Callaway Golf Co (CALY) FY 2022 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Consolidated Financial Statements, the related notes and the section “Important Notice to Investors Regarding Forward-Looking Statements” that appear herein. This section of this Annual Report on Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions related to 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Annual Report on Form 10-K can be found in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on March 1, 2022.
Critical Accounting Estimates
The Company’s discussion and analysis of its results of operations, financial condition and liquidity are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, shareholders’ equity, revenues and expenses, as well as related disclosures of contingent assets and liabilities. The Company bases its estimates and assumptions on historical experience and other assumptions that management believes are reasonable under the circumstances at that time. Actual results may materially differ from these estimates under different assumptions or circumstances. The Company reviews its estimates on an ongoing basis to ensure that its estimates appropriately reflect changes in its business and new information as it becomes available.
Management believes the critical accounting estimates discussed below affect its more significant estimates and assumptions used in the preparation of its consolidated financial statements. For a complete discussion of all of the Company’s significant accounting policies, see Note 2. “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements in this Form 10-K.
Sales Programs
The amount of revenue the Company recognizes is based on the amount of consideration it ultimately expects to receive from customers, which involves certain estimates and assumptions, including estimates for sales returns as well as sales programs, sales promotions and price concessions. These estimates are based on amounts earned by the Company or expected to be claimed by customers on the related sales.
Sell-through promotions are short-term sales programs that are generally offered throughout the product’s life cycle, which is approximately two years. Price reductions and price concessions are generally offered at the end of the product’s life cycle. The Company calculates an estimated rate related to these programs that is based on a combination of historical and forecasted data. The Company records a reduction to net revenues using this rate at the time of the sale and monitors this rate against actual results and forecasted estimates. Adjustments to the rate are made as necessary in order to reflect the amount of consideration the Company expects to receive from its customers. If the actual variable consideration is significantly different than the accrued estimates, the Company may be exposed to adjustments to revenue that could be material. Assuming there had been a 10% increase in the rate used to record sales program incentives, income before taxes for the year ended December 31, 2022 would have decreased by approximately $2.8 million.
The Company records an estimate for anticipated returns at the time the sale is recognized. This estimate is based on historical returns data as well as current economic trends, changes in customer demands and the sell-through of products. If the actual sales returns are significantly different than the recorded estimated amount, the Company may be exposed to losses or gains that could be material. Assuming there had been a 10% increase over the recorded estimated sales returns reserve for the year ended December 31, 2022, pre-tax income would have decreased by approximately $5.5 million, net of the cost recovery of inventory.
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Excess and Obsolescence Reserves
Inventories are recorded at the lower of cost or net realizable value, which includes a reserve for excess, obsolete and/or unmarketable inventory. The Company estimates the reserve based upon current inventory levels, sales trends and historical experience as well as management’s estimates of market conditions and forecasts of future product demand, all of which are subject to change. In addition, the Company considers inventory aging, forecasted consumer demand and pricing, regulatory (USGA and R&A) rule changes, the promotional environment and technological obsolescence, all of which requires management to make assumptions and apply significant judgment.
If these estimates are inaccurate or change, the Company may need to increase its inventory reserve, which could significantly impact operating results. Assuming there had been a 10% increase in the reserve for the year ended December 31, 2022, pre-tax income would have decreased by approximately $1.8 million.
Leases
The Company enters into complex build-to-suit arrangements in connection with its Company-operated venues operations which often results in the Company controlling the underlying ground that the venue is built on, the building, or both during the construction period. Under these arrangements, the construction terms, financing and eventual lease are agreed to prior to the construction period. In most cases, the construction is financed by a third-party real estate financing partner (the legal owner of the property). During the construction period, when the Company is deemed to be in control of the underlying assets, the Company records the asset as if owned and a corresponding construction advance. Once the construction is completed, the Company applies sale-lease back criteria to determine if control of the underlying assets is then transferred to the legal owner or whether the Company remains the accounting owner of the leased assets for accounting purposes. If control does not pass to the legal owner, it is considered a failed sale, and the assets are not derecognized while a deemed landlord finance (“DLF”) liability is recognized. If control passes to the legal owner, it is considered a sale, and the assets are derecognized, and a gain or loss is recognized based on the fair value of the asset. The fair value is determined on the basis of the price that would be received to sell the asset in an orderly transaction between market participants, which is derived from real estate broker valuations and market comparatives. An operating lease is recognized upon leasing back the assets from the legal owner.
The lease term for the ground lease and/or building lease for those properties controlled by the Company during the construction period depends on multiple factors, including the probability that the Company will exercise any renewal options beyond the initial lease term. When applicable, the Company uses historical practices and market trends to assess whether it is reasonably certain to exercise the renewal option. In certain Company-operated venues, the Company leases the underlying land from an independent third-party, with the Company assessing the lease classification as either an operating lease or finance lease on the basis of the relevant contract assumptions such as lease term and related payments. The Company must reassess the lease term upon the occurrence of certain discrete events that are in the control of the lessee (e.g., installing significant leasehold improvements) or if there is a lease modification. This lease term reassessment may impact the recorded right-of-use assets and lease classification, which could be material.
Impairment of Goodwill and Intangible Assets
The Company evaluates the recoverability of its goodwill and indefinite-lived intangible assets at least annually or more frequently whenever indicators are present that the carrying amounts of these assets may not be fully recoverable. To determine fair value, the Company uses cash flow estimates discounted at an appropriate rate, quoted market prices, royalty rates when available and independent appraisals as appropriate. Any required impairment loss is measured as the amount by which the carrying amount of the asset exceeds its fair value and is recorded as a reduction in the carrying value of the asset and a charge to earnings. The Company uses its best judgment based on current facts and circumstances related to its business when making these estimates. However, if actual results are not consistent with the Company’s estimates and assumptions used in calculating future cash flows and asset fair values, the Company may be exposed to impairment losses that could be material.
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Income Taxes
Current income tax expense or benefit is the amount of income taxes expected to be payable or receivable for the current year. A deferred income tax asset or liability is established for the difference between the tax basis of an asset or liability computed and its reported amount in the financial statements that will result in taxable or deductible amounts in future years when the reported amount of the asset or liability is recovered or settled, respectively. In accordance with the applicable accounting rules, the Company maintains a valuation allowance for a deferred tax asset when it is deemed to be more likely than not that some or all of the deferred tax assets will not be realized. In evaluating whether a valuation allowance is required under such rules, the Company considers all available positive and negative evidence, including prior operating results, the nature and reason for any losses, its forecast of future taxable income, and the dates on which any deferred tax assets are expected to expire. These assumptions require a significant amount of judgment, including estimates of future taxable income, and are based on the Company’s best judgment at the time made based on current and projected circumstances and conditions. For further information, see Note 12. “Income Taxes” in the Notes to Consolidated Financial Statements in this Form 10-K.
The Company accrues for the estimated additional amount of taxes for uncertain tax positions if it is deemed to be more likely than not that the Company would be required to pay such additional taxes. The Company is required to file federal and state income tax returns in the United States and various other income tax returns in foreign jurisdictions. The preparation of these income tax returns requires the Company to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by the Company. The Company accrues an amount for its estimate of additional tax liability, including interest and penalties in income tax expense, for any uncertain tax positions taken or expected to be taken in an income tax return. The Company reviews and updates the accrual for uncertain tax positions as more definitive information becomes available. Historically, additional taxes paid as a result of the resolution of the Company’s uncertain tax positions have not been materially different from the Company’s expectations. The Company recognizes interest and/or penalties related to income tax matters in income tax expense. For further information, see Note 12. “Income Taxes”.
Business Combinations
The Company is required to make significant estimates and assumptions to determine the fair value of tangible and intangible assets acquired and liabilities assumed at the acquisition date, as well as the estimated useful life of those acquired intangible assets. Intangible assets may include the acquired company’s trade name, existing customer relationships, developed technology, patents and goodwill. Significant estimates and assumptions used to value intangible assets include expected future revenues, growth rates, cash flows and discount rates. In addition, significant estimates and assumptions are used in determining uncertain tax positions and valuation allowances, as well as the fair value of equity awards assumed. The Company’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is contained in Note 2 “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements in this Form 10-K, which is incorporated herein by this reference.
Discussion of Non-GAAP Measures
In addition to the financial results contained in this report, which have been prepared and presented in accordance with GAAP, the Company has also included supplemental information concerning the Company’s 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 (loss) and diluted earnings (loss) per share excluding certain non-cash and non-recurring charges, as further detailed below.
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The Company has included in this report information to reconcile this non-GAAP information to the most directly comparable GAAP information. The non-GAAP information presented 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. Management uses such non-GAAP information for financial and operational decision-making purposes and as a means to evaluate period over period comparisons of the underlying performance of its business and in forecasting the Company’s business going forward. Management believes that the presentation of such non-GAAP information, when considered in conjunction with the most directly comparable GAAP information, provides additional useful comparative information for investors in their assessment of the underlying performance of the Company’s business.
Current Economic Conditions
A significant portion of the Company’s business is conducted outside of the United States in currencies other than the U.S. dollar. As a result, changes in foreign currency rates can have a significant effect on the Company’s financial results. The Company enters into foreign currency forward contracts to mitigate the effects of changes in foreign currency rates. 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 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 the Company’s foreign currency forward contracts. In general, the Company’s overall financial results are affected positively by a weaker U.S. dollar and are affected negatively by a stronger U.S. dollar as compared to the foreign currencies in which the Company conducts its business. Fluctuations in foreign currencies had an unfavorable impact on international net revenues of $148.1 million for the year ended December 31, 2022, relative to the same period in the prior year. The Company anticipates that changes in foreign currencies will continue to have a significant unfavorable impact on net revenues and operating results for 2023.
The recent increase in inflation partially contributed to the increase in the cost of the Company’s products as well as operating costs. While the Company was generally able to offset these inflationary pressures by increasing the price of its products and services, the length and severity of these conditions are unpredictable, and should conditions persist and/or worsen, such inflationary pressures may have an adverse effect on the Company’s operating expenses. Further, the Company may not be able to offset these increased costs through price increases. As a result, the Company’s cash flows and results of operations could be adversely affected.
During most of 2022, the Company experienced extended lead times on inventory shipments due to significant port delays and container shortages domestically and internationally. As a result, the Company planned its inventory purchases around these increased in-transit times in order to meet the increased demand for its golf equipment and apparel products, as well as manage supplier capacity by pulling-forward inventory orders in order to prepare for upcoming product launches. However, during the third quarter, in-transit times improved and many of the inventory orders the Company made were received earlier than planned, creating an increase in inventory levels in the second half of 2022 compared to the same period in 2021, which were unusually low due to inventory shortages caused by supply chain constraints. A majority of the inventory shipments received during the second half of 2022 were for 2023 products, therefore the Company anticipated continued higher inventory levels going into 2023. The Company believes the quality of its inventory is good and that it will be well positioned going into the 2023 golf season.
Segment and Related Information
The Company’s products and brands are reported under three operating segments: Topgolf, which includes the operations of the Company’s Topgolf business; Golf Equipment, which includes the operations of the Company’s golf clubs and golf balls business; and Active Lifestyle, which includes the operations of the Company’s soft goods business marketed under the Callaway, TravisMathew, Jack Wolfskin and OGIO brand names. For further detail related to the Company’s operating segments, products and seasonality, see “Part I, Item 1. Business - Overview” in this Form 10-K.
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Results of Operations
Years Ended December 31, 2022 and 2021
Net Revenues
The Company’s net revenues for the year ended December 31, 2022 increased $862.3 million (27.5%) to $3,995.7 million compared to $3,133.4 million for the year ended December 31, 2021. The increase reflects strong revenue performance in all three of the Company’s operating segments across all major geographic regions. This revenue growth was achieved despite a significant unfavorable foreign currency exchange impact of $148.1 million, primarily related to the Company’s business operations in Europe and Asia. In addition, 2022 includes a full year of revenue related to Topgolf compared to ten months in 2021 due to the timing of the merger. Net revenues by operating segment and major geographic region are presented below. For further information related to the Company’s operating segments see, “Operating Segment Results” below.
Net revenues by operating segment (in millions, except percentages):
| Year Ended December 31, | Increase/(Decrease) | Non - GAAP Constant Currency Growth | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Amount | Percent | Percent | ||||||||||||
| Net revenues: | ||||||||||||||||
| Topgolf | $ | 1,549.0 | $ | 1,087.6 | $ | 461.4 | 42.4 | % | 43.3% | |||||||
| Golf Equipment | 1,406.6 | 1,229.2 | 177.4 | 14.4 | % | 19.6% | ||||||||||
| Active Lifestyle | 1,040.1 | 816.6 | 223.5 | 27.4 | % | 36.5% | ||||||||||
| Total net revenues | $ | 3,995.7 | $ | 3,133.4 | $ | 862.3 | 27.5 | % | 32.2% |
Net revenues by major geographic region (in millions, except percentages):
| Year Ended December 31, | Increase/(Decrease) | Non-GAAP Constant Currency Growth | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Amount | Percent | Percent | ||||||||||||
| Net revenues: | ||||||||||||||||
| United States | $ | 2,798.0 | $ | 2,067.1 | $ | 730.9 | 35.4 | % | 35.4% | |||||||
| Europe | 537.4 | 499.5 | 37.9 | 7.6 | % | 22.0% | ||||||||||
| Asia | 545.4 | 465.5 | 79.9 | 17.2 | % | 32.4% | ||||||||||
| Rest of World | 114.9 | 101.3 | 13.6 | 13.4 | % | 18.5% | ||||||||||
| Total net revenues | $ | 3,995.7 | $ | 3,133.4 | $ | 862.3 | 27.5 | % | 32.2% |
United States
Net revenues in the United States are comprised of net revenues from the Company’s Topgolf, Golf Equipment, and Active Lifestyle operating segments. During the year ended December 31, 2022, the Company’s net revenues in the United States increased $730.9 million (35.4%) compared to the year ended December 31, 2021. The increase was primarily due to growth in the Topgolf business combined with an additional two months of revenue due to the timing of the merger in 2021, in addition to continued strong demand for Golf Equipment products and Active Lifestyle products, which was primarily attributable to the expansion and brand momentum of the TravisMathew business.
Europe
Net revenues in Europe are comprised of revenues from the Company’s Golf Equipment, Active Lifestyle and Topgolf operating segments. During the year ended December 31, 2022, net revenues in Europe increased $37.9 million (7.6%) compared to the year ended December 31, 2021. The increase was primarily driven by strong revenue performance in the Jack Wolfskin apparel business as well as the Topgolf business, which also includes an incremental two months of sales due to the timing of the merger in 2021. Fluctuations in foreign currency exchange rates had an unfavorable impact on the Company’s net revenues in Europe of $72.1 million. On a constant currency basis, the Company’s net revenues in Europe increased by 22.0%.
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Asia
Net revenues in Asia are comprised of revenues from the Company’s Golf Equipment and Active Lifestyle operating segments. During the year ended December 31, 2022, net revenues in Asia increased $79.9 million (17.2%) compared to the year ended December 31, 2021. The increase was primarily related to continued strong demand for golf equipment products, in addition to an increase in apparel sales driven primarily by the addition of the Korea apparel business in the third quarter of 2021. Foreign currency exchange rates had a $70.9 million unfavorable impact on the Company’s net revenues in Asia, primarily related to sales in Japan and Korea. On a constant currency basis, the Company’s net revenues in Asia increased by 32.4%.
Rest of World
Net revenues in Rest of World are primarily comprised of revenues from the Company’s Golf Equipment and Active Lifestyle operating segments in Canada, Australia, and Latin America. During the year ended December 31, 2022, net revenues in Rest of World increased $13.6 million (13.4%) compared to the year ended December 31, 2021. The increase was primarily driven by continued strong demand for golf equipment and apparel products. Foreign currency exchange rates had a $5.1 million unfavorable impact on the Company’s net revenues in the Rest of World regions, primarily in Australia and Canada. On a constant currency basis, the Company’s net revenues for Rest of World increased by 18.5%.
Costs and Expenses (in millions, except percentages)
| Year Ended December 31, | Increase/(Decrease) | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Amount | Percent | |||||||||||
| Costs and expenses: | ||||||||||||||
| Cost of products | $ | 1,400.6 | $ | 1,136.6 | $ | 264.0 | 23.2 | % | ||||||
| Cost of services, excluding depreciation and amortization | 184.0 | 133.5 | 50.5 | 37.8 | % | |||||||||
| Other venue expense | 1,076.9 | 731.5 | 345.4 | 47.2 | % | |||||||||
| Selling, general and administrative expense | 970.6 | 849.7 | 120.9 | 14.2 | % | |||||||||
| Research and development expense | 76.4 | 68.0 | 8.4 | 12.4 | % | |||||||||
| Venue pre-opening costs | 30.4 | 9.4 | 21.0 | 223.4 | % | |||||||||
| Total costs and expenses | $ | 3,738.9 | $ | 2,928.7 | $ | 810.2 | 27.7 | % |
Cost of Products
The Company’s cost of products is comprised primarily of material and component costs, distribution and warehousing costs, overhead expenses as well as retail merchandise costs, which also includes products sold in retail shops within Topgolf venue facilities. Historically, over 85% of the Company’s manufacturing costs, which are primarily material and component costs, are variable in nature and fluctuate with sales volumes. Variable costs for the Company’s Golf Equipment segment range between 85% to 95% for golf club products and 70% to 80% for golf ball products. Variable costs for soft goods in the Active Lifestyle operating segment are generally greater than 85%. Generally, the relative significance of the components of cost of products do not vary materially from these percentages from period to period.
During the year ended December 31, 2022, cost of products increased $264.0 million (23.2%) to $1,400.6 million compared to $1,136.6 million for the year ended December 31, 2021. The increase was primarily attributable to the variable nature of the Company’s cost of products which was commensurate with the significant increase in sales volumes during 2022, as compared to the same period in 2021. In addition to the overall increase directly related to sales volumes, the Company also experienced an overall increase in commodity and input costs related to the manufacture and distribution of its products, including significant increases in freight and labor costs, as well as the negative impacts of inflationary pressures throughout the year.
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Cost of Services, Excluding Depreciation and Amortization
Cost of services, excluding depreciation and amortization, consist primarily of the cost of food and beverage sold at Topgolf venues, as well as certain costs associated with licensing the Company’s Toptracer ball-flight tracking technology. The cost of services at Topgolf are largely variable in nature. During the year ended December 31, 2022, cost of services, excluding depreciation and amortization, increased $50.5 million (37.8%), to 184.0 million, compared to $133.5 million for the year ended December 31, 2021. The increase was primarily due to additional Topgolf venues added throughout 2022, in addition to an incremental two months of costs incurred during 2022, due to the timing of the Topgolf merger in 2021.
Other Venue Expense
Other venue expense consists of depreciation and amortization, employee costs, rent, utilities, and other costs associated with Topgolf venues. During the year ended December 31, 2022, other venue expense increased $345.4 million (47.2%), to $1,076.9 million, compared to $731.5 million for the year ended December 31, 2021. The increase was primarily due to additional Topgolf venues added throughout 2022, in addition to an incremental two months of expenses incurred during 2022 due to the timing of the Topgolf merger in 2021.
Selling, General and Administrative Expense
Selling, general and administrative expense increased by $120.9 million (14.2%) to $970.6 million during the year ended December 31, 2022, compared to $849.7 million for the year ended December 31, 2021. The increase was primarily to support the continued growth and expansion of the business, which includes increases in employee costs related to increased headcount across all of the Company’s businesses, professional fees, including fees associated with the implementation of new IT systems at various subsidiaries of the Company, marketing and promotional expense and travel and entertainment. In addition, the increase reflects an incremental two months of selling, general and administrative expense recognized at Topgolf during 2022 due to the timing of the merger in 2021.
Research and Development Expense
Research and development expense increased $8.4 million (12.4%) to $76.4 million during the year ended December 31, 2022, compared to $68.0 million for the year ended December 31, 2021. The increase was primarily due to an increase in employee costs resulting from increased headcount.
Venue Pre-Opening Costs
Venue pre-opening costs consist of costs associated with activities prior to the opening of new Company-operated Topgolf venues, as well as other costs that are not considered in the evaluation of ongoing venue performance. Venue pre-opening costs are variable in nature and fluctuate based on the timing of an anticipated venue opening date, as well as the size and location of a particular Company-operated venue. The Company expects to continue to incur venue pre-opening costs as it continues to expand its operations and open Company-operated Topgolf venues domestically and internationally. Venue pre-opening costs increased $21.0 million (223.4%) to $30.4 million during the year ended December 31, 2022, compared to $9.4 million for the year ended December 31, 2021. The increase was primarily due to an increase in the number of venues constructed throughout 2022, and under construction as of December 31, 2022, as compared to the same period in 2021, in addition to two months of incremental expense incurred during 2022 due to the timing of the Topgolf merger in 2021.
Other Income and Expense (in millions)
| Year Ended December 31, | Increase/(Decrease) | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Amount | Percent | |||||||||||
| Other income and expenses: | ||||||||||||||
| Interest expense, net | $ | (142.8) | $ | (115.6) | $ | (27.2) | (23.5) | % | ||||||
| Gain on Topgolf investment | — | 252.5 | (252.5) | (100.0) | % | |||||||||
| Other income | 27.9 | 9.0 | 18.9 | 210.0 | % | |||||||||
| Total other (expense) income, net | $ | (114.9) | $ | 145.9 | $ | (260.8) | (178.8) | % |
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Total other (expense) income, net decreased by $260.8 million (178.8%) to other expense of $114.9 million during the year ended December 31, 2022, compared to other income of $145.9 million during the year ended December 31, 2021. The decrease was primarily due to the recognition of a $252.5 million non-cash gain in 2021 related to the fair-value write-up of the Company’s pre-merger shares of Topgolf in connection with the merger, in addition to an increase of $27.2 million (23.5%) in interest expense, primarily due to additional deemed landlord financing lease obligations related to the construction of new Topgolf venues combined with an additional two months of interest expense related to Topgolf debt obligations due to the timing of the merger in 2021. These increases were partially offset by an $18.9 million (210.0%) increase in other income related to net gains on foreign currency hedging contracts offset by foreign currency transaction losses.
Income Taxes
The Company’s provision for income taxes decreased $44.6 million to an income tax benefit of $16.0 million in 2022, compared to an income tax provision of $28.6 million in 2021. The Company’s effective tax rate as a percentage of pre-tax income for 2022 decreased to (11.3%) compared to 8.2% in 2021. The Company’s effective tax rate for 2022 was impacted by the release of valuation allowances on the Company’s United States deferred tax assets. The Company’s effective tax rate in 2021 was impacted by the nontaxable gain recognized on the Company’s pre-merger investment in Topgolf shares as well as the recognition of a valuation allowance on certain net operating losses and tax credits. For further discussion, see Note 12. “Income Taxes” in the Notes to Consolidated Financial Statements in this Form 10-K.
Net Income (Loss)
Net Income
Net income for the year ended December 31, 2022 decreased $164.1 million (51.0%) to $157.9 million compared to net income of $322.0 million for the year ended December 31, 2021. The decrease was primarily due to the recognition of a $252.5 million gain in 2021 related to the non-cash fair-value write-up of the Company’s pre-merger investment in Topgolf, partially offset by a $52.1 million (25.5%) increase in income from operations, combined with the recognition of a $16.0 million tax benefit for the year ended December 31, 2022 compared to a tax provision of $28.6 million for the year ended December 31, 2021. Diluted earnings per common share decreased $1.00 to $0.82 on 201.3 million diluted shares outstanding for the year ended December 31, 2022 compared to $1.82 on 176.9 million shares outstanding for the year ended December 31, 2021. The increased share count for the year ended December 31, 2022 reflects the addition of 14.7 million common shares as the result of the adoption of ASU 2020-06 on January 1, 2022, which required the application of the if-converted method to calculate the dilutive effect from the Company’s convertible notes.
Non-GAAP Net Income Reconciliation and Diluted Earnings Per Share
On a non-GAAP basis, excluding the impacts of the items described in the table below, the Company’s net income and diluted earnings per share for the year ended December 31, 2022 would have been $158.2 million and $0.82 per share, respectively, compared to $137.9 million and $0.78 per share, respectively, for the year ended December 31, 2021.
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The tables below present a reconciliation of the Company’s results under GAAP and non-GAAP measures (in millions, except per share information):
| Year Ended December 31, 2022 | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| GAAP | Non-Cash Depreciation and Amortization(1) | Non-Recurring Items(2) | Tax Valuation Allowance(3) | Non-GAAP | ||||||||||||||||||
| Net income (loss) | $ | 157.9 | $ | (21.8) | $ | (12.9) | $ | 34.4 | $ | 158.2 | ||||||||||||
| Diluted earnings (loss) per share | $ | 0.82 | $ | (0.11) | $ | (0.06) | $ | 0.17 | $ | 0.82 | ||||||||||||
| Weighted-average shares outstanding | 201.3 | 201.3 | 201.3 | 201.3 | 201.3 | |||||||||||||||||
| Year Ended December 31, 2021 | ||||||||||||||||||||||
| GAAP | Non-Cash Depreciation and Amortization(1) | Non-Cash Amortization of Discount on Convertible Notes(4) | Acquisition and Non-Recurring Items(5) | Tax Valuation Allowance(3) | Non-GAAP | |||||||||||||||||
| Net income (loss) | $ | 322.0 | $ | (23.5) | $ | (8.0) | $ | 233.6 | $ | (18.0) | $ | 137.9 | ||||||||||
| Diluted earnings (loss) per share | $ | 1.82 | $ | (0.13) | $ | (0.05) | $ | 1.32 | $ | (0.10) | $ | 0.78 | ||||||||||
| Weighted-average shares outstanding | 176.9 | 176.9 | 176.9 | 176.9 | 176.9 | 176.9 | ||||||||||||||||
| (1) Includes the amortization and depreciation of acquired intangible assets and purchase accounting adjustments. | ||||||||||||||||||||||
| (2) Includes $5.7 million of impairment charges, $5.9 million of one-time implementation costs associated with new ERP systems installed at acquired companies, $3.6 million for legal and credit agency fees related to a postponed debt refinancing and $0.9 million for reorganization expenses. | ||||||||||||||||||||||
| (3) In connection with the merger with Topgolf in 2021, the Company acquired valuation allowances against certain deferred tax assets. Based on the Company’s ongoing assessment, a portion of these valuation allowances were released in 2022, and additional valuation allowances were recorded in 2021. | ||||||||||||||||||||||
| (4) Includes non-cash interest expense related to the amortization of the discount on the Convertible Notes issued in 2020. In accordance with the adoption of ASC 2020-06 effective January 1, 2022, the Company derecognized the discount on the 2020 Convertible Notes and as such, will no longer recognize amortization expense in future periods. | ||||||||||||||||||||||
| (5) Includes $20.2 million of transaction, transition and other non-recurring costs associated with the merger with Topgolf, $3.8 million of one-time implementation costs associated with new ERP systems installed at acquired companies, in addition to the recognition of a $252.5 million gain on the Company’s pre-merger investment in Topgolf. |
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Operating Segment Results for the Years Ended December 31, 2022 and 2021 (in millions, except percentages)
| Year Ended December 31, | Increase/(Decrease) | Non-GAAP Constant Currency Growth vs. 2021(1) | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Dollars | Percent | Percent | ||||||||||||
| Net revenues: | ||||||||||||||||
| Venues(2) | $ | 1,477.1 | $ | 1,029.0 | $ | 448.1 | 43.5 | % | 44.0% | |||||||
| Other Topgolf business lines(2) | 71.9 | 58.6 | 13.3 | 22.7 | % | 30.7% | ||||||||||
| Topgolf | 1,549.0 | 1,087.6 | 461.4 | 42.4 | % | 43.3% | ||||||||||
| Golf clubs | 1,097.1 | 994.5 | 102.6 | 10.3 | % | 15.7% | ||||||||||
| Golf balls | 309.5 | 234.7 | 74.8 | 31.9 | % | 36.0% | ||||||||||
| Golf Equipment | 1,406.6 | 1,229.2 | 177.4 | 14.4 | % | 19.6% | ||||||||||
| Apparel | 631.7 | 490.9 | 140.8 | 28.7 | % | 38.4% | ||||||||||
| Gear, accessories, & other | 408.4 | 325.7 | 82.7 | 25.4 | % | 33.7% | ||||||||||
| Active Lifestyle | 1,040.1 | 816.6 | 223.5 | 27.4 | % | 36.5% | ||||||||||
| Total net revenues | $ | 3,995.7 | $ | 3,133.4 | $ | 862.3 | 27.5 | % | 32.2% | |||||||
| Segment operating income: | ||||||||||||||||
| Topgolf | $ | 76.8 | $ | 58.2 | $ | 18.6 | 32.0 | % | ||||||||
| Golf Equipment | 251.4 | 203.9 | 47.5 | 23.3 | % | |||||||||||
| Active Lifestyle | 77.4 | 68.5 | 8.9 | 13.0 | % | |||||||||||
| Total segment operating income | 405.6 | 330.6 | 75.0 | 22.7 | % | |||||||||||
| Reconciling Items(3) | (148.8) | (125.9) | (22.9) | 18.2 | % | |||||||||||
| Total operating income | 256.8 | 204.7 | 52.1 | 25.5 | % | |||||||||||
| Gain on Topgolf investment(4) | — | 252.5 | (252.5) | (100.0) | % | |||||||||||
| Interest expense, net | (142.8) | (115.6) | (27.2) | 23.5 | % | |||||||||||
| Other income, net | 27.9 | 9.0 | 18.9 | 210.0 | % | |||||||||||
| Income before income taxes | $ | 141.9 | $ | 350.6 | $ | (208.7) | (59.5) | % | ||||||||
| (1) Calculated by applying 2021 exchange rates to 2022 reported sales in regions outside the U.S. | ||||||||||||||||
| (2) As of January 1, 2022, in order to align with the Company’s current management reporting structure, the Company began reporting revenues associated with corporate advertising sponsorship contracts in the venues business line within the Topgolf operating segment. In 2021, these revenues were included in other Topgolf business lines. In order to conform to the current year presentation, revenue of $15.0 million associated with corporate advertising sponsorship contracts recognized from the merger date through December 31, 2021, was reclassified from other Topgolf business lines to venues for comparative purposes. | ||||||||||||||||
| (3) Amounts for 2022 and 2021 include corporate general and administrative expenses not utilized by management in determining segment profitability, in addition to $25.0 million and $27.2 million of depreciation and amortization of acquired intangible assets and fair value adjustments, respectively, and $15.5 million and $23.9 million of non-recurring items described above, respectively. | ||||||||||||||||
| (4) Amount represents a gain recorded to write-up the Company’s former investment in Topgolf to its fair value in connection with the merger. |
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Topgolf
Topgolf net revenues increased by $461.4 million (42.4%) for the year ended December 31, 2022 compared to the year ended December 31, 2021. This increase was primarily driven by the opening of 11 new Company-owned and operated Topgolf venues throughout 2022, as well as an increase in same venue sales for existing venues. The increase in same venue sales was primarily due to a balanced increase between walk-in traffic at the venues and price increases, in addition to strong performance in Topgolf’s corporate and social events business. In addition, during 2022, the Company recognized a full 12 month period of Topgolf revenues, compared to only ten months during the year ended 2021, which was due to the closing of the merger on March 8, 2021. The increase in segment operating income of $18.6 million (32.0%) primarily reflects the increase in revenue, partially offset by an increase in pre-opening costs due to the opening of new venues in 2022, combined with a planned increase in marketing spend.
Golf Equipment
Golf Equipment net revenues increased by $177.4 million (14.4%) for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase was primarily driven by strong demand for golf ball products, including the 2022 Chrome Soft line of golf balls, as well as packaged sets due to increased supply. The increase was additionally due to continued strong demand across all golf club product categories, primarily from the core golf consumer base, combined with additional supply capacity and inventory fill-in at retail. Golf Equipment segment operating income increased $47.5 million (23.3%) compared to the year ended December 31, 2021. The increase was due to increases in sales volume and average selling prices, which outpaced higher input and freight costs and unfavorable foreign exchange rate impacts.
Active Lifestyle
Active Lifestyle net revenues increased by $223.5 million (27.4%) for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase reflects strong performance across all brands within the Company’s Active Lifestyle portfolio and was primarily driven by continued brand momentum at TravisMathew. Increased sales at Jack Wolfskin as well as growth in the Korea apparel business which launched in July 2021 also contributed to the overall increase in Active Lifestyle net revenues. Active Lifestyle segment operating income increased $8.9 million (13.0%) compared to the year ended December 31, 2021. The increase reflects continued momentum in the business, which outpaced the unfavorable impact of foreign currency rates.
Financial Condition
The Company’s cash and cash equivalents decreased $172.0 million to $180.2 million at December 31, 2022 from $352.2 million at December 31, 2021. This decrease was primarily related to cash used in investing activities of $535.1 million and cash used in operating activities of $35.1 million, partially offset by cash provided by financing activities of $425.3 million. During the 12 months ended December 31, 2022, the Company used its existing cash and cash equivalents, as well as net proceeds from borrowings on its long-term debt and credit facilities, and proceeds from lease financings, to fund its operations and for the development of Topgolf venues and other capital expenditures, for the purchase of inventory, and repurchase shares of its common stock. The Company believes that its existing funds combined with cash expected to be generated from its operating activities, existing sources of and access to capital and any future financings, as necessary, are adequate to fund the Company’s future operations. For further information related to the Company’s financing arrangements, see Note 7. “Financing Arrangements” in the Notes to Consolidated Financial Statements in Part IV, Item 15 and “Liquidity and Capital Resources” in Part II, Item 7 of this Form 10-K.
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The Company’s accounts receivable balance fluctuates throughout the year as a result of the general seasonality of the Company’s business and is also affected by the timing of new product launches. With respect to the Company’s Golf Equipment business, accounts receivable will generally be highest during the first and second quarters, primarily due to the seasonal peak in the golf industry, and will generally decline significantly during the third and fourth quarters as a result of an increase in cash collections and lower sales. The Company’s Active Lifestyle accounts receivable balances are generally higher during the third and fourth quarters, primarily due to the seasonal nature of the Jack Wolfskin business, whose products are significantly geared towards the fall and winter seasons. Topgolf primarily records revenue and collects payment at point-of-sale for most of its venue business. Therefore, Topgolf’s accounts receivable balance is smaller than the Company’s other business segments and primarily consists of media sponsorship receivables. As of December 31, 2022, the Company’s net accounts receivable increased $62.0 million to $167.3 million from $105.3 million as of December 31, 2021. The increase is primarily due to increases in the fourth quarter of Active Lifestyle and Golf Equipment sales.
The Company’s inventory balance fluctuates throughout the year as a result of the general seasonality of the Company’s business and is also affected by the timing of new product launches. With respect to the Company’s 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 height of 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 the Company’s 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 the Company’s other operating segments, with the inventory balances primarily consisting of food and beverage as well as retail merchandise and Toptracer inventory. The Company’s inventory increased $425.7 million to $959.2 million as of December 31, 2022 compared to $533.5 million as of December 31, 2021. These increases were primarily driven by the timing of inventory receipts, which occurred earlier than anticipated due to shortened lead times on inventory shipments. Additionally, inventory levels were constrained throughout 2021 due to supply chain disruptions which caused shortages.
Liquidity and Capital Resources
Liquidity
The Company’s principal sources of liquidity consist of its existing cash balances, funds expected to be generated from operations and funds from its credit facilities. Based upon the Company’s current cash balances, its estimates of funds expected to be generated from operations, as well as from current and projected availability under its current or future credit facilities, the Company believes that it 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-K.
The Company’s ability to generate sufficient positive cash flows from operations is subject to many risks and uncertainties, including future economic trends and conditions, demand for the Company’s products, supply chain challenges, price inflation, foreign currency exchange rates, and other risks and uncertainties applicable to the Company and its business (see “Risk Factors” contained in Part I, Item 1A in this Form 10-K). As of December 31, 2022, the Company had $415.3 million in cash and availability under its credit facilities, which is a decrease of $337.5 million or 44.8% compared to December 31, 2021. Information about the Company’s credit facilities and long-term borrowings is presented in Note 7. “Financing Arrangements” in the Notes to Consolidated Financial Statements in this Form 10-K and is incorporated herein by this reference.
As of December 31, 2022, approximately 75% of the Company’s cash was held in regions outside of the United States. The Company continues to maintain its indefinite reinvestment assertion with respect to most jurisdictions in which it operates because of local cash requirements to operate its business. If the Company were to repatriate cash to the United States outside of settling intercompany balances, it may need to pay incremental foreign withholding taxes which, subject to certain limitations, generate foreign tax credits for use against the Company’s U.S. tax liability, if any. Additionally, the Company may need to pay certain state income taxes.
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Significant Cash Obligations
The Company plans to utilize its liquidity (as described above) and its cash flows from business operations to fund its material cash requirements. The table below summarizes certain significant cash obligations as of December 31, 2022 that will affect the Company’s future liquidity (in millions):
| Payments Due By Period | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total | 2023 | 2024 - 2025 | 2026 - 2027 | Thereafter | ||||||||||||||
| Long-term debt(1) | $ | 1,214.4 | $ | 17.7 | $ | 141.0 | $ | 1,010.8 | $ | 44.9 | ||||||||
| Interest payments relating to long-term debt(2) | 309.2 | 95.8 | 162.4 | 14.9 | 36.1 | |||||||||||||
| Finance leases, including imputed interest(3) | 635.6 | 11.2 | 28.9 | 30.7 | 564.8 | |||||||||||||
| Operating leases, including imputed interest(4) | 2,460.4 | 152.5 | 300.0 | 288.9 | 1,719.0 | |||||||||||||
| DLF obligations(5) | 2,898.3 | 52.2 | 109.9 | 113.5 | 2,622.7 | |||||||||||||
| Minimum lease payments for leases signed but not yet commenced(6) | 834.2 | 8.4 | 35.4 | 35.4 | 755.0 | |||||||||||||
| Capital commitments(7) | 48.0 | 36.0 | 12.0 | — | — | |||||||||||||
| Unconditional purchase obligations(8) | 83.9 | 47.2 | 26.5 | 10.2 | — | |||||||||||||
| Uncertain tax contingencies(9) | 12.5 | 1.8 | 6.7 | 3.2 | 0.8 | |||||||||||||
| Total | $ | 8,496.5 | $ | 422.8 | $ | 822.8 | $ | 1,507.6 | $ | 5,743.3 | ||||||||
| (1) Excludes unamortized debt discounts, unamortized debt issuance costs, and fair value adjustments. For further details, see Note 7. “Financing Arrangements” in the Notes to Consolidated Financial Statements in this Form 10-K. | ||||||||||||||||||
| (2) Long-term debt may have fixed or variable interest rates. For further details, see Note 7. “Financing Arrangements” in the Notes to Consolidated Financial Statements in this Form 10-K. | ||||||||||||||||||
| (3) Represents future minimum payments under financing leases. For further details, see Note 4. “Leases” in the Notes to Consolidated Financial Statements in this Form 10-K. | ||||||||||||||||||
| (4) Represents commitments for minimum lease payments under non-cancellable operating leases. For further details, see Note 4. “Leases” in the Notes to Consolidated Financial Statements in this Form 10-K. | ||||||||||||||||||
| (5) Represents DLF obligations in connection with the construction of Topgolf venues. For further details, see Note 4. “Leases” in the Notes to Consolidated Financial Statements in this Form 10-K. | ||||||||||||||||||
| (6) Represents future minimum lease payments under lease agreements that have not yet commenced as of December 31, 2022 in relation to future Topgolf facilities. For further discussion, see Note 4. “Leases” in the Notes to Consolidated Financial Statements in this Form 10-K. | ||||||||||||||||||
| (7) Represents capital expenditure commitments under lease agreements for Topgolf venues under construction that have been signed as of December 31, 2022. | ||||||||||||||||||
| (8) During the normal course of its business, the Company enters 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 the Company is required to pay royalty fees. The amounts listed above approximate the minimum purchase obligations the Company is obligated to pay under these agreements over the next five years and thereafter as of December 31, 2022. The actual amounts paid under some of the agreements may be higher or lower than these amounts. In addition, the Company also enters 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 13 “Commitments & Contingencies” in the Notes to Consolidated Financial Statements in this Form 10-K. | ||||||||||||||||||
| (9) Amounts represent current and non-current portions of uncertain income tax positions as recorded on the Company’s Consolidated Balance Sheets as of December 31, 2022. Amounts exclude uncertain income tax positions that the Company would be able to offset against deferred taxes. For further discussion, see Note 12. “Income Taxes” in the Notes to Consolidated Financial Statements in this Form 10-K. |
During its normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These include (i) intellectual property indemnities to the Company’s customers and licensees in connection with the use, sale and/or license of Company 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 the Company or based on the negligence or willful misconduct of the Company, and (iv) indemnities involving the accuracy of representations and warranties in certain contracts. In addition, the Company has made contractual commitments to each of its officers and certain other employees providing for severance payments upon the termination of employment. The Company has also issued guarantees in the form of a standby letter of credit in the amount of $0.4 million as security for contingent liabilities related to import and export duties and fees, as well as employee tax withholding.
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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 the Company could be obligated to make. Historically, costs incurred to settle claims related to indemnities have not been material to the Company’s financial position, results of operations or cash flows. In addition, the Company believes the likelihood is remote that payments under the commitments and guarantees described above will have a material effect on the Company’s financial condition. The fair value of these indemnities, commitments and guarantees that the Company issued during the 12 months ended December 31, 2022 was not material to the Company’s financial position, results of operations or cash flows.
In addition to the contractual obligations listed above, the Company’s liquidity could also be adversely affected by an unfavorable outcome with respect to claims and litigation that the Company is subject to from time to time. See Note 13. “Commitments & Contingencies” in the Notes to Consolidated Financial Statements in this Form 10-K.