Callaway Golf Co: Form 10-Q for the period ended Sep 30, 2024
Filed with the SEC on Nov 12, 2024 and accepted by EDGAR at Nov 12, 2024, 17:01 ET.
Management's discussion and analysis
As filed, 58,541 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
The following discussion should be read in conjunction with the condensed consolidated financial statements and 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, 2023, which was filed with the SEC on February 29, 2024. Interim operating results are not indicative of operating results that may be expected for the year ending December 31, 2024, 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.
Intent to Separate into Two Independent Companies
In September 2024, we announced a strategic plan to pursue a separation of our business into two independent companies: Callaway, a leader in golf equipment with a highly complementary Active Lifestyle business; and Topgolf, a category leading, high-growth, pure-play venue-based golf entertainment business. We expect to effect the separation through a spin-off of the Topgolf business to our shareholders in a transaction that is intended to be tax-free to both us and our shareholders for U.S. federal income tax purposes. While we expect that a spin-off of Topgolf into a stand-alone public company is the most likely separation path, we will continue to evaluate other options for separation in order to maximize shareholder value. We expect to complete the spin-off of Topgolf in the second half of 2025, but there can be no assurance regarding the ultimate timing, terms, or form of the separation, or that the separation will ultimately occur.
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 foreign currency fluctuations 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 the non-cash amortization of purchase accounting adjustments associated with acquired intangible assets, including acquired customer and distributor relationships and acquired developed technology related to our merger with Topgolf, acquisitions of Jack Wolfskin, TravisMathew and OGIO, and distribution rights in the Korea apparel market (collectively, the “Acquisitions”). While the amortization of these assets is excluded from our calculation of non-GAAP net income, the revenue, operating costs and associated acquired assets that contribute to the revenue generation associated with these acquired companies is reflected in our calculation of non-GAAP net income.
- Net income and diluted earnings per share excluding certain non-recurring charges, as further detailed below.
- Same venue sales, which is defined as sales for the comparable Topgolf venue base, which includes Company-operated venues with at least 24 full fiscal months of operations as of the year of comparison.
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 offering golf entertainment, golf equipment, and apparel under our portfolio of global brands which includes Topgolf, Callaway Golf, Odyssey, TravisMathew, Jack Wolfskin, OGIO, Toptracer and World Golf Tour. 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 September 30, 2024, we had 98 Company-operated venues, including 92 Topgolf venues and two Company-owned BigShots venues, throughout 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.
Our Topgolf operating segment also includes other business lines comprised of our Toptracer ball-flight tracking technology as well as our WGT virtual golf game. Toptracer ball-flight tracking technology is used by independent driving ranges and during televised golf broadcasts, as well as in many of our Company-operated and franchised Topgolf venues in order to enhance the Topgolf gaming experience. WGT is an online multiplayer virtual golf game that enables players to gather in an online community and participate in simulated gameplay.
Operating results for our Topgolf operating segment fluctuate from quarter to quarter due to seasonal factors. Historically, our venues experience 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. Given that seasonality is an expected factor in Topgolf’s results of operations, adverse weather may impact peak seasons at our venues, which may result in a disproportionate effect on our operating results.
Revenue growth and profitability related to our Topgolf venues are also impacted by the opening of new venues and growth at existing venues measured by same venue sales, which 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.
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.
Operating results for our Golf Equipment segment fluctuate due to seasonal factors, as the game of golf is primarily played on a seasonal basis in most of the regions where we conduct business. Weather conditions generally restrict golf from being played throughout the entire year, with the exception of a few markets, resulting in many of our on-course customers closing during the cold weather months. In general, we launch new products 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 reorders and 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 a result of these factors, 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. 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.
Sales of Callaway Golf-branded golf apparel and accessories generally follow the same seasonality as golf equipment, and are therefore generally higher during the first half of the year. Sales of 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, while Jack Wolfskin-branded product sales are higher during the second half of the year due to sales of its outerwear product lines which are more in demand during the cold-weather months.
For further information about our segments, see Note 17 “Segment Information” in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q.
Current Economic Conditions
Macroeconomic Factors
Our products and services are considered to be non-essential items and are therefore discretionary purchases for consumers. As a result, the demand for our products and services is sensitive to unfavorable macroeconomic conditions. In the third quarter of 2024, we continued to experience soft market conditions as macroeconomic factors, including sustained inflation and high interest rates, continued to put downward pressure on consumer and corporate discretionary spending. While we generally try to mitigate the impact of such macroeconomic factors by closely monitoring changes in consumer retail spending behavior and through the implementation of various strategic initiatives, the persistence of these trends may have an adverse impact on our operating results depending on the severity and length of the changes.
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. These effects include (i) the translation and remeasurement of results denominated in foreign currency into U.S. dollars for reporting purposes, (ii) the mark-to-market adjustments of certain intercompany balance sheet accounts denominated in foreign currencies and (iii) the mark-to-market adjustments of our foreign currency forward contracts. 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 nine months ended September 30, 2024, foreign currency fluctuations had a favorable impact of $2.1 million and an unfavorable impact of $16.5 million on international net revenues, respectively.
Results of Operations
Net Revenues
Net revenues by operating segment for the periods presented below were as follows (in millions, except percentages):
| Net revenues: | Three Months Ended September 30, 2024 | 2023 | Growth/(Decline) Dollars | Percent | Non-GAAP Constant Currency Growth vs. 2023 Percent | Nine Months Ended September 30, 2024 | 2023 | Growth/(Decline) Dollars | Percent | Non-GAAP Constant Currency Growth vs. 2023 Percent |
|---|---|---|---|---|---|---|---|---|---|---|
| Topgolf | $453.2 | $447.7 | $5.5 | 1.2% | 1.0% | $1,370.4 | $1,322.0 | $48.4 | 3.7% | 3.5% |
| Golf Equipment | 293.5 | 293.4 | 0.1 | —% | 0.1% | 1,157.2 | 1,188.1 | (30.9) | (2.6)% | (1.5)% |
| Active Lifestyle | 266.2 | 299.5 | (33.3) | (11.1)% | (11.6)% | 787.3 | 877.6 | (90.3) | (10.3)% | (9.7)% |
| Total net revenues | $1,012.9 | $1,040.6 | $(27.7) | (2.7)% | (2.9)% | $3,314.9 | $3,387.7 | $(72.8) | (2.1)% | (1.7)% |
Total net revenues for the three and nine months ended September 30, 2024 decreased $27.7 million (2.7%) and $72.8 million (2.1%), respectively, primarily due to the following;
Topgolf
The $5.5 million (1.2%) and $48.4 million (3.7%) increases in Topgolf net revenues for three and nine months ended September 30, 2024, respectively, were primarily due to incremental revenues from new Company-operated venue openings and Toptracer bay installations, partially offset by a decline in same venue sales due to slower walk-in traffic and a softer corporate events business.
Golf Equipment
The $0.1 million increase in Golf Equipment net revenues for the three months ended September 30, 2024 was primarily due to the timing of golf club product shipments in the current quarter, partially offset by softer market conditions in Korea and the United States.
The $30.9 million (2.6%) decrease in Golf Equipment net revenues for the nine months ended September 30, 2024 was primarily due to declines in golf club and golf ball sales due to softer market conditions in Korea combined with unfavorable foreign currency impacts in Asia.
Active Lifestyle
The $33.3 million (11.1%) and $90.3 million (10.3%) decreases in Active Lifestyle net revenues for the three and nine months ended September 30, 2024, respectively, were primarily due to a decline in wholesale sales at Jack Wolfskin resulting from soft market conditions in the European market, combined with an expected decline in wholesale sales at TravisMathew due to a corporate channel sell-in during 2023, which did not recur in 2024. In addition, sales in the Callaway soft goods business also decreased, primarily due to market softness in Asia, partially offset by incremental revenues from new TravisMathew stores.
During the three months ended September 30, 2024, foreign currency fluctuations had a favorable impact of $2.1 million on net revenues. During the nine months ended September 30, 2024, foreign currency fluctuations had an unfavorable impact of $16.5 million on net revenues.
Net revenues by major geographic region for the periods presented below were as follows (in millions, except percentages):
| Net revenues: | Three Months Ended September 30, 2024 | 2023 | Growth/(Decline) Dollars | Percent | Non-GAAP Constant Currency Growth vs. 2023 Percent | Nine Months Ended September 30, 2024 | 2023 | Growth/(Decline) Dollars | Percent | Non-GAAP Constant Currency Growth vs. 2023 Percent |
|---|---|---|---|---|---|---|---|---|---|---|
| United States | $724.6 | $737.3 | $(12.7) | (1.7)% | (1.7)% | $2,444.9 | $2,435.1 | $9.8 | 0.4% | 0.4% |
| Europe | 136.6 | 149.5 | (12.9) | (8.6)% | (10.4)% | 392.1 | 423.3 | (31.2) | (7.4)% | (8.7)% |
| Asia | 127.0 | 130.7 | (3.7) | (2.8)% | (2.2)% | 363.7 | 419.1 | (55.4) | (13.2)% | (8.1)% |
| Rest of World | 24.7 | 23.1 | 1.6 | 6.9% | 6.1% | 114.2 | 110.2 | 4.0 | 3.6% | 4.5% |
| Total net revenues | $1,012.9 | $1,040.6 | $(27.7) | (2.7)% | (2.9)% | $3,314.9 | $3,387.7 | $(72.8) | (2.1)% | (1.7)% |
Net 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
The $12.7 million (1.7%) decrease for the three months ended September 30, 2024 was primarily due to a decrease in wholesale sales at TravisMathew due to a corporate channel sell -in during the third quarter of 2023, which did not recur in 2024, partially offset by an increase in Topgolf sales.
The $9.8 million (0.4%) increase for the nine months ended September 30, 2024 was primarily due to incremental revenues from the opening of new Company-operated Topgolf venues, partially offset by a decline in same venue sales combined with the decline in corporate channel wholesale sales at TravisMathew.
Europe
During the three and nine months ended September 30, 2024, net revenues in Europe decreased $12.9 million (8.6%) and $31.2 million (7.4%), respectively, compared to the three and nine months ended September 30, 2023, primarily due to declines in wholesale sales at Jack Wolfskin. This decrease was partially offset by increases in golf club sales and Toptracer installations.
Asia
During the three and nine months ended September 30, 2024, net revenues in Asia decreased $3.7 million (2.8%) and $55.4 million (13.2%) compared to the three and nine months ended September 30, 2023, primarily due to continued soft market conditions in the golf equipment and apparel markets in Korea, combined with unfavorable foreign currency impacts primarily in Japan and Korea. These decreases were partially offset by an increase in sales in the Jack Wolfskin China business.
Rest of World
During the three and nine months ended September 30, 2024, net revenues in Rest of World increased by $1.6 million (6.9%) and $4.0 million (3.6%), respectively, compared to the three and nine months ended September 30, 2023, primarily due to increased Golf Equipment and Active Lifestyle sales in Canada and Australia.
Foreign Currency
For the three and nine months ended September 30, 2024, foreign currency exchange rates had a favorable impact of $2.1 million and an unfavorable impact of $16.5 million, respectively, on international net revenues.
Costs and Expenses (in millions, except percentages)
| Costs and expenses: | Three Months Ended September 30, 2024 | 2023 | Growth/(Decline) Amount | Percent | Nine Months Ended September 30, 2024 | 2023 | Growth/(Decline) Amount | Percent |
|---|---|---|---|---|---|---|---|---|
| Cost of products | $328.5 | $337.1 | $(8.6) | (2.6)% | $1,116.8 | $1,167.0 | $(50.2) | (4.3)% |
| Cost of services, excluding depreciation and amortization | 48.6 | 45.6 | 3.0 | 6.6% | 140.9 | 141.4 | (0.5) | (0.4)% |
| Other venue expense | 325.6 | 312.1 | 13.5 | 4.3% | 988.4 | 934.7 | 53.7 | 5.7% |
| Selling, general and administrative expense | 250.6 | 242.5 | 8.1 | 3.3% | 783.1 | 790.6 | (7.5) | (0.9)% |
| Research and development expense | 22.0 | 22.6 | (0.6) | (2.7)% | 72.2 | 67.4 | 4.8 | 7.1% |
| Venue pre-opening costs | 3.9 | 6.9 | (3.0) | (43.5)% | 9.9 | 16.3 | (6.4) | (39.3)% |
| Total costs and expenses | $979.2 | $966.8 | $12.4 | 1.3% | $3,111.3 | $3,117.4 | $(6.1) | (0.2)% |
Cost of Products
Cost of products is variable in nature and fluctuates relative to sales volumes. Cost of products includes raw materials and component costs, direct labor and manufacturing overhead, inbound freight, duties and shipping charges, and retail merchandise costs for products sold in retail shops within Topgolf venue facilities. During the three and nine months ended September 30, 2024, cost of products decreased $8.6 million (2.6%) and $50.2 million (4.3%), respectively, compared to the three and nine months ended September 30, 2023, respectively. These decreases were primarily due to decreased sales in our Active Lifestyle operating segment, partially offset by increased freight costs in the Golf Equipment operating segment.
Cost of Services, excluding Depreciation and Amortization
Cost of services, excluding depreciation and amortization (“cost of services”), includes the cost of food and beverages sold in our Topgolf venues as well as certain costs associated with our Toptracer ball-flight tracking technology, Swing Suite indoor multi-sport simulators and the WGT digital golf game.
During the three months ended September 30, 2024, cost of services increased $3.0 million (6.6%) compared to the three months ended September 30, 2023, primarily due to incremental costs related to additional venue openings combined with higher food and beverage commodity costs.
During the nine months ended September 30, 2024, cost of services decreased $0.5 million (0.4%) compared to the nine months ended September 30, 2023, primarily due to a decline in same venue sales and lower food and beverage commodity costs, combined with a favorable shift in revenue mix in 2024. These decreases were partially offset by incremental costs related to new venue openings.
Other Venue Expense
Other venue expenses primarily consist of depreciation and amortization, venue employee costs, rent, utilities, marketing and other costs associated with Topgolf venues. During the three and nine months ended September 30, 2024, other venue expenses increased $13.5 million (4.3%) and $53.7 million (5.7%), respectively, compared to the three and nine months ended September 30, 2023, primarily due to the addition of new Company-operated Topgolf venues since September 30, 2023, partially offset by operational efficiencies in the venues.
Selling, General and Administrative Expense
Selling, general and administrative (“SG&A”) expenses primarily consist of non-venue 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 nine months ended September 30, 2024, SG&A expenses increased $8.1 million (3.3%) and decreased $7.5 million (0.9%), respectively, compared to the three and nine months ended September 30, 2023.
The $8.1 million increase for the three months ended September 30, 2024 was primarily related to increases in computer software and equipment costs related to licenses and the implementation of new computer software, higher employee benefits and payroll-related costs due to an increase in corporate headcount, and an increase in selling and marketing costs primarily related to additional advertising spend. These increases were partially offset by decreases in tour player performance bonuses, professional fees and IT related consulting costs.
The $7.5 million decrease for the nine months ended September 30, 2024 was primarily related to lower employee costs in our Topgolf operating segment due to restructuring and reorganization initiatives which took place during the fourth quarter of 2023, in addition to decreases in selling and marketing costs related to ambassador endorsement agreements and tour player performance bonuses and television and digital advertising expenditures. These decreases were partially offset by increases in computer software and equipment costs related to licenses and implementation costs for new computer software and cybersecurity programs.
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 nine months ended September 30, 2024, research and development expenses decreased $0.6 million (2.7%) and increased $4.8 million (7.1%), respectively, compared to the three and nine months ended September 30, 2023.
The $0.6 million decrease for the three months ended September 30, 2024 was primarily due to reduced employee costs as a result of restructuring initiatives which took place during the fourth quarter of 2023 at our Topgolf operating segment, partially offset by increases in computer software and equipment costs related to software licenses.
The $4.8 million increase for the nine months ended September 30, 2024 was primarily driven by additional asset impairment charges related to the abandonment of the Shankstars media game and increases in computer software and equipment costs related to software licenses.
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 fluctuate based on the planned timing, size and location of new venues. During the three and nine months ended September 30, 2024, venue pre-opening costs decreased $3.0 million (43.5%) and $6.4 million (39.3%), respectively, compared to the three and nine months ended September 30, 2023 due to fewer planned venue openings in 2024.
Other Income and Expense (in millions, except percentages)
| Other income and expenses: | Three Months Ended September 30, 2024 | 2023 | Growth/(Decline) Dollars | Percent | Nine Months Ended September 30, 2024 | 2023 | Net Change Dollars | Percent |
|---|---|---|---|---|---|---|---|---|
| Interest expense, net | $(57.7) | $(52.3) | $(5.4) | 10.3% | $(173.5) | $(153.6) | $(19.9) | 13.0% |
| Other income, net | 1.0 | 5.2 | (4.2) | (80.8)% | 10.8 | 2.4 | 8.4 | 350.0% |
| Total other expense, net | $(56.7) | $(47.1) | $(9.6) | 20.4% | $(162.7) | $(151.2) | $(11.5) | 7.6% |
40
Interest expense, net increased $5.4 million (10.3%) and $19.9 million (13.0%) during the three and nine months ended September 30, 2024 as compared to the three and nine months ended September 30, 2023, primarily due to an increase in venue financing interest as the result of the opening of new Topgolf venues, partially offset by decreased interest expense on our term loan as a result of the debt repricing that took place during the first quarter of 2024 combined with lower outstanding balances.
Other income, net decreased $4.2 million (80.8%) during the three months ended September 30, 2024 as compared to the three months ended September 30, 2023, primarily due to an increase in net foreign currency losses, partially offset by the receipt of dividends on our money market accounts.
Other income, net increased $8.4 million (350.0%) during the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023, primarily due to a decrease in net losses on foreign currency transactions, a decrease in transactional losses from refinancing our long-term debt in 2024 and dividend income from our investment in Full Swing and our money market accounts, partially offset by a decrease in net gains on foreign currency hedging contracts.
Income Taxes
Income taxes decreased $16.4 million to an income tax benefit of $19.4 million for the three months ended September 30, 2024, compared to an income tax benefit of $3.0 million for the three months ended September 30, 2023. As a percentage of pre-tax income, our effective tax rate for the three months ended September 30, 2024 increased to 84.3% compared to (10.8)% in the comparable period of 2023. Our effective tax rate for the three months ended September 30, 2024 was impacted by valuation allowances accrued year-to-date associated with the forecasted mix of jurisdictional earnings, and forecasted U.S. income tax credits. Our effective tax rate for the three months ended September 30, 2023 was impacted by a change in the forecasted full year earnings.
Income taxes increased $28.9 million to an income tax benefit of $24.1 million for the nine months ended September 30, 2024, compared to an income tax benefit of $53.0 million for the nine months ended September 30, 2023. As a percentage of pre-tax income, our effective tax rate for the nine months ended September 30, 2024 decreased to (58.9)% compared to (44.4)% in the comparable period of 2023. Our effective tax rate for the nine months ended September 30, 2024 was impacted by valuation allowances accrued year-to-date associated with the forecasted mix of jurisdictional earnings, and forecasted U.S. income tax credits. Our effective tax rate for the nine months ended September 30, 2023 was impacted by the reversal of a significant portion of the valuation allowances on our deferred tax assets and other non-recurring items.
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 September 30, 2024 and 2023 to our non-GAAP results for the same periods (in millions, except per share information):
| Three Months Ended September 30, 2024 Net (Loss) Income | Diluted (Loss) Earnings per share (4) (5) | Three Months Ended September 30, 2023 Net Income | Diluted Earnings per share (4) (5) | |
|---|---|---|---|---|
| GAAP | $(3.6) | $(0.02) | $29.7 | $0.16 |
| Less: Non-cash amortization of acquired intangibles (1) | (2.9) | (0.02) | (2.1) | (0.01) |
| Less: Non-recurring items (2) | (5.0) | (0.03) | (4.3) | (0.02) |
| Less: Tax valuation allowance (3) | — | — | 0.3 | — |
| Non-GAAP | $4.3 | $0.02 | $35.8 | $0.19 |
| GAAP diluted weighted-average shares outstanding | 183.8 | 201.2 | ||
| Non-GAAP diluted weighted-average shares outstanding | 184.6 | 201.2 | ||
| (1) Includes the non-cash amortization of purchase accounting adjustments associated with acquired intangible assets stemming from our Acquisitions, including acquired customer and distributor relationships and acquired developed technology. See “Discussion of Non-GAAP Measures” above for further information. Starting in the second quarter of 2024, the depreciation and amortization of all other purchase accounting adjustments associated with our Acquisitions will be excluded from our non-GAAP adjustments. As such, prior period amounts have been recast in order to conform with the current period presentation. For the three months ended September 30, 2024 and 2023, non-cash depreciation and amortization related to these excluded purchase accounting adjustments was $0.9 million and $3.0 million, respectively. | ||||
| (2) For 2024, amounts primarily include $2.8 million of restructuring and reorganization charges in our Active Lifestyle operating segment, $2.6 million of costs related to the planned separation of Topgolf, and $0.3 million in IT integration charges including costs associated with the implementation of a new cloud based HRM system. For 2023, amounts primarily included $2.7 million in non-recurring restructuring and reorganization charges in our Active Lifestyle operating segment, and $1.5 million in non-recurring IT costs related to a cybersecurity incident. | ||||
| (3) Related to the release of tax valuation allowances that were recorded in connection with the merger with Topgolf. | ||||
| (4) Diluted earnings per share is calculated using the if-converted method, which excludes interest expense related to the Convertible Notes from the calculation of net income in periods where income is reported. During the three months ended September 30, 2024, GAAP diluted weighted-average shares outstanding are equivalent to basic weighted-average shares outstanding due to the Net Loss position. During the three months ended September 30, 2024, Non-GAAP diluted weighted-average shares outstanding exclude the impact of the Convertible Notes, which were anti-dilutive for the period. | ||||
| (5) When aggregated, diluted earnings per share amounts may not be additive due to rounding. |
On a GAAP basis, net income decreased to a net loss of $3.6 million for the three months ended September 30, 2024 compared to net income of $29.7 million for the three months ended September 30, 2023. Diluted loss per share was $(0.02) for the three months ended September 30, 2024 as compared to diluted earnings per share of $0.16 for the same period in 2023. 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 September 30, 2024 would have been $4.3 million and $0.02 per share, respectively, compared to $35.8 million and $0.19 per share, respectively, for the same period in 2023. The decrease in GAAP and non-GAAP net income was primarily due to a decrease in segment operating income as discussed below, combined with the unfavorable impact of foreign currency fluctuations and an increase in interest expense.
The following table presents a reconciliation of our results for the nine months ended September 30, 2024 and 2023 to our non-GAAP results for the same periods (in millions, except per share information):
| Nine Months Ended September 30, 2024 Net Income | Diluted Earnings per share (4) (5) | Nine Months Ended September 30, 2023 Net Income | Diluted Earnings per share (4) (5) | |
|---|---|---|---|---|
| GAAP | $65.0 | $0.35 | $172.1 | $0.88 |
| Less: Non-cash amortization of acquired intangibles (1) | (7.3) | (0.04) | (8.5) | (0.04) |
| Less: Non-recurring items (2) | (29.5) | (0.15) | (20.6) | (0.10) |
| Less: Tax valuation allowance (3) | — | — | 59.4 | 0.29 |
| Non-GAAP | $101.8 | $0.54 | $141.8 | $0.73 |
| GAAP diluted weighted-average shares outstanding | 199.3 | 201.3 | ||
| Non-GAAP diluted weighted-average shares outstanding | 199.3 | 201.3 | ||
| (1) Includes the non-cash amortization of purchase accounting adjustments associated with acquired intangible assets stemming from our Acquisitions, including acquired customer and distributor relationships and acquired developed technology. See “Discussion of Non-GAAP Measures” above for further information. Starting in the second quarter of 2024, the depreciation and amortization of all other purchase accounting adjustments associated with our Acquisitions will be excluded from our non-GAAP adjustments. As such, prior period amounts have been recast in order to conform with the current period presentation. For the nine months ended September 30, 2024 and 2023, non-cash depreciation and amortization related to these excluded purchase accounting adjustments was $4.2 million and $9.7 million, respectively. | ||||
| (2) For 2024, amounts primarily include $14.6 million of restructuring and reorganization charges in our Active Lifestyle operating segment, $4.7 million in charges related to our 2024 debt repricing, $3.4 million of charges related to the impairment and abandonment of the Shankstars media game in the Topgolf segment, $2.6 million of costs incurred related to the planned separation of Topgolf, $2.1 million in IT integration charges including costs associated with the implementation of a new cloud based HRM system, and $1.4 million in IT costs related to a 2023 cybersecurity incident. For 2023, amounts primarily included $5.8 million in non-recurring restructuring and reorganization charges in our Active Lifestyle segment, $3.7 million in non-recurring IT integration and implementation costs stemming from the Acquisitions, $1.5 million in non-recurring costs related to a cybersecurity incident, and $13.6 million in total charges related to our 2023 debt modification. | ||||
| (3) Related to the release of tax valuation allowances that were recorded in connection with the merger with Topgolf. | ||||
| (4) Diluted earnings per share is calculated using the if-converted method, which excludes interest expense related to the Convertible Notes from the calculation of net income. | ||||
| (5) When aggregated, diluted earnings per share amounts may not be additive due to rounding. |
On a GAAP basis, net income for the nine months ended September 30, 2024 decreased to $65.0 million compared to $172.1 million for the nine months ended September 30, 2023. Diluted earnings per share decreased to $0.35 for the nine months ended September 30, 2024 compared to $0.88 per share for the same period in 2023. On a non-GAAP basis, excluding the items described in the table above, our net income and diluted earnings per share for the nine months ended September 30, 2024 would have been $101.8 million and $0.54 per share, respectively, compared to $141.8 million and $0.73 per share, respectively, for the same period in 2023. The decrease in GAAP and non-GAAP net income was primarily due to a decrease in segment operating income as discussed below combined with an increase in interest expense, partially offset by an increase in other income. In addition, GAAP net income was negatively impacted by a lower income tax benefit in 2024 due to the reversal of a valuation allowance in 2023.
Operating Segment Results for the Three and Nine Months Ended September 30, 2024 and 2023 (in millions, except percentages)
| Net revenues: | Three Months Ended September 30, 2024 | 2023 | Growth/(Decline) Dollars | Percent | Non-GAAP Constant Currency Growth vs. 2023(1) Percent | Nine Months Ended September 30, 2024 | 2023 | Growth/(Decline) Dollars | Percent | Non-GAAP Constant Currency Growth vs. 2023(1) Percent |
|---|---|---|---|---|---|---|---|---|---|---|
| Venues | $428.9 | $430.5 | $(1.6) | (0.4)% | (0.4)% | $1,308.3 | $1,270.4 | $37.9 | 3.0% | 2.9% |
| Other business lines | 24.3 | 17.2 | 7.1 | 41.3% | 38.4% | 62.1 | 51.6 | 10.5 | 20.3% | 19.2% |
| Topgolf | 453.2 | 447.7 | 5.5 | 1.2% | 1.0% | 1,370.4 | 1,322.0 | 48.4 | 3.7% | 3.5% |
| Golf clubs | 226.0 | 222.2 | 3.8 | 1.7% | 1.7% | 882.1 | 913.3 | (31.2) | (3.4)% | (2.1)% |
| Golf balls | 67.5 | 71.2 | (3.7) | (5.2)% | (5.1)% | 275.1 | 274.8 | 0.3 | 0.1% | 0.5% |
| Golf Equipment | 293.5 | 293.4 | 0.1 | —% | 0.1% | 1,157.2 | 1,188.1 | (30.9) | (2.6)% | (1.5)% |
| Apparel | 180.6 | 211.7 | (31.1) | (14.7)% | (15.2)% | 485.2 | 531.3 | (46.1) | (8.7)% | (8.0)% |
| Gear, accessories, & other | 85.6 | 87.8 | (2.2) | (2.5)% | (2.8)% | 302.1 | 346.3 | (44.2) | (12.8)% | (12.3)% |
| Active Lifestyle | 266.2 | 299.5 | (33.3) | (11.1)% | (11.6)% | 787.3 | 877.6 | (90.3) | (10.3)% | (9.7)% |
| Total net revenues | $1,012.9 | $1,040.6 | $(27.7) | (2.7)% | (2.9)% | $3,314.9 | $3,387.7 | $(72.8) | (2.1)% | (1.7)% |
| Segment operating income: | ||||||||||
| Topgolf | $28.3 | $38.9 | $(10.6) | (27.2)% | $87.3 | $85.7 | $1.6 | 1.9% | ||
| Golf Equipment | 26.8 | 35.2 | (8.4) | (23.9)% | 186.3 | 213.2 | (26.9) | (12.6)% | ||
| Active Lifestyle | 19.4 | 40.0 | (20.6) | (51.5)% | 58.8 | 96.8 | (38.0) | (39.3)% | ||
| Total segment operating income | 74.5 | 114.1 | (39.6) | (34.7)% | 332.4 | 395.7 | (63.3) | (16.0)% | ||
| Reconciling Items(2) | (40.8) | (40.3) | (0.5) | 1.2% | (128.8) | (125.4) | (3.4) | 2.7% | ||
| Total operating income | 33.7 | 73.8 | (40.1) | (54.3)% | 203.6 | 270.3 | (66.7) | (24.7)% | ||
| Interest expense, net | (57.7) | (52.3) | (5.4) | 10.3% | (173.5) | (153.6) | (19.9) | 13.0% | ||
| Other income, net | 1.0 | 5.2 | (4.2) | (80.8)% | 10.8 | 2.4 | 8.4 | 350.0% | ||
| Total (loss) income before income taxes | $(23.0) | $26.7 | $(49.7) | (186.1)% | $40.9 | $119.1 | $(78.2) | (65.7)% | ||
| (1) Calculated by applying 2023 exchange rates to 2024 reported sales in regions outside the United States. | ||||||||||
| (2) Reconciling items include corporate general and administrative expenses not utilized by management in determining segment profitability, including non-cash amortization expense of intangible assets in connection with the acquisitions and non-recurring costs as discussed above. |
Topgolf
During the three and nine months ended September 30, 2024, Topgolf net revenues increased $5.5 million (1.2%) and $48.4 million (3.7%), respectively, and operating income decreased $10.6 million (27.2%) and increased $1.6 million (1.9%), respectively, both compared to the same period in 2023.
For the three and nine months ended September 30, 2024, the increase in Topgolf net revenues was primarily due to the continued opening of new Company-operated venues, partially offset by a decline in same venue sales due to softer walk-in traffic and a weaker events business. The decrease in operating income for the three months ended September 30, 2024 was primarily due to a decline in operating leverage due to lower same venue sales, partially offset by improvements in operational efficiencies and cost management at the venues. The increase in operating income for the nine months ended September 30, 2024 was primarily due to incremental revenues from the opening of new Company-operated venues combined with improved operating leverage resulting from favorable food and beverage costs and labor efficiencies, in addition to lower corporate overhead and venue pre-opening expenses, partially offset by a decrease in same venue sales.
Golf Equipment
During the three and nine months ended September 30, 2024, Golf Equipment net revenues increased slightly by $0.1 million to $293.5 million and decreased $30.9 million (2.6%), respectively, and segment operating income decreased $8.4 million (23.9%) and $26.9 million (12.6%), respectively, both compared to the same period in 2023. The slight increase in net revenues for the three months ended September 30, 2024 was primarily due to the timing of golf club product shipments in the current quarter, partially offset by softer market conditions in Korea and the United States. The decrease in net revenues for the nine months ended September 30, 2024 was primarily due to declines in golf club and golf ball sales due to softer market conditions in Korea combined with unfavorable foreign currency impacts in Asia.
The decrease in operating income for the three and nine months ended September 30, 2024 was primarily due to softer market conditions in Korea combined with higher freight costs and unfavorable foreign currency.
Active Lifestyle
During the three and nine months ended September 30, 2024, Active Lifestyle net revenues decreased $33.3 million (11.1%) and $90.3 million (10.3%), respectively, and operating income decreased $20.6 million (51.5%) and $38.0 million (39.3%), respectively, both compared to the same period in 2023.
The decrease in net revenues for the three months ended September 30, 2024 was primarily driven by a decrease in sales of Jack Wolfskin soft goods due a decline in wholesale revenue resulting from soft market conditions in Europe, and an expected decrease in wholesale revenue in the TravisMathew business from corporate channel sell-ins during 2023, which did not recur in 2024. The decrease in operating income for the three months ended September 30, 2024 was primarily due to the decrease in revenue combined with operating expense deleverage.
The decrease in net revenues for the nine months ended September 30, 2024 was primarily driven by decreases in sales of Callaway, Jack Wolfskin and TravisMathew soft goods. The decrease in Callaway soft goods sales was primarily due to softer market conditions in Korea and the impact of unfavorable changes in foreign currency rates. The decline in Jack Wolfskin revenue was primarily due to a decline in wholesale channel sales resulting from soft market conditions in Europe, and the decrease at TravisMathew was primarily due to an expected decrease in corporate channel sales resulting from a sell-in during the first quarter of 2023, which did not recur in 2024, partially offset by direct-to-consumer growth in the retail and e-commerce channels. The decrease in operating income during the nine months ended September 30, 2024 was primarily due to the decreases in revenue and operating expense deleverage.
Financial Condition
Our cash and cash equivalents, including restricted cash, increased $48.7 million to $447.5 million at September 30, 2024 from $398.8 million at December 31, 2023. During the nine months ended September 30, 2024, we used our cash and cash equivalents in addition to proceeds received from lease financings to fund operations, purchase capital expenditures, repurchase stock, and complete the BigShots acquisition. Additionally, during the second quarter of 2024, we made a $50.0 million partial repayment of the outstanding principal of our Term Loan B. 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 6 “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 partnership receivables. As of September 30, 2024, our consolidated net accounts receivable increased to $286.4 million from $200.5 million at December 31, 2023. The increase reflects the seasonality of our golf equipment sales. Net accounts receivable as of September 30, 2024 decreased $18.2 million compared to September 30, 2023, primarily due to decreased net sales.
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 service-based business which maintains lower inventory balances than our other business segments, primarily consisting of food and beverages as well as retail merchandise and Toptracer inventory. As of September 30, 2024, our inventory decreased $128.0 million to $666.4 million, compared to December 31, 2023, which reflects the general seasonality of our business combined with the sell-through of out-of-season inventory in our Active Lifestyle business. Our inventory decreased $70.1 million as of September 30, 2024, compared to September 30, 2023, also primarily due to inventory reduction initiatives.
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 and services, supply chain challenges, price inflation, 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, 2023).
On March 19, 2024 we entered into an amendment to the 2023 Term Loan B in order to decrease the interest rate and future interest expense on the 2023 Term Loan B and on May 31, 2024, we made an additional discretionary $50.0 million principal payment on the 2023 Term Loan B. As of September 30, 2024, we had $863.0 million in cash and availability under our credit facilities, which is an increase of $129.0 million compared to September 30, 2023. Information about our credit facilities and long-term debt is presented in Note 6 “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 September 30, 2024, approximately 38% 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
We plan to utilize our liquidity (as described above) and our cash flows from business operations to fund our material cash requirements. The table below summarizes certain significant cash obligations as of September 30, 2024 that will affect our future liquidity (in millions).
| Payments Due By Period Total | Remainder of 2024 | 2025 - 2026 | 2027 - 2028 | Thereafter | |
|---|---|---|---|---|---|
| Long-term debt(1) | $1,500.3 | $4.6 | $295.0 | $29.2 | $1,171.5 |
| Interest payments relating to long-term debt(2) | 594.5 | 27.9 | 217.2 | 202.7 | 146.7 |
| Finance leases, including imputed interest(3) | 828.1 | 2.8 | 33.6 | 34.4 | 757.3 |
| Operating leases, including imputed interest(4) | 2,379.2 | 32.9 | 331.0 | 316.7 | 1,698.6 |
| DLF obligations(5) | 4,798.4 | 14.1 | 187.7 | 196.2 | 4,400.4 |
| Minimum lease payments for leases signed but not yet commenced(6) | 388.0 | 0.1 | 15.0 | 16.5 | 356.4 |
| Capital commitments(7) | 106.0 | 27.0 | 79.0 | — | — |
| Unconditional purchase obligations(8) | 133.1 | 34.4 | 83.5 | 15.2 | — |
| Uncertain tax contingencies(9) | 13.1 | 2.2 | 1.7 | 1.2 | 8.0 |
| Total | $10,740.7 | $146.0 | $1,243.7 | $812.1 | $8,538.9 |
| (1) Excludes unamortized debt discounts, unamortized debt issuance costs, and fair value adjustments. For further details, see Note 6 “Financing Arrangements,” in the Notes to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q. | |||||
| (2) Long-term debt may have fixed or variable interest rates. For further details, see Note 6 “Financing Arrangements,” in the Notes to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q. | |||||
| (3) Represents future minimum payments under financing leases. For further details, see Note 5 “Leases” in the Notes to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q. | |||||
| (4) Represents commitments for minimum lease payments under non-cancellable operating leases. For further details, see Note 5 “Leases” in the Notes to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q. | |||||
| (5) Represents DLF obligations, including extension periods, in connection with the construction of Topgolf venues. For further details, see Note 5 “Leases” in the Notes to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q. | |||||
| (6) Represents future minimum lease payments under lease agreements that have not yet commenced as of September 30, 2024, in relation to future Topgolf facilities and TravisMathew retail stores. For further discussion, see Note 5 “Leases” in the Notes to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q. | |||||
| (7) Represents capital expenditure commitments under lease agreements for Topgolf venues under construction that have been signed as of September 30, 2024. | |||||
| (8) During the normal course of business, we enter into agreements to purchase goods and services, including commitments for endorsement agreements with professional athletes and other endorsers, consulting and service agreements, and intellectual property licensing agreements pursuant to which we are required to pay royalty fees. The amounts listed above approximate the minimum purchase obligations we are obligated to pay under these agreements over the next five years and thereafter as of September 30, 2024. The actual amounts paid under some of the agreements may be higher or lower than these amounts. In addition, we also enter into unconditional purchase obligations with various vendors and suppliers of goods and services during the normal course of business through purchase orders or other documentation or that are undocumented except for an invoice. For further details, see Note 12 “Commitments & Contingencies” in the Notes to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q. | |||||
| (9) Amounts represent current and non-current portions of uncertain income tax positions as recorded on our Condensed Consolidated Balance Sheets as of September 30, 2024. Amounts exclude uncertain income tax positions that we would be able to offset against deferred taxes. For further discussion, see Note 11 "Income Taxes" in the Notes to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q. |
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 nine months ended September 30, 2024 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 12 “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, 2024, are expected to be approximately $190.0 million, comprised of $60.0 million for our legacy business and $130.0 million for the Topgolf business.
Critical Accounting Estimates
For the nine months ended September 30, 2024, 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, 2023, filed with the SEC on February 29, 2024.
Market risk
As filed, 4,165 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
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 6 “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 15 “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 September 30, 2024 through our foreign currency forward contracts.
At September 30, 2024, the estimated loss from our foreign currency forward contracts, calculated using the sensitivity analysis model described above, was $27.9 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 6 “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 swap contracts as part of our interest rate risk management strategy. Information about our interest rate hedges is provided in Note 15 “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 $4.6 million over the 12-month period ended on September 30, 2024.
Inflation
The continued increase in inflation partially contributed to the increase in the cost of our products and services 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 pressures 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.
Controls and procedures
As filed, 1,547 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
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 September 30, 2024, 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 September 30, 2024.
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 during the three months ended September 30, 2024.
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.
Risk factors
As filed, 5,231 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
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, 2023, 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, 2023 with respect to the Risk Factors, other than the addition of the Risk Factor below.
The separation of our business into two independent companies may not be completed on the currently contemplated timeline, or at all, and may not achieve the intended benefits.
In September 2024, we announced our intention to pursue the separation of our business into two independent companies, Callaway and Topgolf. We expect to effect the separation through a spin-off of the Topgolf business to our shareholders in a transaction that is intended to be tax-free to both us and our shareholders for U.S. federal income tax purposes. While we expect that a spin-off of Topgolf into a stand-alone public company is the most likely separation path, we will continue to evaluate other options for separation in order to maximize shareholder value. We expect to complete the spin-off of Topgolf in the second half of 2025, but there can be no assurance regarding the ultimate timing, terms, or form of the separation, or that the separation will ultimately occur. Completion of a separation is complex, and completion of the proposed separation and the timing of its completion will be subject to a number of factors and conditions, including the finalization of the structure of the proposed separation, general market conditions, receipt of regulatory approvals, an opinion from tax counsel and/or a private letter ruling from the Internal Revenue Service regarding the tax-free status of the spin-off of the Topgolf business to us and our shareholders for U.S. federal income tax purposes, execution of intercompany agreements, further due diligence as appropriate and final approval by our Board of Directors. Unanticipated developments or changes, including changes in the law, macroeconomic environment and competitive conditions of our markets, the uncertainty of the financial markets and challenges in executing the separation, could delay or prevent the completion of the separation or cause the separation to occur on terms or conditions that are different or less favorable than expected.
Whether or not we complete the separation, our ongoing businesses may face material challenges in connection with the separation, including, but not limited to:
- the diversion of our management’s attention from operating and growing our business as a result of the significant amount of time and effort required to execute the separation;
- foreseen and unforeseen costs and expenses that will be incurred in connection with the separation, including accounting, tax, legal and other professional services costs;
- retaining existing business and operational relationships, including with customers, suppliers and employees, as well as cultivating new business relationships; and
- potential negative reactions from the financial markets if we fail to complete the separation in its currently intended form, within the anticipated time frame or at all.
Additionally, volatility in the world financial markets could increase borrowing costs or affect our ability to access the capital markets. Our ability to issue debt or enter into other financing arrangements on acceptable terms could be adversely affected if there is a material decline in the demand for our products or services or in the solvency of our customers or suppliers or if there are other significantly unfavorable changes in economic conditions. These conditions may adversely affect our anticipated timeline to complete the separation and the expected benefits of the separation, including by increasing the time and expense involved in the separation. Other challenges associated with effectively executing the separation include attracting and retaining key management and employees during the pendency of the separation and following its completion, and the fact that the execution of the proposed separation has required, and may continue to require, significant time and attention from our senior management and employees, which could cause disruption in business processes and adversely affect our financial results and our results of operations, and our employees may be distracted due to uncertainty regarding the future state of our company. Any of these factors could have a material adverse effect on our business, financial condition, results of operations, cash flows and/or the price of our common stock. Furthermore, if the separation is completed, we cannot provide assurance that the separation will achieve the full strategic and financial benefits expected to result from the separation or maximize shareholder value, nor can we provide assurance that each independent company will be successful in meeting its objectives.
Figures reported in this filing
Standardized line items from the XBRL in this filing, for the period ended 2024-09-30. Comparative periods it repeats are left out.
| Line item | Period | Value | XBRL concept |
|---|---|---|---|
| Revenue | 3 months2024-07-01 to 2024-09-30 | $1.01bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months2024-01-01 to 2024-09-30 | $3.31bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Research and development | 3 months2024-07-01 to 2024-09-30 | $22.0m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months2024-01-01 to 2024-09-30 | $72.2m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months2024-07-01 to 2024-09-30 | $250.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months2024-01-01 to 2024-09-30 | $783.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months2024-07-01 to 2024-09-30 | $33.7m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months2024-01-01 to 2024-09-30 | $203.6m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months2024-07-01 to 2024-09-30 | $57.7m | us-gaap:InterestExpenseNonoperating |
| Interest expense | 9 months2024-01-01 to 2024-09-30 | $173.5m | us-gaap:InterestExpenseNonoperating |
| Income tax | 3 months2024-07-01 to 2024-09-30 | −$19.4m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months2024-01-01 to 2024-09-30 | −$24.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months2024-07-01 to 2024-09-30 | −$3.6m | us-gaap:NetIncomeLoss |
| Net income | 9 months2024-01-01 to 2024-09-30 | $65.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months2024-07-01 to 2024-09-30 | −$0.02 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months2024-01-01 to 2024-09-30 | $0.35 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months2024-07-01 to 2024-09-30 | −$0.02 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months2024-01-01 to 2024-09-30 | $0.35 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months2024-07-01 to 2024-09-30 | 183,800,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months2024-01-01 to 2024-09-30 | 199,300,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months2024-01-01 to 2024-09-30 | $338.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months2024-01-01 to 2024-09-30 | $227.1m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months2024-01-01 to 2024-09-30 | $31.4m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | At period end2024-09-30 | $441.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | At period end2024-09-30 | $1.62bn | us-gaap:AssetsCurrent |
| Total assets | At period end2024-09-30 | $9.16bn | us-gaap:Assets |
| Current liabilities | At period end2024-09-30 | $842.5m | us-gaap:LiabilitiesCurrent |
| Long-term debt | At period end2024-09-30 | $1.46bn | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | At period end2024-09-30 | $15.6m | us-gaap:LongTermDebtCurrent |
| Short-term borrowings | At period end2024-09-30 | $41.0m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | At period end2024-09-30 | $3.94bn | us-gaap:StockholdersEquity |
Source: SEC EDGAR, the filing index for accession 0000837465-24-000078. Last ingested by Listed: Nov 5, 2026, 20:47 ET. Listed shows no prices and gives no investment advice.