financial statements. As a result, the income tax provision or benefit reflected in our consolidated statements of operations may differ from our tax returns filed with the applicable taxing authorities. These differences may be permanent or temporary, depending on their nature and the applicable tax regulations related to them, and as such, may create deferred income tax assets and liabilities, which are recognized on our consolidated balance sheet. Deferred income tax assets generally represent items that can be used as a tax deduction or credit in future tax returns for which we have already recorded a tax benefit in our consolidated statements of operations. We may record a valuation allowance to reduce our deferred income tax assets if, based on all available evidence, we believe that some portion of the tax benefit is not expected to be realized.
For further information, see Note 12. “Income Taxes” in the Notes to Consolidated Financial Statements in this Form 10-K.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is contained in Note 2. “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements in this Form 10-K, which is incorporated herein by this reference.
Discussion of Non-GAAP Measures
In addition to the financial results contained in this report, which have been prepared and presented in accordance with GAAP, we have also included supplemental information concerning our financial results on a non-GAAP basis. This non-GAAP information includes the following:
•A constant currency measure on net revenues in order to demonstrate the impact of foreign currency fluctuations on our results. This information represents an estimate for comparative purposes and is calculated by taking current period local currency results and translating them into U.S. dollars based on the foreign currency exchange rates for the applicable comparable prior period.
•Net income and diluted earnings per share excluding certain non-cash and non-recurring charges, as further detailed below.
•Same venue sales, which is defined as sales for the comparable Topgolf venue base, which includes Company-operated venues with at least 24 full fiscal months of operations as of the year of comparison.
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We have included information in this report to reconcile non-GAAP information for the periods presented to the most directly comparable GAAP information. We use such non-GAAP information for financial and operational decision-making purposes and as a means to evaluate the underlying performance of our business and in forecasting our business. Non-GAAP information in this report should not be considered in isolation or as a substitute for any measure derived in accordance with GAAP, and may also be inconsistent with the manner in which similar measures are derived or used by other companies. We believe that the presentation of such non-GAAP information, when considered in conjunction with the most directly comparable GAAP information, provides additional useful information for investors in their assessment of the underlying performance of our business.
Current Economic Conditions
Macroeconomic Factors
Our products and services are considered to be non-essential items and are therefore discretionary purchases for consumers. In addition, our Topgolf venues business also depends on corporate discretionary spending relative to its leisure and entertainment-based offerings. As a result, the demand for our products and services is highly sensitive to macroeconomic pressures. Such pressures could result in a decline in general consumer and corporate discretionary spending and as such, demand for our products and services may decline. While we generally try to mitigate the impact of such macroeconomic factors by closely monitoring changes in consumer retail spending behavior and through the implementation of various strategic initiatives, the continued fluctuation of these trends may have an adverse impact on our operating results depending on the severity and length of the changes.
Foreign Currency
A significant portion of our business is conducted outside of the United States in currencies other than the U.S. dollar. Therefore, we enter into foreign currency forward contracts to mitigate the effects that changes in foreign currency rates may have on our financial results. While these foreign currency forward contracts can mitigate the effects of changes in foreign currency rates in the short-term, they do not eliminate those effects, which can be significant, and they do not mitigate their effects over the long-term. These effects include (i) the translation of results denominated in foreign currency into U.S. dollars for reporting purposes, (ii) the mark-to-market adjustments of certain intercompany balance sheet accounts denominated in foreign currencies and (iii) the mark-to-market adjustments of our foreign currency forward contracts. In general, our overall financial results are affected positively by a weaker U.S. dollar and are affected negatively by a stronger U.S. dollar as compared to the foreign currencies in which we conduct business. Fluctuations in foreign currencies had an unfavorable impact on international net revenues of $25.7 million for the year ended December 31, 2023, relative to the same period in the prior year, on a constant currency basis.
Supply Chain
During most of 2022, we experienced longer than normal lead times on inventory shipments due to global supply chain challenges. Due to these challenges, we changed the timing and method of our inventory purchases in order to meet the heightened demand for our golf equipment and apparel products, as well as manage capacity at our suppliers. After making these changes, inventory shipment timing and supply chain channels improved globally, leading to the receipt of inventory orders for our planned 2023 product launches earlier than anticipated, which resulted in increased inventory levels late in 2022 and early in 2023. Since December 31, 2022, our total inventory has decreased by $164.8 million.
Inflation
The recent increase in inflation partially contributed to the increase in the cost of our products as well as operating costs. While we were generally able to offset these inflationary pressures by increasing the price of our products and services, the length and severity of these conditions are unpredictable, and should conditions persist and/or worsen, such inflationary pressures may have an adverse effect on our operating expenses. Further, we may not be able to offset these increased costs through price increases. As a result, our cash flows and results of operations could be adversely affected.
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Segment and Related Information
Our products, services and brands are reported under three operating segments: Topgolf, which includes the operations of our Topgolf business; Golf Equipment, which includes the operations of our golf clubs and golf balls business; and Active Lifestyle, which includes the operations of our soft goods business marketed under the Callaway, TravisMathew, Jack Wolfskin and OGIO brand names. For further detail related to our operating segments, products and seasonality, see “Part I, Item 1. Business – Overview” in this Form 10-K.
Results of Operations
Years Ended December 31, 2023 and 2022
Net Revenues
Net revenues by operating segment for the year ended December 31, 2023 as compared to the year ended December 31, 2022 were as follows (in millions, except percentages):
| Year Ended December 31, | Increase/(Decrease) | Non – GAAP Constant Currency Growth | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | Amount | Percent | Percent | ||||||||||||
| Net revenues: | ||||||||||||||||
| Topgolf | $ | 1,761.0 | $ | 1,549.0 | $ | 212.0 | 13.7 | % | 13.7% | |||||||
| Golf Equipment | 1,387.5 | 1,406.6 | (19.1) | (1.4) | % | 0.1% | ||||||||||
| Active Lifestyle | 1,136.3 | 1,040.1 | 96.2 | 9.2 | % | 9.7% | ||||||||||
| Total net revenues | $ | 4,284.8 | $ | 3,995.7 | $ | 289.1 | 7.2 | % | 7.9% |
The $289.1 million (7.2%) increase in total net revenues was primarily related to the addition of new venues in our Topgolf operating segment and marketplace expansion in our Active Lifestyle operating segment, primarily related to our TravisMathew and Jack Wolfskin businesses. These increases were partially offset by a decrease in our Golf Equipment operating segment, which was primarily due to higher sales in 2022 related to a post-pandemic inventory fill-in at retail which did not recur in 2023 combined with the impact from unfavorable foreign currency exchange rates. The decreases in our Golf Equipment operating segment were partially offset by an increase in golf ball sales primarily related to the 2023 launch of Supersoft and ERC Soft golf ball product lines.
Net revenues by major geographic region for the year ended December 31, 2023 as compared to the year ended December 31, 2022 were as follows (in millions, except percentages):
| Year Ended December 31, | Increase/(Decrease) | Non-GAAP Constant Currency Growth | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | Amount | Percent | Percent | ||||||||||||
| Net revenues: | ||||||||||||||||
| United States | $ | 3,081.4 | $ | 2,798.0 | $ | 283.4 | 10.1 | % | 10.1% | |||||||
| Europe | 540.6 | 537.4 | 3.2 | 0.6 | % | (1.0)% | ||||||||||
| Asia | 531.9 | 545.4 | (13.5) | (2.5) | % | 2.7% | ||||||||||
| Rest of World | 130.9 | 114.9 | 16.0 | 13.9 | % | 19.0% | ||||||||||
| Total net revenues | $ | 4,284.8 | $ | 3,995.7 | $ | 289.1 | 7.2 | % | 7.9% |
Net revenues from our Topgolf operations are primarily concentrated in the United States and Europe, with the United States being our principal market. We sell our Golf Equipment products and Callaway Golf and OGIO Active Lifestyle products in the United States and internationally, with our principal international regions being Europe and Asia. Active Lifestyle revenues from our TravisMathew and Jack Wolfskin operations are largely concentrated in the United States and Europe, respectively.
United States
During the year ended December 31, 2023, net revenues in the United States increased $283.4 million (10.1%) compared to the year ended December 31, 2022. The increase was primarily due to the growth and continued expansion of our Topgolf and TravisMathew businesses.
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Europe
During the year ended December 31, 2023, net revenues in Europe increased $3.2 million (0.6%) compared to the year ended December 31, 2022. The increase was primarily driven by favorable foreign currency impacts in addition to growth in our Jack Wolfskin business and increased sales at our international Topgolf venues, partially offset by a decrease in golf club sales in our Golf Equipment business.
Asia
During the year ended December 31, 2023, net revenues in Asia decreased $13.5 million (2.5%) compared to the year ended December 31, 2022. The decrease was primarily due to the unfavorable foreign currency exchange impacts in Japan combined with softer demand in the apparel market in various parts of Korea. These decreases were partially offset by increases related to market expansion and direct to consumer growth in the Jack Wolfskin business.
Rest of World
During the year ended December 31, 2023, net revenues in Rest of World increased $16.0 million (13.9%) compared to the year ended December 31, 2022. The increase was primarily due to strong performance in Canada for our Golf Equipment and Active Lifestyle products, partially offset by the unfavorable foreign currency impacts.
Costs and Expenses (in millions, except percentages)
| Year Ended December 31, | Increase/(Decrease) | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | Amount | Percent | |||||||||||
| Costs and expenses: | ||||||||||||||
| Cost of products | $ | 1,443.9 | $ | 1,400.6 | $ | 43.3 | 3.1 | % | ||||||
| Cost of services, excluding depreciation and amortization | 186.8 | 184.0 | 2.8 | 1.5 | % | |||||||||
| Other venue expense | 1,252.3 | 1,076.9 | 175.4 | 16.3 | % | |||||||||
| Selling, general and administrative expense | 1,036.6 | 970.6 | 66.0 | 6.8 | % | |||||||||
| Research and development expense | 101.6 | 76.4 | 25.2 | 33.0 | % | |||||||||
| Venue pre-opening costs | 25.9 | 30.4 | (4.5) | (14.8) | % | |||||||||
| Total costs and expenses | $ | 4,047.1 | $ | 3,738.9 | $ | 308.2 | 8.2 | % |
Cost of Products
Our cost of products is variable in nature and fluctuates relative to sales volumes. Cost of products includes raw materials and component costs, direct labor and manufacturing overhead, inbound freight, duties and shipping charges, and retail merchandise costs for products sold in retail shops within Topgolf venue facilities. During the year ended December 31, 2023, cost of products increased $43.3 million (3.1%) as compared to the year ended December 31, 2022. The increases were primarily due to increased sales in our Active Lifestyle operating segment, partially offset by a decrease in sales in our Golf Equipment operating segment.
Cost of Services, Excluding Depreciation and Amortization
Our cost of services primarily consists of costs related to food and beverage sold at Topgolf venues and transaction fees related to in-app purchases within our WGT digital golf game. In addition, cost of services includes costs associated with Topgolf’s Toptracer license agreements that are primarily classified as sales-type leases. Food and beverage costs are variable in nature, fluctuate relative to sales volume, and are impacted by product mix and commodity pricing. Cost of services excludes employee costs as well as depreciation and amortization. The $2.8 million (1.5%) increase in cost of services for the year ended December 31, 2023 as compared to the year ended December 31, 2022 was primarily due to the opening of new Company-operated Topgolf venues.
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Other Venue Expense
Other venue expenses consist of employee costs that directly support venue operations, rent and occupancy costs, property taxes, depreciation associated with assets at the venues, supplies, credit card fees and marketing expenses. Other venue expenses include both fixed and variable components and therefore do not directly correlate with revenue. During the year ended December 31, 2023, other venue expense increased $175.4 million (16.3%) as compared to the year ended December 31, 2022. The increase was primarily due to the addition of new Company-operated Topgolf venues, in addition to higher wages and planned increases in costs related to new marketing campaigns.
Selling, General and Administrative Expense
Selling, general and administrative (“SG&A”) expenses primarily consist of non-venue employee costs, advertising and promotional expense, legal and professional fees, tour expenses, travel expenses, building and rent expenses, depreciation charges (excluding those related to manufacturing, distribution, and venue operations), amortization, and other miscellaneous expenses.
During the year ended December 31, 2023, SG&A expenses increased by $66.0 million (6.8%) as compared to the year ended December 31, 2022. The increase was primarily to support the continued growth and expansion of the overall business, and primarily included increases of $12.8 million in computer licenses and software costs, $11.4 million in restructuring and reorganization costs, $11.7 million in depreciation and amortization due to higher capital expenditures, $9.4 million in lease-related building expenses, $7.1 million in planned costs related to new marketing campaigns, and $5.4 million in employee costs due to an overall increase in wages and headcount, in addition to marginal increases in travel and entertainment, professional fees, various non-recurring costs, and other miscellaneous expenses.
Research and Development Expense
Research and development expenses are comprised of costs to design, develop, test or improve our products and technology, and primarily include employee costs of personnel engaged in research and development activities, research costs and depreciation expense. During the year ended December 31, 2023, research and development expense increased $25.2 million (33.0%) as compared to the year ended December 31, 2022. The increase was primarily due to an $11.7 million asset impairment charge related to the abandonment of the Shankstars media game, in addition to higher employee costs due to increased headcount, higher professional fees and additional non-recurring period costs related to the abandonment of Shankstars.
Venue Pre-Opening Costs
Venue pre-opening costs consist of costs associated with activities prior to the opening of new Company-operated Topgolf venues, as well as other costs that are not considered in the evaluation of ongoing venue performance. These are variable in nature and fluctuate based on the timing of an anticipated venue opening date, as well as the size and location of a particular Company-operated venue. During the year ended December 31, 2023, venue pre-opening costs decreased $4.5 million (14.8%) as compared to the year ended December 31, 2022, primarily due to the timing of venue openings combined with cost savings from operational efficiencies.
Other Income and Expense (in millions, except percentages)
| Year Ended December 31, | Increase/(Decrease) | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | Amount | Percent | |||||||||||
| Other income and expenses: | ||||||||||||||
| Interest expense, net | $ | (210.2) | $ | (142.8) | $ | (67.4) | 47.2 | % | ||||||
| Other income, net | 7.3 | 27.9 | (20.6) | (73.8) | % | |||||||||
| Total other expense, net | $ | (202.9) | $ | (114.9) | $ | (88.0) | 76.6 | % |
Interest expense, net increased $67.4 million (47.2%) during the year ended December 31, 2023 as compared to the year ended December 31, 2022, primarily due to higher outstanding balances and increased interest rates on our term loans and senior secured asset-based revolving credit facilities, as well as an increase in deemed landlord financing (“DLF”) obligations and finance lease obligations for Topgolf.
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Other income, net decreased by $20.6 million (73.8%) during the year ended December 31, 2023, as compared to the year ended December 31, 2022, primarily due to the recognition of a $10.5 million non-cash loss to write-off unamortized deferred debt issuance and original discount costs in connection with our 2023 debt modification, combined with net decreases related to foreign currency transactions and hedging activity.
Income Taxes
Our income tax benefit increased $44.2 million to $60.2 million during the year ended December 31, 2023 as compared to $16.0 million in 2022. As a percentage of pre-tax income, our effective tax rate for the year ended December 31, 2023 decreased to (173.0)% compared to (11.3)% in 2022. Our effective tax rate for the year ended December 31, 2023 and 2022 was impacted by the reversal of a significant portion of the valuation allowances on our deferred tax assets and other nonrecurring items. Excluding the valuation allowance release and other non-recurring items, our effective tax rate would have been 14.4% and 15.5% for the years ended December 31, 2023 and 2022, respectively. For further discussion on our income taxes, see Note 12. “Income Taxes” in the Notes to Consolidated Financial Statements in this Form 10-K.
Net Income, Diluted Earnings Per Share and Reconciliation of Non-GAAP Measures
The following table presents a reconciliation of our GAAP results for the years ended December 31, 2023 and 2022 to our non-GAAP results for the same periods (in millions, except per share information):
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net Income | Diluted earnings per share(4) | Net Income | Diluted earnings per share(4) | ||||||||||
| GAAP | $ | 95.0 | $ | 0.50 | $ | 157.9 | $ | 0.82 | |||||
| Less: Non-Cash Acquisition Amortization and Depreciation(1) | (19.4) | (0.10) | (21.8) | (0.11) | |||||||||
| Less: Non-Recurring Items(2) | (36.9) | (0.18) | (12.9) | (0.06) | |||||||||
| Less: Tax Valuation Allowance(3) | 58.3 | 0.29 | 34.4 | 0.17 | |||||||||
| Non-GAAP | $ | 93.0 | $ | 0.49 | $ | 158.2 | $ | 0.82 | |||||
| Diluted Weighted-Average Shares Outstanding | 201.1 | 201.3 | |||||||||||
| (1) Includes the amortization and depreciation of acquired intangible assets and purchase accounting adjustments. | |||||||||||||
| (2) 2023 amounts primarily include $12.7 million in total charges related to the impairment and abandonment of the Shankstars media game in the Topgolf segment, $12.3 million of total reorganization costs in the Topgolf and Active Lifestyle segments, $13.7 million in total charges related to our 2023 debt modification, $4.2 million in IT integration and implementation costs primarily related to the Topgolf merger, and $2.4 million in costs related to a cybersecurity incident. 2022 amounts primarily include $5.7 million in non-cash asset write-downs related to the suspension of our Jack Wolfskin retail operations in Russia and the closure of a pre-merger Topgolf concept location, $5.9 million in IT integration and implementation costs primarily related to the Topgolf merger, $3.6 million in legal and credit agency fees related to a postponed debt refinancing, and $0.9 million for reorganization expenses. | |||||||||||||
| (3) Related to the release of tax valuation allowances that were recorded in connection with the merger with Topgolf. | |||||||||||||
| (4) Diluted Earnings per share calculated using the if-converted method, which excludes interest expense related to the Convertible Notes from the calculation of net income. |
Net income and diluted earnings per share for the year ended December 31, 2023 were $95.0 million and $0.50 per share, respectively, as compared to $157.9 million and $0.82 per share, respectively, for the year ended December 31, 2022. The decrease in net income was primarily due to a decrease in income from operations in addition to an increase in other expense, net, partially offset by a higher income tax benefit in the current period.
On a non-GAAP basis, excluding the items described in the table above, our net income and diluted earnings per share for the for the year ended December 31, 2023 would have been $93.0 million and $0.49 per share, respectively, compared to $158.2 million and $0.82 per share, respectively, for the same period in 2022. The decrease in non-GAAP net income was primarily due to an increase in other expense, net, primarily due to higher interest expense, partially offset by a decrease in the income tax provision combined with an increase in income from operations.
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Operating Segment Results for the Years Ended December 31, 2023 and 2022 (in millions, except percentages)
| Year Ended December 31, | Increase/(Decrease) | Non-GAAP Constant Currency Growth vs. 2022(1) | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | Dollars | Percent | Percent | ||||||||||||
| Net revenues: | ||||||||||||||||
| Venues | $ | 1,692.6 | $ | 1,477.1 | $ | 215.5 | 14.6 | % | 14.6% | |||||||
| Other Topgolf business lines | 68.4 | 71.9 | (3.5) | (4.9) | % | (4.0)% | ||||||||||
| Topgolf | 1,761.0 | 1,549.0 | 212.0 | 13.7 | % | 13.7% | ||||||||||
| Golf clubs | 1,073.5 | 1,097.1 | (23.6) | (2.2) | % | (0.5)% | ||||||||||
| Golf balls | 314.0 | 309.5 | 4.5 | 1.5 | % | 2.2% | ||||||||||
| Golf Equipment | 1,387.5 | 1,406.6 | (19.1) | (1.4) | % | 0.1% | ||||||||||
| Apparel | 713.2 | 631.7 | 81.5 | 12.9 | % | 13.5% | ||||||||||
| Gear, accessories, & other | 423.1 | 408.4 | 14.7 | 3.6 | % | 3.8% | ||||||||||
| Active Lifestyle | 1,136.3 | 1,040.1 | 96.2 | 9.2 | % | 9.7% | ||||||||||
| Total net revenues | $ | 4,284.8 | $ | 3,995.7 | $ | 289.1 | 7.2 | % | 7.9% | |||||||
| Segment operating income: | ||||||||||||||||
| Topgolf | $ | 108.8 | $ | 76.8 | $ | 32.0 | 41.7 | % | ||||||||
| Golf Equipment | 193.3 | 251.4 | (58.1) | (23.1) | % | |||||||||||
| Active Lifestyle | 117.0 | 77.4 | 39.6 | 51.2 | % | |||||||||||
| Total segment operating income | 419.1 | 405.6 | 13.5 | 3.3 | % | |||||||||||
| Reconciling Items(2) | (181.4) | (148.8) | (32.6) | 21.9 | % | |||||||||||
| Total operating income | 237.7 | 256.8 | (19.1) | (7.4) | % | |||||||||||
| Interest expense, net | (210.2) | (142.8) | (67.4) | 47.2 | % | |||||||||||
| Other income, net | 7.3 | 27.9 | (20.6) | (73.8) | % | |||||||||||
| Income before income taxes | $ | 34.8 | $ | 141.9 | $ | (107.1) | (75.5) | % | ||||||||
| (1) Calculated by applying 2022 exchange rates to 2023 reported sales in regions outside the U.S. | ||||||||||||||||
| (3) Reconciling items include corporate general and administrative expenses not utilized by management in determining segment profitability, including non-cash amortization expense of intangible assets in connection with the acquisitions and non-recurring costs. |
Topgolf
During the year ended December 31, 2023, Topgolf segment operating income increased $32.0 million (41.7%) as compared to the same period in 2022. The increase was primarily due to higher revenues from the continued opening of new Company-owned and operated venues in addition to gross margin improvements and operational efficiencies at the venues. The increase in segment operating income was partially offset by higher advertising and promotional costs for national Topgolf marketing campaigns.
Golf Equipment
During the year ended December 31, 2023, Golf Equipment segment operating income decreased $58.1 million (23.1%) as compared to the same period in 2022. The decrease was primarily due to lower revenues and production volumes in 2023 as a result of a post-pandemic inventory fill-in at retail in 2022, which did not recur in 2023, and resulted in expected lower production volumes in the second half of 2023 and unfavorable cost absorption, combined with a return to a normalized promotional environment in 2023 and the unfavorable impact of changes in foreign currency exchange rates. In addition, Golf Equipment segment operating expenses increased by $16.4 million, primarily related to increases in advertising and promotional expense and other infrastructure and employee related costs.
Active Lifestyle
During the year ended December 31, 2023, Active Lifestyle segment operating income increased $39.6 million (51.2%) as compared to the same period in 2022 primarily driven by an increase in revenues and gross margin improvements due to a higher mix of direct-to-consumer sales and lower freight costs. These increases were partially offset by higher operating expenses to support the growth of the TravisMathew and Jack Wolfskin businesses.
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Financial Condition
Our cash and cash equivalents increased $213.3 million to $393.5 million at December 31, 2023 from $180.2 million at December 31, 2022. The increase in cash and cash equivalents was primarily related to net cash provided by financing activities of $375.8 million, including proceeds from lease financing, and cash provided by operating activities of $364.7 million, partially offset by cash used in investing activities of $542.9 million, primarily for capital expenditures. During the year ended December 31, 2023, we used our cash and cash equivalents in addition to proceeds received from our financing and operating activities to fund our operations and invest in the expansion of the Topgolf business and other capital expenditures. We believe that our existing funds and existing sources of and access to capital and any future financings, as necessary, are adequate to fund our future operations. For further information related to our financing arrangements, see Note 7. “Financing Arrangements” in the Notes to Consolidated Financial Statements in Part IV, Item 15 and “Liquidity and Capital Resources” in Part II, Item 7 of this Form 10-K.
Our accounts receivable balance fluctuates throughout the year as a result of the general seasonality of our business, and is also affected by the timing of new product launches. With respect to our Golf Equipment business, accounts receivable are generally the highest during the first and second quarters during the seasonal peak in the golf industry, and generally decline significantly during the third and fourth quarters as a result of an increase in cash collections combined with lower seasonal sales. Our Active Lifestyle accounts receivable balances are generally higher during the third and fourth quarters, primarily due to the seasonal concentration of sales for the Jack Wolfskin business during the fall and winter seasons. Our Topgolf venue business primarily records revenue and collects payment at point-of-sale, therefore, Topgolf’s accounts receivable balance is lower than our other business segments. As of December 31, 2023, our net accounts receivable increased $33.2 million to $200.5 million from $167.3 million as of December 31, 2022. The increase is primarily due to an increase in net sales in the fourth quarter of 2023 compared to the same period in 2022, combined with a shift in the timing of sales in the fourth quarter of 2023, which were higher in December compared to 2022.
Our inventory balance fluctuates throughout the year as a result of the general seasonality of certain operating segments within our business, and is also affected by the timing of new product launches. With respect to our Golf Equipment business, the buildup of inventory generally begins during the fourth quarter and continues into the first quarter and beginning of the second quarter in order to meet increased demand during the golf season. Inventory levels are also impacted by the timing of new product launches as well as the success of new products. Active Lifestyle inventory levels start to increase during the second quarter and continue to increase into the third and fourth quarters primarily due to the seasonal nature of our Jack Wolfskin business, whose products are significantly geared towards the fall and winter seasons. Topgolf is primarily a services business with lower inventory balances than our other business segments, with the inventory balances primarily consisting of food and beverage as well as retail merchandise and Toptracer inventory. Our inventory decreased by $164.8 million to $794.4 million as of December 31, 2023 compared to $959.2 million as of December 31, 2022. The decrease was primarily due to improvements in supply chain timing in the back half of 2022 leading to the receipt of inventory orders for our planned 2023 product launches earlier than anticipated, which resulted in increased inventory levels late in 2022 and early in 2023. Since December 31, 2022, our total inventory has decreased by $164.8 million.
Liquidity and Capital Resources
Liquidity
Our principal sources of liquidity consist of our existing cash balances, funds expected to be generated from operations and funds from our credit facilities. Based upon our current cash balances, our estimates of funds expected to be generated from operations, as well as from current and projected availability under our current or future credit facilities, we believe that we will be able to finance current and planned operating requirements, capital expenditures, required debt repayments and contractual obligations and commercial commitments for at least the next 12 months from the issuance date of this Form 10-K.
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Our ability to generate sufficient positive cash flows from operations is subject to many risks and uncertainties, including future economic trends and conditions, demand for our products, supply chain challenges, price inflation, foreign currency exchange rates, and other risks and uncertainties applicable to us and our business (see “Risk Factors” contained in Part I, Item 1A in this Form 10-K). As of December 31, 2023, we had $742.6 million in cash and availability under our credit facilities, which is an increase of $327.3 million or 78.8% compared to December 31, 2022. Information about our credit facilities and long-term borrowings is presented in Note 7. “Financing Arrangements” in the Notes to Consolidated Financial Statements in this Form 10-K and is incorporated herein by this reference.
On March 16, 2023, we completed a comprehensive plan to refinance and modify our capital structure in order to extend our debt maturities, reduce our base borrowing rate and improve our liquidity, as well as simplify our capital structure. As a result, we entered into a new $1,250.0 million senior secured Term Loan B facility which matures on March 16, 2030. We used a portion of the proceeds to pay off our then existing senior secured Term Loan B facility of $432.0 million and Topgolf senior secured credit facilities of $504.1 million. In addition to the entry into our Term Loan B facility, we also extended and increased our then existing $400.0 million senior secured ABL revolving credit facility with a new $525.0 million senior secured ABL revolving credit facility which matures on March 16, 2028.
As of December 31, 2023, approximately 40% of our cash was held in regions outside of the United States. We continue to maintain our indefinite reinvestment assertion with respect to most jurisdictions in which we operate because of local cash requirements to operate our business. If we were to repatriate cash to the United States outside of settling intercompany balances, we may need to pay incremental foreign withholding taxes which, subject to certain limitations, generate foreign tax credits for use against our U.S. tax liability, if any. Additionally, we may need to pay certain state income taxes.
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Significant Cash Obligations
We plan to utilize our liquidity (as described above) and our cash flows from business operations to fund our material cash requirements. The table below summarizes certain significant cash obligations as of December 31, 2023 that will affect our future liquidity (in millions):
| Payments Due By Period | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total | 2024 | 2025 - 2026 | 2027 - 2028 | Thereafter | ||||||||||||||
| Long-term debt(1) | $ | 1,566.8 | $ | 20.8 | $ | 295.0 | $ | 29.3 | $ | 1,221.7 | ||||||||
| Interest payments relating to long-term debt(2) | 756.7 | 124.4 | 240.0 | 225.3 | 167.0 | |||||||||||||
| Finance leases, including imputed interest(3) | 821.8 | 14.9 | 34.5 | 32.7 | 739.7 | |||||||||||||
| Operating leases, including imputed interest(4) | 2,456.4 | 155.6 | 319.0 | 304.3 | 1,677.5 | |||||||||||||
| DLF obligations(5) | 4,389.8 | 72.9 | 164.9 | 173.2 | 3,978.8 | |||||||||||||
| Minimum lease payments for leases signed but not yet commenced(6) | 364.9 | 4.2 | 19.6 | 19.6 | 321.5 | |||||||||||||
| Capital commitments(7) | 107.0 | 58.0 | 49.0 | — | — | |||||||||||||
| Unconditional purchase obligations(8) | 176.8 | 52.5 | 63.0 | 29.8 | 31.5 | |||||||||||||
| Uncertain tax contingencies(9) | 13.6 | 2.9 | 1.3 | 0.6 | 8.8 | |||||||||||||
| Total | $ | 10,653.8 | $ | 506.2 | $ | 1,186.3 | $ | 814.8 | $ | 8,146.5 | ||||||||
| (1) Excludes unamortized debt discounts, unamortized debt issuance costs, and fair value adjustments. For further details, see Note 7. “Financing Arrangements” in the Notes to Consolidated Financial Statements in this Form 10-K. | ||||||||||||||||||
| (2) Long-term debt may have fixed or variable interest rates. For further details, see Note 7. “Financing Arrangements” in the Notes to Consolidated Financial Statements in this Form 10-K. | ||||||||||||||||||
| (3) Represents future minimum payments under financing leases. For further details, see Note 6. “Leases” in the Notes to Consolidated Financial Statements in this Form 10-K. | ||||||||||||||||||
| (4) Represents commitments for minimum lease payments under non-cancellable operating leases. For further details, see Note 6. “Leases” in the Notes to Consolidated Financial Statements in this Form 10-K. | ||||||||||||||||||
| (5) Represents DLF obligations, including extension periods, in connection with the construction of Topgolf venues. For further details, see Note 6. “Leases” in the Notes to Consolidated Financial Statements in this Form 10-K. | ||||||||||||||||||
| (6) Represents future minimum lease payments under lease agreements that have not yet commenced as of December 31, 2023 in relation to future Topgolf facilities. For further discussion, see Note 6. “Leases” in the Notes to Consolidated Financial Statements in this Form 10-K. | ||||||||||||||||||
| (7) Represents capital expenditure commitments under lease agreements for Topgolf venues under construction that have been signed as of December 31, 2023. | ||||||||||||||||||
| (8) During the normal course of our business, we enter into agreements to purchase goods and services, including commitments for endorsement agreements with professional athletes and other endorsers, consulting and service agreements, and intellectual property licensing agreements pursuant to which we are required to pay royalty fees. The amounts listed above approximate the minimum purchase obligations we are obligated to pay under these agreements over the next five years and thereafter as of December 31, 2023. The actual amounts paid under some of the agreements may be higher or lower than these amounts. In addition, we also enter into unconditional purchase obligations with various vendors and suppliers of goods and services during the normal course of business through purchase orders or other documentation or that are undocumented except for an invoice. For further details, see Note 13. “Commitments & Contingencies” in the Notes to Consolidated Financial Statements in this Form 10-K. | ||||||||||||||||||
| (9) Amounts represent current and non-current portions of uncertain income tax positions as recorded on our Consolidated Balance Sheets as of December 31, 2023. Amounts exclude uncertain income tax positions that we would be able to offset against deferred taxes. For further discussion, see Note 12. “Income Taxes” in the Notes to Consolidated Financial Statements in this Form 10-K. |
During the normal course of business, we have made certain indemnities, commitments and guarantees under which we may be required to make payments in relation to certain transactions. These include (i) intellectual property indemnities to our customers and licensees in connection with the use, sale and/or license of our products or trademarks, (ii) indemnities to various lessors in connection with facility leases for certain claims arising from such facilities or leases, (iii) indemnities to vendors and service providers pertaining to the goods or services provided to us or based on the negligence or willful misconduct, and (iv) indemnities involving the accuracy of representations and warranties in certain contracts. In addition, we have made contractual commitments to each of our officers and certain other employees providing for severance payments upon the termination of employment. We have also issued guarantees in the form of a standby letter of credit in the amount of $0.4 million primarily as security for contingent liabilities under certain workers’ compensation insurance policies.
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The duration of these indemnities, commitments and guarantees varies, and in certain cases may be indefinite. The majority of these indemnities, commitments and guarantees do not provide for any limitation on the maximum amount of future payments we could be obligated to make. Historically, costs incurred to settle claims related to indemnities have not been material to our financial position, results of operations or cash flows. In addition, we believe the likelihood is remote that payments under the commitments and guarantees described above will have a material effect on our financial condition. The fair value of these indemnities, commitments and guarantees that we issued during the 12 months ended December 31, 2023 was not material to our financial position, results of operations or cash flows.
In addition to the contractual obligations listed above, our liquidity could also be adversely affected by an unfavorable outcome with respect to claims and litigation that we are subject to from time to time. See Note 13. “Commitments & Contingencies” in the Notes to Consolidated Financial Statements in this Form 10-K.
We have no material off-balance sheet arrangements.