14. EMPLOYEE BENEFIT PLANS
Stock-based Compensation Plans
Stock Option Plans
In fiscal 2001, we adopted the 2000 Long-Term Equity Incentive Plan, which provides for the issuance of non-qualified stock options and incentive stock options, as well as stock purchase rights, stock appreciation rights and long-term performance awards to our eligible employees, officers and directors who are also employees or consultants, independent consultants and advisers. In fiscal 2011, our stockholders, upon the recommendation of our Board of Directors, approved the adoption of the Amended and Restated 2000 Long-Term Equity Incentive Plan (the 2000 Plan), which extended the termination date of the 2000 Plan by ten years and increased the number of authorized shares of stock that may be issued by 388,313,015 shares. Under the terms of the 2000 Plan, options to purchase common stock are granted at not less than fair market value, become exercisable as established by the Board (generally 25% annually over four years under our current practice) and generally expire no more than ten years from the date of grant. As of May 31, 2013, options to purchase 426 million shares of common stock were outstanding under the 2000 Plan, of which 180 million were vested. As of May 31, 2013, approximately 296 million shares of common stock were available for future awards under the 2000 Plan. To date, we have not issued any stock purchase rights, stock appreciation rights, restricted stock-based awards or long-term performance awards under the 2000 Plan.
In fiscal 1993, the Board adopted the 1993 Directors’ Stock Option Plan (the Directors’ Plan), which provides for the issuance of non-qualified stock options to non-employee directors. The Directors’ Plan has from time to time been amended and restated. Under the terms of the Directors’ Plan, options to purchase 10 million shares of common stock were reserved for issuance (including a fiscal 2013 amendment to increase the number of shares of our common stock reserved for issuance by 2 million shares), options are granted at not less than fair market value, become exercisable over four years and expire no more than ten years from the date of grant. The Directors’ Plan provides for automatic grants of options to each non-employee director upon first becoming a director and thereafter on an annual basis, as well as automatic nondiscretionary grants for chairing certain Board committees. The Board will determine the particular terms of any such stock awards at the time of grant, but the terms will be consistent with those of options granted under the Directors’ Plan with respect to vesting or forfeiture schedules and treatment on termination of status as a director. As of May 31, 2013, options to purchase approximately 3 million shares of common stock were outstanding under the 1993 Directors’ Plan, of which approximately 2 million were vested. As of May 31, 2013, approximately 2 million shares were available for future option awards under this plan.
In connection with certain of our acquisitions, we assumed certain outstanding stock options and other restricted stock-based awards of each acquiree’s respective stock plans. These stock options and other restricted stock-based awards generally retain all of the rights, terms and conditions of the respective plans under which they were originally granted. As of May 31, 2013, stock options to purchase 18 million shares of common stock and 1 million shares of restricted stock-based awards were outstanding under these plans.
The following table summarizes stock option activity for our last three fiscal years ended May 31, 2013:
|
| Options Outstanding | |||
(in millions, except exercise price) |
| Shares Under Option |
| Weighted Average Exercise Price | |
Balance, May 31, 2010 |
| 352 |
| $ | 18.84 |
Granted |
| 110 |
| $ | 22.58 |
Assumed |
| 1 |
| $ | 16.38 |
Exercised |
| (78) |
| $ | 16.73 |
Canceled |
| (31) |
| $ | 29.17 |
Balance, May 31, 2011 |
| 354 |
| $ | 19.53 |
Granted |
| 112 |
| $ | 32.05 |
Assumed |
| 8 |
| $ | 12.17 |
Exercised |
| (39) |
| $ | 16.61 |
Canceled |
| (13) |
| $ | 29.31 |
Balance, May 31, 2012 |
| 422 |
| $ | 22.66 |
Granted |
| 119 |
| $ | 29.90 |
Assumed |
| 9 |
| $ | 32.52 |
Exercised |
| (83) |
| $ | 17.38 |
Canceled |
| (20) |
| $ | 28.94 |
Balance, May 31, 2013 |
| 447 |
| $ | 25.48 |
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Options outstanding that have vested and that are expected to vest as of May 31, 2013 were as follows:
|
| Outstanding Options |
| Weighted Average Exercise Price |
| Weighted Average Remaining Contract Term |
| In-the-Money Options as of May 31, 2013 |
| Aggregate Intrinsic Value(1) | ||
Vested |
| 193 |
| $ | 21.17 |
| 5.15 |
| 189 |
| $ | 2,491 |
Expected to vest(2) |
| 228 |
| $ | 28.60 |
| 8.20 |
| 224 |
|
| 1,215 |
Total |
| 421 |
| $ | 25.20 |
| 6.80 |
| 413 |
| $ | 3,706 |
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__________
(1) | The aggregate intrinsic value was calculated based on the gross difference between our closing stock price on the last trading day of fiscal 2013 of $33.78 and the exercise prices for all “in-the-money” options outstanding, excluding tax effects. |
(2) | The unrecognized compensation expense calculated under the fair value method for shares expected to vest (unvested shares net of expected forfeitures) as of May 31, 2013 was approximately $1.2 billion and is expected to be recognized over a weighted average period of 2.57 years. Approximately 26 million shares outstanding as of May 31, 2013 were not expected to vest. |
Stock-Based Compensation Expense and Valuation of Stock Options
Stock-based compensation is included in the following operating expense line items in our consolidated statements of operations:
|
| Year Ended May 31, | |||||||
(in millions) |
| 2013 |
| 2012 |
| 2011 | |||
Sales and marketing |
| $ | 147 |
| $ | 122 |
| $ | 87 |
Software license updates and product support |
|
| 20 |
|
| 18 |
|
| 14 |
Hardware systems products |
|
| 3 |
|
| 1 |
|
| 2 |
Hardware systems support |
|
| 5 |
|
| 5 |
|
| 5 |
Services |
|
| 31 |
|
| 23 |
|
| 16 |
Research and development |
|
| 352 |
|
| 295 |
|
| 231 |
General and administrative |
|
| 164 |
|
| 162 |
|
| 145 |
Acquisition related and other |
|
| 33 |
|
| 33 |
|
| 10 |
Total stock-based compensation |
|
| 755 |
|
| 659 |
|
| 510 |
Estimated income tax benefit included in provision for income taxes |
|
| (243) |
|
| (216) |
|
| (170) |
Total stock-based compensation, net of estimated income tax benefit |
| $ | 512 |
| $ | 443 |
| $ | 340 |
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We estimate the fair values of our share-based payments using the Black-Scholes-Merton option-pricing model, which was developed for use in estimating the fair values of stock options. Option valuation models, including the Black-Scholes-Merton option-pricing model, require the input of assumptions, including stock price volatility. Changes in the input assumptions can materially affect the fair value estimates and ultimately how much we recognize as stock-based compensation expense. The fair values of our stock options were estimated at the grant dates or at the acquisition dates for options assumed in a business combination. The weighted average input assumptions used and resulting fair values of our stock options were as follows for fiscal 2013, 2012 and 2011:
|
| Year Ended May 31, | |||||||
|
| 2013 |
| 2012 |
| 2011 | |||
Expected life (in years) |
|
| 5.0 |
|
| 5.1 |
|
| 5.1 |
Risk-free interest rate |
|
| 0.7% |
|
| 1.6% |
|
| 1.8% |
Volatility |
|
| 31% |
|
| 30% |
|
| 33% |
Dividend yield |
|
| 0.8% |
|
| 0.8% |
|
| 0.9% |
Weighted-average fair value per share |
| $ | 7.99 |
| $ | 9.30 |
| $ | 6.61 |
The expected life input is based on historical exercise patterns and post-vesting termination behavior, the risk-free interest rate input is based on U.S. Treasury instruments, the annualized dividend yield input is based on the per share dividend declared by our Board of Directors and the volatility input is calculated based on the implied volatility of our publicly traded options.
Tax Benefits from Exercise of Stock Options and Vesting of Restricted Stock-Based Awards
Total cash received as a result of option exercises was approximately $1.4 billion, $622 million and $1.3 billion for fiscal 2013, 2012 and 2011, respectively. The aggregate intrinsic value of options exercised and vesting of restricted stock-based awards was $1.3 billion, $587 million and $1.1 billion for fiscal 2013, 2012 and 2011, respectively. In connection with these exercises and vesting of restricted stock-based awards, the tax benefits realized by us were $410 million, $182 million and $325 million for fiscal 2013, 2012 and 2011, respectively. Of the total tax benefits received, we classified excess tax benefits from stock-based compensation of $241 million, $97 million and $215 million as cash flows from financing activities rather than cash flows from operating activities for fiscal 2013, 2012 and 2011, respectively.
Employee Stock Purchase Plan
We have an Employee Stock Purchase Plan (Purchase Plan) that allows employees to purchase shares of common stock at a price per share that is 95% of the fair market value of Oracle stock as of the end of the semi-annual option period. As of May 31, 2013, 64 million shares were reserved for future issuances under the Purchase Plan. We issued 3 million shares under the Purchase Plan in fiscal 2013 and 4 million shares in each of fiscal 2012 and 2011.
Defined Contribution and Other Postretirement Plans
We offer various defined contribution plans for our U.S. and non-U.S. employees. Total defined contribution plan expense was $353 million, $344 million and $312 million for fiscal 2013, 2012 and 2011, respectively. The number of plan participants in our benefit plans has generally increased in recent years primarily as a result of additional eligible employees from our acquisitions.
In the United States, regular employees can participate in the Oracle Corporation 401(k) Savings and Investment Plan (Oracle 401(k) Plan). Participants can generally contribute up to 40% of their eligible compensation on a per-pay-period basis as defined by the Oracle 401(k) Plan document or by the section 402(g) limit as defined by the United States Internal Revenue Service (IRS). We match a portion of employee contributions, currently 50% up to 6% of compensation each pay period, subject to maximum aggregate matching amounts. Our contributions to the Oracle 401(k) Plan, net of forfeitures, were $129 million, $125 million and $119 million in fiscal 2013, 2012 and 2011, respectively.
We also offer non-qualified deferred compensation plans to certain key employees whereby they may defer a portion of their annual base and/or variable compensation until retirement or a date specified by the employee in accordance with the plans. Deferred compensation plan assets and liabilities were each approximately $320 million as of May 31, 2013 and were each approximately $264 million as of May 31, 2012 and were presented in other assets and other non-current liabilities in the accompanying consolidated balance sheets.
We sponsor certain defined benefit pension plans that are offered primarily by certain of our foreign subsidiaries. Many of these plans were assumed through our acquisitions or are required by local regulatory requirements. We may deposit funds for these plans with insurance companies, third party trustees, or into government-managed accounts consistent with local regulatory requirements, as applicable. Our total defined benefit plan pension expenses were $81 million, $55 million and $76 million for fiscal 2013, 2012 and 2011, respectively. The aggregate projected benefit obligation and aggregate net liability (funded status) of our defined benefit plans as of May 31, 2013 was $734 million and $364 million, respectively, and as of May 31, 2012 was $691 million and $297 million, respectively.