Share-Based Compensation
We provide share-based compensation to our employees, officers and non-employee directors, including stock options, an employee stock purchase plan, restricted stock units (“RSUs”) and performance-based restricted stock units (“PeRSUs”) (collectively, “share-based awards”). Most of our share-based awards are granted in the first quarter of each fiscal year.
Compensation expense for the share-based awards is recognized for the portion of awards ultimately expected to vest. We estimate the number of share-based awards, which will ultimately vest primarily based on historical experience. The estimated forfeiture rate established upon grant is re-assessed throughout the requisite service period and is adjusted when actual forfeitures occur. The actual forfeitures in future reporting periods could be higher or lower than current estimates.
The compensation expense recognized has been classified in the consolidated statements of operations or capitalized in the consolidated balance sheets in the same manner as cash compensation paid to our employees. There was no material share-based compensation expense capitalized as part of the cost of an asset in 2013, 2012 and 2011.
Impact on Net Income
The components of share-based compensation expense and related tax benefits are as follows:
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| | | | | | | | | | | |
| Years Ended March 31, |
(In millions) | 2013 | | 2012 | | 2011 |
RSUs (1) | $ | 109 |
| | $ | 97 |
| | $ | 79 |
|
PeRSUs (2) | 23 |
| | 24 |
| | 27 |
|
Stock options | 24 |
| | 23 |
| | 22 |
|
Employee stock purchase plan | 11 |
| | 10 |
| | 9 |
|
Share-based compensation expense | 167 |
| | 154 |
| | 137 |
|
Tax benefit for share-based compensation expense (3) | (59 | ) | | (55 | ) | | (48 | ) |
Share-based compensation expense, net of tax | $ | 108 |
| | $ | 99 |
| | $ | 89 |
|
| |
(1) | This expense was primarily the result of PeRSUs awarded in prior years, which converted to RSUs due to the attainment of goals during the applicable years' performance period. |
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(2) | Represents estimated compensation expense for PeRSUs that are conditional upon attaining performance objectives during the current year's performance period. |
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(3) | Income tax benefit is computed using the tax rates of applicable tax jurisdictions. Additionally, a portion of pre-tax compensation expense is not tax-deductible. |
Stock Plans
The 2005 Stock Plan provides our employees, officers and non-employee directors share-based long-term incentives. The 2005 Stock Plan permits the granting of up to 42.5 million shares in the form of stock options, restricted stock, RSUs, PeRSUs and other share-based awards. As of March 31, 2013, 5.8 million shares remain available for future grant under the 2005 Stock Plan.
Stock Options
Stock options are granted at no less than fair market value, and those options granted under the 2005 Stock Plan generally have a contractual term of seven years and follow a four-year vesting schedule.
Compensation expense for stock options is recognized on a straight-line basis over the requisite service period and is based on the grant-date fair value for the portion of the awards that is ultimately expected to vest. We use the Black-Scholes options-pricing model to estimate the fair value of our stock options. Once the fair value of an employee stock option is determined, current accounting practices do not permit it to be changed, even if the estimates used are different from actual. The options-pricing model requires the use of various estimates and assumptions as follows:
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• | Expected stock price volatility is based on a combination of historical volatility of our common stock and implied market volatility. We believe that this market-based input provides a reasonable estimate of our future stock price movements and is consistent with employee stock option valuation considerations. |
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• | Expected dividend yield is based on historical experience and investors' current expectations. |
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• | The risk-free interest rate for periods within the expected life of the option is based on the constant maturity U.S. Treasury rate in effect at the time of grant. |
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• | Expected life of the options is based primarily on historical employee stock option exercises and other behavior data and reflects the impact of changes in contractual life of current option grants compared to our historical grants. |
Weighted-average assumptions used to estimate the fair value of employee stock options were as follows:
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| | | | | |
| Years Ended March 31, |
| 2013 | | 2012 | | 2011 |
Expected stock price volatility | 27% | | 27% | | 29% |
Expected dividend yield | 0.9% | | 1.0% | | 1.1% |
Risk-free interest rate | 0.8% | | 2.1% | | 2.6% |
Expected life (in years) | 5 | | 5 | | 5 |
The following is a summary of stock options outstanding at March 31, 2013:
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| | | | | | | | | | | | | | | | | | | | |
| | Options Outstanding | | Options Exercisable |
Range of Exercise Prices | | Number of Options Outstanding at Year End (In millions) | | Weighted-Average Remaining Contractual Life (Years) | | Weighted- Average Exercise Price | | Number of Options Exercisable at Year End (In millions) | | Weighted- Average Exercise Price |
$ | 29.01 |
| – | $ | 47.28 |
| | 2 | | 3 | | $ | 39.95 |
| | 1 | | $ | 39.67 |
|
47.29 |
| – | 65.59 |
| | 1 | | 2 | | 58.64 |
| | 1 | | 58.64 |
|
65.60 |
| – | 83.90 |
| | 3 | | 5 | | 75.13 |
| | 1 | | 72.79 |
|
83.91 |
| – | 102.21 |
| | 1 | | 6 | | 87.67 |
| | — | | 84.41 |
|
| | | | 7 | | | | | | 3 | | |
The following table summarizes stock option activity during 2013, 2012 and 2011:
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(In millions, except per share data) | Shares | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value (2) |
Outstanding, March 31, 2010 | 16 | | $ | 41.26 |
| | 3 | | $ | 394 |
|
Granted | 1 | | 67.95 |
| | | | |
Exercised | (8) | | 37.63 |
| | | | |
Outstanding, March 31, 2011 | 9 | | $ | 49.01 |
| | 4 | | $ | 269 |
|
Granted | 1 | | 83.30 |
| | | | |
Exercised | (2) | | 42.20 |
| | | | |
Outstanding, March 31, 2012 | 8 | | $ | 56.88 |
| | 4 | | $ | 226 |
|
Granted | 1 | | 87.66 |
| | | | |
Exercised | (2) | | 47.63 |
| | | | |
Outstanding, March 31, 2013 | 7 | | $ | 65.79 |
| | 4 | | $ | 260 |
|
| | | | | | | |
Vested and expected to vest (1) | 6 | | $ | 65.37 |
| | 4 | | $ | 259 |
|
Vested and exercisable, March 31, 2013 | 3 | | 56.19 |
| | 3 | | 154 |
|
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(1) | The number of options expected to vest takes into account an estimate of expected forfeitures. |
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(2) | The intrinsic value is calculated as the difference between the period-end market price of the Company's common stock and the exercise price of “in-the-money” options. |
The following table provides data related to stock option activity:
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| | | | | | | | | | | |
| Years Ended March 31, |
(In millions, except per share data) | 2013 | | 2012 | | 2011 |
Weighted-average grant date fair value per stock option | $ | 19.63 |
| | $ | 20.32 |
| | $ | 18.37 |
|
Aggregate intrinsic value on exercise | $ | 107 |
| | $ | 108 |
| | $ | 276 |
|
Cash received upon exercise | $ | 106 |
| | $ | 113 |
| | $ | 319 |
|
Tax benefits realized related to exercise | $ | 41 |
| | $ | 40 |
| | $ | 106 |
|
Total fair value of stock options vested | $ | 24 |
| | $ | 23 |
| | $ | 21 |
|
Total compensation cost, net of estimated forfeitures, related to unvested stock options not yet recognized, pre-tax | $ | 37 |
| | $ | 40 |
| | $ | 41 |
|
Weighted-average period in years over which stock option compensation cost is expected to be recognized | 1 |
| | 1 |
| | 1 |
|
RSUs and PeRSUs
RSUs, which entitle the holder to receive at the end of a vesting term a specified number of shares of the Company's common stock, are accounted for at fair value at the date of grant. Total compensation expense for RSUs under our stock plans is determined by the product of the number of shares that are expected to vest and the grant date market price of the Company's common stock. The Compensation Committee determines the vesting terms at the time of grant. These awards generally vest in three to four years. We recognize expense for RSUs on a straight-line basis over the requisite service period.
Non-employee directors receive an annual grant of RSUs, which vest immediately and are expensed upon grant. The director may choose to receive payment immediately or defer receipt of the underlying shares if they meet director stock ownership guidelines. At March 31, 2013, 140,000 RSUs for our directors are vested, but shares have not been issued.
PeRSUs are RSUs for which the number of RSUs awarded may be conditional upon the attainment of one or more performance objectives over a specified period. PeRSUs are accounted for as variable awards until the performance goals are reached and the grant date is established. Total compensation expense for PeRSUs is determined by the product of the number of shares eligible to be awarded and expected to vest, and the market price of the Company's common stock, commencing at the inception of the requisite service period. During the performance period, the compensation expense for PeRSUs is re-computed using the market price and the performance modifier at the end of a reporting period. At the end of the performance period, if the goals are attained, the awards are granted and classified as RSUs and accounted for on that basis. We recognize compensation expense of these awards on a straight-line basis over the requisite aggregate service period of generally four years.
The following table summarizes RSU activity during 2013, 2012 and 2011:
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| | | | | |
(In millions, except per share data) | Shares | | Weighted-Average Grant Date Fair Value Per Share |
Nonvested, March 31, 2010 | 4 | | $ | 49.21 |
|
Granted | 3 | | 67.84 |
|
Vested | (1) | | 61.05 |
|
Nonvested, March 31, 2011 | 6 | | $ | 57.79 |
|
Granted | 2 | | 82.71 |
|
Vested | (1) | | 57.95 |
|
Nonvested, March 31, 2012 | 7 | | $ | 65.14 |
|
Granted | 1 | | 87.86 |
|
Vested | (2) | | 41.80 |
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Nonvested, March 31, 2013 | 6 | | $ | 76.20 |
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The following table provides data related to RSU activity:
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| | | | | | | | | | | |
| Years Ended March 31, |
(In millions) | 2013 | | 2012 | | 2011 |
Total fair value of shares vested | $ | 66 |
| | $ | 44 |
| | $ | 43 |
|
Total compensation cost, net of estimated forfeitures, related to nonvested RSU awards not yet recognized, pre-tax | $ | 128 |
| | $ | 143 |
| | $ | 131 |
|
Weighted-average period in years over which RSU cost is expected to be recognized | 2 |
| | 3 |
| | 2 |
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In May 2012, the Compensation Committee approved 1 million PeRSU target share units representing the base number of awards that could be granted, if goals are attained, and would be granted in the first quarter of 2014 (the “2013 PeRSU”). These target share units are not included in the table above as they have not been granted in the form of RSUs. As of March 31, 2013, the total pre-tax compensation expense, net of estimated forfeitures, related to nonvested 2013 PeRSUs not yet recognized was approximately $82 million, (based on the period-end market price of the Company's common stock) and the weighted-average period over which the cost is expected to be recognized is three years.
Employee Stock Purchase Plan (“ESPP”)
The Company has an ESPP under which 16 million shares have been authorized for issuance. The ESPP allows eligible employees to purchase shares of our common stock through payroll deductions. The deductions occur over three-month purchase periods and the shares are then purchased at 85% of the market price at the end of each purchase period. Employees are allowed to terminate their participation in the ESPP at any time during the purchase period prior to the purchase of the shares. The 15% discount provided to employees on these shares is included in compensation expense. The shares related to funds outstanding at the end of a quarter are included in the calculation of diluted weighted average shares outstanding. These amounts have not been significant. In 2013, 2012 and 2011, 1 million shares were issued under the ESPP and 1 million shares remain available for issuance at March 31, 2013.
