Topgolf Callaway Brands Corp. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2023. The company combines golf entertainment, golf equipment, and active-lifestyle businesses, including Topgolf, Callaway, TravisMathew, Jack Wolfskin, and OGIO. Comparisons below are to the corresponding 2022 periods.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $1,040.6 million | $988.5 million | $3,387.7 million | $3,144.4 million |
| Operating income | $73.8 million | $68.2 million | $270.3 million | $291.5 million |
| Net income | $29.7 million | $38.5 million | $172.1 million | $230.6 million |
| Diluted EPS | $0.16 | $0.20 | $0.88 | $1.17 |
| Operating margin | 7.1% | 6.9% | 8.0% | 9.3% |
- Q3 revenue increased 5.3%; nine-month revenue increased 7.7%. Topgolf and Active Lifestyle drove growth, while Golf Equipment revenue declined.
- Q3 operating income rose 8.2%, but net income fell 22.9%, principally as higher interest expense offset operating improvement. For the nine months, operating income declined 7.3% and net income declined 25.4%.
- Segment results: Q3 Topgolf revenue was $447.7 million and operating income $38.9 million; Golf Equipment revenue was $293.4 million and operating income $35.2 million; Active Lifestyle revenue was $299.5 million and operating income $40.0 million.
- Operating cash flow for the nine months was $227.7 million, versus $34.6 million in 2022. Capital expenditures were $388.7 million, implying operating cash flow less capital expenditures of negative $161.0 million.
- Cash and cash equivalents were $330.3 million at quarter-end. Reported available liquidity, including cash and available borrowing capacity, was $734.1 million.
- At September 30, long-term debt principal was $1,572.0 million and short-term asset-based facility borrowings were $78.1 million. Interest expense, net, rose 43.7% in Q3 to $52.3 million and 53.1% for the nine months to $153.6 million.
Material changes and management commentary
- Topgolf revenue grew 8.2% in Q3, helped by nine venues opened since September 2022. Management cited lower same-venue sales, reflecting weaker walk-in traffic, extreme heat in some markets, and fewer corporate events than in the prior-year quarter. Venue operating income increased with revenue and improved operating efficiencies.
- Golf Equipment Q3 revenue declined 1.1% and segment operating income declined 29.0%. Management attributed results to planned golf-club launch timing shifted to Q4, softer Asia demand, prior-year golf-ball retail inventory replenishment, more normalized promotions, and lower production-volume cost absorption.
- Active Lifestyle Q3 revenue increased 7.7% and segment operating income increased 42.3%, supported by TravisMathew and Jack Wolfskin sales and a higher direct-to-consumer mix. Nine-month sales also benefited from brand growth and retail expansion.
- Inventory declined $222.7 million from December 31, 2022, to $736.5 million, which management attributed to improved sell-through and normalized supply-chain conditions.
- The company refinanced its debt in March 2023, issuing a $1.25 billion Term Loan B due in 2030 and replacing its prior term loan and Topgolf facilities. It also increased and extended its asset-based revolving facility to $525 million, maturing in 2028. The company reported compliance with applicable financial covenants.
- A $50.8 million release of U.S. deferred-tax valuation allowance in Q2 contributed to the nine-month income tax benefit of $53.0 million. This non-cash tax benefit is a significant factor in reported year-to-date earnings.
Outlook, risks, and unusual items
- Management estimated 2023 capital expenditures, net of third-party real-estate financing reimbursements, of approximately $240 million: $175 million for Topgolf and $65 million for the legacy business. No full-year revenue or earnings guidance is provided in the filing text.
- Management stated that available cash, expected operating cash flows, and credit-facility availability should fund operations, planned capital expenditures, debt repayments, and contractual obligations for at least the next 12 months. This outlook remains subject to demand, economic conditions, supply-chain, and foreign-exchange risks.
- Expansion brings substantial commitments: $1,012.9 million of future lease obligations for nine signed venues whose leases had not commenced, and $9,979.9 million of listed significant cash obligations across debt, interest, leases, construction commitments, purchases, and tax contingencies. These amounts span multiple years and include lease commitments.
- Q3 non-GAAP adjustments included $2.7 million of reorganization charges and $1.5 million of cybersecurity-related IT costs. The company expected approximately $13 million of total reorganization charges, with initiatives expected to finish by year-end 2023. Nine-month adjustments also included $13.6 million of debt-modification charges.
- On November 1, 2023, the company acquired certain BigShots Golf assets and development rights for approximately $29.4 million, funded with cash. Additional commitments may arise from future development rights.
- Risks include discretionary consumer and corporate spending, venue seasonality and weather, inflation, foreign exchange, interest rates, integration and expansion execution, and competition. Routine legal matters are disclosed; the company says it cannot estimate their ultimate aggregate financial impact. It reported no material changes to the risk factors in its 2022 Form 10-K.
Investor facts to verify
- Whether Topgolf same-venue sales and corporate-event demand recover, and how new venue openings affect profitability and cash needs.
- Whether Golf Equipment sales and segment margins improve after the planned product launches and as retail inventory comparisons normalize.
- How higher interest expense, debt balances, and venue lease and deemed-landlord financing obligations affect cash generation and covenant headroom.
- Whether operating cash flow can support the expansion program and capital spending, given the negative operating-cash-flow-less-capex result for the nine-month period.
- The sustainability of earnings after the deferred-tax valuation allowance release and the impact of the BigShots acquisition and future development commitments.