Share-Based Employee Compensation

3 Months Ended

Mar. 31, 2021

Share-based Payment Arrangement [Abstract]

Note 15. Share-Based Employee Compensation

As of March 31, 2021, the Company had three shareholder approved stock plans under which shares were available for equity-based awards: the Callaway Golf Company Amended and Restated 2004 Incentive Plan, the 2013 Non-Employee Directors Stock Incentive Plan and the 2021 Employment Inducement Plan. The Company grants stock options, restricted stock units, performance share units, phantom stock units, stock appreciation rights and other awards under these plans.

The Company accounts for its share-based compensation arrangements in accordance with ASC Topic 718, which requires the measurement and recognition of compensation expense for all share-based payment awards to employees and directors based on estimated fair values, and ASU No. 2014-12 for stock awards that are subject to performance measures. ASC Topic 718 further requires a reduction in share-based compensation expense by an estimated forfeiture rate. The forfeiture rate used by the Company is based on historical forfeiture trends. If actual forfeiture rates are not consistent with the Company’s estimates, the Company may be required to increase or decrease compensation expenses in future periods.

In connection with the merger with Topgolf, on March 8, 2021, the Company granted restricted stock units and performance share units to certain employees of the Company and Topgolf under the 2021 Employment Inducement Plan that was adopted by the Company as of the merger date. This inducement plan has substantially the same terms as the Company’s other stock plans.

Replacement Awards

In connection with the merger with Topgolf, the Company converted certain stock options previously held by former equity holders of Topgolf into options to purchase a number of shares of Callaway common stock, and certain outstanding

restricted stock awards of Topgolf, to the extent unvested, into shares of Callaway common stock (together, the "replacement awards"). On March 8, 2021, the Company converted approximately 3,168,000 shares underlying stock options with a fair value of $5,343,000, and approximately 188,000 restricted stock awards with a fair value of $4,794,000. The Company's stock price on the conversion date was $29.52. The Company used the Black-Scholes option-pricing model to determine the fair value of the stock options. The average fair value assumptions used in the Black-Scholes model on March 8, 2021 were a risk-free interest rate of 0.6%, an expected term of 3.7 years and an expected stock price volatility of 55.1%.

Compensation expense will be recognized over the remaining vesting terms of each award ranging between 1 to 3 years. During the three months ended March 31, 2021, the Company recognized $406,000 in compensation expense related to these awards, net of estimated forfeitures. At March 31, 2021, unamortized compensation expense related to stock options and restricted stock awards was $5,122,000 and $4,608,000, respectively, each of which will recognized over a weighted average period of 1.9 years.

Restricted Stock Units

Restricted stock units are valued at the Company’s closing stock price on the date of grant, and generally vest over a one- to five-year period. Compensation expense for restricted stock units is recognized on a straight-line basis over the vesting period and is reduced by an estimate for forfeitures.

During the three months ended March 31, 2021 and 2020, the Company granted 987,000 shares underlying restricted stock units, including inducement awards of 774,000, and 268,000 shares underlying restricted stock units, respectively, at a weighted average grant-date fair value of $29.61 and $19.67 per share, respectively.

The Company recognized $2,175,000 and $1,615,000, in compensation expense, net of estimated forfeitures, related to restricted stock units for the three months ended March 31, 2021 and 2020, respectively. At March 31, 2021, the Company had $46,360,000 of total unamortized compensation expense related to non-vested restricted stock units. That cost is expected to be recognized over a weighted-average period of 2.4 years.

Performance Based Awards

Performance based awards are stock-based awards in which the number of shares ultimately received depends on the Company's performance against specified metrics, including earnings before interest, taxes, depreciation, amortization and stock compensation, earnings per share, adjusted pre-tax income and total shareholder return. The performance period ranges over one- to five years from the date of grant. Performance share units are initially valued at the Company's closing stock price on the date of grant. Stock compensation expense, net of estimated forfeitures, is recognized on a straight-line basis over the vesting period. The expense recognized over the vesting period is adjusted up or down based on the anticipated performance level during the performance period. If the performance metrics are not probable of achievement during the performance period, compensation expense would be reversed. The awards are forfeited if the threshold performance metrics are not achieved as of the end of the performance period. The performance share units cliff-vest in full over a period of three to five years from the date of grant.

During the three months ended March 31, 2021, the Company granted 1,346,000 shares underlying performance share units, including inducement awards of 1,149,000, at a weighted average grant-date fair value of $29.58. During the three months ended March 31, 2020, the Company granted 125,000 shares underlying performance share units at a weighted average grant-date fair value of $19.66.

During the three months ended March 31, 2021 and 2020, the Company recognized total compensation expense, for performance-based awards of $2,028,000 and $245,000, respectively, net of estimated forfeitures. At March 31, 2021, unamortized compensation expense related to these awards was $65,237,000, which is expected to be recognized over a weighted-average period of 2.7 years.

Share-Based Compensation Expense

The table below summarizes the amounts recognized in the financial statements for the three months ended March 31, 2021 and 2020 for share-based compensation, including expense for restricted stock units, performance share units, restricted stock awards and stock options (in thousands).


	Three Months Ended March 31,
		2021		2020

Cost of products		$	226	$	156
Selling, general and administrative expenses		4,210		1,587
Research and development expenses		176		118
Total cost of share-based compensation included in income, before income tax		4,612		1,861
Income tax benefit		1,106		428
Total cost of employee share-based compensation, after tax		$	3,506	$	1,433