Share-Based Employee Compensation

9 Months Ended

Sep. 30, 2021

Share-based Payment Arrangement [Abstract]

Note 15. Share-Based Employee Compensation

As of September 30, 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, which was adopted in connection with the merger with Topgolf on March 8, 2021. This inducement plan has substantially the same terms as the Company's other stock plans. In general, the Company grants stock options, restricted stock units, performance based awards, phantom stock units and other awards under these plans.

The Company accounts for its share-based compensation arrangements in accordance with ASC Topic 718 and ASU No. 2014-12, which requires the measurement and recognition of compensation expense, net of an estimated forfeiture rate, for all share-based payment awards to employees and directors.

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 into shares of Callaway common stock (together, the "replacement awards"). The Company included $33,051,000 in the consideration transferred in the merger for these replacement awards, which represents the fair value of the vested portion the replacement awards. The unvested portion of these replacement awards, which is associated with the future services that will be rendered in the post-combination period, is comprised of 3,168,000 shares underlying stock options with an acquisition date fair value of $5,343,000, and 188,000 shares of restricted stock awards with an acquisition date fair value of $4,794,000.

The fair value of the stock options was based on the Black-Scholes option-pricing model. The model uses various assumptions including a risk-free interest rate, an expected term, stock price volatility and a dividend yield. The table below summarizes the range and the weighted averages of the fair value assumptions used in the valuation as of March 8, 2021.


Assumptions:	Range	Weighted Averages
Expected term (in years)	0.3 - 7.1	3.7
Volatility	43.0% - 85.4%	55.1%
Risk free interest rate	0.1% -1.3%	0.6%
Dividend yield	—	—

During the three and nine months ended September 30, 2021, the Company recognized compensation expense of $1,525,000 and $3,503,000, respectively, related to these awards, net of estimated forfeitures. At September 30, 2021, unamortized compensation expense related to stock options and restricted stock awards was $2,857,000 and $2,831,000, respectively, which will be recognized over a weighted average vesting period of 1.3 years and 1.4 years, respectively.

Restricted Stock Units

Restricted stock units are valued at the Company’s closing stock price on the date of grant, and generally vest over one to five years. 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 September 30, 2021, the Company granted 40,000 shares underlying restricted stock units at a weighted average grant-date fair value of $29.67 per share. There were no restricted stock units granted for the three months ended September 30, 2020. During the nine months ended September 30, 2021, the Company granted 1,149,000 shares underlying restricted stock units, including 612,000 shares in connection with the merger with Topgolf, at a weighted average grant-date fair value of $29.62. During the nine months ended September 30, 2020, the Company granted 406,000 shares underlying restricted stock units at a weighted average grant-date fair value of $17.82 per share.

Compensation expense, net of estimated forfeitures, for restricted stock units was $3,840,000 and $1,907,000 for the three months ended September 30, 2021 and 2020, respectively, and $9,790,000 and $4,884,000 for the nine months ended September 30, 2021 and 2020, respectively.

At September 30, 2021, the Company had $29,298,000 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 2.1 years.

Performance Based Awards

The Company grants performance based awards in which the number of shares ultimately received depends on the Company's performance against specified metrics, including adjusted earnings before interest, taxes, depreciation, amortization, 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 based awards are initially valued at the Company's closing stock price on the date of grant, and compensation expense, net of estimated forfeitures, is recognized on a straight-line basis over the vesting period of three to five years, and is adjusted according to the level of performance expected to be achieved during the performance period. Awards that do not achieve the minimum performance threshold are forfeited at the end of the performance period.

During the nine months ended September 30, 2021, the Company granted 1,440,000 shares underlying performance based awards, including 1,063,000 shares in connection with the merger with Topgolf, at a weighted average grant-date fair value of $29.42. During the nine months ended September 30, 2020, the Company granted 250,000 shares underlying performance based awards at a weighted average grant-date fair value of $21.44. There were no performance based awards granted during three months ended September 30, 2021 and 2020.

Compensation expense, net of estimated forfeitures, for performance based awards was $6,100,000 and $1,365,000 for the three months ended September 30, 2021 and 2020, respectively, and $13,820,000 and $3,182,000 for the nine months ended September 30, 2021 and 2020, respectively.

At September 30, 2021, unamortized compensation expense related to these awards was $50,257,000, which is expected to be recognized over a weighted-average period of 2.2 years.

Share-Based Compensation Expense

The table below summarizes the amounts recognized in the financial statements for the three and nine months ended September 30, 2021 and 2020 for share-based compensation, including expense for restricted stock units, performance based awards units and stock options (in thousands).


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020

Cost of products	$	345	$	158	$	892	$	553
Selling, general and administrative expenses	10,867		2,930		25,548		7,044
Research and development expenses	263		184		683		469
Total cost of share-based compensation included in income, before income tax	11,475		3,272		27,123		8,066
Income tax benefit	2,754		785		6,510		1,936
Total cost of employee share-based compensation, after tax	$	8,721	$	2,487	$	20,613	$	6,130