Callaway Golf Co (CALY) FY 2024 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 2024 and 2023 items and year-to-year comparisons between 2024 and 2023. Discussions related to 2022 items and year-to-year comparisons between 2023 and 2022 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, 2023, which was filed with the SEC on February 29, 2024.
Intent to Separate into Two Independent Companies
In September 2024, we announced a strategic plan to pursue a separation of our business into two independent companies: Callaway, a leader in golf equipment with a highly complementary Active Lifestyle business; and Topgolf, a category leading, high-growth, pure-play venue-based golf entertainment business. We expect to effect the separation through a spin-off of the Topgolf business to our shareholders in a transaction that is intended to be tax-free to both us and our shareholders for U.S. federal income tax purposes. While we expect that a spin-off of Topgolf into a stand-alone public company is the most likely separation path, we will continue to evaluate other options for separation in order to maximize shareholder value. We expect to complete the spin-off of Topgolf in the second half of 2025, but there can be no assurance regarding the ultimate timing, terms, or form of the separation, or that the separation will ultimately occur.
We believe that creating two companies will result in material benefits to the stand-alone businesses that will maximize shareholder value, including enhanced strategic focus, optimized capital allocation, simplified operating structure and a distinct investment thesis for each company that would allow investors to have the opportunity to support and invest in each business on the basis of its distinct qualities.
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, 2024, pre-tax income would have decreased by approximately $6.8 million, net of the cost recovery of inventory.
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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, 2024 would have decreased by approximately $2.0 million.
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, 2024, pre-tax income would have decreased by approximately $2.4 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 12 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 12 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.
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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, 2024, we recorded a goodwill impairment of $1,352.4 million. The impairment was driven by a combination of factors, including macroeconomic conditions which have put downward pressure on consumer and corporate discretionary spending, resulting in negative same venue sales and fewer projected future venue openings than were previously planned in the near term. 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.
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, 2024, we determined that the fair value of our Topgolf tradename was impaired, and as a result, we recorded an impairment loss of $99.6 million to write down the Topgolf tradename to its new estimated fair value.
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.
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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 these 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 the non-cash amortization of purchase accounting adjustments associated with acquired intangible assets, including acquired customer and distributor relationships and acquired developed technology related to our merger with Topgolf, acquisitions of Jack Wolfskin, TravisMathew and OGIO, and distribution rights in the Korea apparel market (collectively, the “Acquisitions”). While the amortization of these assets is excluded from our calculation of non-GAAP net income, the revenue, operating costs and associated acquired assets that contribute to the revenue generation associated with these acquired companies is reflected in our calculation of non-GAAP net income.
•Net income and diluted earnings per share excluding certain non-recurring charges, as further detailed below.
•Same venue sales, which is defined as sales for the comparable Topgolf venue base, which includes Company-owned and operated venues with at least 24 full fiscal months of operations as of the year of comparison.
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, demand for our products is highly sensitive to downturns in the economy and the corresponding impact on discretionary consumer and corporate spending. During 2024, macroeconomic factors including sustained inflation and high interest rates, which continued into the fourth quarter and put downward pressure on consumer and corporate discretionary spending. 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 persistence of these trends may have an adverse impact on our operating results depending on the severity and length of the changes.
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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 $18.2 million for the year ended December 31, 2024, relative to the same period in the prior year, on a constant currency basis.
Inflation
Sustained inflationary pressure partially contributed to the increase in the cost of our products as well as operating costs. While we were able to partially offset these inflationary pressures by increasing the price of our products and services and through cost management initiatives, the length and severity of these conditions are unpredictable, and should conditions persist and/or worsen, such inflationary pressures may have a further adverse effect on our operating results. 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.
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.
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Results of Operations
Years Ended December 31, 2024 and 2023
Net Revenues
Net revenues for the year ended December 31, 2024 as compared to the year ended December 31, 2023 were as follows (in millions, except percentages):
| Year Ended December 31, | Increase/(Decrease) | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | Amount | Percent | |||||||||||
| Net revenues: | ||||||||||||||
| Products | $ | 2,447.8 | $ | 2,540.1 | $ | (92.3) | (3.6) | % | ||||||
| Services | 1,791.5 | 1,744.7 | 46.8 | 2.7 | % | |||||||||
| Total net revenues | $ | 4,239.3 | $ | 4,284.8 | $ | (45.5) | (1.1) | % |
The $45.5 million (1.1%) decrease in total net revenues was due to a decline in product revenue primarily in our Active Lifestyle operating segment, offset by an increase in services revenue in our Topgolf operating segment. The decline in product revenue in our Active Lifestyle segment was primarily driven by decreases in our Jack Wolfskin and TravisMathew product lines. The increase in service revenue in our Topgolf segment was driven by the opening of new venues partially offset by an 8.6% decrease in same venue sales.
Net revenues by major geographic region for the year ended December 31, 2024 as compared to the year ended December 31, 2023 were as follows (in millions, except percentages):
| Year Ended December 31, | Increase/(Decrease) | Non-GAAP Constant Currency Growth | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | Amount | Percent | Percent | ||||||||||||
| Net revenues: | ||||||||||||||||
| United States | $ | 3,102.5 | $ | 3,081.4 | $ | 21.1 | 0.7 | % | 0.7% | |||||||
| Europe | 511.1 | 540.6 | (29.5) | (5.5) | % | (6.7)% | ||||||||||
| Asia | 487.6 | 531.9 | (44.3) | (8.3) | % | (3.9)% | ||||||||||
| Rest of World | 138.1 | 130.9 | 7.2 | 5.5 | % | 6.4% | ||||||||||
| Total net revenues | $ | 4,239.3 | $ | 4,284.8 | $ | (45.5) | (1.1) | % | (0.6)% |
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, 2024, net revenues in the United States increased $21.1 million (0.7%) compared to the year ended December 31, 2023. The increase was primarily due to incremental revenues from the opening of new Company-owned and operated Topgolf venues, partially offset by a decline in same venue sales combined with a decline in sales of TravisMathew products in the corporate wholesale channel.
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Europe
During the year ended December 31, 2024, net revenues in Europe decreased $29.5 million (5.5%) compared to the year ended December 31, 2023. The decrease was primarily driven by a decline in sales of Jack Wolfskin products in the wholesale channel, partially offset by increases in golf club sales and Toptracer installations.
Asia
During the year ended December 31, 2024, net revenues in Asia decreased $44.3 million (8.3%) compared to the year ended December 31, 2023. The decrease was primarily due to softer demand in the apparel market in Korea combined with unfavorable foreign currency exchange rates in both Japan and Korea. These decreases were partially offset by increases related to market expansion and direct to consumer growth in the Jack Wolfskin business in China.
Rest of World
During the year ended December 31, 2024, net revenues in Rest of World increased $7.2 million (5.5%) compared to the year ended December 31, 2023, primarily in sales of Golf Equipment and Active Lifestyle products in the Australia and Canada markets, partially offset by unfavorable foreign currency rates.
Costs and Expenses (in millions, except percentages)
| Year Ended December 31, | Increase/(Decrease) | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | Amount | Percent | |||||||||||
| Costs and expenses: | ||||||||||||||
| Cost of products | $ | 1,401.7 | $ | 1,443.9 | $ | (42.2) | (2.9) | % | ||||||
| Cost of services, excluding depreciation and amortization | 186.7 | 186.8 | (0.1) | (0.1) | % | |||||||||
| Other venue expense | 1,303.5 | 1,252.3 | 51.2 | 4.1 | % | |||||||||
| Selling, general and administrative expense | 1,045.7 | 1,036.6 | 9.1 | 0.9 | % | |||||||||
| Research and development expense | 92.1 | 101.6 | (9.5) | (9.4) | % | |||||||||
| Goodwill and intangible assets impairment | 1,452.0 | — | 1,452.0 | n/m | ||||||||||
| Venue pre-opening costs | 14.8 | 25.9 | (11.1) | (42.9) | % | |||||||||
| Total costs and expenses | $ | 5,496.5 | $ | 4,047.1 | $ | 1,449.4 | 35.8 | % |
Cost of Products
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, depreciation and amortization, and retail merchandise costs for products sold in retail shops within Topgolf venue facilities. During the year ended December 31, 2024, cost of products decreased $42.2 million (2.9%) as compared to the year ended December 31, 2023. The decreases were primarily due to lower sales in our Active Lifestyle and Golf Equipment operating segments.
Cost of Services, Excluding Depreciation and Amortization
Cost of services primarily consists of costs related to food and beverage sold at Topgolf venues and 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 $0.1 million (0.1%) decrease in cost of services for the year ended December 31, 2024 as compared to the year ended December 31, 2023 was primarily due to a decline in Topgolf same venue sales, partially offset by the addition of new Company-owned and operated Topgolf venues.
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, 2024, other venue expense increased $51.2 million (4.1%) as compared to the year ended December 31, 2023. The increase was primarily due to the addition of new Company-owned and operated Topgolf venues, in addition to higher wages and planned increases in costs related to new marketing campaigns, partially offset by operational efficiencies in the venues.
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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, 2024, SG&A expenses increased by $9.1 million (0.9%) as compared to the year ended December 31, 2023. The increase was primarily due to a $14.3 million increase in IT costs related to ongoing integration initiatives and $5.9 million in incremental lease expenses related to the expansion of our TravisMathew business. In addition, during the fourth quarter of 2024, we recognized a $9.6 million loss related to the sale of the WGT business. These increases were partially offset by a $9.5 million decrease in employee costs resulting primarily from restructuring and reorganization initiatives in our Topgolf operating segment, which took place in 2023 that did not recur in 2024, a $6.7 million decrease in tour player expenses and ambassador endorsement agreements, and decreases in television and digital advertising expenditures, professional fees, travel and entertainment 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 costs of personnel engaged in research and development activities, research costs and depreciation expense. During the year ended December 31, 2024, research and development expense decreased $9.5 million (9.4%) as compared to the year ended December 31, 2023. The decrease was primarily due to asset impairment charges related to the abandonment of the Shankstars media game in 2023, combined with a decline in employee costs due to reduced headcount resulting from restructuring in our Active Lifestyle operating segment.
Goodwill and Intangible Assets Impairment
During the year ended December 31, 2024, we recorded impairment losses of $1,452.0 million on goodwill and intangible assets associated with our Topgolf operating segment. The impairment was driven by sustained unfavorable macroeconomic conditions, including elevated inflation and interest rates, which have continued to put downward pressure on consumer and corporate discretionary spending. This trend contributed to declines in same venue sales, which lead to management’s determination during the fourth quarter of 2024 to decrease the number of planned venue openings in the near term as compared to previous projections. There were no goodwill or intangible asset impairment losses recognized during the year ended December 31, 2023.
Venue Pre-Opening Costs
Venue pre-opening costs consist of costs associated with activities prior to the opening of new Company-owned and 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-owned and operated venue. During the year ended December 31, 2024, venue pre-opening costs decreased $11.1 million (42.9%) as compared to the year ended December 31, 2023, primarily due to fewer venue openings combined with cost savings from operational efficiencies.
Other Income and Expense (in millions, except percentages)
| Year Ended December 31, | Increase/(Decrease) | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | Amount | Percent | |||||||||||
| Other income and expenses: | ||||||||||||||
| Interest expense, net | $ | (231.2) | $ | (210.2) | $ | (21.0) | 10.0 | % | ||||||
| Other income, net | 15.2 | 7.3 | 7.9 | 108.2 | % | |||||||||
| Total other expense, net | $ | (216.0) | $ | (202.9) | $ | (13.1) | 6.5 | % |
Interest expense, net increased $21.0 million (10.0%) during the year ended December 31, 2024 as compared to the year ended December 31, 2023, primarily due to an increase in venue financing interest as the result of the opening of new Topgolf venues, partially offset by decreased interest expense on our term loan as a result of the debt repricing that took place during the first quarter of 2024 and lower outstanding borrowings after the discretionary $50.0 million principal payment that was made on the 2023 Term Loan B on May 31, 2024.
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Other income, net increased by $7.9 million (108.2%) during the year ended December 31, 2024, as compared to the year ended December 31, 2023, primarily due to increased dividend income from our money market accounts and a dividend received from our investment in Full Swing, combined with a decrease in losses recognized from repricing of our long-term debt in 2024 compared to debt refinancing losses incurred in 2023. These increases were partially offset by a decrease in net foreign currency gains combined with the recognition of a loss related to the dissolution of our Jack Wolfskin subsidiary in Russia.
Income Taxes
Our income tax benefit decreased $34.7 million to $25.5 million during the year ended December 31, 2024 as compared to $60.2 million in 2023. As a percentage of pre-tax income, our effective tax rate for the year ended December 31, 2024 increased to 1.7% compared to (173.0)% in 2023.
Our effective tax rate for the year ended December 31, 2024 was lower primarily due to the goodwill impairment charge recorded during the period, which is not deductible for tax purposes. Excluding the impact of the goodwill impairment in 2024 and the release of the valuation allowance in 2023 and other non-recurring items, our effective tax rate would have been 13.4% and 13.3% for the years ended December 31, 2024 and 2023, 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.
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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, 2024 and 2023 to our non-GAAP results for the same periods (in millions, except per share information):
| Year Ended December 31, 2024 | Year Ended December 31, 2023 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net (Loss) Income | Diluted (Loss) Earnings per share(5) (6) | Net Income | Diluted (Loss) Earnings per share(5) (6) | |||||||||||
| GAAP | $ | (1,447.7) | $ | (7.88) | $ | 95.0 | $ | 0.50 | ||||||
| Less: Non-Cash Amortization of Acquired Intangibles(1) | (9.6) | (0.05) | (10.6) | (0.05) | ||||||||||
| Less: Non-Cash Goodwill and Intangible Assets Impairment(2) | (1424.6) | (7.72) | — | — | ||||||||||
| Less: Non-Recurring Items(3) | (55.5) | (0.30) | (36.6) | (0.18) | ||||||||||
| Less: Tax Valuation Allowance(4) | — | — | 58.3 | 0.29 | ||||||||||
| Non-GAAP | $ | 42.0 | $ | 0.23 | $ | 83.9 | $ | 0.45 | ||||||
| GAAP Diluted Weighted-Average Shares Outstanding | 183.7 | 201.1 | ||||||||||||
| Non-GAAP Diluted Weighted-Average Shares Outstanding | 184.6 | 201.1 | ||||||||||||
| (1) Includes the non-cash amortization of purchase accounting adjustments associated with acquired intangible assets stemming from our Acquisitions, including acquired customer and distributor relationships and acquired developed technology. See “Discussion of Non-GAAP Measures” above for further information. Starting in the second quarter of 2024, the depreciation and amortization of all other purchase accounting adjustments associated with our Acquisitions will be excluded from our non-GAAP adjustments. As such, prior period amounts have been recast in order to conform with the current period presentation. For the years ended December 31, 2024 and 2023, non-cash depreciation and amortization related to these excluded purchase accounting adjustments was $6.0 million and $11.8 million, respectively. | ||||||||||||||
| (2) Represents non-cash goodwill and intangible assets impairments recognized during 2024 in our Topgolf operating segment. | ||||||||||||||
| (3) 2024 amounts primarily include $22.9 million of total reorganization costs in the Topgolf and Active Lifestyle segments, $8.0 million of costs incurred related to the planned separation of Topgolf, $4.7 million of costs related to our 2024 debt repricing, and $3.4 million in charges related to the impairment and abandonment of the Shankstars media game in the Topgolf segment, $2.1 million in IT integration and implementation costs primarily related to the merger with Topgolf, and $1.4 million in costs related to a cybersecurity incident. 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. | ||||||||||||||
| (4) Related to the release of tax valuation allowances that were recorded in connection with the merger with Topgolf. | ||||||||||||||
| (5) Diluted earnings per share is calculated using the if-converted method, which excludes interest expense related to the Convertible Notes from the calculation of net income in periods where income is reported. During the year ended December 31, 2024, GAAP diluted weighted-average shares outstanding are equivalent to basic weighted-average shares outstanding due to the net loss position. Non-GAAP diluted weighted-average shares outstanding exclude the impact of the Convertible Notes, which were anti-dilutive for the period. | ||||||||||||||
| (6) When aggregated, diluted earnings per share amounts may not be additive due to rounding. |
Net loss and diluted loss per share for the year ended December 31, 2024 were $1,447.7 million and $(7.88) per share, respectively, as compared to net income and diluted earnings per share of $95.0 million and $0.50 per share, respectively, for the year ended December 31, 2023. The decline in net income to a net loss was primarily due to the goodwill and intangible assets impairment charge recognized during the period, in addition to an increase in interest expense and the decrease in the income tax benefit compared to the prior year.
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, 2024 would have been $42.0 million and $0.23 per share, respectively, compared to $83.9 million and $0.45 per share, respectively, for the comparable period in 2023. The decrease in non-GAAP net income was primarily due to a decrease in segment operating income as discussed below combined with an increase in interest expense, partially offset by an increase in other income and a decrease in the provision for income taxes.
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Operating Segment Results for the Years Ended December 31, 2024 and 2023 (in millions, except percentages)
| Year Ended December 31, | Increase/(Decrease) | Non-GAAP Constant Currency Growth vs. 2023(1) | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | Dollars | Percent | Percent | ||||||||||||
| Net revenues: | ||||||||||||||||
| Venues | $ | 1,728.3 | $ | 1,692.6 | $ | 35.7 | 2.1 | % | 2.0% | |||||||
| Other Topgolf business lines | 81.1 | 68.4 | 12.7 | 18.6 | % | 17.7% | ||||||||||
| Topgolf | 1,809.4 | 1,761.0 | 48.4 | 2.7 | % | 2.6% | ||||||||||
| Golf clubs | 1,060.9 | 1,073.5 | (12.6) | (1.2) | % | —% | ||||||||||
| Golf balls | 321.1 | 314.0 | 7.1 | 2.3 | % | 2.7% | ||||||||||
| Golf Equipment | 1,382.0 | 1,387.5 | (5.5) | (0.4) | % | 0.6% | ||||||||||
| Apparel | 676.5 | 713.2 | (36.7) | (5.1) | % | (4.5)% | ||||||||||
| Gear, accessories, & other | 371.4 | 423.1 | (51.7) | (12.2) | % | (11.8)% | ||||||||||
| Active Lifestyle | 1,047.9 | 1,136.3 | (88.4) | (7.8) | % | (7.2)% | ||||||||||
| Total net revenues | $ | 4,239.3 | $ | 4,284.8 | $ | (45.5) | (1.1) | % | (0.6)% | |||||||
| Segment operating income: | ||||||||||||||||
| Topgolf | $ | 114.2 | $ | 108.8 | $ | 5.4 | 5.0 | % | ||||||||
| Golf Equipment | 183.6 | 193.3 | (9.7) | (5.0) | % | |||||||||||
| Active Lifestyle | 82.4 | 117.0 | (34.6) | (29.6) | % | |||||||||||
| Total segment operating income | 380.2 | 419.1 | (38.9) | (9.3) | % | |||||||||||
| Reconciling Items(2) | (1,637.4) | (181.4) | (1,456.0) | n/m | ||||||||||||
| Total operating (loss) income | (1,257.2) | 237.7 | (1,494.9) | n/m | ||||||||||||
| Interest expense, net | (231.2) | (210.2) | (21.0) | 10.0 | % | |||||||||||
| Other income, net | 15.2 | 7.3 | 7.9 | 108.2 | % | |||||||||||
| (Loss) Income before income taxes | $ | (1,473.2) | $ | 34.8 | $ | (1,508.0) | n/m | |||||||||
| (1) Calculated by applying 2023 exchange rates to 2024 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 as discussed above. |
Topgolf
During the year ended December 31, 2024, net revenues in our Topgolf operating segment increased $48.4 million (2.7%), primarily due to incremental revenues from new Company-owned and operated venue openings and Toptracer bay installations for new Toptracer customers, partially offset by a decline in same venue sales due to slower walk-in traffic and a softer corporate events business due to unfavorable macroeconomic conditions.
During the year ended December 31, 2024, Topgolf segment operating income increased $5.4 million (5.0%) as compared to the same period in 2023. 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, 2024, net revenues in our Golf Equipment operating segment decreased $5.5 million (0.4%), primarily due to declines in golf club and golf ball sales related to softer market conditions in Korea combined with unfavorable foreign currency impacts in Asia.
During the year ended December 31, 2024, Golf Equipment segment operating income decreased $9.7 million (5.0%) compared to the same period in 2023 primarily due to softer market conditions in Korea combined with higher freight costs and unfavorable foreign currency exchange rates.
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Active Lifestyle
During the year ended December 31, 2024, net revenues in our Active Lifestyle segment decreased $88.4 million (7.8%) compared to the same period in 2023, primarily due to decreases in sales of Callaway, Jack Wolfskin and TravisMathew soft goods. The decrease in sales for Callaway soft goods was primarily due to softer market conditions in Korea combined with the impact of unfavorable foreign currency exchange rates primarily in Japan. The decline in Jack Wolfskin sales was primarily due to a decline in wholesale channel sales resulting from soft market conditions in Europe, and the decrease at TravisMathew was primarily due to an expected decrease in corporate channel sales resulting from a sell-in to a distribution partner during the first quarter of 2023, which did not recur in 2024. These declines were partially offset by direct-to-consumer growth in the retail and e-commerce channels at TravisMathew due to product line expansion and the opening of new stores, as well as direct-to-consumer growth for Jack Wolfskin in the China market.
During the year ended December 31, 2024, Active Lifestyle segment operating income decreased $34.6 million (29.6%) as compared to the same period in 2023 primarily driven by the decreases in revenue and operating expense deleverage.
Financial Condition
Our cash and cash equivalents increased $51.5 million to $445.0 million at December 31, 2024 from $393.5 million at December 31, 2023. The increase in cash and cash equivalents was primarily related to cash provided by operating activities of $382.0 million, partially offset by cash used in investing activities of $297.3 million, primarily for capital expenditures, and net cash used in financing activities of $23.6 million, including proceeds from lease financing. During the year ended December 31, 2024, we used our cash and cash equivalents in addition to proceeds received from lease financings to fund operations, purchase capital expenditures, repurchase stock, and complete the BigShots acquisition. Additionally, we made a $50.0 million partial repayment of the outstanding principal of our 2023 Term Loan B. 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, 2024, our net accounts receivable decreased $24.8 million to $175.7 million from $200.5 million as of December 31, 2023. The decrease is primarily due to stronger collections on increased sales in the fourth quarter of 2024 compared to the same period in 2023.
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 $37.1 million to $757.3 million as of December 31, 2024 compared to $794.4 million as of December 31, 2023. The decrease was primarily due to sell-through of inventory in our Active Lifestyle business, combined with inventory reduction initiatives.
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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 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.
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, 2024, we had $796.9 million in cash and availability under our credit facilities, which is an increase of $54.3 million or 7% compared to December 31, 2023. 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 19, 2024 we entered into an amendment to the 2023 Term Loan B in order to decrease the interest rate and future interest expense on the 2023 Term Loan B and on May 31, 2024, we made a discretionary $50.0 million principal payment on the 2023 Term Loan B.
As of December 31, 2024, approximately 30% 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, 2024 that will affect our future liquidity (in millions):
| Payments Due By Period | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total | 2025 | 2026 - 2027 | 2028 - 2029 | Thereafter | ||||||||||||||
| Long-term debt(1) | $ | 1,495.5 | $ | 18.6 | $ | 291.9 | $ | 27.6 | $ | 1,157.4 | ||||||||
| Interest payments relating to long-term debt(2) | 508.6 | 99.9 | 185.1 | 178.6 | 45.0 | |||||||||||||
| Finance leases, including imputed interest(3) | 891.2 | 15.3 | 36.1 | 37.7 | 802.1 | |||||||||||||
| Operating leases, including imputed interest(4) | 2,333.7 | 157.2 | 323.1 | 309.8 | 1,543.6 | |||||||||||||
| DLF obligations(5) | 4,965.7 | 86.9 | 199.4 | 207.6 | 4,471.8 | |||||||||||||
| Minimum lease payments for leases signed but not yet commenced(6) | 854.3 | 2.0 | 36.7 | 37.2 | 778.4 | |||||||||||||
| Capital commitments(7) | 110.8 | 58.0 | 49.7 | 3.1 | — | |||||||||||||
| Unconditional purchase obligations(8) | 110.3 | 56.6 | 52.6 | 1.1 | — | |||||||||||||
| Uncertain tax contingencies(9) | 11.6 | 2.4 | 1.1 | 0.1 | 8.0 | |||||||||||||
| Total | $ | 11,281.7 | $ | 496.9 | $ | 1,175.7 | $ | 802.8 | $ | 8,806.3 | ||||||||
| (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, 2024 in relation to future Topgolf facilities and TravisMathew retail stores. 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, 2024. | ||||||||||||||||||
| (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, 2024. 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, 2024. 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, 2024 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.