NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. The Company and Basis of Presentation
The Company
Topgolf Callaway Brands Corp. (together with its wholly-owned subsidiaries, referred to as “we,” “our,” “us,” or “Topgolf Callaway Brands” unless otherwise specified), a Delaware corporation, is a leading modern golf and active lifestyle company that provides world-class golf entertainment experiences, designs and manufactures premium golf equipment, and sells golf and active lifestyle apparel and other accessories through our family of brand names which include Topgolf, Callaway Golf, Odyssey, TravisMathew, Jack Wolfskin, OGIO, Toptracer and World Golf Tour (“WGT”).
Our products and brands are reported under three operating segments: Topgolf, which includes the operations of our Topgolf business; Golf Equipment, which includes the operations of our golf clubs and golf balls business under the Callaway Golf, Odyssey and Strata brand names; and Active Lifestyle, which includes the operations of our soft goods business marketed under the Callaway, TravisMathew, Jack Wolfskin and OGIO brand names.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Pursuant to these rules and regulations, we have condensed or omitted certain information and disclosures that are normally included in our annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, these condensed consolidated financial statements include all of the normal and recurring adjustments necessary for the fair presentation of the financial position, results of operations and cash flows for the periods and dates presented. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on March 1, 2023. Interim operating results are not necessarily indicative of operating results that may be expected for the year ending December 31, 2023, or any other future periods.
We translate the financial statements of our foreign subsidiaries using end-of-period exchange rates for assets and liabilities and average exchange rates during each reporting period for results of operations. All intercompany balances and transactions have been eliminated during consolidation.
Our Topgolf subsidiary previously operated on a 52- or 53-week retail calendar year, which ended on the Sunday closest to December 31. As of April 4, 2022 and going forward, Topgolf began operating on a fiscal year calendar, which will end on December 31. Topgolf financial information included in our condensed consolidated financial statements for the three months ended March 31, 2023 is for the period beginning January 1, 2023 and ending March 31, 2023. Topgolf financial information included in our condensed consolidated financial statements for the three months ended March 31, 2022 is for the period beginning January 3, 2022 and ending April 3, 2022.
Note 2. Summary of Significant Accounting Policies
Our significant accounting policies are described in Note 2 to our audited consolidated financial statements for the year ended December 31, 2022, which are included in our Annual Report on Form 10-K which was filed with the SEC on March 1, 2023.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical information and various other assumptions that are believed to be reasonable under the circumstances. Examples of such estimates include, among other things, determining the nature and timing of the satisfaction of performance obligations as it relates to revenue recognition, the valuation of share-based awards, the recoverability of long-lived assets, the assessment of intangible assets and goodwill for impairment, the determination of the incremental borrowing rate for operating and financing leases, provisions for warranty and expected credit losses, inventory obsolescence, sales returns, future price concessions, tax contingencies and valuation allowances, the estimated useful lives of property, plant and equipment, and acquired intangible assets. Actual results may materially differ from these estimates. On an ongoing basis, we review our estimates to ensure that these estimates appropriately reflect changes in our business or new information as it becomes available.
Recently Issued Accounting Standards
In June 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions” (“ASU 2022-03”). ASU 2022-03 clarifies the guidance in Topic 820 when measuring the fair value of an equity security that is subject to a contractual sale restriction, and also introduces new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value. ASU 2022-03 is effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted. We are in the process of evaluating the impact that this ASU will have on our consolidated financial statements and related disclosures.
Note 3. Leases
Sales-Type Leases
We enter into non-cancellable license agreements that provide software and hardware to driving ranges, hospitality venues, and entertainment venues. These license agreements are classified as sales-type leases.
Leasing revenue from sales-type leases is included in service revenues within the condensed consolidated statements of operations. Leasing revenue from sales-type leases consists of the selling price and interest income as follows (in millions):
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
Sales-type lease selling price(1) | | | | | $ | 8.2 | | | $ | 7.1 | |
Cost of underlying assets | | | | | (3.4) | | | (3.3) | |
Operating profit | | | | | $ | 4.8 | | | $ | 3.8 | |
| | | | | | | |
Interest income | | | | | $ | 1.3 | | | $ | 0.9 | |
| | | | | | | |
Leasing revenue attributable to sales-type leases | | | | | $ | 9.5 | | | $ | 8.0 | |
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(1) Selling price is equal to the present value of lease payments over the non-cancellable term of the licensing agreement. |
Leasing receivables related to our net investment in sales-type leases are as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Balance Sheet Location | | March 31, 2023 | | December 31, 2022 |
Leasing receivables, net—short-term | Other current assets | | $ | 20.1 | | | $ | 17.5 | |
Leasing receivables, net—long-term | Other assets | | 59.8 | | | 57.5 | |
Total Leasing receivables | | | $ | 79.9 | | | $ | 75.0 | |
As of March 31, 2023, net maturities of sales-type lease receivables for the next five years and thereafter were as follows (in millions):
| | | | | |
| Sales-type Leases |
Remainder of 2023 | $ | 19.3 | |
2024 | 24.5 | |
2025 | 20.3 | |
2026 | 13.6 | |
2027 | 6.8 | |
Thereafter | 4.2 | |
Total future lease proceeds | 88.7 | |
Less: imputed interest | 8.8 | |
Total | $ | 79.9 | |
Operating and Finance Leases
As a lessee, we lease office spaces, manufacturing plants, warehouses, distribution centers, company-operated Topgolf venues, vehicles and equipment, as well as retail and outlet locations.
Supplemental balance sheet information related to leases is as follows (in millions):
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| Balance Sheet Location | | March 31, 2023 | | December 31, 2022 |
Operating Leases | | | | | |
Right-of-use (“ROU”) assets, net | Operating lease ROU assets, net | | $ | 1,411.3 | | | $ | 1,419.1 | |
Lease liabilities, short-term | Operating lease liabilities, short-term | | $ | 80.0 | | | $ | 76.4 | |
Lease liabilities, long-term | Operating lease liabilities, long-term | | $ | 1,430.9 | | | $ | 1,437.5 | |
| | | | | |
Finance Leases | | | | | |
ROU assets, net | Other assets | | $ | 231.9 | | | $ | 215.7 | |
Lease liabilities, short-term | Accounts payable and accrued expenses | | $ | 1.6 | | | $ | 1.7 | |
Lease liabilities, long-term | Other long-term liabilities | | $ | 245.3 | | | $ | 225.9 | |
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The components of lease expense are as follows (in millions):
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | 2023 | | 2022 |
Operating lease costs | | | | | $ | 44.0 | | | $ | 37.4 | |
Financing lease costs: | | | | | | | |
Amortization of right-of-use assets | | | | | 1.9 | | | 0.6 | |
Interest on lease liabilities | | | | | 3.6 | | | 2.1 | |
Total financing lease costs | | | | | 5.5 | | | 2.7 | |
Variable lease costs | | | | | 2.5 | | | 1.9 | |
Total lease costs | | | | | $ | 52.0 | | | $ | 42.0 | |
Other information related to leases (in millions): | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
Supplemental Cash Flows Information | | 2023 | | 2022 |
Cash paid for amounts included in the measurement of lease liabilities: | | | | |
Operating cash flows from operating leases | | $ | 38.0 | | | $ | 39.8 | |
Operating cash flows from finance leases | | $ | 1.2 | | | $ | 2.1 | |
Financing cash flows from finance leases | | $ | 1.0 | | | $ | 0.1 | |
| | | | |
Lease liabilities arising from new ROU assets: | | | | |
Operating leases | | $ | 9.7 | | | $ | — | |
Finance leases | | $ | 17.6 | | | $ | 30.0 | |
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
Weighted average remaining lease term (years): | | | |
Operating leases | 16.4 | | 16.6 |
Finance leases | 36.6 | | 36.5 |
| | | |
Weighted average discount rate: | | | |
Operating leases | 5.6 | % | | 5.6 | % |
Finance leases | 6.1 | % | | 6.1 | % |
Future minimum lease obligations as of March 31, 2023 were as follows (in millions):
| | | | | | | | | | | | | |
| Operating Leases | | Finance Leases | | |
Remainder of 2023 | $ | 108.3 | | | $ | 8.0 | | | |
2024 | 155.9 | | | 14.4 | | | |
2025 | 151.0 | | | 14.9 | | | |
2026 | 146.7 | | | 15.0 | | | |
2027 | 145.6 | | | 15.2 | | | |
Thereafter | 1,723.6 | | | 567.1 | | | |
Total future lease payments | 2,431.1 | | | 634.6 | | | |
Less: imputed interest | 920.2 | | | 387.7 | | | |
Total | $ | 1,510.9 | | | $ | 246.9 | | | |
Deemed Landlord Financing Obligations (“DLF” Obligations)
We work with third-party developers or real estate financing partners to acquire rights to land and fund the construction associated with certain venues under build-to-suit arrangements. While we seek to use financing partners, in certain instances, we typically fund a portion of the construction ourselves, and in some cases, all of the construction costs. In certain build-to-suit arrangements, we are deemed to have control of the underlying assets under construction and are therefore considered the accounting owner of these assets. Upon the completion of construction, we determine whether control has transferred to the financing partner. If control has not been transferred to our financing partners, we reverse the construction advance accumulated during the construction phase and record a DLF obligation. When land is acquired directly or venue construction is self-financed, we may enter into arrangements to sell those assets and lease back from a financing partner. In these cases, if control is not transferred upon the closing of the transaction and the commencement of the subsequent leaseback, we will record a DLF obligation associated with the cash proceeds.
The net book value of assets under DLF obligations included in property, plant and equipment, including the portion of the assets that we funded, was $852.9 million and $813.2 million, as of March 31, 2023 and December 31, 2022, respectively. Buildings capitalized in conjunction with these DLF obligations are depreciated, less their residual value, over the shorter period of 40 years or the lease term.
Supplemental balance sheet information related to DLF obligations is as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | |
| Balance Sheet Location | | March 31, 2023 | | December 31, 2022 | | | | |
DLF obligations, short-term | Accounts payable and accrued expenses | | $ | 0.9 | | | $ | 2.4 | | | | | |
DLF obligations, long-term | Deemed landlord financing obligations, long-term | | $ | 707.5 | | | $ | 658.0 | | | | | |
The components of DLF obligation expenses are as follows (in millions):
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | 2023 | | 2022 |
Amortization of DLF obligations | | | | | $ | 5.1 | | | $ | 3.2 | |
Interest on DLF obligations | | | | | 15.2 | | | 10.1 | |
Total DLF contract expenses | | | | | $ | 20.3 | | | $ | 13.3 | |
Other information related to DLF obligations was as follows (in millions):
| | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
Supplemental Cash Flows Information | | 2023 | | 2022 | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | |
Operating cash flows from DLF obligations | | $ | 8.6 | | | $ | 9.6 | | | |
Financing cash flows from DLF obligations | | $ | 4.4 | | | $ | — | | | |
| | | | | | |
DLF obligations arising from new properties | | $ | 45.7 | | | $ | 2.6 | | | |
| | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 | | |
Weighted average remaining lease term (years) | 38.4 | | 38.5 | | |
Weighted average discount rate | 8.9 | % | | 8.8 | % | | |
Future minimum financing obligations related to DLF obligations as of March 31, 2023 were as follows (in millions):
| | | | | | | | |
Remainder of 2023 | | $ | 36.6 | |
2024 | | 56.4 | |
2025 | | 56.8 | |
2026 | | 57.8 | |
2027 | | 59.0 | |
Thereafter | | 2,708.4 | |
Total future lease payments | | 2,975.0 | |
Less: imputed interest | | 2,266.6 | |
Total | | $ | 708.4 | |
Leases Under Construction
Our minimum capital commitment for leases under construction, net of amounts reimbursed by third-party real estate financing partners, was approximately $63.0 million as of March 31, 2023. As we are actively involved in the construction of these properties, we recorded $145.0 million in construction costs within property, plant and equipment as of March 31, 2023. Additionally, as of March 31, 2023, we recorded $51.2 million in construction advances from the landlords in connection with these properties. We will determine the lease classification for properties currently under construction at the end of the construction period. The initial base term upon the commencement of these leases is generally 20 years. In addition, as of March 31, 2023, we had $1,005.5 million of future lease obligations related to 10 venues subject to non-cancellable leases that have been signed but have not yet commenced.
Note 4. Revenue Recognition
We primarily recognize revenue from the sale of our products and the operation of our venues. Revenue from product sales includes golf clubs, golf balls, lifestyle and outdoor apparel, gear and accessories, and golf apparel and accessories. We sell our products to customers, which include on- and off-course golf shops and national retail stores, as well as to consumers through our e-commerce business and at our apparel retail and venue locations. Our product revenue also includes royalty income from third parties from the licensing of certain soft goods products. Revenue from services primarily includes venue sales of food and beverage, fees charged for gameplay, the sale of game credits to guests, franchise fees, the sale of gift cards, sponsorship contracts, leasing revenue and non-refundable deposits received for venue reservations at Topgolf. In addition, we recognize service revenue through our online multiplayer WGT digital golf game.
Our contracts with customers for our products are generally in the form of a purchase order. In certain cases, we enter into sales agreements containing specific terms, discounts and allowances. We enter into licensing agreements with certain distributors and, with respect to our Toptracer operations, driving ranges and hospitality and entertainment venues.
The following table presents our revenue disaggregated by major category and operating and reportable segment (in millions):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Topgolf: | | | | | | | |
Venues | $ | 386.7 | | | $ | 306.5 | | | | | |
Other business lines | 16.8 | | | 15.5 | | | | | |
Total Topgolf | $ | 403.5 | | | $ | 322.0 | | | | | |
| | | | | | | |
Golf Equipment: | | | | | | | |
Golf club | $ | 350.8 | | | $ | 370.4 | | | | | |
Golf ball | 92.9 | | | 97.6 | | | | | |
Total Golf Equipment | $ | 443.7 | | | $ | 468.0 | | | | | |
| | | | | | | |
Active Lifestyle: | | | | | | | |
Apparel | $ | 176.1 | | | $ | 138.4 | | | | | |
Gear, accessories & other | 144.1 | | | 111.8 | | | | | |
Total Active Lifestyle | $ | 320.2 | | | $ | 250.2 | | | | | |
| | | | | | | |
Total Consolidated | $ | 1,167.4 | | | $ | 1,040.2 | | | | | |
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Venue product sales at our Topgolf operating segment include the sale of golf clubs, golf balls, apparel, gear and accessories. During the three months ended March 31, 2023 and 2022, venue product sales totaled $3.7 million and $4.2 million, respectively.
Product and Service Revenue
We sell our Golf Equipment products and Active Lifestyle products in the United States and internationally, with our principal international regions being Europe and Asia. Golf Equipment product sales are generally higher than Active Lifestyle sales in most regions except for Europe, which has a higher concentration of Active Lifestyle sales due to the Jack Wolfskin business. Revenue from venues is higher in the United States due to Topgolf having significantly more domestic venues than international venues. Revenue related to other business lines at Topgolf is predominantly in the United States and regions within Europe.
The following table summarizes our revenue by major geographic region (in millions):
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
Revenue by Major Geographic Region: | | | | | | | |
United States | | | | | $ | 811.1 | | | $ | 709.4 | |
Europe | | | | | 153.6 | | | 134.9 | |
Asia | | | | | 160.2 | | | 158.6 | |
Rest of world | | | | | 42.5 | | | 37.3 | |
| | | | | $ | 1,167.4 | | | $ | 1,040.2 | |
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Royalty Income
We receive royalty income at our Topgolf and Active Lifestyle operating segments primarily related to leasing agreements for Toptracer installations (see Note 3) and licensing agreements, respectively. The following table summarizes royalty income by operating segment (in millions):
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
Royalty Income: | | | | | | | |
Topgolf | | | | | $ | 12.1 | | | $ | 9.7 | |
Active Lifestyle | | | | | 6.7 | | | 5.4 | |
Total | | | | | $ | 18.8 | | | $ | 15.1 | |
Deferred Revenue
Our deferred revenue balance includes short-term and long-term deferred revenue which consists primarily of revenue from the sale of gift cards, event deposits, loyalty points, memberships and prepaid sponsorships at Topgolf, virtual currency and game credits related to the WGT digital golf game, as well as upfront territory fees and upfront franchise fees received from international franchise partners.
Revenue from gift cards is deferred and recognized when the cards are redeemed, which generally occurs within a twelve-month period from the date of purchase. Revenue from the event deposits, loyalty points, memberships, prepaid sponsorships, game credits, and virtual currency related to the WGT digital golf game are recognized when redeemed or once the event or sponsorship occurs, over the estimated life of a customer’s membership, or based on historical currency or credit usage trends, as applicable, which generally occur within a one to thirty-six month period from the date of purchase. Revenue related to territory and franchise fees for each arrangement are allocated to each individual venue and recognized up to a 40-year term, including renewal options, per the respective franchise agreement.
The following table provides a reconciliation of activity related to our short-term deferred revenue balance for the periods presented (in millions):
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| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
Beginning Balance | | | | | $ | 94.9 | | | $ | 93.9 | |
Deferral of revenue | | | | | 157.8 | | | 107.4 | |
Revenue recognized | | | | | (142.8) | | | (101.3) | |
Breakage | | | | | (7.0) | | | (4.9) | |
Foreign currency translation and other | | | | | (0.1) | | | 4.2 | |
Ending Balance | | | | | $ | 102.8 | | | $ | 99.3 | |
As of March 31, 2023 and December 31, 2022, our long-term deferred revenue balance was $3.3 million and $3.2 million, respectively.
For each of the three months ended March 31, 2023 and 2022, we recognized $29.5 million of revenue that was included in the deferred revenue balances at December 31, 2022 and 2021, respectively.
Variable Consideration
We recognize revenue based on the amount of consideration we expect to receive from customers for our products and services. The consideration is based on the sales price of our products and services adjusted for estimates of variable consideration, including sales returns, discounts and allowances, sales promotions and sales programs, and price concessions that we offer. These estimates are based on the amounts earned or expected to be claimed by customers.
The following table provides a reconciliation of the activity related to our short-term sales program incentives for the periods presented (in millions):
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| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
Beginning Balance | | | | | $ | 20.8 | | | $ | 23.3 | |
Additions | | | | | 15.5 | | | 15.9 | |
Credits issued | | | | | (10.7) | | | (6.2) | |
Foreign currency translation and other | | | | | (0.1) | | | (0.7) | |
Ending Balance | | | | | $ | 25.5 | | | $ | 32.3 | |
We record an estimate for anticipated returns as a reduction of product revenues and cost of products, and accounts receivable, in the period that the related sales are recorded. Our provision for the sales return liability fluctuates with the seasonality of the business, while actual sales returns are generally more heavily weighted toward the second half of the year as the golf season comes to an end.
The following table provides a reconciliation of the activity related to our sales return reserve for the periods presented (in millions):
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| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
Beginning Balance | | | | | $ | 55.4 | | | $ | 47.4 | |
Provision | | | | | 58.9 | | | 49.9 | |
Sales returns | | | | | (41.6) | | | (29.7) | |
Ending Balance | | | | | $ | 72.7 | | | $ | 67.6 | |
The cost recovery of inventory associated with the sales return liability is accounted for in other current assets on our condensed consolidated balance sheet. As of March 31, 2023 and December 31, 2022, our balance for cost recovery was $34.0 million and $25.5 million, respectively.
Note 5. Financing Arrangements
Our debt obligations are summarized as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Maturity Date | | Interest Rate | | March 31, 2023 | | December 31, 2022 |
Short-Term Credit Facilities | | | | | | | | |
U.S. Asset-Based Revolving Credit Facility(1) | | March 16, 2028 | | 6.19% | | $ | 65.1 | | | $ | 181.1 | |
2022 Japan ABL Credit Facility | | January 25, 2025 | | 0.86% | | 45.2 | | | 38.2 | |
Total Principal Amount | | | | | | $ | 110.3 | | | $ | 219.3 | |
Unamortized Debt Issuance Costs | | | | | | $ | 4.4 | | | $ | 0.9 | |
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Balance Sheet Location | | | | | | | | |
Asset-based credit facilities | | $ | 110.3 | | | $ | 219.3 | |
Prepaid expenses | | $ | 1.0 | | | $ | 0.6 | |
Other long-term assets | | $ | 3.4 | | | $ | 0.3 | |
| | | | | | | | |
| | Maturity Date | | Interest Rate | | March 31, 2023 | | December 31, 2022 |
Long-Term Debt and Credit Facilities | | | | | | | | |
2023 Term Loan B | | March 16, 2030 | | 8.26% | | $ | 1,250.0 | | | $ | — | |
Convertible Notes | | May 1, 2026 | | 2.75% | | 258.3 | | | 258.3 | |
Equipment Notes | | July 24, 2023 - December 27, 2027 | | 2.36% - 5.93% | | 25.6 | | | 27.8 | |
Mortgage Loans | | July 1, 2033 - July 29, 2036 | | 9.75% - 11.31% | | 45.6 | | | 45.9 | |
Financed Tenant Improvements | | February 1, 2035 | | 8.00% | | 3.5 | | | 3.5 | |
Term Loan B | | — | | 8.88% | | — | | | 432.0 | |
Topgolf Term Loan | | — | | 10.58% | | — | | | 336.9 | |
Topgolf Revolving Credit Facility | | — | | 8.08% | | — | | | 110.0 | |
Total Principal Amount | | | | | | $ | 1,583.0 | | | $ | 1,214.4 | |
Less: Unamortized Debt Issuance Costs | | | | | | 35.2 | | | 24.3 | |
Total Debt, net of Unamortized Debt Issuance Costs | | | | | | $ | 1,547.8 | | | $ | 1,190.1 | |
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Balance Sheet Location | | | | | | | | |
Other current liabilities | | $ | 18.3 | | | $ | 13.8 | |
Long-term debt | | 1,529.5 | | | 1,176.3 | |
| | | | | | $ | 1,547.8 | | | $ | 1,190.1 | |
(1) Weighted Average interest rate. Fluctuates depending on availability ratio. |
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Total interest and amortization expense related to our debt obligations and credit facilities, which is included in “Interest Expense, net” in the condensed consolidated statement of operations, is summarized as follows (in millions):
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
Short-Term Credit Facilities | | | | | | | |
U.S. Asset-Based Revolving Credit Facility | | | | | $ | 3.7 | | | $ | 0.3 | |
2022 Japan ABL Credit Facility | | | | | 0.1 | | | 0.1 | |
Total | | | | | $ | 3.8 | | | $ | 0.4 | |
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Long-Term Debt and Credit Facilities | | | | | | | |
2023 Term Loan B | | | | | $ | 4.7 | | | $ | — | |
Convertible Notes | | | | | 1.8 | | | 1.8 | |
Equipment Notes | | | | | 0.2 | | | 0.2 | |
Mortgage Loans | | | | | 1.2 | | | 1.2 | |
Term Loan B | | | | | 8.6 | | | 6.0 | |
Topgolf Term Loan | | | | | 7.8 | | | 6.0 | |
Topgolf Revolving Credit Facility | | | | | 2.7 | | | 0.4 | |
Total (1) | | | | | $ | 27.0 | | | $ | 15.6 | |
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(1) Excludes interest expense from DLF obligations and financing leases (see Note 3). |
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Revolving Credit Facilities and Available Liquidity
In addition to cash on hand and cash generated from operations, we rely on our U.S. Asset-Based Revolving Credit Facility and 2022 Japan ABL Credit Facility to manage seasonal liquidity fluctuations. The principal terms of these credit facilities are described further below and in Note 7 in the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K which was filed with SEC on March 1, 2023. As of March 31, 2023, our available liquidity, which is comprised of cash on hand and amounts available under our U.S. and Japan facilities, less outstanding letters of credit and outstanding borrowings, was $626.1 million.
U.S. Asset-Based Revolving Credit Facility
In March 2023, we entered into a Fifth Amended and Restated Loan and Security Agreement (the “New ABL Agreement”) with Bank of America, N.A. and other lenders, which provides for senior secured asset-based revolving credit facilities in an aggregate principal amount of up to $525.0 million, consisting of a U.S. facility in an aggregate principal amount of up to $440.0 million, a Canadian facility in an aggregate principal amount of up to $5.0 million, a German facility in an aggregate principal amount of up to $60.0 million, and a U.K./Dutch facility in an aggregate principal amount of up to $20.0 million (collectively, the “New ABL Facility”), in each case subject to borrowing base availability under the applicable facility and reallocation of such amounts between jurisdictions in accordance with the terms of the New ABL Agreement. Amounts outstanding under the New ABL Facility are secured by certain assets, (i) substantially all personal assets, including inventory, accounts receivable and intellectual property and (ii) certain eligible real estate, in each case of us and certain of our subsidiaries in the United States, Germany, Canada, the Netherlands, and the United Kingdom (the “U.K.”), subject to certain customary exceptions. The New ABL Facility includes customary affirmative and negative covenants, including among other things, restrictions on the incurrence of additional debt, liens, dividends and other restricted payments, asset sales, investments, mergers, acquisitions and affiliate transactions. Under the New ABL Facility, we are also subject to compliance with a 1.0:1.0 minimum fixed charge coverage ratio during certain specified periods in which our borrowing base availability, as adjusted, falls below 10.0% of the maximum aggregate principal amount of the New ABL Facility, as adjusted.
The interest rate applicable to outstanding borrowings under the New ABL Facility may fluctuate as specified in the New ABL Agreement, depending on our “Availability Ratio,” which is further defined in the New ABL Agreement and is expressed as a percentage of (i) the average daily availability under the New ABL Facility to (ii) the sum of the Canadian, German, U.K./Dutch and U.S. borrowing bases, as adjusted. Any unused portions of the New ABL Facility are subject to a monthly fee of 0.25% per annum.
During the three months ended March 31, 2023, average outstanding borrowings under the U.S. Asset-Based Revolving Credit Facility were $220.9 million. As of March 31, 2023 our trailing 12-month average availability under the U.S. Asset-Based Revolving Credit Facility was $249.4 million and the trailing 12-month average interest rate applicable to outstanding borrowings under the U.S. Asset-Based Revolving Credit Facility was 4.91%.
2022 Japan ABL Credit Facility
We have an Asset-Based Revolving Credit facility with the Bank of Tokyo-Mitsubishi UFJ (the “2022 Japan ABL Credit Facility”) which provides a line of credit to our Japan subsidiary of up to 6.0 billion Yen (or $45.2 million), is subject to borrowing base availability under the facility, and is secured by certain assets, including eligible inventory and accounts receivable of our Japan subsidiary which are subject to certain restrictions and covenants related to certain pledged assets and financial performance metrics. The interest rate applicable to outstanding borrowings under the 2022 Japan ABL Credit Facility is subject to an effective interest rate equal to the Tokyo Interbank Offered Rate plus 0.80%. As of March 31, 2023, there was no availability under the 2022 Japan ABL Credit Facility.
Long-Term Debt
2023 Term Loan B
In March 2023 we entered into a Credit Agreement (the “Credit Agreement”) with Bank of America, N.A. as administrative agent, and the financial institutions party thereto as lenders which provides for a Term Loan B facility (the “2023 Term Loan B”). The 2023 Term Loan B provides for an aggregate principal amount of $1,250.0 million, which was issued net of an original issuance discount of $12.5 million. We used a portion of the net proceeds from the 2023 Term Loan B for the repayment of outstanding principal and interest amounts on our prior Term Loan B, as well as the repayment of the outstanding principal, interest and fees associated with the prior Topgolf credit facilities, which consisted of the Topgolf Term Loan and Topgolf Revolving Credit Facility (collectively, the “Topgolf Credit Facilities”). We accounted for the transactions associated with the Credit Agreement and repayment and retirement of the prior Term Loan B and Topgolf Credit Facilities as a debt modification. As a result, during the three months ended March 31, 2023, we recognized a non-cash loss of $10.5 million within other income/expense in our condensed consolidated statement of operations related to the write-off of the unamortized original issuance discounts and debt issuance costs associated with the prior Term Loan B and Topgolf Credit Facilities for lenders who did not participate in the Credit Agreement. Additionally, we recognized $1.8 million of third-party fees and capitalized $11.0 million in debt issuance costs in connection with the Credit Agreement. The third-party fees of $1.8 million were recognized as selling, general and administrative expense in our condensed consolidated statement of operations during the three months ended March 31, 2023. The debt issuance costs and original issuance discount are being amortized into interest expense over the term of the Credit Agreement and are included as a reduction to long-term debt in our condensed consolidated balance sheet as of March 31, 2023.
The 2023 Term Loan B amortizes at a rate per annum equal to 1.00% of the initial aggregate principal amount of the loan, payable quarterly, commencing with the quarter ending June 30, 2023, with the remaining outstanding principal amount due and payable at maturity. The 2023 Term Loan B contains customary mandatory prepayment provisions and specifies that prepayments which occur in connection with a repricing transaction within six months after the closing date of the Credit Agreement are subject to a prepayment premium equal to 1.00% of the principal amount being prepaid, subject to certain customary exceptions. The 2023 Term Loan B also contains customary affirmative and negative covenants, including, among other things, restrictions related on the incurrence of additional debt, liens, dividends and other restricted payments, asset sales, investments, mergers, acquisitions, and affiliate transactions with which we must remain in compliance in order to avoid default or acceleration of the loan.
The interest rate on outstanding borrowings under the 2023 Term Loan B are, at our option, a rate per annum equal to (a) a term Secured Overnight Financing Rate (“Term SOFR”) plus a 0.10% credit spread adjustment (and subject to a 0% floor), plus an applicable margin of 3.25% or 3.50%, depending on our applicable Debt Rating (as defined below) or (b) a base rate equal to the sum of (i) the greater of (A) the greater of the federal funds rate and the overnight bank funding rate published by the Federal Reserve Bank of New York, plus 0.50%, (B) Term SOFR for a one-month interest period term plus 1.0% (and subject to a 1% floor), (C) the prime rate announced by Bank of America from time to time, and (D) 1.0%, plus (ii) an applicable margin of 2.25% or 2.50%, depending on our applicable Debt Rating.
Applicable margins on interest rates to the 2023 Term Loan B are determined depending on our applicable debt rating (the “Debt Rating”), which is based on our corporate credit rating determined by S&P, and our corporate family rating as determined by Moody’s.
Convertible Notes
We have $258.3 million of convertible senior notes (the “Convertible Notes”), which bear interest at a rate of 2.75% per annum on the principal amount, which is payable semi-annually in arrears on May 1 and November 1 of each year. The Convertible Notes are structurally subordinated to all existing and future indebtedness and other liabilities, including trade payables, and (to the extent we are not a holder thereof) preferred equity, if any, of our subsidiaries.
We may settle the Convertible Notes through cash settlement, physical settlement, or combination settlement at our election, and may redeem all or part of the Convertible Notes on or after May 6, 2023, subject to certain stipulations. The Convertible Notes are convertible into shares of our common stock at an initial conversion rate of 56.8 shares per $1,000 principal amount of Convertible Notes, which is equal to an initial conversion price of $17.62 per share. Additionally, all or any portion of the Convertible Notes may be converted at the conversion rate and at the holders’ option on or after February 1, 2026 until the close of business on the second trading day immediately prior to the maturity date, and upon the occurrence of certain contingent conversion events. The Convertible Notes are structurally subordinated to all existing and future indebtedness and other liabilities, including trade payables, and (to the extent we are not a holder thereof) preferred equity, if any, of our subsidiaries.
Capped Call
In connection with the pricing of the Convertible Notes, we entered into privately negotiated capped call transactions with certain counterparties (“Capped Calls”). The Capped Calls cover the aggregate number of shares of our common stock that initially underlie the Convertible Notes, and are generally expected to reduce potential dilution and/or offset any cash payments we are required to make related to any conversion of the Convertible Notes. The Capped Calls each have an exercise price of $17.62 per share, subject to certain adjustments, which correspond to the initial conversion prices of the Convertible Notes, and a cap price of $27.10 per share. Capped Calls are excluded from the calculation of diluted earnings per share, as they would be anti-dilutive under the if-converted method. The initial cost of the Capped Calls was recognized as a reduction to additional paid-in-capital on our condensed consolidated balance sheet.
Equipment Notes
We have long-term financing agreements (the “Equipment Notes”) with various lenders which it uses in order to invest in certain facilities and information technology equipment. The loans are secured by the relative underlying equipment.
Mortgage Loans
We have three mortgage loans related to our Topgolf venues. The mortgage loans are secured by the assets of each respective venue and require either monthly (i) principal and interest payments or (ii) interest-only payments until their maturity dates. For loans requiring monthly interest-only payments, the entire unpaid principal balance and any unpaid accrued interest is due on the maturity date.
Aggregate Amount of Long-Term Debt Maturities
The following table presents our combined aggregate amount of maturities for our long-term debt over the next five years and thereafter as of March 31, 2023. Amounts payable under the 2023 Term Loan B included below represent the minimum principal repayment obligations as of March 31, 2023.
| | | | | | | | |
| | (in millions) |
Remainder of 2023 | | $ | 16.2 | |
2024 | | 20.8 | |
2025 | | 18.6 | |
2026 | | 276.4 | |
2027 | | 15.5 | |
Thereafter | | 1,235.5 | |
| | $ | 1,583.0 | |
Less: Unamortized Debt Issuance Costs | | 35.2 | |
Total | | $ | 1,547.8 | |
As of March 31, 2023, we were in compliance with all fixed charge coverage ratios and all other financial covenants and reporting requirements under the terms of our credit facilities mentioned above, as applicable.
Note 6. Earnings Per Common Share
Basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding for the period.
Diluted earnings per common share (“Diluted EPS”) takes into account the potential dilution that could occur if outstanding securities were exercised or settled in shares. Dilutive securities that may impact Diluted EPS include shares underlying outstanding stock options, restricted stock units and performance share units granted to employees and non-employee directors (see Note 12), as well as common shares underlying the Convertible Notes (see Note 5). Dilutive securities related to common shares underlying outstanding stock options, restricted stock units, and performance share units granted to employees and non-employee directors are included in the calculation of diluted earnings per common share using the treasury stock method. Dilutive securities related to common shares underlying the Convertible Notes are included in the calculation of diluted earnings per common share using the if-converted method.
Basic and diluted weighted-average common shares outstanding are the same in periods when a net loss is reported or in periods when anti-dilution occurs.
The following table summarizes the computation of basic and diluted earnings per common share (in millions, except per share data):
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
Earnings per common share—basic | | | | | | | |
Net income | | | | | $ | 25.0 | | | $ | 86.7 | |
Weighted-average common shares outstanding—basic | | | | | 185.2 | | | 185.1 | |
Earnings per common share—basic | | | | | $ | 0.13 | | | $ | 0.47 | |
Earnings per common share—diluted | | | | | | | |
Net income | | | | | $ | 25.0 | | | $ | 86.7 | |
Interest expense(1) | | | | | 1.6 | | | 1.6 | |
Net income attributable to earnings per common share—diluted | | | | | $ | 26.6 | | | $ | 88.3 | |
| | | | | | | |
Weighted-average common shares outstanding—basic | | | | | 185.2 | | | 185.1 | |
Convertible Notes weighted-average common shares outstanding(1) | | | | | 14.7 | | | 14.7 | |
Outstanding options, restricted stock units and performance share units | | | | | 1.6 | | | 1.0 | |
Weighted-average common shares outstanding—diluted | | | | | 201.5 | | | 200.8 | |
Earnings per common share—diluted | | | | | $ | 0.13 | | | $ | 0.44 | |
| | | | | | | |
(1) The If-converted method is used for calculating the dilutive weighted-average shares outstanding related to the Convertible Notes when calculating earnings per common share-diluted. Under this method, interest expense related to the Convertible Notes for the period presented is excluded from net income. |
Anti-Dilutive Options and Restricted Stock Units
For the three months ended March 31, 2023 and 2022, approximately 1.2 million and 1.3 million securities outstanding, respectively, comprised of stock options and restricted stock units, were excluded from the calculation of earnings per common share—diluted as they would be anti-dilutive.
Note 7. Goodwill and Intangible Assets
Changes in the carrying amount of goodwill by operating and reportable segment are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Topgolf | | Golf Equipment | | Active Lifestyle | | | | Total |
Balance at December 31, 2022 | | $ | 1,363.6 | | | $ | 530.3 | | | $ | 89.8 | | | | | | $ | 1,983.7 | |
| | | | | | | | | | | |
Foreign currency translation and other | | — | | | 0.2 | | | — | | | | | | 0.2 | |
Balance at March 31, 2023 | | $ | 1,363.6 | | | $ | 530.5 | | | $ | 89.8 | | | | | | $ | 1,983.9 | |
Goodwill is net of accumulated impairment losses of $148.4 million, which were recorded prior to December 31, 2022 in the Active Lifestyle segment.
Our intangible assets by major asset class are as follows (in millions, except useful life amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Indefinite-lived: | | Amortizing: | | | | |
| Tradename and Trademarks | | Liquor Licenses | | Patents | | Customer/ Distributor Relationships and Other | | Developed Technology | | Total | | | | | | | | |
Useful Life (Years) | NA | | NA | | 2-16 | | 1-10 | | 10 | | | | | | | | | | | | | | |
As of March 31, 2023 | | | | | | | | | | | | | | | | | | | | | | | |
Gross | $ | 1,441.0 | | | $ | 9.4 | | | $ | 32.2 | | | $ | 67.4 | | | $ | 69.7 | | | $ | 1,619.7 | | | | | | | | | | | | | |
Accumulated amortization | — | | | — | | | (31.8) | | | (38.3) | | | (13.9) | | | (84.0) | | | | | | | | | | | | | |
Translation and other | (25.7) | | | — | | | — | | | (4.0) | | | (3.1) | | | (32.8) | | | | | | | | | | | | | |
Net book value | $ | 1,415.3 | | | $ | 9.4 | | | $ | 0.4 | | | $ | 25.1 | | | $ | 52.7 | | | $ | 1,502.9 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
As of December 31, 2022 | | | | | | | | | | | | | | | | | | | | | | | |
Gross | $ | 1,441.0 | | | $ | 8.9 | | | $ | 32.2 | | | $ | 67.4 | | | $ | 69.7 | | | $ | 1,619.2 | | | | | | | | | | | | | |
Accumulated amortization | — | | | — | | | (31.8) | | | (35.8) | | | (12.2) | | | (79.8) | | | | | | | | | | | | | |
Translation and other | (28.3) | | | — | | | — | | | (4.2) | | | (3.2) | | | (35.7) | | | | | | | | | | | | | |
Net book value | $ | 1,412.7 | | | $ | 8.9 | | | $ | 0.4 | | | $ | 27.4 | | | $ | 54.3 | | | $ | 1,503.7 | | | | | | | | | | | | | |
For the three months ended March 31, 2023 and 2022 we recognized amortization expense related to acquired intangible assets of $4.2 million and $3.7 million, respectively. Amortization expense is included in selling, general and administrative expenses in the condensed consolidated statements of operations.
Amortization expense related to intangible assets at March 31, 2023 in each of the next five years and beyond is expected to be incurred as follows (in millions):
| | | | | |
Remainder of 2023 | $ | 9.8 | |
2024 | 11.2 | |
2025 | 11.1 | |
2026 | 11.0 | |
2027 | 10.7 | |
Thereafter | 24.4 | |
| $ | 78.2 | |
Note 8. Investments
Investment in Full Swing
We have an ownership interest of less than 20.0% in Full Swing Golf Holdings, LLC (“Full Swing”), which owns an indoor golf simulation technology that delivers golf ball tracking data and measures ball flight indoors. The investment is accounted for at cost less impairments, and adjusted for observable changes in fair value. As of March 31, 2023 and December 31, 2022, the value of our investment in Full Swing was $9.3 million. This investment is included in other assets on our condensed consolidated balance sheets.
Investment in Five Iron Golf
We have an ownership interest of less than 20.0% in The Range NYC, LLC (“Five Iron Golf”), an urban indoor golf experience company which hosts a golf simulation technology and serves food and beverage. The investment is accounted for at cost less impairments, and adjusted for observable changes in fair value. As of March 31, 2023 and December 31, 2022, the value of our investment in Five Iron Golf was $30.0 million. This investment is included in other assets on our condensed consolidated balance sheets.
Note 9. Selected Financial Data
Selected financial data as of the dates presented below is as follows (in millions, except useful life data):
| | | | | | | | | | | | | | | | | |
| | | March 31, 2023 | | December 31, 2022 |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Inventories: | | | | | |
Finished goods | | | $ | 748.8 | | | $ | 770.1 | |
Work in process | | | 1.2 | | | 1.2 | |
Raw materials | | | 172.7 | | | 181.5 | |
Food and beverage | | | 7.1 | | | 6.4 | |
| | | $ | 929.8 | | | $ | 959.2 | |
| | | | | |
| | | March 31, 2023 | | December 31, 2022 |
Other current assets: | | | | | |
Credit card receivables | | | $ | 19.9 | | | $ | 40.1 | |
Sales return reserve cost recovery asset | | | 34.0 | | | 25.5 | |
VAT/Sales tax receivable | | | 11.0 | | | 17.2 | |
Other current assets | | | 64.7 | | | 53.2 | |
| | | $ | 129.6 | | | $ | 136.0 | |
| | | | | |
| Estimated Useful Life | | March 31, 2023 | | December 31, 2022 |
Property, plant and equipment, net: | | | | | |
Land | | | $ | 183.7 | | | $ | 160.4 | |
Buildings and leasehold improvements | 10 - 40 years | | 1,238.4 | | | 1,196.7 | |
Machinery and equipment | 5 - 10 years | | 262.4 | | | 248.8 | |
Furniture, computer hardware and equipment | 3 - 5 years | | 321.0 | | | 299.1 | |
Internal-use software | 3 - 5 years | | 118.7 | | | 109.9 | |
Production molds | 2 - 5 years | | 9.2 | | | 9.1 | |
Construction-in-process | | | 315.0 | | | 271.6 | |
| | | 2,448.4 | | | 2,295.6 | |
Less: Accumulated depreciation | | | 534.2 | | | 486.0 | |
| | | $ | 1,914.2 | | | $ | 1,809.6 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
For the three months ended March 31, 2023 and 2022 we recorded depreciation expense of $51.9 million and $38.9 million, respectively, in our condensed consolidated statements of operations.
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
Accounts payable and accrued expenses: | |
Accounts payable | $ | 228.2 | | | $ | 159.1 | |
Accrued expenses | 181.3 | | | 160.9 | |
Accrued inventory | 176.3 | | | 260.0 | |
| $ | 585.8 | | | $ | 580.0 | |
Note 10. Income Taxes
We calculate our interim income tax provision in accordance with Accounting Standards Codification (“ASC”) Topic 270, “Interim Reporting,” and ASC Topic 740, “Accounting for Income Taxes.” At the end of each interim period, we estimate our annual effective tax rate and apply that rate to our ordinary quarterly earnings to calculate the tax related to ordinary income. The tax effects for other items that are excluded from ordinary income are discretely calculated and recognized in the period in which they occur.
The realization of deferred tax assets, including loss and credit carryforwards, is subject to us generating sufficient taxable income during the periods in which the deferred tax assets become realizable. As a result of the Topgolf merger and the fact that Topgolf’s losses exceed our income in recent years, we have determined that it is not more likely than not that a portion of our U.S. deferred tax assets will be realized. The valuation allowance on our U.S. deferred tax assets as of March 31, 2023, primarily relate to federal and state deferred tax assets related to tax attributes that we estimate are not more likely than not to be utilized prior to expiration. However, if our more recent earnings history were to continue, management believes that it is possible that within the next 12 months sufficient positive evidence may become available to allow management to reach a conclusion that a significant portion of the valuation allowance will no longer be needed. Release of the valuation allowance would result in the recognition of certain deferred tax assets with a potential corresponding decrease to income tax expense for the period the release is recorded, which would represent a non-cash benefit. The exact timing and amount of the valuation allowance release would be predicated on our continued profitability combined with the continued profitability we believe we can maintain. With respect to non-U.S. entities, there continues to be sufficient positive evidence to conclude that realization of our deferred tax assets is more likely than not under applicable accounting rules, and therefore no significant valuation allowances have been established.
We recorded an income tax benefit of $4.2 million and $15.7 million for the three months ended March 31, 2023 and 2022, respectively. As a percentage of pre-tax income, our effective tax rate was (20.0)% and (22.0)% for the three months ended March 31, 2023 and 2022, respectively. In the three months ended March 31, 2023 and 2022, the primary difference between the statutory rate and the effective rate relates to the release of valuation allowances on our deferred tax assets.
At March 31, 2023, the gross liability for income taxes associated with uncertain tax positions was $27.3 million. Of this amount, $10.9 million would benefit our condensed consolidated financial statements and effective income tax rate if favorably settled. We recognize interest and penalties related to income tax matters in income tax expense.
Note 11. Commitments & Contingencies
Legal Matters
We are subject to routine legal claims, proceedings, and investigations associated with the normal conduct of our business activities, including commercial disputes and employment matters. From time to time we also receive information claiming that products we sell infringe or may infringe patent, trademark, or other intellectual property rights of third parties. One or more such claims of potential infringement could lead to litigation, the need to obtain licenses, the need to alter a product to avoid infringement, a settlement or judgment, or some other action or material loss, which could adversely affect our overall ability to protect our product designs and ultimately limit our future success in the marketplace. Additionally, we are occasionally subject to non-routine claims, proceedings, or investigations.
We regularly assess such matters to determine the degree of probability that we will incur a material loss as a result of such matters, as well as the range of possible loss. An estimated loss contingency is accrued in our financial statements if it is probable we will incur a loss and the amount of the loss can be reasonably estimated. Historically, the claims, proceedings, and investigations brought against us, individually and in the aggregate, have not had a material adverse effect on our consolidated results of operations, cash flows or financial position. However, it is not possible to predict the outcome of the pending actions, and, as with any litigation, it is possible that some of these actions could be decided unfavorably. Consequently, we are unable to estimate the ultimate aggregate amount of monetary loss, amounts covered by insurance, or the financial impact that will result from such matters. In addition, we cannot assure that we will be successful in our defense of those matters, or that any amounts accrued in relation to a potential loss are sufficient.
Unconditional Purchase Obligations
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 below approximate the minimum purchase obligations we are obligated to pay under these agreements. The actual amounts paid under some of the agreements may be higher or lower than these amounts due to the variable nature of these obligations.
As of March 31, 2023, the minimum obligation we are required to pay under these agreements over the next five years and thereafter is as follows (in millions):
| | | | | |
Remainder of 2023 | $ | 50.8 | |
2024 | 27.8 | |
2025 | 18.3 | |
2026 | 12.6 | |
2027 | 5.6 | |
Thereafter | — | |
| $ | 115.1 | |
Our minimum capital commitment related to lease agreements for Topgolf venues under construction, net of amounts reimbursed by third-party real estate financing partners, of $63.0 million is not reflected in this total. These commitments are generally outstanding for periods less than a year (see Note 3).
Other Contingent Contractual Obligations
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. The duration of these indemnities, commitments and guarantees varies, and in certain cases, may be indefinite and 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 consolidated financial statements. The fair value of indemnities, commitments and guarantees that we issued during the three months ending, and as of March 31, 2023, were not material to our financial position, results of operations, or cash flows.
Note 12. Share-Based Compensation
We granted the following awards under our stock compensation plans during the periods presented (in millions, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2023 | | 2022 | | | | |
| | Shares Granted | Weighted-average grant date fair value per share | | Shares Granted | Weighted-average grant date fair value per share | | | | |
| | | | | | | | | | |
Restricted stock units | | 0.6 | | $ | 23.46 | | | 0.5 | | $ | 23.43 | | | | | |
| | | | | | | | | | |
Performance based restricted share unit awards (1) | | 0.6 | | $ | 36.58 | | | 0.6 | | $ | 30.73 | | | | | |
(1) Weighted-average grant date fair value per share determined using Monte-Carlo valuation method. | | | | |
Share-Based Compensation Expense
The table below summarizes total share-based compensation expense, net of estimated forfeitures, by award-type recognized in the condensed consolidated statement of operations for the periods presented (in millions):
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2023 | | 2022 | | | | |
Stock options | | $ | 0.1 | | | $ | 0.4 | | | | | |
Restricted stock units | | 4.6 | | | 4.1 | | | | | |
Restricted stock awards | | 0.2 | | | 0.4 | | | | | |
Performance based restricted share unit awards | | 7.5 | | | 8.9 | | | | | |
Total cost of share-based compensation included in income, before income tax | | 12.4 | | | 13.8 | | | | | |
Income tax benefit | | (3.0) | | | (3.3) | | | | | |
Total cost of share-based compensation, after tax | | $ | 9.4 | | | $ | 10.5 | | | | | |
The table below summarizes total share-based compensation expense, net of estimated forfeitures, recognized for stock options, restricted stock awards, restricted stock units and performance-based restricted stock unit awards in the condensed consolidated statement of operations for the periods presented (in millions):
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
| | | |
Cost of products | | | | | $ | 0.4 | | | $ | 0.5 | |
Selling, general and administrative expenses | | | | | 10.8 | | | 12.8 | |
Research and development expenses | | | | | 0.5 | | | 0.4 | |
Other venue expenses | | | | | 0.7 | | | 0.1 | |
Total cost of share-based compensation included in income, before income tax | | | | | 12.4 | | | 13.8 | |
Income tax benefit | | | | | (3.0) | | | (3.3) | |
Total cost of share-based compensation, after tax | | | | | $ | 9.4 | | | $ | 10.5 | |
Note 13. Fair Value of Financial Instruments
Fair Value Measurements
We measure our financial assets and liabilities at fair value on a recurring basis using a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Authoritative guidance establishes three levels of the fair value hierarchy as follows:
Level 1: Quoted market prices in active markets for identical assets or liabilities;
Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and
Level 3: Fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
The carrying amounts of cash and cash equivalents, accounts receivables, accounts payable and accrued expenses and other current liabilities approximate fair value due to their short-term nature, and are therefore categorized within Level 1 of the fair value hierarchy.
Hedging instruments are re-measured on a recurring basis using broker quotes, daily market foreign currency rates, and interest rate curves as applicable (see Note 14) and are therefore categorized within Level 2 of the fair value hierarchy.
The following table summarizes the valuation of our foreign currency forward contracts and interest rate hedge agreements (see Note 14) that are measured at fair value on a recurring basis, and are classified within Level 2 of the fair value hierarchy as of March 31, 2023 and December 31, 2022 (in millions):
| | | | | | | | | | | | | | | |
| Fair Value | | | | Level 2 | | |
March 31, 2023 | | | | | | | |
Foreign currency forward contracts—asset position | $ | 3.4 | | | | | $ | 3.4 | | | |
Foreign currency forward contracts—liability position | (5.9) | | | | | (5.9) | | | |
| | | | | | | |
| | | | | | | |
| $ | (2.5) | | | | | $ | (2.5) | | | |
December 31, 2022 | | | | | | | |
Foreign currency forward contracts—asset position | $ | 0.2 | | | | | $ | 0.2 | | | |
Foreign currency forward contracts—liability position | (5.4) | | | | | (5.4) | | | |
Interest rate hedge agreements—asset position | 7.2 | | | | | 7.2 | | |
| | | | | | | |
| $ | 2.0 | | | | | $ | 2.0 | | | |
There were no transfers of financial instruments between the levels of the fair value hierarchy during the three and three months ended March 31, 2023 and 2022.
Disclosures about the Fair Value of Financial Instruments
Fair value of information was derived using Level 2 inputs of the fair value hierarchy and included quoted prices for similar instruments in active markets, quantitative pricing models, observable market borrowing rates, as well as other observable inputs and applicable valuation techniques. The table below presents information about the fair value of our financial liabilities, and is provided for comparative purposes only relative to the carrying values of our financial instruments recognized in the condensed consolidated balance sheets as of March 31, 2023 and consolidated balance sheets as of December 31, 2022 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
U.S. Asset-Based Revolving Credit Facility | $ | 65.1 | | | $ | 65.1 | | | $ | 181.1 | | | $ | 181.1 | |
2022 Japan ABL Facility | $ | 45.2 | | | $ | 45.2 | | | $ | 38.2 | | | $ | 38.2 | |
2023 Term Loan B | $ | 1,250.0 | | | $ | 1,264.1 | | | $ | — | | | $ | — | |
Convertible Notes | $ | 258.3 | | | $ | 354.7 | | | $ | 258.3 | | | $ | 337.7 | |
Equipment Notes | $ | 25.6 | | | $ | 21.6 | | | $ | 27.8 | | | $ | 23.6 | |
Mortgage Loans | $ | 45.6 | | | $ | 53.2 | | | $ | 45.9 | | | $ | 55.3 | |
Term Loan B | $ | — | | | $ | — | | | $ | 432.0 | | | $ | 431.1 | |
Topgolf Term Loan | $ | — | | | $ | — | | | $ | 336.9 | | | $ | 337.1 | |
Topgolf Revolving Credit Facility | $ | — | | | $ | — | | | $ | 110.0 | | | $ | 110.0 | |
During the three months ended March 31, 2023, we completed a modification of our U.S. Asset-Based Revolving Credit Facility, Term Loan B and Topgolf Credit Facilities. For further information about the modification of these facilities, see Note 5, “Financing Arrangements”.
Non-recurring Fair Value Measurements
We measure certain assets at fair value on a non-recurring basis at least annually or more frequently if impairment indicators are present. These assets include long-lived assets, goodwill, non-amortizing intangible assets and investments that are written down to fair value when they are held for sale or determined to be impaired. We did not recognize any impairments during the three months ended March 31, 2023 and 2022.
Note 14. Derivatives and Hedging
We are exposed to gains and losses resulting from fluctuations in foreign currency exchange rates and interest rates during our normal course of business. We use designated cash flow hedges and non-designated hedges in the form of foreign currency forward contracts as part of our strategy to manage the exposure to fluctuations in foreign currency exchange rates and to mitigate the impact of foreign currency translation on transactions that are denominated primarily in Japanese Yen, British Pounds, Euros, Canadian Dollars, Australian Dollars and Korean Won. We also use interest rate swap contracts to mitigate the impact of variable interest rates on our long-term debt.
We only use foreign currency forward contracts and interest rate swap contracts to meet our objectives of minimizing variability in our operating results which may arise from changes in foreign exchange rates and interest rates, and we do not enter into either of these types of contracts for speculative purposes. We utilize counterparties for our derivative instruments that we believe are creditworthy at the time we enter into the transactions, and we closely monitor the credit ratings of these counterparties.
The following table summarizes the fair value of our derivative instruments as well as the location of the asset and/or liability on the condensed consolidated balance sheets as of March 31, 2023 and consolidated balance sheets as of December 31, 2022 (in millions):
| | | | | | | | | | | | | | | | | |
| Balance Sheet Location | | Fair Value of Asset Derivatives |
| March 31, 2023 | | December 31, 2022 |
Derivatives designated as cash flow hedging instruments: | | | | | |
Foreign currency forward contracts | Other current assets | | $ | 1.2 | | | $ | 0.1 | |
Interest rate swap contract | Other current assets | | — | | | 4.4 | |
Interest rate swap contract | Other assets | | — | | | 2.8 | |
Total | | | $ | 1.2 | | | $ | 7.3 | |
Derivatives not designated as hedging instruments: | | | | | |
Foreign currency forward contracts | Other current assets | | 2.2 | | | 0.1 | |
| | | | | |
| | | | | |
| | | | | |
Total asset position | | $ | 3.4 | | | $ | 7.4 | |
| | | | | | | | | | | | | | | | | |
| Balance Sheet Location | | Fair Value of Liability Derivatives |
| March 31, 2023 | | December 31, 2022 |
Derivatives designated as cash flow hedging instruments: | | | | | |
Foreign currency forward contracts | Accounts payable and accrued expenses | | $ | 1.3 | | | $ | 2.6 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Derivatives not designated as hedging instruments: | | | | | |
Foreign currency forward contracts | Accounts payable and accrued expenses | | 4.6 | | | 2.8 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Total liability position | | $ | 5.9 | | | $ | 5.4 | |
Our derivative instruments are subject to a master netting agreement with each respective counterparty bank and are therefore net settled at their maturity date. Although we have the legal right of offset under the master netting agreements, we have elected not to present these contracts on a net settlement amount basis, and therefore present these contracts on a gross basis on the accompanying condensed consolidated balance sheets as of March 31, 2023 and consolidated balance sheets as of December 31, 2022.
Cash Flow Hedging Instruments
Foreign Currency Forward Contracts
We use foreign currency derivatives designated as qualifying cash flow hedging instruments, including foreign currency forward contracts to help mitigate our foreign currency exposure from intercompany sales of inventory and intercompany expense reimbursements to our foreign subsidiaries. These contracts generally mature within 12 months to 15 months from their inception. As of March 31, 2023 and December 31, 2022, the notional amounts of our foreign currency forward contracts designated as cash flow hedge instruments were $107.5 million and $100.0 million, respectively.
As of March 31, 2023, we recorded a net gain of $2.4 million in accumulated other comprehensive income related to foreign currency forward contracts. Of this amount, net gains of $1.3 million for the three months ended March 31, 2023, were removed from accumulated other comprehensive income and recognized in cost of products for the underlying sales that were recognized. Additionally, for the three months ended March 31, 2023, $1.0 million of net gains related to the amortization of forward points were removed from accumulated other comprehensive income and recognized in cost of products. Based on the current valuation of our foreign currency forward contracts, we expect to reclassify net losses of $1.3 million related to our foreign currency forward contracts from accumulated other comprehensive income into earnings over the course of the next 12 months.
During the three months ended March 31, 2022, we recognized net gains of $0.4 million in cost of products related to our foreign currency forward contracts.
Interest Rate Swap Contract
We used an interest rate swap designated as a cash flow hedge in order to mitigate the risk of changes in interest rates associated with our variable-rate Term Loan B, which was replaced by our 2023 Term Loan B as part of our debt modification which occurred in March 2023 (see Note 5). As part of this modification, we entered into a termination agreement to unwind our existing interest rate swap, and as a result of the termination we received proceeds of $5.6 million. As of March 31, 2023, we have a deferred gain of $5.4 million recognized in other comprehensive income related to these proceeds, which will be amortized into interest expense over the remaining term of the contract.
During the three months ended March 31, 2023 and March 31, 2022, we recognized net gains of $0.9 million and net losses of $1.2 million in interest expense related to the interest rate swap contract, respectively.
The following tables summarize the net effect of all cash flow hedges for each of our derivative contracts on the condensed consolidated financial statements for the three months ended March 31, 2023 and 2022 (in millions):
| | | | | | | | | | | | | | | | | | |
| | | | | | Gain (Loss) Recognized in Other Comprehensive Income |
| | | | Three Months Ended March 31, |
Derivatives designated as cash flow hedging instruments | | | | | | 2023 | | 2022 |
Foreign currency forward contracts | | | | | | $ | 2.4 | | | $ | 1.0 | |
Interest rate swap contract | | | | | | (0.9) | | | 7.1 | |
| | | | | | $ | 1.5 | | | $ | 8.1 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | Gain (Loss) Reclassified from Other Comprehensive Income into Earnings |
| | | | Three Months Ended March 31, |
Derivatives designated as cash flow hedging instruments | | | | | | 2023 | | 2022 |
Foreign currency forward contracts | | | | | | $ | 1.3 | | | $ | 0.4 | |
Interest rate swap contract | | | | | | 0.9 | | | (1.2) | |
| | | | | | $ | 2.2 | | | $ | (0.8) | |
Foreign Currency Forward Contracts Not Designated as Hedging Instruments
We use foreign currency forward contracts that are not designated as qualifying cash flow hedging instruments to mitigate the exposure to fluctuations in foreign currency exchange rates due to the remeasurement of certain balance sheet payables and receivables denominated in foreign currencies, as well as gains and losses resulting from the translation of the operating results of our international subsidiaries into U.S. dollars for financial reporting purposes. These contracts generally mature within 12 months from inception. As of March 31, 2023 and December 31, 2022, the notional amounts of our foreign currency forward contracts used to mitigate the exposures discussed above were approximately $443.4 million and $162.9 million, respectively. We estimate the fair values of foreign currency forward contracts based on pricing models using current market rates, and record all derivatives on the balance sheet at fair value with the changes in fair value recorded in the condensed consolidated statements of operations. Foreign currency forward contracts are classified under Level 2 of the fair value hierarchy (see Note 13).
The following table summarizes the location of net gains and losses for each type of our derivative contracts recognized in the condensed consolidated statements of operations during the three months ended March 31, 2023 and 2022, respectively (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Location of Net Gain Recognized in Income on Derivative Instruments | | | | | | Amount of Net Gain Recognized in Income on Derivative Instruments |
Derivatives not designated as hedging instruments | | | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
Foreign currency forward contracts | | Other income, net | | | | | | $ | 2.9 | | | $ | 13.2 | |
In addition, during the three months ended March 31, 2023 and 2022, we recognized net foreign currency transaction losses of $2.5 million and $5.7 million, respectively, in our condensed consolidated statements of operations.
Note 15. Accumulated Other Comprehensive Income (Loss)
The following table details amounts reclassified from accumulated other comprehensive income (loss) and foreign currency translation adjustments for the three months ended March 31, 2023 (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | Derivative Instruments | | Foreign Currency Translation | | Total |
| | | | | | |
Accumulated other comprehensive loss, December 31, 2022, after tax | | $ | 4.9 | | | $ | (66.4) | | | $ | (61.5) | |
Change in derivative instruments | | 1.5 | | | — | | | 1.5 | |
Net gains reclassified to cost of products | | (1.3) | | | — | | | (1.3) | |
| | | | | | |
Net gains reclassified to interest expense | | (0.9) | | | — | | | (0.9) | |
Income tax impact on derivative instruments | | 0.4 | | | — | | | 0.4 | |
Foreign currency translation adjustments | | — | | | 5.3 | | | 5.3 | |
Accumulated other comprehensive loss, March 31, 2023, after tax | | $ | 4.6 | | | $ | (61.1) | | | $ | (56.5) | |
Note 16. Segment Information
We have three operating and reportable segments:
•Topgolf, which is primarily comprised of service revenues and expenses from our company-operated Topgolf venues, Toptracer ball-flight tracking technology, and WGT digital golf game;
•Golf Equipment, which is comprised of product revenues and expenses that encompass golf club and golf ball products, including Callaway Golf-branded woods, hybrids, irons, wedges, Odyssey putters, including Toulon Design putters by Odyssey, packaged sets, Callaway Golf and Strata-branded golf balls and sales of pre-owned golf clubs; and
•Active Lifestyle, which is comprised of product revenues and expenses for the Jack Wolfskin outdoor apparel, gear and accessories business, the TravisMathew golf and lifestyle apparel and accessories business, the Callaway soft goods business and the OGIO business, which consists of golf apparel and accessories (including golf bags and gloves), and storage gear for sport and personal use. This segment also includes royalties from licensing of our trademarks and service marks for various soft goods products.
There were no significant intersegment transactions during the three months ended March 31, 2023 or 2022.
The following table contains information utilized by management to evaluate our operating segments for the interim periods presented (in millions):
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
Net revenues: | | | | | | | |
Topgolf | | | | | $ | 403.5 | | | $ | 322.0 | |
Golf Equipment | | | | | 443.7 | | | 468.0 | |
Active Lifestyle | | | | | 320.2 | | | 250.2 | |
Total net revenues | | | | | $ | 1,167.4 | | | $ | 1,040.2 | |
| | | | | | | |
Segment operating income: | | | | | | | |
Topgolf | | | | | $ | 2.8 | | | $ | 6.5 | |
Golf Equipment | | | | | 81.6 | | | 100.8 | |
Active Lifestyle | | | | | 37.3 | | | 26.7 | |
Total segment operating income | | | | | 121.7 | | | 134.0 | |
Reconciling items(1) | | | | | (41.2) | | | (39.7) | |
Total operating income | | | | | 80.5 | | | 94.3 | |
Interest expense, net | | | | | (49.6) | | | (31.4) | |
Other income, net | | | | | (10.1) | | | 8.1 | |
Total income before income taxes | | | | | $ | 20.8 | | | $ | 71.0 | |
| | | | | | | |
Additions to long-lived assets: | | | | | | | |
Topgolf | | | | | $ | 133.2 | | | $ | 120.1 | |
Golf Equipment | | | | | 3.4 | | | 5.3 | |
Active Lifestyle | | | | | 3.4 | | | 3.6 | |
| | | | | | | |
Total additions to long-lived assets | | | | | $ | 140.0 | | | $ | 129.0 | |
| | | | | | | |
| | | | | | | |
(1) Reconciling items include corporate general and administrative expenses not utilized by management in determining segment profitability as well as the amortization and depreciation of acquired intangible assets and purchase accounting adjustments. The amount for 2023 includes costs associated with the implementation of new IT systems. The amount for 2022 includes costs associated with the implementation of new IT systems, legal and credit agency fees related to a postponed debt refinancing, in addition to charges related to the suspension of the Jack Wolfskin retail business in Russia due to the Russia-Ukraine war. |