Topgolf Callaway Brands (MODG) - 2022 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements for the first quarter ended March 31, 2022 Consolidated Condensed Balance Sheets Total assets grew to $8.1 billion, driven by higher accounts receivable, while liabilities also increased Consolidated Condensed Balance Sheet Highlights (in millions) | Account | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total Assets | $8,079.4 | $7,747.8 | | Cash and cash equivalents | $245.0 | $352.2 | | Accounts receivable, net | $413.1 | $105.3 | | Inventories | $552.4 | $533.5 | | Goodwill | $1,974.4 | $1,960.1 | | Total Liabilities | $4,378.9 | $4,064.9 | | Asset-based credit facilities | $219.3 | $9.1 | | Long-term debt, net | $1,070.5 | $1,025.3 | | Total Shareholders' Equity | $3,700.5 | $3,682.9 | Consolidated Condensed Statements of Operations Q1 net revenues rose to $1.04 billion, while net income decreased due to a prior-year one-time gain on the Topgolf investment Q1 Statement of Operations Highlights (in millions, except per share data) | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Total net revenues | $1,040.2 | $651.6 | | Income from operations | $94.3 | $76.1 | | Gain on Topgolf investment | $0.0 | $252.5 | | Net income | $86.7 | $272.5 | | Diluted EPS | $0.44 | $2.19 | Consolidated Condensed Statements of Cash Flows Net cash used in operations was $185.3 million, reflecting increased working capital needs and capital expenditures Q1 Cash Flow Summary (in millions) | Cash Flow Activity | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(185.3) | $(78.6) | | Net cash (used in) provided by investing activities | $(124.3) | $142.5 | | Net cash provided by (used in) financing activities | $205.1 | $(30.4) | | Net (decrease) increase in cash | $(107.5) | $31.2 | Notes to Consolidated Condensed Financial Statements Disclosures detail accounting policies, the Topgolf merger's impact, segment reporting, and new accounting standards - The company operates and reports under three segments: Topgolf, Golf Equipment, and Apparel, Gear and Other[28] - Effective January 1, 2022, the company adopted ASU 2020-06, simplifying accounting for convertible instruments and impacting debt, equity, and diluted EPS calculations[35] - The merger with Topgolf was completed on March 8, 2021, resulting in a $252.5 million gain in Q1 2021 from a fair-value step-up of the prior investment[63][66] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a 59.6% revenue increase driven by Topgolf and strong segment performance - Net revenue for Q1 2022 increased by 59.6% to $1,040.2 million, driven by increases in all three operating segments and across all major regions[167] - Operating income increased 23.9% to $94.3 million in Q1 2022, despite higher operating expenses from the full-quarter impact of Topgolf and inflationary pressures[168] - The company's cash and cash equivalents decreased by $107.2 million to $245.0 million during the quarter, used to fund operations, capital expenditures, and share repurchases[199] Results of Operations Q1 2022 net revenues rose 59.6% to $1.04 billion, with broad-based growth across all segments and regions Net Revenues by Operating Segment (in millions) | Segment | Q1 2022 | Q1 2021 | Growth (%) | | :--- | :--- | :--- | :--- | | Topgolf | $322.0 | $92.6 | 247.7% | | Golf Equipment | $468.0 | $376.9 | 24.2% | | Apparel, Gear and Other | $250.2 | $182.1 | 37.4% | | Total | $1,040.2 | $651.6 | 59.6% | Net Revenues by Region (in millions) | Region | Q1 2022 | Q1 2021 | Growth (%) | | :--- | :--- | :--- | :--- | | United States | $709.4 | $388.2 | 82.7% | | Europe | $134.9 | $108.3 | 24.6% | | Asia | $158.6 | $123.9 | 28.0% | | Rest of world | $37.3 | $31.2 | 19.6% | - Selling, general and administrative (SG&A) expenses increased by $69.2 million to $243.1 million, with $28.1 million of the increase attributable to the incremental impact from Topgolf[181] Operating Segment Results All three operating segments reported significant growth in operating income, led by strong consumer demand - Topgolf segment operating income increased to $6.5 million, reflecting a full quarter's contribution and strong recovery in corporate events[195] - Golf Equipment segment operating income rose to $100.8 million, driven by strong sales volumes and higher average selling prices for new products[196] - Apparel, Gear and Other segment operating income increased to $26.7 million, due to strong demand for TravisMathew and Callaway products[197][198] Liquidity and Capital Resources The company maintains sufficient liquidity through cash and credit facilities to fund operations and investments - As of March 31, 2022, the company had $575.6 million in cash and availability under its credit facilities, a decrease of 24% from year-end 2021[203] - The company expects to invest approximately $315.0 million in total capital expenditures for the full year 2022, with $230.0 million allocated to the Topgolf business[210] Summary of Material Cash Requirements (in millions) | Obligation | Total | Remainder of 2022 | 2023 - 2024 | 2025 - 2026 | Thereafter | | :--- | :--- | :--- | :--- | :--- | :--- | | Long-term debt | $1,112.4 | $14.4 | $31.8 | $1,019.8 | $46.4 | | Operating leases | $2,231.3 | $104.2 | $284.7 | $272.7 | $1,569.7 | | DLF obligations | $1,984.9 | $23.4 | $74.2 | $77.1 | $1,810.2 | | Total | $7,578.3 | $272.7 | $631.2 | $1,537.0 | $5,137.4 | Item 3. Quantitative and Qualitative Disclosures about Market Risk The company is exposed to foreign currency and interest rate risks, which it manages using derivative instruments - The company uses derivative instruments to mitigate exposure to foreign currency and interest rate fluctuations[212] - A sensitivity analysis showed that a hypothetical 10% unfavorable movement in foreign currencies could lead to an estimated maximum loss of $42.1 million from forward contracts[214][215] - A sensitivity analysis indicated that a 10% increase in interest rates would have a nominal impact on expense over a 12-month period[217] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of the end of the first quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of March 31, 2022[218] - The company revised certain internal controls during Q1 2022 related to the integration of the Topgolf business[219] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is subject to routine legal claims that have not had a material adverse effect on its financial position - The company is subject to routine legal claims and proceedings which, to date, have not had a material adverse effect on its financial position[115][223] Item 1A. Risk Factors There have been no material changes from the risk factors previously disclosed in the 2021 Annual Report - There are no material changes from the risk factors disclosed in the company's 2021 Form 10-K[224] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company completed its $50 million share repurchase program during the first quarter of 2022 - In Q1 2022, the company completed its $50 million share repurchase program authorized in December 2021[225] Q1 2022 Share Repurchase Summary | Period | Total Shares Purchased | Weighted Average Price Paid per Share | | :--- | :--- | :--- | | Jan 2022 | 23,567 | $27.44 | | Feb 2022 | 675,578 | $23.53 | | Mar 2022 | 769,220 | $23.13 | | Total Q1 2022 | 1,468,365 | $23.38 | Item 5. Other Information An accounting policy was changed to reclassify corporate advertising sponsorship revenues within the Topgolf segment - A change in accounting policy was implemented to reclassify corporate advertising sponsorship revenues from 'other Topgolf business lines' to the 'venues' service category[230] - For the full year 2021, $15.0 million was reclassified to conform with the new presentation[194][231] Item 6. Exhibits This section lists the exhibits filed with the report, including required CEO and CFO certifications - The report includes certifications from the CEO and CFO as required by the Sarbanes-Oxley Act[235]