Business context and reporting period
Topgolf Callaway Brands Corp. (formerly Callaway Golf Company; NYSE ticker changed from ELY to MODG in September 2022) filed this unaudited Form 10-Q for the quarter ended September 30, 2022. The company operates Topgolf, Golf Equipment, and Active Lifestyle segments. Comparisons are with the three and nine months ended September 30, 2021; Topgolf was included for fewer months in the 2021 nine-month comparison because the merger closed in March 2021.
Key financial metrics
Amounts are in millions of dollars, except per-share data. Results are GAAP unless otherwise noted.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net revenue | $988.5 | $856.5 | $3,144.4 | $2,421.7 |
| Operating income | $68.2 | $76.0 | $291.5 | $259.4 |
| Net income (loss) | $38.5 | $(16.0) | $230.6 | $348.2 |
| Diluted EPS | $0.20 | $(0.09) | $1.17 | $2.03 |
| Net cash provided by operating activities | Not separately presented for the quarter | $34.6 | $246.8 |
- Revenue and margins: Q3 revenue rose 15.4% year over year (21.3% on a constant-currency basis); nine-month revenue rose 29.8% (34.4% constant currency). Calculated operating margin was approximately 6.9% in Q3 versus 8.9% a year earlier, and 9.3% for the nine months versus 10.7%.
- Segment performance: Q3 revenue increased in Topgolf (+24.0%), Golf Equipment (+2.5%), and Active Lifestyle (+19.3%). Segment operating income totaled $101.3, down 2.9% year over year. For the nine months, segment operating income rose 14.4% to $402.3.
- Cash flow and investment: Nine-month operating cash flow was $34.6, versus $246.8 in 2021. Investing activities used $353.6, including $353.4 of capital expenditures; financing activities provided $165.3. Cash and cash equivalents were $200.3 at September 30, 2022, down from $352.2 at year-end 2021.
- Debt and liquidity: Long-term debt, net, was $1,079.5, and asset-based credit facility borrowings were $99.6. Deemed landlord financing obligations were $577.0. The company reported $659.4 of available liquidity, including cash and availability under U.S. and Japan facilities, and stated it was in compliance with applicable debt covenants.
- Balance sheet and obligations: Inventories were $722.3, up from $533.5 at December 31, 2021. Total assets were $8,221.7 and shareholders’ equity was $3,806.5. The filing lists $7,988.3 of specified future cash obligations, including lease and venue financing commitments.
Material changes versus prior comparable periods
- Q3 GAAP net income improved from a $16.0 loss to $38.5 income, while operating income declined $7.8. The Q3 tax provision fell to $0.3 from $66.2, primarily reflecting releases of deferred-tax valuation allowances.
- Nine-month net income declined to $230.6 from $348.2, in part because 2021 included a $252.5 gain on the step-up in fair value of the company’s pre-merger Topgolf investment. Nine-month operating income nevertheless increased $32.1.
- Foreign currency movements reduced revenue by $50.4 in Q3 and $110.3 for the nine-month period compared with 2021. The company also reported nine-month foreign-currency transaction losses of $32.9.
- Inventory increased amid improved shipping lead times and earlier-than-expected receipts; management said much of the Q3 receipts were for 2023 products. The company attributed the year-over-year comparison in part to unusually low 2021 inventory caused by supply constraints.
- Effective January 1, 2022, the company adopted ASU 2020-06 for convertible debt accounting. It now uses the if-converted method for diluted EPS, increasing diluted weighted-average shares and adding back related after-tax interest in diluted EPS calculations.
Outlook, management commentary, risks and unusual items
- Management estimated 2022 capital expenditures of approximately $325, comprising $250 for Topgolf and $75 for the legacy business. No full-year revenue or earnings guidance is stated in the supplied filing text.
- Management said existing funds, expected operating cash flows, and available or potential financing were expected to cover operating needs, capital expenditures, debt repayments, and contractual obligations for at least 12 months from the filing’s issuance date. This outlook is subject to risks affecting cash generation and financing access.
- The company anticipated significant unfavorable foreign-exchange effects on revenue and operating results through the remainder of 2022 and into 2023. It cautioned that inflation in product, freight, employee, and operating costs may pressure margins if price increases cannot offset costs.
- Other key risks include consumer demand and discretionary spending, economic downturn, supply-chain disruptions, retailer inventory and purchasing behavior, Topgolf integration and venue expansion, seasonality and weather, and variable-rate debt. Topgolf venue performance is also exposed to changes in traffic, event bookings, occupancy, and operating costs.
- Expansion commitments are substantial: 12 U.S. venues and one U.K. venue were under construction, and the filing disclosed $966.8 of future lease obligations for 10 signed venues whose leases had not commenced. Management expected higher inventory levels going into 2023.
- Unusual items included a $4.8 Q3 impairment related to an underperforming pre-merger Topgolf concept location. Nine-month non-GAAP adjustments also included impairment and Russia-related business suspension costs, ERP implementation costs, and fees tied to a postponed debt refinancing. The filing states that routine and other legal matters are pending, but management could not estimate aggregate potential losses; it reported no material change to previously disclosed risk factors.
- The board authorized a $100.0 share repurchase program in May 2022; no purchases had been made under that program by September 30. Reported Q3 share withholding was to cover employee tax obligations, not purchases under the public program.
Important facts for investors to verify
- Whether revenue growth and venue traffic persist after considering foreign-exchange effects, consumer demand, seasonality, and the timing of Topgolf’s inclusion in prior-period comparisons.
- Whether inventory levels, including receipts intended for 2023, convert to sales without elevated discounting, returns, or write-downs.
- Whether operating cash flow improves enough to support planned capital spending and venue expansion, given the sharp year-over-year decline in nine-month cash generation.
- The company’s total debt and venue-related lease and deemed-financing burden, refinancing and variable-rate exposure, covenant headroom, and continuing access to credit facilities.
- The sustainability and cash impact of tax valuation-allowance releases, and the distinction between GAAP and management’s non-GAAP results.
- Progress, costs, and returns from venues under construction and signed but not yet commenced leases; also monitor disclosed legal contingencies and other commitments.