Topgolf Callaway Brands Corp. (NYSE: MODG) — Q1 2024 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2024. The company operates Topgolf entertainment and technology, Golf Equipment, and Active Lifestyle businesses. Results are unaudited; the company cautions that first-quarter results are seasonal and not necessarily indicative of full-year performance.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Net revenue | $1,144.2 million | $1,167.4 million | Down 2.0% (down 1.3% constant currency) |
| Operating income | $66.9 million | $80.5 million | Down 16.9% |
| Net income | $6.5 million | $25.0 million | Down 74.0% |
| Diluted EPS | $0.04 | $0.13 | Down $0.09 |
| Cash used in operating activities | $73.3 million | $152.1 million | Use decreased $78.8 million |
| Capital expenditures | $65.4 million | $121.4 million | Down $56.0 million |
Operating margin was approximately 5.8%, versus 6.9% a year earlier; net margin was approximately 0.6%, versus 2.1%. Net interest expense rose to $58.8 million from $49.6 million. The tax provision was $5.0 million, compared with a $4.2 million tax benefit in the prior-year quarter; the effective tax rate was 43.3% versus negative 20.0%.
Revenue and segment trends
- Topgolf: Revenue rose 4.8% to $422.8 million; segment operating income was $2.9 million, versus $2.8 million. Venue growth from new locations was partly offset by lower same-venue sales, including extreme January weather and a prior-year corporate-events comparison.
- Golf Equipment: Revenue rose 1.4% to $449.9 million; segment operating income increased slightly to $82.1 million. Management cited launches of Chrome golf balls and Ai Smoke clubs.
- Active Lifestyle: Revenue fell 15.2% to $271.5 million and segment operating income fell 33.8% to $24.7 million. Lower TravisMathew sales reflected a prior-year corporate-channel sell-in that did not recur; Jack Wolfskin faced soft European demand and high retailer inventory.
Geographically, U.S. revenue increased 2.2%; Europe declined 7.9% and Asia declined 20.3%. Foreign exchange reduced international revenue by $7.8 million. Consolidated product revenue was $726.1 million and service revenue was $418.1 million.
Balance sheet, cash flow, and liquidity
- Cash and cash equivalents were $233.9 million at March 31, down from $393.5 million at year-end; cash, cash equivalents, and restricted cash totaled $239.3 million.
- Current assets were $1.593 billion and current liabilities $875.0 million. Accounts receivable rose to $423.9 million from $200.5 million at year-end, primarily reflecting seasonal golf-equipment sales. Inventory decreased to $702.9 million from $794.4 million, attributed to improved sell-through and inventory-reduction initiatives.
- Long-term debt, net, was $1.519 billion; total debt including current debt and asset-based facility borrowings was approximately $1.588 billion before unamortized issuance costs. The Term Loan B principal was $1.238 billion and its stated rate at quarter-end was 8.33%. A March amendment reduced its interest rate, but the filing text does not provide a clear post-amendment rate.
- Available liquidity, defined by the company as cash plus available credit-facility capacity, was $719.7 million. Management said existing funds and access to capital should cover operating needs, capital expenditures, debt repayments, and obligations for at least the next 12 months.
- Operating, financing, and deemed-landlord obligations are significant: balance-sheet lease liabilities and deemed landlord financing obligations totaled approximately $2.82 billion. Undiscounted future payments across those categories totaled approximately $7.67 billion. These are distinct from funded debt.
Material changes, outlook, and risks
- Management attributed lower overall earnings primarily to lower revenue and higher expenses, including increased venue costs, interest expense, and taxes. Other income improved largely due to foreign-currency hedge gains.
- The company acquired BigShots-related assets and development rights in three transactions for an aggregate $53.1 million, funded with cash. The acquisitions’ Q1 operating results and related costs were not material.
- Management estimated 2024 capital expenditures, net of third-party financing-partner reimbursements, at approximately $240 million: $180 million for Topgolf and $60 million for the legacy business.
- On March 19, the company amended its Term Loan B to reduce the applicable interest rate. The change generated a $4.7 million non-cash debt-modification/extinguishment loss; the company also recorded $0.9 million of related fees in SG&A.
- The company reported $73.3 million of operating cash outflow in the quarter. It cited seasonal working-capital movements, including the increase in receivables, as part of its financial condition discussion.
- Key risks include discretionary consumer demand, retailer inventory and purchasing patterns, weather and seasonality, inflation, foreign exchange, supply-chain constraints, venue expansion and construction commitments, and interest-rate exposure. A 10% unfavorable currency movement produced an estimated $56.3 million loss on foreign-currency forward contracts in the company’s sensitivity analysis; a 10% interest-rate increase was estimated to add $4.9 million of expense over 12 months. These are scenario estimates, not forecasts.
- Management stated that pending legal matters were not expected to have a material adverse effect. The filing reported no material risk-factor changes from the 2023 Form 10-K. Disclosure controls were deemed effective; implementation of a cloud-based HR system materially affected internal-control processes and controls.
- Q1 share repurchases under the company’s public program were $2.1 million. Separately, after quarter-end, it repurchased 1.0 million shares for $16.1 million.
Most important facts for investors to verify
- Whether revenue and same-venue trends improve, particularly at Topgolf and in Active Lifestyle, as seasonal periods progress.
- Whether inventory reduction continues without impairing product availability or sales, and whether European retailer inventory and demand recover.
- The Term Loan B’s post-amendment interest rate, interest expense trajectory, and compliance with debt and credit-facility terms.
- Cash conversion and working-capital movements, including the seasonal receivables build and operating cash outflows.
- Execution and funding of the $240 million capital-expenditure plan, venue construction commitments, and the economics of BigShots expansion.
- Potential effects of foreign exchange, inflation, weather, and consumer-spending weakness on revenue, margins, and liquidity.