Callaway 2013 Annual Report Download - page 42

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28
Share-based Compensation
The Company accounts for share-based compensation arrangements in accordance with ASC Topic 718, “Stock
Compensation,” which requires the measurement and recognition of compensation expense for all share-based payment
awards to employees and non-employees based on estimated fair values. 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 forfeitures are not consistent with the Company’s estimates, the Company may be
required to increase or decrease compensation expenses in future periods.
The Company uses the Black-Scholes option valuation model to estimate the fair value of its stock options and
stock appreciation rights (“SARs”) at the date of grant. The Black-Scholes option valuation model requires the input of
highly subjective assumptions including the Company’s expected stock price volatility, the expected dividend yield, the
expected term of an option or SAR and the risk-free interest rate, which is based on the U.S. Treasury yield curve in effect
at the time of grant. The Company uses historical data to estimate the expected price volatility and the expected term.
The Company uses forecasted dividends to estimate the expected dividend yield. Changes in subjective input assumptions
can materially affect the fair value estimates of an option or SAR. Furthermore, the estimated fair value of an option or
SAR does not necessarily represent the value that will ultimately be realized by an employee. Compensation expense is
recognized on a straight-line basis over the vesting period for stock options. Compensation expense for SARs is recognized
on a straight-line basis over the vesting period based on an award’s estimated fair value, which is remeasured at the end
of each reporting period. Once vested, SARs continued to be remeasured to fair value until they are exercised.
The Company records compensation expense for restricted stock awards and restricted stock units (collectively
“restricted stock”) based on the estimated fair value of the award on the date of grant. The estimated fair value is determined
based on the closing price of the Company’s common stock on the date of grant multiplied by the number of shares
awarded. Compensation expense is recognized on a straight-line basis over the vesting period, reduced by an estimated
forfeiture rate.
Phantom stock units (“PSUs”) are a form of share-based awards that are indexed to the Company’s stock and are
settled in cash. Compensation expense for PSUs is recognized on a straight-line basis over the vesting period based on
the award’s estimated fair value. Fair value is remeasured at the end of each interim reporting period through the award’s
settlement date and is based on the closing price of the Company’s stock.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is contained in Note 2 “Significant Accounting
Policies” to the Notes to Consolidated Financial Statements, which is incorporated herein by this reference.
Results of Operations
Overview of Business, Seasonality and Foreign Currency
The Company designs, manufactures and sells high quality golf clubs and golf balls, and also sells golf accessories,
such as golf apparel and footwear, golf bags, golf gloves, travel gear, headwear and other golf-related accessories. In
addition, the Company licenses its trademarks and service marks in exchange for a royalty fee to third parties for use on
golf related accessories, including golf apparel and footwear, golf gloves, umbrellas, prescription eyewear, and practice
aids. The Company designs its products to be technologically advanced and in this regard invests a considerable amount
in research and development each year. The Company’s golf products are designed for golfers of all skill levels, both
amateur and professional.
The Company has two operating segments that are organized on the basis of products, namely the golf clubs segment
and golf balls segment. The golf clubs segment consists primarily of Callaway Golf woods, hybrids, irons and wedges,
and Odyssey putters. This segment also includes other golf-related accessories described above and royalties from licensing
of the Company’s trademarks and service marks as well as sales of pre-owned golf clubs. The golf balls segment consists
of Callaway Golf and Strata golf balls. The Company sold the Top-Flite and Ben Hogan brands in March 2012 (see Note
8 “Goodwill and Intangible Assets” to the Notes to Consolidated Financial Statements). As discussed in Note 19 “Segment
Information” to the Notes to Consolidated Financial Statements, the Company’s operating segments exclude a significant
amount of corporate general administrative expenses and other income (expense) not utilized by management in
determining segment profitability.