Callaway Golf Co quarterly report, Q2 FY2023

Business context and reporting period

Topgolf Callaway Brands Corp. (ticker MODG; the filing entity, despite the request’s “Callaway Golf Co” label) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2023. Its businesses are Topgolf, Golf Equipment, and Active Lifestyle. Comparisons with 2022 have a calendar-period limitation: Topgolf’s prior-year reporting calendar changed in April 2022.

Financial performance and position

Amounts in millions, except per-share data. Quarterly and six-month results compare with the corresponding 2022 periods.

• Revenue increased 5.7% in Q2 and 8.9% in the first half. Operating income fell 10.1% and 12.0%, respectively. Operating margin was approximately 9.8% in Q2 versus 11.6% a year earlier.
• Reported net income benefited from a $45.8 million Q2 income tax benefit, including a $50.8 million release of U.S. deferred-tax valuation allowance. The first-half tax benefit was $50.0 million. Excluding specified items, non-GAAP diluted EPS was $0.39 for Q2 versus $0.47, and $0.57 for the first half versus $0.84.
• First-half operating cash flow was negative $21.8 million, compared with negative $48.1 million. Investing cash outflow was $280.7 million, including $262.6 million of capital expenditures. Financing cash inflow was $297.7 million. Cash and cash equivalents at June 30 were $191.8 million.
• At June 30, total debt principal was $1,577.5 million ($1,543.5 million net of issuance costs); cash plus available credit-facility capacity was $647.5 million. The company reported compliance with applicable financial covenants. Current assets were $1,657.9 million and current liabilities $932.6 million.
• Debt excludes significant lease-related commitments: balance-sheet operating lease liabilities were $1,531.9 million and deemed landlord financing obligations were $765.8 million. Future minimum lease payments and deemed landlord financing payments totaled $6,338.9 million before imputed interest.

Material changes versus prior comparable periods

• Topgolf revenue rose 16.6% in Q2 and 20.5% in the first half, supported by 11 new company-operated venues opened since June 2022 and higher same-venue sales. Segment operating income was nearly flat in Q2 and down 7.7% in the first half as marketing and labor costs increased.
• Golf Equipment revenue was nearly flat in Q2 and down 2.7% in the first half; segment operating income declined 3.9% and 11.5%, respectively. Prior-year retail restocking did not recur, and foreign exchange was unfavorable. Golf ball sales increased, while club revenue declined.
• Active Lifestyle revenue declined 0.8% in Q2 but increased 13.3% in the first half. First-half growth and operating income gains reflected TravisMathew momentum, Jack Wolfskin shipment timing and improved supply, partly offset by weaker Callaway soft-goods results and currency effects.
• Higher debt balances and interest rates, together with Topgolf venue financing, drove interest expense up 59.1% in Q2 and 58.5% for the first half. The first-half result also included a $10.5 million non-cash loss on debt modification.
• Inventory declined $119.4 million from year-end to $839.8 million, but remained $235.8 million above June 2022, reflecting earlier receipts of planned 2023 products after supply-chain conditions improved.

Outlook, risks, and unusual items

• Management expects 2023 capital expenditures of approximately $270 million, including $190 million for Topgolf. It stated that available funds and financing sources should cover operating needs, capital expenditures, debt repayments, and contractual obligations for at least 12 months after filing. No full-year revenue or earnings guidance is provided in the supplied filing text.
• Management expects foreign-currency movements to remain an unfavorable influence on revenue and operating results for the rest of 2023. Inflation may continue to raise operating costs; price increases and freight-mix changes have partly offset pressure, but may not do so consistently.
• Key risks include consumer-demand weakness, economic downturn and inflation, higher rates, foreign exchange, seasonality and weather, retail inventory and promotional activity, supply constraints, Topgolf integration and expansion execution, and the ability to realize expected synergies. Topgolf’s venue results are seasonal, and golf equipment sales and much of that segment’s profit are concentrated in the first half.
• The March 2023 refinancing established a $1.25 billion Term Loan B due 2030 and a $525 million asset-based revolving facility due 2028. The company also reported $801.4 million of future lease obligations for eight signed but not yet commenced venues and $48.0 million of net capital commitments for leases under construction.
• Q2 included $3.1 million of reorganization charges; the company expects approximately $8.0 million of total charges for the IT and organizational restructuring, targeted for completion by year-end 2023. Routine legal claims are disclosed, but the company could not estimate aggregate potential losses; it reported no material off-balance-sheet arrangements.

Important facts for investors to verify

• Assess how much reported earnings and EPS depend on the deferred-tax valuation-allowance release; compare GAAP and non-GAAP results and review the company’s adjustment definitions.
• Track whether Topgolf same-venue sales and new-venue growth can offset higher labor, marketing, depreciation, and venue-financing costs.
• Monitor cash conversion and working capital: first-half operating cash flow was negative, with substantial cash tied up in receivables despite lower inventory.
• Evaluate refinancing economics, variable-rate exposure, debt maturities, covenant headroom, and total lease and deemed-financing commitments alongside the stated $647.5 million liquidity figure.
• Check whether planned $270 million capital spending, new venue commitments, and management’s 12-month liquidity assessment remain consistent with future operating cash flows and demand.