Topgolf Callaway Brands Corp. (NYSE: MODG) — FY 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; comparisons are with the year ended December 31, 2022. This is an annual filing, not a quarterly report. The issuer is Topgolf Callaway Brands Corp., formerly Callaway Golf Company. Its three segments are Topgolf, Golf Equipment, and Active Lifestyle.
Financial performance
| Metric | FY 2023 | FY 2022 |
|---|---|---|
| Net revenue | $4,284.8 million | $3,995.7 million |
| Operating income | $237.7 million | $256.8 million |
| Operating margin | 5.5% | 6.4% |
| Income before taxes | $34.8 million | $141.9 million |
| Income tax benefit | $60.2 million | $16.0 million |
| Net income | $95.0 million | $157.9 million |
| Diluted EPS | $0.50 | $0.82 |
| Cash provided by operating activities | $364.7 million | Cash used: $35.1 million |
| Capital expenditures | $482.0 million | $532.3 million |
| Cash and cash equivalents at year-end | $393.5 million | $180.2 million |
Revenue increased 7.2% (7.9% at constant currency). Topgolf revenue grew 13.7% to $1,761.0 million; Golf Equipment fell 1.4% to $1,387.5 million; and Active Lifestyle increased 9.2% to $1,136.3 million. Segment operating income was $108.8 million for Topgolf, $193.3 million for Golf Equipment, and $117.0 million for Active Lifestyle.
Operating income declined 7.4%, and net income declined 39.8%, despite higher revenue. Higher venue expenses, SG&A, R&D, and financing costs pressured results. Net interest expense rose 47.2% to $210.2 million. The $60.2 million tax benefit materially supported reported net income; it primarily reflected release of U.S. deferred-tax valuation allowances. Management reports a 14.4% effective tax rate excluding that release and other nonrecurring items.
Cash, debt, and liquidity
Operating cash flow improved by $399.8 million year over year, helped in part by inventory reductions. Inventory fell $164.8 million to $794.4 million. Investing activities used $542.9 million, including capital expenditures; financing activities provided $375.8 million. Cash and cash equivalents increased $213.3 million.
At year-end, principal long-term debt and revolving-credit borrowings totaled approximately $1,621.5 million before unamortized debt issuance costs; balance-sheet debt, net, was $1,535.3 million, plus $54.7 million of asset-based credit facilities. The company reported $742.6 million of cash and availability under credit facilities. In March 2023, it refinanced its capital structure, including a $1.25 billion Term Loan B due 2030 and a $525 million ABL facility due 2028. Variable-rate exposure remains; 2023 net interest expense rose significantly.
Debt is only part of the financing burden: the filing lists $4,389.8 million of future deemed-landlord-financing payments and $2,456.4 million of operating lease payments, both including imputed interest, among total contractual obligations of $10,653.8 million. The company says it expects liquidity sources to fund operating needs, capital expenditures, debt payments, and commitments for at least 12 months from the filing date. It reported compliance with applicable debt covenants at year-end.
Material developments and unusual items
- Topgolf’s venue count grew to 98, including 88 domestic owned-and-operated venues, one acquired domestic venue, four international owned-and-operated venues, and five franchised venues. Venue expansion drove revenue growth but also increased costs and capital needs.
- The company acquired BigShots-related assets in November 2023 for approximately $29.7 million. It also acquired Swing Suite assets for $12.5 million. Further BigShots-related acquisitions totaling $21.9 million were completed in early 2024.
- Golf Equipment revenue and segment income weakened against 2022, when retail customers replenished inventories after the pandemic. Lower production volumes, normalized promotions, foreign-exchange effects, and cost absorption contributed to lower segment income.
- Active Lifestyle segment income improved on revenue growth, better gross margins, a higher direct-to-consumer mix, and lower freight costs.
- The company recorded an $11.7 million impairment charge for abandoning the Shankstars digital game, and $12.3 million of reorganization costs. No goodwill or indefinite-lived intangible impairment was recorded in 2023.
- A September 2023 fire at a Taiwanese golf-ball supplier disrupted production for nearly six months. The company shifted sourcing to other facilities and said it mitigated the impact.
- An August 2023 social-engineering incident affected certain company systems and temporarily disrupted e-commerce. Personal information of approximately one million customers was affected; the company said no full payment-card or government-identification numbers were affected. It incurred $2.4 million of incident-related costs included in its non-GAAP reconciliation.
- The company repurchased 2.9 million shares during 2023 for $46.3 million under its $100 million authorization. It does not anticipate paying dividends in the foreseeable future.
Outlook, risks, and contingencies
The supplied filing text provides no specific FY 2024 revenue, earnings, or cash-flow guidance. Management describes long-term priorities as innovation, expansion, synergies, and efficiency, with continued Topgolf venue growth and focus on improving venue earnings contribution. Management’s liquidity assessment is subject to economic conditions, consumer demand, supply constraints, inflation, foreign exchange, and other risks.
Principal risks include sensitivity of golf products, apparel, and entertainment to discretionary spending; competition and changing consumer preferences; labor and operating-cost pressures; execution and profitability of new venues; seasonality and adverse weather; reliance on international suppliers and shipping; foreign-currency and interest-rate volatility; and debt covenant, refinancing, and liquidity constraints. The company also identifies food safety, venue licensing, litigation, privacy, and cybersecurity risks. A golf-ball specification change adopted by golf’s governing bodies is scheduled to take effect in 2028 for professionals and 2030 for recreational golfers and may require product redesign or affect demand.
The filing describes routine and other legal claims but says management cannot estimate the ultimate aggregate loss or financial impact. It reports $13.6 million of uncertain tax contingencies in its contractual-obligations table, as well as extensive lease, venue-financing, and capital commitments. Management states there are no material off-balance-sheet arrangements. Deloitte issued unqualified opinions on the financial statements and internal controls; management also concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Whether Topgolf venue growth produces sustainable earnings and cash returns relative to its capital investment and long-term lease and deemed-financing obligations.
- Whether the reported tax benefit is repeatable: FY 2023 net income benefited from a valuation-allowance release, while the filing’s adjusted tax rate was 14.4%.
- Debt balances, borrowing-base availability, interest-rate exposure, covenant headroom, and refinancing or repayment requirements, including the 2026 convertible notes.
- The ongoing effects of the supplier fire, alternative sourcing, and the new golf-ball testing rules on product availability, costs, and demand.
- The scope and remediation costs, if any, arising from the cybersecurity incident, including potential claims or regulatory action.
- Segment performance and underlying margins, especially the Golf Equipment recovery and Active Lifestyle growth, separating reported results from non-GAAP adjustments.