Share-Based Employee Compensation

6 Months Ended

Jun. 30, 2020

Share-based Payment Arrangement [Abstract]

Note 15. Share-Based Employee Compensation

As of June 30, 2020, the Company had two shareholder approved stock plans under which shares were available for equity-based awards: the Callaway Golf Company Amended and Restated 2004 Incentive Plan (the "2004 Incentive Plan") and the 2013 Non-Employee Directors Stock Incentive Plan (the "2013 Directors Plan"). From time to time, 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.

Restricted Stock Units

Restricted stock units awarded under the 2004 Incentive Plan and the 2013 Directors Plan are valued at the Company’s closing stock price on the date of grant. Restricted stock units 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 June 30, 2020 and 2019, the Company granted 134,000 and 53,000 underlying restricted stock units, respectively, at a weighted average grant-date fair value of $14.15 and $16.73 per share, respectively. During the six months ended June 30, 2020 and 2019, the Company granted 402,000 and 452,000 shares underlying restricted stock units, respectively, at a weighted average grant-date fair value of $17.83 and $15.35 per share, respectively.

Total compensation expense, net of estimated forfeitures, recognized for restricted stock units was $1,362,000 and $1,683,000 for the three months ended June 30, 2020 and 2019, respectively, and $2,977,000 and $3,319,000, for the six months ended June 30, 2020 and 2019, respectively. At June 30, 2020, the Company had $12,349,000 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

Performance based awards are stock-based awards in which the number of shares ultimately received depends on the Company's performance against specified metrics over a one- to five-year performance period from the date of grant. These performance metrics are established by the Company at the beginning of the performance period. At the end of the performance period, the number of shares of stock that could be issued is fixed based upon the degree of achievement of the performance goals. The number of shares that could be issued can range from 0% to 200% of the participant's target award. The Company grants two types of performance based awards: performance share units and awards subject to total shareholder return metrics under the 2004 Incentive Plan.

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.

Performance share units with total shareholder return requirements are awards that compare the performance of the Company's common stock over a three-year period to that of the Company's peer group. The fair value of these awards is derived using the Monte Carlo simulation which utilizes the stock volatility, dividend yield and market correlation of the Company and the Company's peer group. The Monte Carlo fair value is expensed on a straight-line basis over the vesting

period, net of estimated forfeitures. 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 three-year vesting period.

The Company granted 125,000 and 265,000 shares underlying performance share units during the six months ended June 30, 2020 and 2019, respectively, at a weighted average grant-date fair value of $19.66 and $15.17 per share, respectively. There were no performance share units granted during three months ended June 30, 2020 and 2019. The awards granted during 2020 and 2019 are subject to a three- to five-year performance period provided that (i) if certain first year performance goals are achieved, the participant could earn up to 50% of the three-year target award shares, subject to continued service through the vesting date, and (ii) if certain cumulative first- and second-year performance goals are achieved, the participant could earn up to an aggregate of 80% of the three-year target award shares (which includes any shares earned during the first year), subject to continued service through the vesting date. Based on the Company’s performance, participants earned a minimum of 50% of the target award shares granted in 2019, and 80% of the target award shares granted in 2018, in each case subject to continued service through the vesting date.

During the six months ended June 30, 2020 and 2019, the Company granted 125,000 and 149,000 shares underlying performance share units subject to total shareholder return requirements, respectively, at a weighted average grant-date fair value of $23.22 and $16.96, respectively. There were no performance share units granted during three months ended June 30, 2020 and 2019.

During the six months ended June 30, 2020, the Company performed a remeasurement of these awards based on the Company’s most recent financial targets resulting in a reduction to expense. During the three months ended June 30, 2020 and 2019, the Company recognized total compensation expense, net of estimated forfeitures, for performance based awards of $1,572,000 and $1,847,000, respectively and, $1,817,000 and $3,646,000 for the six months ended June 30, 2020 and 2019, respectively. The decrease in expense reflects a decrease in the anticipated degree of achievement against the performance metrics established on performance-based awards as a result of the uncertain future economic impact on the Company's business due to the COVID-19 pandemic. At June 30, 2020, unamortized compensation expense related to these awards was $8,170,000, which is expected to be recognized over a weighted-average period of 1.7 years.

Share-Based Compensation Expense

The table below summarizes the amounts recognized in the financial statements for the three and six months ended June 30, 2020 and 2019 for share-based compensation, including expense for restricted stock units and performance share units (in thousands).



	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019

Cost of sales	$	239	$	247	$	395	$	502
Operating expenses	2,694		3,283		4,399		6,463
Total cost of share-based compensation included in income, before income tax	$	2,933	$	3,530	$	4,794	$	6,965