Callaway Golf Co: Form 10-Q for the period ended Jun 30, 2023

The following discussion should be read in conjunction with the condensed consolidated financial statements and the related notes that appear elsewhere in this report, and the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on March 1, 2023. Interim operating results are not necessarily indicative of operating results that may be expected for the year ending December 31, 2023, or any other future periods. See “Important Notice to Investors Regarding Forward-Looking Statements” on page 2 of this report. References to the “Company,” “Topgolf Callaway Brands,” “we,” “our,” or “us” in this report refer to Topgolf Callaway Brands Corp., together with our wholly-owned subsidiaries.

Discussion of Non-GAAP Measures

In addition to the financial results contained in this report, which have been prepared and presented in accordance accounting principles generally accepted in the United States of America (“GAAP”), we have also included supplemental information concerning our financial results on a non-GAAP basis. This non-GAAP information includes the following:

• A constant currency measure on net revenues in order to demonstrate the impact of fluctuations from foreign currencies on these results. This information represents an estimate for comparative purposes and is calculated by taking current period local currency results and translating them into U.S. dollars based on the foreign currency exchange rates for the applicable comparable prior period.
• Net income and diluted earnings per share excluding certain non-cash and non-recurring charges, as further detailed below.

We have included information in this report to reconcile non-GAAP information for the periods presented to the most directly comparable GAAP information. Non-GAAP information in this report should not be considered in isolation or as a substitute for any measure derived in accordance with GAAP and may also be inconsistent with the manner in which similar measures are derived or used by other companies. We use such non-GAAP information for financial and operational decision-making purposes and as a means to evaluate the underlying performance of our business and/or in forecasting our business. We believe that the presentation of such non-GAAP information, when considered in conjunction with the most directly comparable GAAP information, provides additional useful information for investors in their assessment of the underlying performance of our business.

Operating Segments and Seasonality

We are a technology-enabled modern golf company delivering leading golf equipment, apparel and entertainment, with a portfolio of global brands including Topgolf, Callaway Golf, Odyssey, TravisMathew, Jack Wolfskin, OGIO, Toptracer and World Golf Tour (“WGT”). Our products and brands are reported under our Topgolf, Golf Equipment, and Active Lifestyle operating segments.

Topgolf

Our Topgolf operating segment is primarily comprised of company-operated domestic and international Topgolf venues, which are equipped with technology-enabled hitting bays, multiple bars, dining areas and event spaces. Our company-operated venues also offer advertising partnerships to corporate sponsors to feature their names and logos at Topgolf venues and on other media platforms. Revenue from company-operated venues is primarily derived from the sale of food and beverage, gameplay, and events. As of June 30, 2023, we had 80 company-operated Topgolf venues, and one company-operated Topgolf lounge in the United States and four company-operated venues in the United Kingdom. In addition to our company-operated venues, we also have five international franchised Topgolf venues from which we receive royalties.

The Topgolf operating segment also includes other business lines comprised of our Toptracer ball-flight tracking technology as well as the digital media platform. The Toptracer ball-flight tracking technology is used by independent driving ranges, as well as in many of our company-operated and franchised Topgolf venues in order to enhance the Topgolf gaming experience. The digital media platform includes digital golf games comprised of online multiplayer virtual golf games that enable players to gather online as a community and participate in simulated photorealistic gameplay.

Operating results for our Topgolf operating segment fluctuate from quarter to quarter due to seasonal factors. Historically, our venues experience nominally higher second and third quarter revenues associated with the spring and summer, while the first and fourth quarters have historically had lower revenues, with the first quarter being the lowest, due to cooler temperatures and fewer corporate events. Seasonality is expected to be a factor in Topgolf’s results of operations, and as a result, factors such as adverse weather may impact peak seasons at our venues, which may have a disproportionate effect on our operating results.

Revenue growth and profitability related to our Topgolf venues are impacted by same venue sales. Same venue sales is defined as sales for the comparable venue base, which includes new venues that have 24 full fiscal months of operations. Same venue sales is a key performance indicator used within our industry and is indicative of acceptance of our initiatives as well as local economic and consumer trends.

Our Topgolf subsidiary previously operated on a 52- or 53-week retail calendar year, which ended on the Sunday closest to December 31. As of April 4, 2022, Topgolf began operating on a fiscal year calendar ending on December 31. Therefore, Topgolf financial information included in our condensed consolidated financial statements for the three and six months ended June 30, 2022 was from April 4, 2022 through June 30, 2022, and January 3, 2022 through June 30, 2022, respectively. Beginning January 1, 2023, Topgolf financial information is reported on a calendar year basis.

Golf Equipment

Our Golf Equipment operating segment is comprised of Callaway Golf-branded woods, hybrids, irons, wedges, Odyssey putters, packaged sets, and Callaway Golf and Strata-branded golf balls, as well as the sale of pre-owned golf clubs. Our golf equipment products are designed to be technologically advanced for golfers of all skill levels, from beginner to professional.

In most of the regions where we conduct business, the game of golf is primarily played on a seasonal basis. Weather conditions generally restrict golf from being played year-round, except in a few markets, with many of our on-course customers closing during the cold weather months. In general, we launch new product for the new golf season during the first quarter of the year. This initial sell-in period typically continues into the second quarter, while third-quarter sales are generally dependent on reorder business, but may also include smaller new product launches. Fourth-quarter sales are generally less than the other quarters due to the end of the golf season in many of our key regions. In addition to this seasonality, our golf equipment sales may also be impacted by other factors, including the timing of new product introductions as well as weather conditions. As a result, a majority of our Golf Equipment sales, and most, if not all, of the profitability from our Golf Equipment operating segment generally occurs during the first half of the year.

Active Lifestyle

Our Active Lifestyle operating segment is comprised of Callaway Golf, TravisMathew, Jack Wolfskin and OGIO soft goods products, which are largely designed and developed internally. The Callaway Golf soft goods brand offers a full line of premium golf apparel, footwear, gear and accessories. TravisMathew offers a full line of premium golf and lifestyle apparel as well as footwear and accessories. Under the Jack Wolfskin brand, we offer a full line of premium outdoor apparel, gear and accessories. The OGIO brand offers a full line of premium personal storage gear for sport and personal use and accessories. On certain soft goods products, we receive royalties from the licensing of our trademarks and service marks.

Callaway Golf-branded golf apparel and accessories sales generally follow the same seasonality as golf equipment, and are therefore generally higher during the first half of the year. TravisMathew-branded products are more evenly spread throughout the year as the product line is generally lifestyle focused and not dependent on the seasonality of golf. Sales of Jack Wolfskin-branded products are higher during the second half of the year driven by stronger sales of its outerwear product lines during the cold-weather months.

For further information about our segments, see Note 16 “Segment Information” in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q.

Current Economic Conditions

Inflation & Interest

Our business is subject to the impacts of inflationary pressures and interest rate exposure. We monitor the impacts that inflationary pressures and interest rate changes may have on our business and consumers, and we manage our business to adjust for such impacts. In 2023, inflationary pressures have contributed to higher operating expenditures, which we have been able to partially offset by increasing the price of our products and services in addition to changing our mix of freight between sea and air. While we generally have been able to offset certain inflationary pressures, the length and severity of these conditions are generally unpredictable and may adversely impact our operating expenses, which we may not be able to continue to offset. Changes to interest rates in response to inflationary pressures may also have adverse impacts on our business, cash flows and operating results depending on the severity and length of the changes.

Supply Chain

During most of 2022, we experienced longer lead times on inventory shipments due to global supply chain challenges. Due to these challenges, we changed the timing and method of our inventory purchases in order to meet the heightened demand for our golf equipment and apparel products, as well as manage capacity at our suppliers. After making these changes, inventory shipment timing and supply chain channels improved globally, leading to the receipt of inventory orders earlier than anticipated, which resulted in increased inventory levels late last year and earlier this year. Since December 31, 2022, our total inventory has decreased by $119.4 million. A majority of our current inventory on hand is for 2023 product and future 2023 planned product launches.

Foreign Currency

A significant portion of our business is conducted outside of the United States in currencies other than the U.S. dollar. Therefore, we enter into foreign currency forward contracts to mitigate the effects that changes in foreign currency rates may have on our financial results. While these foreign currency forward contracts can mitigate the effects of changes in foreign currency rates in the short-term, they do not eliminate those effects, which can be significant, and they do not mitigate their effects over the long-term. In general, our overall financial results are affected positively by a weaker U.S. dollar and negatively by a stronger U.S. dollar as compared to the foreign currencies in which we conduct our business. For the three and six months ended June 30, 2023, foreign currency fluctuations had an unfavorable impact on international net revenues of $8.0 million and $37.4 million, respectively. We believe foreign currency changes will continue to have an unfavorable impact on net revenues and operating results throughout the remainder of the year.

Results of Operations

Net Revenues

Net revenues by operating segment for the three and six months ended June 30, 2023 as compared to the three and six months ended June 30, 2022 were as follows (in millions, except percentages):

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Net revenues for the three and six months ended June 30, 2023 increased $64.0 million or 5.7% (6.5% on a constant currency basis), and $191.2 million or 8.9% (10.6% on a constant currency basis, respectively), as compared to the three and six months ended June 30, 2022.

The $64.0 million (5.7%) increase in net revenues for the three months ended June 30, 2023 was primarily related to growth in our Topgolf operating segment, which was driven by strong performance at newly opened Topgolf venues combined with increased same venue sales. This increase was offset by decreases in our Active Lifestyle and Golf Equipment operating segments. The decrease in our Active Lifestyle segment was primarily related to a shift in the timing of Jack Wolfskin wholesale shipments in 2022 from the first quarter to the second quarter. The decrease in our Golf Equipment business was primarily due to retail fill-in during the second quarter of 2022 that was not repeated in 2023, combined with the unfavorable impact from changes in foreign currency rates. These decreases were partially offset by increased golf ball sales combined with continued strong consumer demand for the Paradym family of clubs, which contributed to market share gains in the United States in June 2023.

The $191.2 million (8.9%) increase in net revenues for the six months ended June 30, 2023 was primarily related to growth in our Topgolf and Active Lifestyle operating segments. The increase at Topgolf was primarily related to strong performance at newly opened Topgolf venues and increased same venue sales. The increase in our Active Lifestyle operating segment was primarily related to continued strong brand momentum and additional store openings at TravisMathew, in addition to an improved supply chain and timing of inventory shipments at Jack Wolfskin, combined with growth in the retail and e-commerce channels. These increases were partially offset by a decrease in our Golf Equipment segment primarily due to retail fill-in during the first half of 2022 that was not repeated in 2023 combined with the unfavorable impact from changes in foreign currency rates. These decreases were partially offset by increased golf ball sales combined with continued strong consumer demand for the Paradym family of clubs.

Net revenues by major geographic region for the three and six months ended June 30, 2023 as compared to the three and six months ended June 30, 2022 were as follows (in millions, except percentages):

Revenues from our Topgolf operations are primarily concentrated in the United States and Europe, with the United States being our principal market. We sell our Golf Equipment products and Callaway Golf and OGIO Active Lifestyle products in the United States and internationally, with our principal international regions being Europe and Asia. Active Lifestyle revenues from our TravisMathew and Jack Wolfskin operations are largely concentrated in the United States and Europe, respectively.

United States

During the three and six months ended June 30, 2023, net revenues in the United States increased $86.2 million (10.8%) and $187.9 million (12.4%), respectively, compared to the three and six months ended June 30, 2022. These increases were primarily due to the growth and continued expansion of our Topgolf business, as well as growth and strong performance of our TravisMathew business, partially offset by a small decline in Golf Equipment revenues.

Europe

During the three and six months ended June 30, 2023, net revenues in Europe decreased $20.8 million (14.8%) and $2.0 million (0.7%), respectively, compared to the three and six months ended June 30, 2022. The $20.8 million decrease for the three months ended June 30, 2023 was primarily driven by a $17.3 million decrease at Jack Wolfskin due to supply chain constraints in early 2022, which resulted in a shift in timing of wholesale shipments, shifting from the first quarter to the second quarter. The $2.0 million decrease for the six months ended June 30, 2023 was primarily due to the unfavorable impact of changes in foreign currency rates, partially offset by an increase in sales of Jack Wolfskin apparel.

Asia

During the three and six months ended June 30, 2023, net revenues in Asia decreased $7.0 million (5.2%) and $5.5 million (1.9%), respectively, compared to the three and six months ended June 30, 2022. The decreases were primarily due to the unfavorable impact of changes in foreign currency rates in Japan and Korea, partially offset by an increase in sales of Jack Wolfskin apparel.

Rest of World

During the three and six months ended June 30, 2023, net revenues in Rest of World increased $5.6 million (14.4%) and $10.8 million (14.2%), respectively, compared to the three and six months ended June 30, 2022. These increases were primarily due to strong performance in Canada for our Golf Equipment products, partially offset by the unfavorable impact of changes in foreign currency rates of $2.4 million.

Costs and Expenses (in millions, except percentages)

Cost of Products

Cost of products is variable in nature and fluctuates relative to sales volumes. During the three months ended June 30, 2023 cost of products decreased $12.1 million (3.0%) compared to the three months ended June 30, 2022 primarily due lower freight costs. During the six months ended June 30, 2023, cost of products increased $18.1 million (2.2%), compared to the six months ended June 30, 2022 due to the increase in sales in our Active Lifestyle operating segment, partially offset by a decline in freight costs.

Cost of Services, excluding Depreciation and Amortization

Cost of services, excluding depreciation and amortization (“cost of services”) includes the cost of food and beverage sold in our Topgolf venues as well as certain costs associated with the licensing of our Toptracer ball-flight tracking technology. During the three and six months ended June 30, 2023, cost of services increased $2.3 million (4.7%) and $7.7 million (8.7%), respectively, compared to the three and six months ended June 30, 2022, which was primarily due to the opening of 11 new company-operated Topgolf venues since June 30, 2022.

Other Venue Expense

Other venue expenses primarily consist of depreciation and amortization, employee costs, rent, utilities, marketing and other costs associated with Topgolf venues. During the three and six months ended June 30, 2023, other venue expense increased $54.9 million (20.9%) and $130.0 million (26.4%), respectively, compared to the three and six months ended June 30, 2022, primarily due to the addition of 11 new company-operated Topgolf venues since June 30, 2022, in addition to higher wages and a planned increase in costs related to marketing campaigns.

Selling, General and Administrative Expense

Selling, general and administrative (“SG&A”) expenses primarily consist of employee costs, advertising and promotional expense, legal and professional fees, tour expenses, travel expenses, building and rent expenses, depreciation charges (excluding those related to manufacturing, distribution, and venue operations), amortization, and other miscellaneous expenses. During the three and six months ended June 30, 2023, SG&A expenses increased by $27.0 million (10.7%) and $52.4 million (10.6%), respectively, compared to the three and six months ended June 30, 2022.

The $27.0 million increase for the three months ended June 30, 2023 was due to increased costs to support the overall growth in the business, which were primarily related to an $7.8 million increase in planned advertising and promotional expense for new marketing campaigns, a $3.1 million increase in depreciation and amortization, a $3.1 million charge related to reorganization costs, and other miscellaneous selling, general and administrative charges, including travel and entertainment, professional fees, corporate development costs, and IT integration charges. The $52.4 million increase for the six months ended June 30, 2023 was driven by costs to support the overall growth of the business, which were primarily related to a $14.1 million increase in planned advertising and promotional costs related to new marketing campaigns, a $9.3 million increase in employee costs due to an overall increase in headcount, and a $5.7 million increase in depreciation and amortization, in addition to other total costs of $16.2 million. Other total costs were primarily comprised of costs for our debt refinancing which we completed in the first quarter of 2023, and reorganization charges incurred in the second quarter of 2023, in addition to other miscellaneous costs to support the growth of the business.

Research and Development Expense

Research and development expenses are comprised of costs to design, develop, test or improve our products and technology, and primarily include employee costs of personnel engaged in research and development activities, research costs and depreciation expense. During the three and six months ended June 30, 2023, research and development expenses increased $3.3 million (17.6%) and $8.6 million (23.8%), respectively, compared to the three and six months ended June 30, 2022, primarily driven by higher employee costs due to increased headcount.

Venue Pre-Opening Costs

Venue pre-opening costs are primarily related to the costs associated with activities prior to the opening of new company-operated Topgolf venues, and consist of, but are not limited to, labor, rent and occupancy costs, and travel and marketing expenses. These costs may fluctuate based on the planned timing, size and location of new venues. During the three and six months ended June 30, 2023, venue pre-opening costs increased $1.6 million (39.0%) and $1.2 million (14.6%), respectively, as compared to the three and six months ended June 30, 2022.

Other Income and Expense (in millions, except percentages)

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Interest expense, net increased $19.2 million (59.1%) and $37.4 million (58.5%) during the three and six months ended June 30, 2023 as compared to the three and six months ended June 30, 2022, primarily due to higher outstanding balances and increased interest rates on our term loans and senior secured asset-based revolving credit facilities, as well as an increase in deemed landlord financing (“DLF”) obligations for Topgolf.

Other (expense) income, decreased $4.5 million (38.1%) and $22.7 million (114.1%) during the three and six months ended June 30, 2023, respectively, as compared to the three and six months ended June 30, 2022, primarily due to the recognition of a $10.5 million non-cash loss to write-off unamortized deferred debt issuance costs and an original issuance discount in connection with our 2023 debt modification, combined with a net decrease in foreign currency hedge gains.

Income Taxes

Our provision for income taxes decreased $48.7 million to an income tax benefit of $45.8 million for the three months ended June 30, 2023, compared to an income tax expense of $2.9 million in the comparable period of 2022. As a percentage of pre-tax income, our effective tax rate for the three months ended June 30, 2023 decreased to (64.0)% compared to 2.7% in the comparable period of 2022. Our effective tax rate for the three months ended June 30, 2023 and 2022 was impacted by reversing a significant portion of the valuation allowances on our deferred tax assets and other nonrecurring items. Excluding these items, our effective tax rate would have been 9.7% and 19.1% for the three months ended June 30, 2023 and 2022, respectively. For further discussion see Note 10 “Income Taxes” in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q.

The benefit for income taxes increased $37.2 million to $50.0 million for the six months ended June 30, 2023, compared to $12.8 million in the comparable period of 2022. As a percentage of pre-tax income, our effective tax rate for the six months ended June 30, 2023 decreased to (54.1)% compared to (7.1)% in the comparable period of 2022. Our effective tax rate for the six months ended June 30, 2023 and 2022 was impacted by the reversal of a significant portion of the valuation allowances on our deferred tax assets and other nonrecurring items. Excluding these items, our effective tax rate would have been 13.8% and 17.6% for the six months ended June 30, 2023 and 2022, respectively. For further discussion see Note 10 “Income Taxes” in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q.

Net Income, Diluted Earnings Per Share and Reconciliation of Non-GAAP Measures

The following table presents a reconciliation of our results for the three months ended June 30, 2023 and 2022 to our non-GAAP results for the same periods (in millions, except per share information):

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Net income for the three months ended June 30, 2023 increased to $117.4 million compared to $105.4 million for the three months ended June 30, 2022. Diluted earnings per share increased from $0.53 per share to $0.59 per share for the three months ended June 30, 2023 compared to the same period in 2022. Fully diluted shares for the three months ended June 30, 2023 were 201.3 million shares of common stock compared to 200.6 million shares for the same period in 2022. On a non-GAAP basis, excluding the items described in the table above, our net income and diluted earnings per share for the three months ended June 30, 2023 would have been $77.8 million and $0.39 per share, respectively, compared to $93.5 million and $0.47 per share, respectively, for the same period in 2022. The decrease in non-GAAP net income for the three months ended June 30, 2023 was primarily due to a $4.6 million (3.4%) decrease in operating income, combined with an increase of $24.8 million in other expense, which was driven by higher interest rates and increased interest related to increased borrowings and new Topgolf venues, in addition to a decrease in net foreign currency hedge gains. The increases were partially offset by a $13.7 million decrease in our income tax provision.

The following table presents a reconciliation of our results for the six months ended June 30, 2023 and 2022 to our non-GAAP results for the same periods (in millions, except per share information):

Net income for the six months ended June 30, 2023 decreased to $142.4 million compared to $192.1 million for the six months ended June 30, 2022. Diluted earnings per share decreased by $0.25 to $0.72 per share for the first six months of 2023 compared to $0.97 for the same period in 2022. Fully diluted shares for the six months ended June 30, 2023 were 201.4 million shares of common stock compared to 200.7 million shares for the same period in 2022. On a non-GAAP basis, excluding the items described in the table below, our net income and diluted earnings per share for the six months ended June 30, 2023 would have been $111.0 million and $0.57 per share, respectively, compared to $164.4 million and $0.84 per share, respectively, for the same period in 2022. The decrease in non-GAAP net income for the six months ended June 30, 2023 was due to a $19.6 million (8.1%) decrease in operating income, combined with an increase of $51.1 million in other expense, which was primarily driven by higher outstanding debt balances and interest rates, as well as increased interest related to new Topgolf venues, in addition to a decrease in net foreign currency hedge gains.

Operating Segment Results for the Three and Six Months Ended June 30, 2023 and 2022 (in millions, except percentages)

Topgolf

During the three and six months ended June 30, 2023, Topgolf net revenues increased $67.1 million (16.6%) and $148.6 million (20.5%), respectively, and operating income decreased $0.2 million (0.5%) and $3.9 million (7.7%), respectively, both compared to the same periods in 2022. The increase in net revenues was due to the opening of 11 new company-owned and operated venues since June 2022, combined with an increase in same venue sales, which was primarily driven by strong walk-in traffic and price increases. The decrease in segment operating income is primarily due to a planned increase in marketing expenses associated with national marketing campaigns and higher labor costs, partially offset by operational efficiencies at the venues.

Golf Equipment

During the three and six months ended June 30, 2023, Golf Equipment net revenues decreased $0.9 million (0.2%) and $25.2 million (2.7%), respectively, and segment operating income decreased $3.9 million (3.9%) and $23.1 million (11.5%), respectively, compared to the same periods in 2022. The decrease in net revenues and operating income was primarily due to retail fill-in during the second quarter and first half of 2022 to restock low inventory levels related to increased demand and supply chain constraints, combined with the unfavorable impact of changes in foreign currency rates. The decrease in segment operating income was also due to planned operational expenditures to support the business, partially offset by an improvement in gross margin resulting from lower freight and pricing increases.

Active Lifestyle

During the three and six months ended June 30, 2023, Active Lifestyle net revenues decreased $2.2 million (0.8%) and increased $67.8 million (13.3%), respectively, and operating income decreased $3.0 million (13.3%) and increased $7.6 million (15.4%), respectively, all compared to the same periods in 2022.

The decrease in net revenues in the second quarter of 2023 was primarily driven by Jack Wolfskin as the result of a shift in the timing of wholesale shipments from the first quarter to the second quarter of 2022, and Callaway apparel due to decreases in the Asia apparel market. These decreases were largely offset by increases at TravisMathew due to continued brand momentum and growth in all sales channels. The decline in operating income in the second quarter of 2023 was largely due to planned operational expenditures to support business growth, partially offset by an increase in gross margin resulting from increases in price and a higher mix of direct-to-consumer sales.

The increase in net revenue in the first half of 2023 was primarily related to TravisMathew, driven by continued brand momentum and growth across all sales channels, combined with the opening of additional retail doors in 2023. In addition, net revenue and operating income increased for Jack Wolfskin due to improved supply chain and the timing of inventory shipments in the first half of 2023 compared to the prior year, combined with organic growth in the retail sector and digital growth in the e-commerce channel. These increases were partially offset by a decrease in Callaway branded soft goods, primarily due to lower retail foot traffic in the Asia market, in addition to the impact of unfavorable changes in foreign currency rates. The increase in operating income was due to an increase in gross margin attributable to price increases, lower freight costs and a higher mix of direct-to-consumer sales, partially offset by a planned increase in operating expenses to support business growth combined with an unfavorable change in foreign currency rates.

Financial Condition

Our cash and cash equivalents, including restricted cash, decreased $6.9 million to $196.5 million at June 30, 2023 from $203.4 million at December 31, 2022. The decrease in cash and cash equivalents during the six months ended June 30, 2023 was primarily related to cash used in operating activities of $21.8 million and cash used in investing activities of $280.7 million, offset by cash provided by financing activities of $297.7 million. During the six months ended June 30, 2023, we used our cash and cash equivalents in addition to proceeds received from refinancing our credit facilities in the first quarter of 2023 and from lease financings, to repay debt, fund our operations and invest in the expansion of the Topgolf business and other capital expenditures. We believe that our existing funds and existing sources of and access to capital and any future financings, as necessary, are adequate to fund our future operations. For further information related to our financing arrangements, see Note 5 “Financing Arrangements,” in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 and “Liquidity and Capital Resources” in Part I, Item 2 of this Form 10-Q.

Our accounts receivable balance fluctuates throughout the year as a result of the general seasonality of our business, and is also affected by the timing of new product launches. With respect to our Golf Equipment business, accounts receivable are generally the highest during the first and second quarters during the seasonal peak in the golf industry, and generally decline significantly during the third and fourth quarters as a result of an increase in cash collections combined with lower seasonal sales. Our Active Lifestyle accounts receivable balances are generally higher during the third and fourth quarters, primarily due to the seasonal concentration of sales for the Jack Wolfskin business during the fall and winter seasons. Our Topgolf venue business primarily records revenue and collects payment at point-of-sale, therefore, Topgolf’s accounts receivable balance is smaller than our other business segments and primarily consists of media sponsorship receivables. As of June 30, 2023, our consolidated net accounts receivable increased to $397.2 million from $167.3 million at December 31, 2022. The increase reflects the seasonal increase in golf equipment sales. Net accounts receivable as of June 30, 2023 increased $21.2 million compared to June 30, 2022 primarily due to the timing of cash receipts.

Our inventory balance fluctuates throughout the year as a result of the general seasonality of certain operating segments within our business, and is also affected by the timing of new product launches. With respect to our Golf Equipment business, the buildup of inventory generally begins during the fourth quarter and continues into the first quarter and beginning of the second quarter in order to meet increased demand during the golf season. Inventory levels are also impacted by the timing of new product launches as well as the success of new products. Active Lifestyle inventory levels start to increase during the second quarter and continue to increase into the third and fourth quarters primarily due to the seasonal nature of our Jack Wolfskin business, whose products are significantly geared towards the fall and winter seasons. Topgolf is primarily a services business with lower inventory balances than our other business segments, with the inventory balances primarily consisting of food and beverage as well as retail merchandise and Toptracer inventory. Our inventory decreased $119.4 million to $839.8 million as of June 30, 2023 compared to December 31, 2022 due to improved sell through as a result of normalized supply chain conditions. Our inventory increased $235.8 million as of June 30, 2023 compared to June 30, 2022, primarily due to the pull forward of inventory during the back half of 2022 to support 2023 product launches and manage longer expected lead times on inventory shipments. Throughout the second half of 2022, inventory in-transit times and supply chain channels significantly improved, leading to the earlier receipt of inventory orders, which resulted in an increase in inventory levels mostly for planned 2023 products.

Liquidity and Capital Resources

Our principal sources of liquidity consist of our existing cash and cash equivalent balances, funds expected to be generated from operations and available funds from our credit facilities. Based on our current cash balances, estimates of funds expected to be generated from operations, and the current and projected availability under current or future credit facilities, we believe we will be able to finance current and planned operating requirements, capital expenditures, required debt repayments and contractual obligations and commercial commitments for at least the next 12 months from the issuance date of this Form 10-Q.

Our ability to generate sufficient positive cash flows from operations is subject to many risks and uncertainties, including future economic trends and conditions, demand for our products, supply chain challenges, foreign currency exchange rates, and other risks and uncertainties applicable to us and our business (see “Risk Factors” contained in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022).

On March 16, 2023, we completed a comprehensive plan to refinance and modify our capital structure in order to extend our debt maturities, reduce our borrowing costs and improve our liquidity, as well as simplify and unify our financial reporting. As a result, we entered into a new $1,250.0 million secured Term Loan B which matures on March 16, 2030. We used a portion of the proceeds to pay off our then existing Term Loan B facility of $432.0 million and Topgolf credit facilities of $504.1 million. In addition to the modification of our Term Loan B, we also extended and increased the existing $400.0 million ABL facility with a new $525.0 million senior secured ABL revolving credit facility which matures on March 16, 2028. As of June 30, 2023, we had $647.5 million in cash and availability under our credit facilities, which is an increase of $7.2 million compared to June 30, 2022. Information about our credit facilities and long-term debt is presented in Note 5 “Financing Arrangements” in the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q, which is incorporated herein by this reference.

As of June 30, 2023, approximately 78% of our cash was held in regions outside of the United States. We continue to maintain our indefinite reinvestment assertion with respect to most jurisdictions in which we operate because of local cash requirements to operate our business. If we were to repatriate cash to the United States outside of settling intercompany balances, we may need to pay incremental foreign withholding taxes which, subject to certain limitations, generate foreign tax credits for use against our U.S. tax liability, if any. Additionally, we may need to pay certain state income taxes.

Significant Cash Obligations

The table below summarizes certain significant cash obligations as of June 30, 2023 that will affect our future liquidity. We plan to utilize our liquidity (as described above) and our cash flows from business operations to fund our material cash requirements.

(in millions)

During the normal course of business, we have made certain indemnities, commitments and guarantees under which we may be required to make payments in relation to certain transactions. These include (i) intellectual property indemnities to our customers and licensees in connection with the use, sale and/or license of our products or trademarks, (ii) indemnities to various lessors in connection with facility leases for certain claims arising from such facilities or leases, (iii) indemnities to vendors and service providers pertaining to the goods or services provided to us or based on the negligence or willful misconduct, and (iv) indemnities involving the accuracy of representations and warranties in certain contracts. In addition, we have made contractual commitments to each of our officers and certain other employees providing for severance payments upon the termination of employment. We have also issued guarantees in the form of a standby letter of credit primarily as security for contingent liabilities under certain workers’ compensation insurance policies.

The duration of these indemnities, commitments and guarantees varies, and in certain cases may be indefinite. The majority of these indemnities, commitments and guarantees do not provide for any limitation on the maximum amount of future payments we could be obligated to make. Historically, costs incurred to settle claims related to indemnities have not been material to our financial position, results of operations or cash flows. In addition, we believe the likelihood is remote that payments under the commitments and guarantees described above will have a material effect on our financial condition. The fair value of indemnities, commitments and guarantees that we issued during the three and six months ended June 30, 2023 was not material to our financial position, results of operations or cash flows.

In addition to the contractual obligations listed above, our liquidity could also be adversely affected by an unfavorable outcome with respect to claims and litigation that we are subject to from time to time (see Note 11 “Commitments & Contingencies” in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 and “Legal Proceedings” in Part II, Item 1 of this Form 10-Q).

We have no material off-balance sheet arrangements.

Capital Expenditures

Total estimated capital expenditures, net of reimbursements by third party real estate financing partners, for the year ending December 31, 2023, are expected to be approximately $270.0 million, comprised of $80.0 million for our legacy business and $190.0 million for the Topgolf business.

Critical Accounting Estimates

For the period ended June 30, 2023, there have been no material changes to our critical accounting estimates from the information reported in our Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on March 1, 2023.

We use derivative financial instruments to mitigate our exposure to changes in foreign currency exchange rates and interest rates. Transactions involving these financial instruments are with creditworthy banks, primarily banks that are party to our credit facilities (see Note 5 “Financing Arrangements,” in the Notes to Condensed Consolidated Financial Statements in Part 1, Item 1 of this Form 10-Q). The use of these instruments exposes us to market and credit risk which may at times be concentrated with certain counterparties, although counterparty nonperformance is not anticipated.

Foreign Currency Fluctuations

Information about our foreign currency hedging activities is set forth in Note 14 “Derivatives and Hedging,” in the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1, of this Form 10-Q, which is incorporated herein by this reference.

As part of our risk management procedure, a sensitivity analysis model is used to measure the potential loss in future earnings of market-sensitive instruments resulting from one or more selected hypothetical changes in interest rates or foreign currency values. The sensitivity analysis model quantifies the estimated potential effect of unfavorable movements of 10% in foreign currencies to which we were exposed at June 30, 2023 through our foreign currency forward contracts.

At June 30, 2023, the estimated loss from our foreign currency forward contracts, calculated using the sensitivity analysis model described above, was $56.4 million. We believe that such a hypothetical loss from our foreign currency forward contracts would be partially offset by increases in the value of the underlying transactions being hedged.

The sensitivity analysis model is a risk analysis tool and does not purport to represent actual losses in earnings that we will incur, nor does it consider the potential effect of favorable changes in market rates. It also does not represent the maximum possible loss that may occur. Actual future gains and losses will differ from those estimated because of changes or differences in market rates and interrelationships, hedging instruments and hedge percentages, timing and other factors.

Interest Rate Fluctuations

We are exposed to interest rate risk from our credit facilities and long-term borrowing commitments. Outstanding borrowings under these credit facilities and long-term borrowing commitments accrue interest as described in Note 5 “Financing Arrangements,” in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1, and in “Liquidity and Capital Resources” in Part I, Item 2 of this Form 10-Q. Our long-term borrowing commitments are subject to interest rate fluctuations, which could be material to our cash flows and results of operations. In order to mitigate this risk, we enter into interest rate hedges and swaps as part of our interest rate risk management strategy. Information about our interest rate hedges and swaps is provided in Note 14 “Derivatives and Hedging” in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q. In order to determine the impact of unfavorable changes in interest rates on our cash flows and results of operations, we performed a sensitivity analysis as part of our risk management procedures. The sensitivity analysis quantified that the incremental expense incurred by a 10% increase in interest rates would be $3.6 million over the 12-month period ending on June 30, 2023.

Inflation

The continued increase in inflation partially contributed to the increase in the cost of our products as well as operating costs. If the cost of our products, employee costs, or other costs continue to be subject to significant inflationary pressures, such inflationary pressure may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses. Further, we may not be able to offset these increased costs through price increases. As a result, our inability to quickly respond to inflation could harm our cash flows and results of operations in the future.

Disclosure Controls and Procedures. We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness, as of June 30, 2023, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2023.

Changes in Internal Control over Financial Reporting. There were no changes in our internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Certain Factors Affecting Topgolf Callaway Brands

We have included in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022, a description of certain risks and uncertainties that could affect our business, future performance or financial condition (the “Risk Factors”). Investors should consider the Risk Factors prior to making an investment decision with respect to our stock. There are no material changes from the disclosure provided in the Form 10-K for the year ended December 31, 2022 with respect to the Risk Factors.