Topgolf Callaway Brands (MODG) - 2023 Q4 - Annual Report

FORM 10-K Cover Page The company filed its annual report on Form 10-K for the fiscal year ended December 31, 2023, as a large accelerated filer - Topgolf Callaway Brands Corp. filed its annual report on Form 10-K for the fiscal year ended December 31, 2023. The company is a large accelerated filer[2][5][6] Securities Registered Pursuant to Section 12(b) of the Act | Title of Each Class | Trading Symbol(s) | Name of Each Exchange on which Registered | | :------------------ | :---------------- | :---------------------------------------- | | Common Stock, $0.01 par value per share | MODG | The New York Stock Exchange | Market Value and Shares Outstanding As of June 30, 2023, non-affiliate common stock market value was $2.81 billion, with 183.6 million shares outstanding as of February 19, 2024 - As of June 30, 2023, the aggregate market value of common stock held by non-affiliates was $2,808,466,571. As of February 19, 2024, there were 183,598,015 shares of common stock outstanding[7][8] Documents Incorporated by Reference Part III of the report incorporates information from the registrant's Definitive Proxy Statement for the 2024 Annual Meeting of Shareholders - Part III of the report incorporates information by reference from the registrant's Definitive Proxy Statement for the 2024 Annual Meeting of Shareholders, scheduled for May 30, 2024, to be filed within 120 days after December 31, 2023[10] Important Notice to Investors Regarding Forward-Looking Statements The report contains forward-looking statements about future plans and financial results, subject to inherent uncertainties and risks that could cause actual results to differ materially - The report contains forward-looking statements, identifiable by words like 'may,' 'should,' 'will,' 'anticipate,' 'plan,' 'believe,' 'project,' 'estimate,' and 'expect.' These statements relate to future plans, events, liquidity, financial results, performance, prospects, and growth opportunities, including industry conditions, product demand, brand momentum, investments, and expansion plans for Topgolf, TravisMathew, OGIO, and Jack Wolfskin[11] - Forward-looking statements are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict and many of which are outside the company's control, potentially causing actual results to differ materially[11] - Key factors that could cause actual results to differ include changes in capital markets or economic conditions (especially inflation and decreased consumer spending), consumer acceptance of products, retailer purchasing activity, U.S. trade policies, promotional activity, foreign currency exchange rates, international business risks, ability to manage synergies, credit market changes, and costs related to the Topgolf merger[11] Topgolf Callaway Brands Trademarks The company maintains an extensive portfolio of trademarks and phrases, including key brands like Callaway, Topgolf, TravisMathew, and Jack Wolfskin - The company lists an extensive portfolio of trademarks and phrases, including AI Smoke, Apex, Big Bertha, Callaway, Chrome Soft, Epic, Flash Face, Jack Wolfskin, Jailbreak, JAWS MD5, Mack Daddy, Mavrik, Microhinge, Nanuk, OGIO, Odyssey, Paradym, Paw Print, Rig 9800, SLED, Stroke Lab, Tank, Texapore, TopGolf, TopTracer, Toulon, Tour Authentic, TRAVISMATHEW, Truvis, VFT, Warbird, White Hot, and X-Series, among many others[13] Risk Factors Summary The company faces diverse risks across its industry, operations, regulations, and financial matters, which could significantly impact its business and financial performance Risks Related to our Industry and Business The company's business is susceptible to economic downturns, reduced golf participation, intense competition, and challenges in expanding its apparel and Topgolf venue businesses - Unfavorable economic conditions, including inflation, could negatively impact consumer discretionary spending, affecting the company's results[18] - A reduction in golf rounds played or participants could adversely affect sales of golf-related products[18] - The company faces intense competition across all its markets and operating segments, including Topgolf, golf equipment, and active lifestyle[18] - Growth strategies for Topgolf venues depend on the ability to open new locations, which faces risks related to site availability, financing, and regulatory compliance[18] - The expanding apparel business and retail operations are subject to risks from changing consumer tastes, fashion trends, and operational management challenges[18] Risks Related to Operations, Manufacturing, and Technology Operational risks include challenges from significant international operations, foreign currency fluctuations, raw material costs, supplier dependence, and cybersecurity incidents - Significant international operations expose the company to risks such as adverse foreign currency exchange rates and difficulties in managing global business processes[21] - The costs and availability of finished products, components, and raw materials can be volatile, impacting operating results[21] - Dependence on a limited number of suppliers for critical components could lead to production delays or disruptions[21] - Difficulties arising from strategic acquisitions, including the Topgolf merger, could adversely affect business, financial condition, and results of operations[21] - Cybersecurity incidents, including cyber-attacks and data breaches, could result in significant expense and negatively impact reputation and business[21] Risks Related to Regulations The company is subject to numerous federal, state, local, and foreign laws and regulations, with non-compliance potentially leading to increased costs, fines, and litigation - Compliance with extensive federal, state, local, and foreign laws and regulations is costly and complex, and failure to comply could have an adverse impact on the business[21] - Changes in, or failure to comply with, data privacy laws, regulations, and standards may adversely affect the business[21] Risks Related to Tax and Financial Matters Financial risks include potential adverse effects from changes in tax laws, limitations on net operating loss utilization, and restrictive covenants within existing credit facilities - Changes in tax law and unanticipated tax liabilities could adversely affect the effective income tax rate, profitability, and cash flows[21] - The ability to utilize U.S. deferred tax assets, including loss and credit carryforwards, may be subject to limitations due to ownership changes[21] - Obligations and financial covenants under existing credit facilities expose the company to risks that could materially affect liquidity, business, operating results, and financial condition[21] TOPGOLF CALLAWAY BRANDS CORP. INDEX This index provides a detailed roadmap to the various sections of the report, covering business operations, risk factors, financial statements, and other disclosures - Topgolf Callaway Brands Corp. is a leading modern golf and active lifestyle company, offering golf entertainment, premium golf equipment, and active lifestyle apparel and accessories[25] - The company's portfolio includes brands like Topgolf, Callaway Golf, Odyssey, TravisMathew, Jack Wolfskin, OGIO, and Toptracer, serving consumers in over 120 countries[25][26] - The long-term growth strategy is anchored on four key initiatives: innovation, expansion, synergy, and efficiency across its family of brands[27] Item 1. Business This section provides an overview of Topgolf Callaway Brands Corp.'s business, including its history, growth strategy, reportable segments, product offerings, and operational details Overview Topgolf Callaway Brands Corp. is a modern golf and active lifestyle company, diversified through strategic acquisitions like Topgolf, and operating globally - Topgolf Callaway Brands Corp. is a leading modern golf and active lifestyle company, providing golf entertainment, premium golf equipment, and active lifestyle apparel and accessories[25] - The company's brand portfolio includes Topgolf, Callaway Golf, Odyssey, TravisMathew, Jack Wolfskin, OGIO, and Toptracer, with products and services sold globally in over 120 countries[25][26] - The company was incorporated in 1982 as Callaway Golf Company, became public in 1992, and expanded into active lifestyle apparel and golf entertainment through strategic acquisitions, culminating in the merger with Topgolf in 2021 and a name change in 2022[26] Growth and Overall Strategy The company's long-term growth strategy focuses on innovation, expansion, synergy, and efficiency across its diversified active lifestyle and modern golf brands - The company is well-positioned for long-term growth due to its diversified portfolio of product and service offerings and scalability within the active lifestyle and modern golf ecosystem[27] - The long-term growth strategy is anchored on four key initiatives: innovation, expansion, synergy, and efficiency across its family of brands[27] Reportable Segments and Products As of December 31, 2023, the company manages its global business operations through three reportable operating segments: Topgolf, Golf Equipment, and Active Lifestyle - As of December 31, 2023, the company operates through three reportable business segments: Topgolf, Golf Equipment, and Active Lifestyle[28] Topgolf Topgolf is a technology-enabled golf entertainment business with venues, ball-tracking technology, and a digital media platform, experiencing seasonal revenue fluctuations - Topgolf is a leading technology-enabled golf entertainment business with venues, proprietary Toptracer ball-tracking technology, and a digital media platform[29] Topgolf Venues by Region (as of December 31) | Topgolf Venues by region: | 2023 | 2022 | 2021 | | :------------------------ | :--- | :--- | :--- | | Domestic Owned and Operated | 88 | 77 | 67 | | Domestic Acquired (1) | 1 | 0 | 0 | | International Owned and Operated | 4 | 4 | 3 | | International Franchised | 5 | 5 | 3 | | Total | 98 | 86 | 73 | - Topgolf venues generate revenue primarily from food and beverage sales, gameplay, events, and advertising partnerships. They offer technology-enabled hitting bays and flexible spaces for various entertainment and corporate events[36] - Topgolf sales are seasonal, with higher revenues in the second and third quarters (spring and summer) and lower revenues in the first and fourth quarters due to cooler temperatures and fewer corporate events[39] - Other Topgolf business lines include licensing Toptracer ball-tracking technology to driving ranges and golf broadcasts, licensing Swing Suite for simulated gameplay, and the Topgolf digital gaming platform, which includes the mobile golf game World Golf Tour (WGT)[40][41][42] Golf Equipment The Golf Equipment segment designs, manufactures, and sells high-quality golf clubs and balls, emphasizing R&D and facing intense competition and seasonal sales patterns - The Golf Equipment segment designs, manufactures, and sells golf clubs (Callaway, Odyssey) and golf balls (Callaway Golf, Strata), focusing on technologically advanced products for all skill levels[43][44][45] - Product design leverages continuous R&D investment and artificial intelligence to create advanced designs, utilizing computer-aided design, finite element analysis, and structural optimization techniques[46] - Manufacturing for golf clubs is primarily in Monterrey, Mexico, with contract manufacturers in China and Vietnam, and over 50% of assembly outside the U.S. Golf ball manufacturing is in Chicopee, Massachusetts, and contract manufacturers in China and Taiwan, with approximately 75% of golf balls manufactured outside the U.S. in 2023[47][48] - Sales channels include wholesale customers (pro shops, off-course retailers, sporting goods, online, distributors, mass merchants) and direct-to-consumer via websites and retail locations in Japan and Korea. The company also offers custom club fitting and a 'Trade In! Trade Up!' program for pre-owned clubs[50][51] - The golf equipment business is highly competitive, with major competitors including TaylorMade, Ping, Acushnet (Titleist), Puma (Cobra), SRI Sports Limited, Mizuno, Bridgestone, and PXG for clubs, and Acushnet (Titleist, Pinnacle), SRI Sports Limited (Dunlop, Srixon), and Bridgestone for golf balls[52][53][54] - The golf equipment business is subject to seasonal fluctuations, with a majority of sales and profitability occurring in the first half of the year due to the golf season. New product introductions and weather conditions can significantly impact quarterly sales[57] Active Lifestyle The Active Lifestyle segment offers premium soft goods under multiple brands, with internal design, third-party manufacturing, and sales through diverse channels, experiencing varied seasonality - The Active Lifestyle segment designs, develops, and sells high-quality soft goods under the Callaway, TravisMathew, OGIO, and Jack Wolfskin brands, offering premium performance and lifestyle products[58] - Product offerings include Callaway golf apparel and accessories, TravisMathew men's, women's, and youth apparel and accessories (including Cuater footwear), OGIO storage and active travel gear, and Jack Wolfskin functional outdoor apparel, footwear, and equipment[59][60][61][62] - Soft goods products are designed internally and manufactured by third-party partners in Vietnam, China, Indonesia, Thailand, Bangladesh, the Philippines, and Peru[63] - Sales channels include wholesale customers and direct-to-consumer through websites and retail locations. TravisMathew is also sold in luxury department stores, and Jack Wolfskin has a significant retail presence in Europe and China[64][65][66][67][68] - Competition comes from other golf companies, premium golf apparel companies (e.g., Nike, Peter Millar), and well-established outdoor brands (e.g., Patagonia, Columbia, The North Face)[69] - Seasonality varies: Callaway apparel sales are higher in the first half, TravisMathew sales are more evenly spread, and Jack Wolfskin experiences stronger sales in the second half due to cold-weather product focus[71] Distribution The company operates a primary distribution center in Fort Worth, Texas, for North America, supported by company-operated and third-party centers globally - The primary distribution center for golf equipment and soft goods in North America is located in Fort Worth, Texas[72] - Company-operated distribution centers are also located in Toronto (Canada), Swindon (England), Melbourne (Australia), Hamburg (Germany), and Shanghai (China)[72] - Third-party logistical operations support distribution in Tokyo (Japan) and Seoul (Korea)[72] Intellectual Property The company owns an extensive portfolio of approximately 5,300 trademarks and over 1,900 patents, actively protecting its proprietary rights through registration and litigation - The company owns approximately 5,300 U.S. and foreign trademark registrations and over 1,900 U.S. and foreign patents related to its products, designs, manufacturing processes, and R&D concepts[73] - Intellectual property rights are protected through registration of trademarks and patents, maintenance of trade secrets, and creation of trade dress, with enforcement through litigation when necessary[73] - Patents are generally in effect for up to 20 years from filing, while trademarks are valid as long as in use and properly maintained[74] Human Capital Resources The company values its approximately 32,000 global employees, fostering a culture of growth, well-being, and diversity, supported by competitive benefits and community engagement - As of December 31, 2023, the company had approximately 32,000 full-time and part-time employees worldwide across 27 countries[75] - The company is committed to Diversity, Equity, and Inclusion (DE&I), aiming to increase women and diverse candidates in management and making golf more accessible. In 2023, over half of management-level new hires, promoted employees, and interns in the U.S. were from diverse backgrounds[78][79] - Employee well-being is supported through competitive compensation, comprehensive health and welfare benefits, life and disability insurance, retirement plans with employer matching, and an Employee Assistance Program (EAP)[80][81] - The company offers various training and development opportunities, including Code of Conduct, Anti-Corruption, Business Ethics, Safety, Cybersecurity Awareness, Diversity & Inclusion, and leadership programs[83] - Community giving programs include the Callaway Golf Company Foundation, the Employee Community Giving Program, and the Topgolf Driving for Good Program, supporting initiatives like the Pro Kids Scholarship Program and hosting over 3,500 charitable events[84][85] Government Regulation The company is subject to extensive federal, state, local, and foreign laws and regulations across various areas, with compliance costs historically not material - The company is subject to extensive federal, state, local, and foreign laws and regulations, including those related to nutritional content, food safety, employment, data privacy, environmental, health and human safety, franchising, and anti-bribery[87] - Historically, compliance costs have not had a material adverse effect on the business, and operations are believed to be in substantial compliance with applicable laws[88] - Future material capital or operating expenditures may be required to comply with evolving government regulations[88] Environmental and Social Responsibility The company demonstrates environmental and social responsibility through its Global Sustainability Program, overseen by the Board and Executive Sustainability Committee, assessing ESG concerns and reporting performance - The Global Sustainability Program, overseen by the Board of Directors and an Executive Sustainability Committee, aims to increase awareness and structure existing social and environmental sustainability initiatives[90][91] - The program benchmarks against sustainability frameworks from the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB) for consumer goods, apparel, and entertainment sectors[90] - Environmental efforts include adherence to federal, state, and local environmental laws, managing waste by-products, and conducting third-party social, safety, and environmental responsibility audits across the global supply chain[93][95] - Social matters are guided by a Code of Conduct, Supplier Code of Conduct, and Human Rights Policy, with a CSR Program established in 2007 and updated in 2019, benchmarking against UN Universal Declaration of Human Rights and ILO Guidelines[96] Information About Our Executive Officers This section provides biographical information for the company's executive officers, highlighting their roles, experience, and educational backgrounds Executive Officers and Positions | Name | Age | Position(s) Held | | :------------------ | :-- | :------------------------------------------------ | | Oliver G. Brewer III | 60 | President and Chief Executive Officer, Director | | Brian P. Lynch | 62 | Executive Vice President, Chief Financial Officer | | Glenn Hickey | 62 | Executive Vice President and President, Callaway Golf | | Mark F. Leposky | 59 | Executive Vice President and Chief Supply Chain Officer | | Rebecca Fine | 61 | Executive Vice President and Chief People Officer | | Arthur F. Starrs | 47 | Chief Executive Officer, Topgolf International | - Oliver G. Brewer III has served as President and CEO since March 2012, with prior experience at Adams Golf, Inc. and board roles in golf foundations and charities[98] - Brian P. Lynch is EVP, CFO, and Chief Legal Officer, responsible for finance, accounting, law, IT, corporate audit, and compliance functions, having joined the company in 1999[100] - Arthur F. Starrs, III is the CEO of Topgolf, overseeing its global businesses including venues, Toptracer, Swing Suite, and Topgolf Media, with previous leadership roles at Pizza Hut[104] Access to the SEC Fillings Through Company Website Investors can access the company's SEC filings and corporate governance documents free of charge on the Investor Relations section of its website - Annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments are accessible free of charge on the Investor Relations section of www.topgolfcallawaybrands.com[106](index=106&type=chunk) - The website also provides Corporate Governance Guidelines, Code of Conduct, and written charters of the Board of Directors' committees[106] - The Investor Relations website is used for disclosing material non-public information and complying with Regulation FD[106] Item 1A. Risk Factors This section details various risks and uncertainties that could adversely affect the company's business, operations, and financial condition, urging careful consideration by investors - The company's business, operations, and financial condition are subject to various risks and uncertainties that could adversely affect future growth prospects and stock prices[108] - Key risk categories include industry and business factors (e.g., economic conditions, competition), operational and technological challenges (e.g., supply chain, cybersecurity), regulatory compliance, and tax and financial matters (e.g., debt covenants, interest rates)[108] Certain Factors Affecting Topgolf Callaway Brands This section highlights that the company's business and financial condition are subject to various risks and uncertainties, which investors should carefully consider - The company's business, operations, and financial condition are subject to various risks and uncertainties[108] - Investors are urged to carefully consider these risks, along with forward-looking statements, as they could adversely affect the business and cause securities prices to decline[108] Risks Related to our Industry and Business The company faces significant risks from unfavorable economic conditions, declining golf participation, intense competition, and challenges in expanding Topgolf venues and apparel businesses - Unfavorable economic conditions, including inflation, could negatively impact consumer discretionary spending on golf products and entertainment, affecting financial results[110] - A reduction in golf participation or rounds played could adversely affect sales of golf-related products and Topgolf venue traffic[111][112] - The company faces intense competition in all its markets (Topgolf, Golf Equipment, Active Lifestyle), which could lead to market share loss or price reductions[122][124][127] - Topgolf's growth strategy depends on opening new venues, which is subject to risks like site availability, financing, regulatory compliance, and unforeseen construction problems[133][134] - Changes in equipment standards, such as the USGA/R&A rule change to reduce golf ball distances, could adversely affect product sales and golf participation[145][146] - The business is subject to seasonal fluctuations, with golf equipment and Callaway apparel sales higher in the first half, Jack Wolfskin sales stronger in cold-weather months, and Topgolf revenues higher in spring/summer[159][161][162] Risks Related to Operations, Manufacturing, and Technology Operational risks stem from significant international operations, supply chain vulnerabilities, integration challenges from acquisitions, and reliance on complex information systems vulnerable to cybersecurity incidents - Significant international operations expose the company to risks including adverse foreign currency exchange rates, political instability, and challenges in protecting intellectual property rights[171] - The costs and availability of finished products, components, and raw materials are volatile due to factors like inflation, labor costs, and tariffs, potentially impacting operating results[177][178] - Dependence on a limited number of suppliers for critical components (e.g., clubheads, shafts, golf ball materials) could lead to significant production delays or business disruptions[188] - The company relies on complex information systems for major operations, and failures or cybersecurity incidents could disrupt business, decrease sales, and harm reputation[204][206][207] - The Topgolf venues business is susceptible to food-borne illness incidents, guest complaints, and litigation, which could damage brand reputation and financial performance[192][194][196] - Failure to adequately enforce intellectual property rights against imitation or infringement could adversely affect reputation and sales, particularly in the golf club and apparel industries[217][218][219] Risks Related to Regulations The company and its franchisees are subject to a wide array of complex federal, state, local, and foreign laws and regulations, with non-compliance posing significant financial and reputational risks - The company and its Topgolf franchisees/licensees are subject to extensive and costly federal, state, local, and foreign laws and regulations, including those related to nutritional content, food safety, employment, data privacy, environmental, health and human safety, franchising, and anti-bribery[233] - Compliance with rapidly evolving global data privacy laws (e.g., CCPA, GDPR) is complex and costly, with potential for significant fines, litigation, and reputational damage from non-compliance or perceived failures[236][238][239][240] - Violations of economic sanctions, FCPA, U.K. Bribery Act, and other anti-bribery laws could result in criminal/civil penalties and harm business and reputation[242] - Environmental, health, and safety laws and regulations could subject the company to liabilities, increased costs, or operational restrictions, including for contamination at owned or leased properties[243][245] - Increased scrutiny and changing expectations regarding ESG practices and reporting could lead to additional costs, resource allocation, and risks impacting reputation, customer attraction, and access to capital[246][248] Risks Related to Tax and Financial Matters The company's financial health is exposed to risks from changes in tax laws, limitations on net operating loss utilization, and restrictive covenants within its credit facilities - Changes in tax laws, including international initiatives like the OECD's BEPS project, could adversely affect the effective income tax rate, profitability, and cash flows[250][252] - The ability to utilize U.S. net operating losses (NOLs) and tax credits may be significantly limited by 'ownership changes' as defined by the Internal Revenue Code, potentially impacting future taxable income and cash flows[253][254] - Obligations and financial covenants under existing credit facilities (New ABL Facility, 2022 Japan ABL Credit Facility, 2023 Term Loan B) expose the company to risks that could materially affect liquidity, business, operating results, and financial condition, including restrictions on dividends and debt acceleration upon default[256][258] - The company may need to raise additional funds for growth initiatives, particularly for Topgolf venue construction, and there is no guarantee that financing will be available on favorable terms or at all, potentially diluting stockholders or increasing indebtedness[260][261][262] - Increases in variable interest rates on credit facilities could significantly increase debt servicing costs, reducing profitability and cash flows[263] - Goodwill and intangible assets constitute a significant portion of total assets, and any impairment could negatively impact results of operations and shareholders' equity[264][265] General Risk Factors General risks include potential for inadequate insurance coverage and adverse impacts if critical accounting policy estimates or judgments prove incorrect - Insurance policies may not provide adequate coverage against all claims, and the company may incur losses not covered by insurance, or face increased premiums[268] - If estimates or judgments relating to critical accounting policies (e.g., revenue recognition, inventory reserves, goodwill impairment) prove incorrect, financial condition and results of operations could be adversely affected[269] Item 1B. Unresolved Staff Comments There are no unresolved staff comments to report for the period - There are no unresolved staff comments[270] Item 1C. Cybersecurity The company has a cybersecurity risk management program based on the NIST CSF, overseen by the Board, with no material threats identified to date - The company has a cybersecurity risk management program based on the National Institute of Standards and Technology Cybersecurity Framework (NIST CSF), integrated into its overall enterprise risk management[271][272][273] - The program includes risk assessments, security controls, external service providers, employee awareness training, a global incident response plan, and a third-party risk management process[273] - The Board of Directors, through the Audit Committee, oversees cybersecurity risks, receiving reports from management at least twice a year and updates on material incidents[275][276] - Management, with over 90 years of combined experience in cybersecurity, risk, and compliance, supervises efforts to prevent, detect, mitigate, and remediate cybersecurity risks and incidents[277][278] - No known cybersecurity threats have materially affected or are reasonably likely to materially affect the company, but there's no assurance the program will always be fully effective[274] Item 2. Properties The company operates in owned and leased properties globally, including executive offices, manufacturing facilities, distribution centers, and a majority of its Topgolf venues - The company operates in both owned and leased properties, including executive offices, golf club assembly, golf ball manufacturing, warehousing, distribution, sales offices, and Topgolf venues[279] - Principal executive offices are in Carlsbad, California, with two owned buildings for corporate offices, R&D, club assembly, and a performance center[279] - The company leases 45 TravisMathew retail locations in the U.S., over 157 Jack Wolfskin retail locations in Germany/Europe/China, and 24 Callaway retail locations in Japan, plus 4 Jack Wolfskin and 4 TravisMathew locations in Japan[281] - As of December 31, 2023, 93 Company-owned and operated venues (88 Topgolf, 1 acquired U.S., 4 UK Topgolf) are mostly leased (over 80%)[282] - Key manufacturing and distribution facilities, including the Chicopee, Massachusetts golf ball plant and Monterrey, Mexico golf club facility, are leased[283] Item 3. Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 13, 'Commitments & Contingencies,' in the Notes to Consolidated Financial Statements - Information on legal proceedings is incorporated from Note 13, 'Commitments & Contingencies,' in the Notes to Consolidated Financial Statements[284] Item 4. Mine Safety Disclosures This item is not applicable to the company - This item is not applicable[285] PART II. This section covers market information for common equity, related shareholder matters, issuer purchases of equity securities, and management's discussion and analysis of financial condition and results of operations Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE under 'MODG', with 4,347 holders of record as of January 31, 2024, and a $100.0 million share repurchase program authorized in May 2022 - The company's common stock is listed and principally traded on the New York Stock Exchange (NYSE) under the symbol 'MODG'[287] - As of January 31, 2024, there were 4,347 holders of record of the common stock[287] - The company ceased quarterly dividends in August 2020 and does not anticipate paying dividends in the foreseeable future, subject to liquidity, capital availability, and credit facility restrictions[288] Cumulative Total Shareholder Return (2018-2023) | | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | | :--------------------------------- | :----- | :----- | :----- | :----- | :----- | :----- | | Topgolf Callaway Brands (NYSE: MODG) | $100.00 | $138.62 | $157.06 | $179.50 | $129.20 | $93.81 | | S&P 500 | $100.00 | $128.88 | $149.83 | $190.13 | $153.16 | $190.27 | | S&P 1500 Consumer Discretionary | $100.00 | $125.69 | $165.47 | $205.91 | $131.20 | $182.59 | - On May 26, 2022, the Board authorized a $100.0 million share repurchase program. In Q4 2023, 859,009 shares were repurchased under this program for $11.9 million[292][295] - The company also repurchases shares by withholding a portion of employee restricted stock unit and performance share unit awards to satisfy payroll tax withholding obligations[293][295] Item 6. [Reserved] This item is reserved and contains no information - This item is reserved[296] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a detailed analysis of the company's financial condition and results of operations for 2023 and 2022, covering segment performance, revenues, costs, and liquidity - The discussion focuses on 2023 and 2022 financial results, with 2021 comparisons available in the prior year's 10-K[298] - Critical accounting estimates include sales programs (returns, promotions), excess and obsolescence reserves for inventory, business combinations, impairment of goodwill and intangible assets, and income taxes[300][301][305][306][308][312] - Non-GAAP measures, such as constant currency net revenues and adjusted net income/EPS, are used to evaluate underlying business performance[316][317] - Macroeconomic factors, foreign currency fluctuations, supply chain challenges, and inflation significantly impact the company's discretionary product and service offerings[318][319][320][321] - The company's three operating segments are Topgolf, Golf Equipment, and Active Lifestyle[322] - Liquidity is primarily sourced from existing cash, operating cash flows, and credit facilities, believed to be adequate for the next 12 months[350] Critical Accounting Estimates The company's financial statements rely on critical accounting estimates for revenue recognition, inventory reserves, business combinations, asset impairment, and income tax provisions - Revenue recognition involves estimates for sales returns, short-term sales programs, sales promotions, and price concessions, based on historical data and current trends[301][302][303] - Inventories are recorded at the lower of cost or net realizable value, with reserves for excess, obsolete, and unmarketable inventory estimated based on sales trends, market conditions, and future demand forecasts[305] - Business combinations require significant estimates and judgments to assign fair values to acquired assets and assumed liabilities, including future revenues, growth rates, and discount rates[306][307] - Goodwill and indefinite-lived intangible assets are evaluated for impairment at least annually using discounted cash flow and market approaches, requiring projections of financial performance and market multiples[308][309][310][311] - Income tax provisions and related assets/liabilities are based on actual and expected future income, statutory tax rates, and tax regulations, requiring significant judgment in interpreting tax laws and evaluating uncertain tax positions[312][313] Recent Accounting Pronouncements The company is evaluating new FASB ASUs on income tax disclosures and segment reporting, and has adopted ASUs on fair value measurement and convertible instruments - The company is evaluating ASU No. 2023-09, 'Income Taxes (Topic 740): Improvements to Income Tax Disclosures,' effective for fiscal years beginning after December 15, 2024[503] - The company is evaluating ASU No. 2023-07, 'Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures,' effective for fiscal years beginning after December 15, 2023[504] - ASU No. 2022-03, 'Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions,' was early adopted on January 1, 2023, with no impact on financial statements[505] - ASU No. 2020-06, 'Accounting for Convertible Instruments and Contracts in an Entity's Own Equity,' was adopted on January 1, 2022, under the modified retrospective method, resulting in a $57.1 million reduction in additional paid-in capital and a $12.4 million increase in retained earnings[506] Discussion of Non-GAAP Measures The company uses non-GAAP financial measures, including constant currency net revenues and adjusted net income/EPS, for internal decision-making and evaluating underlying business performance - Non-GAAP information includes constant currency net revenues to show foreign currency impact, and net income/diluted EPS excluding certain non-cash and non-recurring charges[316] - Same venue sales for Topgolf are defined as sales for company-operated venues with at least 24 full fiscal months of operations[316] - These non-GAAP measures are used for financial and operational decision-making, evaluating underlying business performance, and forecasting, but should not be considered in isolation from GAAP results[317] Current Economic Conditions The company's discretionary products are sensitive to macroeconomic pressures, with foreign currency fluctuations, supply chain improvements, and inflation impacting financial results - Demand for the company's non-essential products and services is highly sensitive to macroeconomic pressures, such as declines in consumer and corporate discretionary spending[318] - Foreign currency fluctuations had an unfavorable impact of $25.7 million on international net revenues for the year ended December 31, 2023, on a constant currency basis[319] - Global supply chain challenges in 2022 led to earlier-than-anticipated inventory receipts for 2023 product launches, resulting in a $164.8 million decrease in total inventory since December 31, 2022[320][349] - Increased inflation contributed to higher product and operating costs, which were generally offset by price increases, but the length and severity of these conditions are unpredictable[321] Segment and Related Information The company's business operations are managed through three reportable operating segments: Topgolf, Golf Equipment, and Active Lifestyle, each with distinct product offerings - The company's three operating segments are Topgolf, Golf Equipment, and Active Lifestyle[322] - Topgolf includes venues, Toptracer, and the WGT digital golf game. Golf Equipment covers golf clubs and balls. Active Lifestyle includes soft goods from Callaway, TravisMathew, Jack Wolfskin, and OGIO[322] Results of Operations Total net revenues increased by $289.1 million (7.2%) to $4,284.8 million in 2023, driven by Topgolf and Active Lifestyle growth, while net income decreased to $95.0 million ($0.50 diluted EPS) Net Revenues by Operating Segment (in millions) | Net revenues: | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | Increase/(Decrease) Amount | Percent | Non – GAAP Constant Currency Growth Percent | | :-------------- | :---------------------- | :---------------------- | :------------------------- | :------ | :---------------------------------------- | | Topgolf | $1,761.0 | $1,549.0 | $212.0 | 13.7 % | 13.7% | | Golf Equipment | $1,387.5 | $1,406.6 | $(19.1) | (1.4)% | 0.1% | | Active Lifestyle | $1,136.3 | $1,040.1 | $96.2 | 9.2 % | 9.7% | | Total net revenues | $4,284.8 | $3,995.7 | $289.1 | 7.2 % | 7.9% | - The $289.1 million (7.2%) increase in total net revenues was primarily due to new Topgolf venues and Active Lifestyle expansion, partially offset by a decrease in Golf Equipment sales due to a non-recurring post-pandemic inventory fill-in in 2022 and unfavorable foreign currency[323] Net Revenues by Major Geographic Region (in millions) | Net revenues: | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | Increase/(Decrease) Amount | Percent | Non-GAAP Constant Currency Growth Percent | | :-------------- | :---------------------- | :---------------------- | :------------------------- | :------ | :---------------------------------------- | | United States | $3,081.4 | $2,798.0 | $283.4 | 10.1 % | 10.1% | | Europe | $540.6 | $537.4 | $3.2 | 0.6 % | (1.0)% | | Asia | $531.9 | $545.4 | $(13.5) | (2.5)% | 2.7% | | Rest of World | $130.9 | $114.9 | $16.0 | 13.9 % | 19.0% | | Total net revenues | $4,284.8 | $3,995.7 | $289.1 | 7.2 % | 7.9% | Costs and Expenses (in millions) | Costs and expenses: | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | Increase/(Decrease) Amount | Percent | | :------------------ | :---------------------- | :---------------------- | :------------------------- | :------ | | Cost of products | $1,443.9 | $1,400.6 | $43.3 | 3.1 % | | Cost of services, excluding depreciation and amortization | $186.8 | $184.0 | $2.8 | 1.5 % | | Other venue expense | $1,252.3 | $1,076.9 | $175.4 | 16.3 % | | Selling, general and administrative expense | $1,036.6 | $970.6 | $66.0 | 6.8 % | | Research and development expense | $101.6 | $76.4 | $25.2 | 33.0 % | | Venue pre-opening costs | $25.9 | $30.4 | $(4.5) | (14.8)% | | Total costs and expenses | $4,047.1 | $3,738.9 | $308.2 | 8.2 % | - Interest expense, net, increased by $67.4 million (47.2%) in 2023, primarily due to higher outstanding balances and increased interest rates on term loans and credit facilities, as well as increased deemed landlord financing and finance lease obligations[337] - Net income decreased to $95.0 million ($0.50 diluted EPS) in 2023 from $157.9 million ($0.82 diluted EPS) in 2022, primarily due to lower income from operations and higher net other expenses, partially offset by a higher income tax benefit[340] Operating Segment Results for the Years Ended December 31, 2023 and 2022 In 2023, Topgolf operating income increased by 41.7%, Active Lifestyle surged by 51.2%, while Golf Equipment operating income decreased by 23.1% Net Revenues and Segment Operating Income by Segment (in millions) | | 2023 | 2022 | Increase/(Decrease) Dollars | Percent | | :-------------------------------- | :----- | :----- | :------------------------ | :------ | | Net revenues: | | | | | | Topgolf | $1,761.0 | $1,549.0 | $212.0 | 13.7 % | | Golf Equipment | $1,387.5 | $1,406.6 | $(19.1) | (1.4)% | | Active Lifestyle | $1,136.3 | $1,040.1 | $96.2 | 9.2 % | | Segment operating income: | | | | | | Topgolf | $108.8 | $76.8 | $32.0 | 41.7 % | | Golf Equipment | $193.3 | $251.4 | $(58.1) | (23.1)% | | Active Lifestyle | $117.0 | $77.4 | $39.6 | 51.2 % | - Topgolf segment operating income increased $32.0 million (41.7%) in 2023, driven by new venue openings, gross margin improvements, and operational efficiencies, partially offset by higher advertising costs[344] - Golf Equipment segment operating income decreased $58.1 million (23.1%) in 2023 due to lower revenues and production volumes (following a 2022 post-pandemic inventory fill-in), unfavorable cost absorption, a return to normalized promotional environment, and unfavorable foreign currency impacts[345] - Active Lifestyle segment operating income increased $39.6 million (51.2%) in 2023, primarily from increased revenues and gross margin improvements due to a higher mix of direct-to-consumer sales and lower freight costs, partially offset by higher operating expenses for business growth[346] Financial Condition Cash and cash equivalents increased to $393.5 million in 2023, driven by financing and operating activities, while inventory decreased by $164.8 million due to improved supply chain timing - Cash and cash equivalents increased by $213.3 million to $393.5 million at December 31, 2023, from $180.2 million at December 31, 2022[347] - The increase in cash was primarily driven by $375.8 million from financing activities and $364.7 million from operating activities, partially offset by $542.9 million used in investing activities (mainly capital expenditures)[347] - Net accounts receivable increased by $33.2 million to $200.5 million at December 31, 2023, compared to $167.3 million in 2022, due to higher net sales and a shift in sales timing in Q4 2023[348] - Total inventory decreased by $164.8 million to $794.4 million at December 31, 2023, from $959.2 million in 2022, primarily due to improved supply chain timing in late 2022 leading to earlier receipt of 2023 product launch inventory[349] Liquidity and Capital Resources The company's liquidity, including $742.6 million in total available liquidity as of December 31, 2023, is deemed adequate, supported by a comprehensive debt refinancing in March 2023 - Principal liquidity sources are existing cash balances, funds from operations, and credit facilities, believed to be adequate for current and planned operating requirements, capital expenditures, and debt repayments for at least the next 12 months[350] - As of December 31, 2023, total cash and availability under credit facilities was $742.6 million, a 78.8% increase from December 31, 2022[352] - In March 2023, the company refinanced its capital structure, entering a new $1,250.0 million senior secured Term Loan B facility (maturing March 2030) and extending its ABL revolving credit facility to $525.0 million (maturing March 2028)[353] - Approximately 40% of cash was held outside the United States as of December 31, 2023, with an indefinite reinvestment assertion for most jurisdictions[354] Significant Cash Obligations as of December 31, 2023 (in millions) | | Total | 2024 | 2025 - 2026 | 2027 - 2028 | Thereafter | | :------------------------------------------ | :------ | :----- | :---------- | :---------- | :--------- | | Long-term debt | $1,566.8 | $20.8 | $295.0 | $29.3 | $1,221.7 | | Interest payments relating to long-term debt | $756.7 | $124.4 | $240.0 | $225.3 | $167.0 | | Finance leases, including imputed interest | $821.8 | $14.9 | $34.5 | $32.7 | $739.7 | | Operating leases, including imputed interest | $2,456.4 | $155.6 | $319.0 | $304.3 | $1,677.5 | | DLF obligations | $4,389.8 | $72.9 | $164.9 | $173.2 | $3,978.8 | | Minimum lease payments for leases signed but not yet commenced | $364.9 | $4.2 | $19.6 | $19.6 | $321.5 | | Capital commitments | $107.0 | $58.0 | $49.0 | — | — | | Unconditional purchase obligations | $176.8 | $52.5 | $63.0 | $29.8 | $31.5 | | Uncertain tax contingencies | $13.6 | $2.9 | $1.3 | $0.6 | $8.8 | | Total | $10,653.8 | $506.2 | $1,186.3 | $814.8 | $8,146.5 | Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company uses derivative financial instruments to manage exposure to foreign currency and interest rate risks, with a hypothetical 10% interest rate increase potentially raising interest expense by $5.2 million - The company uses derivative financial instruments (foreign currency forward contracts and interest rate swap contracts) to mitigate exposure to changes in foreign currency exchange rates and interest rates[360] - At December 31, 2023, the estimated maximum loss from foreign currency forward contracts, based on a 10% unfavorable movement, was $31.6 million, expected to be partially offset by underlying hedged transactions[363] - A hypothetical 10% increase in interest rates (approximately 50 basis points) would result in an incremental interest expense of approximately $5.2 million for the 12-month period ending December 31, 2023[365] - Continued inflationary pressures on product, employee, and operating costs could adversely affect gross margins and SG&A expenses if not offset by price increases[366] Item 8. Financial Statements and Supplementary Data The Consolidated Financial Statements as of December 31, 2023 and 2022, and for the three years ended December 31, 2023, along with the independent auditor's report, are included starting on page F-1 - The Consolidated Financial Statements and the report of the independent registered public accounting firm are included in this Annual Report on Form 10-K starting on page F-1[367] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There have been no changes in or disagreements with accountants on accounting and financial disclosure - There are no changes in or disagreements with accountants on accounting and financial disclosure[368] Item 9A. Controls and Procedures As of December 31, 2023, the CEO and CFO concluded that the company's disclosure controls and internal control over financial reporting were effective, with no material changes during Q4 2023 - As of December 31, 2023, the CEO and CFO concluded that the company's disclosure controls and procedures were effective[369] - Management assessed and concluded that the company's internal control over financial reporting was effective as of December 31, 2023, based on the COSO Internal Control—Integrated Framework (2013)[370] - The effectiveness of internal control over financial reporting was audited by Deloitte & Touche LLP, who issued an unqualified opinion[371] - No changes in internal control over financial reporting materially affected or are reasonably likely to materially affect it during the quarter ended December 31, 2023[372] - Internal control over financial reporting has inherent limitations, meaning misstatements due to error or fraud may not be prevented or detected timely[373] Item 9B. Other Information No officers or directors adopted or terminated any Rule 10b5-1(c) trading arrangements during the three months ended December 31, 2023 - No officers or directors adopted or terminated any Rule 10b5-1(c) trading arrangements during the three months ended December 31, 2023[374] Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - This item is not applicable[374] PART III. This section incorporates by reference information regarding directors, executive compensation, security ownership, related transactions, and principal accountant fees from the definitive Proxy Statement Item 10. Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's definitive Proxy Statement - Information concerning executive officers is included in Part I, Item 1 of this Form 10-K[384] - Other required information for Item 10 will be included in the definitive Proxy Statement, to be filed within 120 days after December 31, 2023[384] Item 11. Executive Compensation Information on executive compensation, including employee benefit plans, is incorporated by reference from the company's definitive Proxy Statement - Information on executive compensation will be included in the definitive Proxy Statement, to be filed within 120 days after December 31, 2023[385] - Employee benefit plans and programs in which executive officers participate are set forth or incorporated by reference as Exhibits to this report[385] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters Information regarding security ownership of beneficial owners and management is incorporated by reference, with 3.7 million shares underlying outstanding options and awards as of December 31, 2023 - Information on security ownership of certain beneficial owners and management will be included in the definitive Proxy Statement, to be filed within 120 days after December 31, 2023[386] Equity Compensation Plan Information (as of December 31, 2023) | Plan Category | Number of Shares to be Issued Upon Exercise of Outstanding Options and Vesting of Restricted Stock Units and Performance Share Units (1)(2) | Weighted Average Exercise Price of Outstanding Options | Number of Shares Remaining Available for Future Issuance (3) | | :------------------------------------ | :---------------------------------------------------------------------------------------------------------------- | :------------------------------------- | :------------------------------------------------------- | | Equity Compensation Plans Approved by Shareholders | 3.4 | $28.44 | 12.0 | | Equity Compensation Plans Not Approved by Shareholders | 0.3 (4) | — | — | | Total | 3.7 | $28.44 | 12.0 | - As of December 31, 2023, 3.7 million shares were to be issued upon exercise of outstanding options and vesting of restricted stock units and performance share units, with a weighted average exercise price of $28.44[389] - 12.0 million shares remained available for future issuance under shareholder-approved equity compensation plans[389] Item 13. Certain Relationships, Related Transactions and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's definitive Proxy Statement - Information on certain relationships, related transactions, and director independence will be included in the definitive Proxy Statement, to be filed within 120 days after December 31, 2023[390] Item 14. Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's definitive Proxy Statement - Information on principal accountant fees and services will be included in the definitive Proxy Statement, to be filed within 120 days after December 31, 2023[391] PART IV. This section details the exhibits and financial statement schedules included in the report, along with a statement regarding the absence of a Form 10-K Summary Item 15. Exhibits and Financial Statement Schedules This section lists the consolidated financial statements and various exhibits, including corporate governance documents, debt agreements, and equity compensation plans - The section lists documents filed as part of the report, including consolidated financial statements and various exhibits[394][395] - Exhibits include the Third Restated Certificate of Incorporation, Amended and Restated Bylaws