Topgolf Callaway Brands Corp. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. The filing is for Topgolf Callaway Brands Corp. (NYSE: MODG), a golf equipment, active lifestyle and golf entertainment company. Financial statements are unaudited. Topgolf’s comparative 2022 quarter covered January 3–April 3, rather than the calendar quarter.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net revenue | $1,167.4 million | $1,040.2 million |
| Operating income | $80.5 million | $94.3 million |
| Net income | $25.0 million | $86.7 million |
| Diluted EPS | $0.13 | $0.44 |
| Cash used in operating activities | $152.1 million | $185.3 million |
| Capital expenditures | $121.4 million | $124.3 million |
- Revenue increased 12.2% reported and 15.1% on a non-GAAP constant-currency basis. Products contributed $767.6 million and services $399.8 million.
- Operating margin was approximately 6.9%, versus 9.1%; net margin was approximately 2.1%, versus 8.3%. The filing does not present a consolidated gross margin figure.
- Cash and cash equivalents were $180.6 million at quarter-end. Available liquidity, including cash and availability under U.S. and Japan facilities, was $626.1 million.
- At March 31, long-term debt, net of issuance costs, was $1,529.5 million; short-term asset-based facility borrowings were $110.3 million. Separately, long-term operating lease liabilities were $1,430.9 million and long-term deemed landlord financing obligations were $707.5 million.
- Current assets were $1,754.8 million and current liabilities $1,074.6 million. Inventory was $929.8 million, down from $959.2 million at year-end but up $377.4 million year over year.
Material changes versus the prior-year quarter
- Topgolf: Revenue rose 25.3% to $403.5 million, reflecting 11 additional company-operated venues since March 2022 and higher same-venue sales. Segment operating income fell to $2.8 million from $6.5 million, primarily amid planned marketing increases and higher labor costs.
- Golf Equipment: Revenue declined 5.2% to $443.7 million; constant-currency revenue declined 1.5%. Segment operating income fell 19.0% to $81.6 million. The company cited the prior-year retail inventory restocking, foreign-exchange headwinds and, for profit, partly offsetting price increases and lower freight costs.
- Active Lifestyle: Revenue rose 28.0% to $320.2 million and segment operating income increased 39.7% to $37.3 million, driven by TravisMathew and Jack Wolfskin momentum and improved freight costs.
- Overall operating income decreased 14.6%. Higher interest expense ($49.6 million versus $31.4 million) and a swing in other income/expense to a $10.1 million expense from $8.1 million of income contributed to lower pre-tax income.
- Net cash used in operations improved to $152.1 million from $185.3 million, but remained a use of cash. The company cited seasonal receivables and reported a $285.2 million cash-flow use from increased accounts receivable.
Outlook, financing, risks and unusual items
- Management expects 2023 capital expenditures of approximately $270 million: $190 million for Topgolf and $80 million for the legacy business. No full-year revenue or earnings guidance is provided in this filing.
- In March 2023, the company refinanced its capital structure, issuing a $1.25 billion Term Loan B due 2030 and replacing its prior term loan and Topgolf credit facilities. It also extended and increased its asset-based revolving facility to $525 million, due 2028. Management said the refinancing was intended to extend maturities, reduce borrowing costs and improve liquidity. The new Term Loan B carried an 8.26% rate at quarter-end; rates are variable under the agreement.
- The refinancing generated a $10.5 million non-cash debt-modification loss; $1.8 million of third-party fees were expensed. Interest expense also reflected higher debt balances, rates and Topgolf financing obligations. The company reported compliance with applicable financial covenants at quarter-end.
- Management believes available funds and access to capital are adequate for at least the next 12 months, while noting that cash generation depends on economic conditions, product demand, supply chains and foreign exchange. It anticipates foreign-currency changes will continue to weigh unfavorably on revenue and operating results during the rest of 2023; FX reduced Q1 international revenue by $29.4 million year over year.
- Inflation increased product and operating costs. Price increases and a greater ocean-freight mix partly offset the pressure, but management cautioned that persistent inflation could hurt margins and cash flows if costs cannot be passed through.
- Topgolf is seasonal, with historically lower first- and fourth-quarter revenue; adverse weather can disproportionately affect peak periods. Supply-chain improvement caused inventory to arrive earlier than expected, and most inventory on hand was for 2023 products and launches.
- Significant long-term commitments include $2,431.1 million of future operating lease payments, $2,975.0 million of deemed landlord financing payments and $1,005.5 million for signed leases not yet commenced. These figures include future payments and should be considered alongside the balance-sheet liabilities.
- The company maintained a valuation allowance against some U.S. deferred tax assets, but said continued profitability could provide grounds within 12 months to release a significant portion; any release would be a non-cash tax benefit. Routine legal matters were disclosed, but the company could not estimate the aggregate possible loss.
Key facts for investors to verify
- Whether Topgolf same-venue sales, venue economics and operating income improve as new locations mature and marketing and labor costs evolve.
- Whether Golf Equipment demand and Active Lifestyle growth persist, and how retailer inventory, product launches and seasonality affect subsequent quarters.
- Debt costs, variable-rate exposure, covenant compliance and liquidity after the refinancing; also assess lease and deemed landlord financing commitments alongside reported debt.
- Whether foreign-exchange and inflation headwinds remain consistent with management’s outlook, and whether pricing and freight savings continue to offset cost increases.
- Operating cash flow conversion and inventory levels, including the timing of receivable collections and 2023 product sell-through.
- Any change in the U.S. deferred-tax valuation allowance, and developments in legal matters or other contingencies.