11.Stock and Stock-Based Incentive Plans

 

(A)Share Repurchase Program

In fiscal 2013, our board of directors authorized the repurchase of up to $800 million of our common stock which was exhausted in fiscal 2015.  In fiscal 2015, our board of directors authorized the repurchase of up to an additional $3 billion of our common stock of which $1 billion expires on December 31, 2015, and $2 billion expires on December 31, 2016.

 

Common Stock Repurchases

 

 

(B)Stock Incentive Plans

We maintain long-term incentive plans for management, key employees and the nonemployee members of our board of directors.  The plans allow for the granting of equity-based compensation awards, including nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock awards, stock- and cash-settled restricted stock units, stock grants or a combination of awards.  To date, we have not awarded any incentive stock options.

 

The majority of associates who receive share-based compensation awards primarily receive cash-settled restricted stock units.  Senior management and other key associates receive awards of nonqualified stock options, stock-settled restricted stock units and stock-settled performance stock units.  Nonemployee directors receive awards of nonqualified stock options, stock grants and/or restricted stock awards.  Excluding stock grants, all share-based compensation awards, including any associated dividend rights, are subject to forfeiture.

 

Nonqualified Stock Options.  Nonqualified stock options are awards that allow the recipient to purchase shares of our common stock at a fixed price.  Stock options are granted at an exercise price equal to the fair market value of our common stock on the grant date.  The stock options generally vest annually in equal amounts over periods of one to four years.  These options expire no later than ten years after the date of the grant.

 

Cash-Settled Restricted Stock Units.  Also referred to as restricted stock units, or RSUs, these are restricted stock unit awards that entitle the holder to a cash payment equal to the fair market value of a share of our common stock for each unit granted.  Conversion generally occurs at the end of a three-year vesting period.  However, the cash payment per RSU will not be greater than 200% or less than 75% of the fair market value of a share of our common stock on the grant date.  RSUs are liability awards and do not have voting rights.

 

Stock-Settled Market Stock Units.  Also referred to as market stock units, or MSUs, these are restricted stock unit awards with market conditions granted to eligible key associates that are converted into between zero and two shares of common stock for each unit granted.  Conversion generally occurs at the end of a three-year vesting period.  The conversion ratio is calculated by dividing the average closing price of our stock during the final forty trading days of the three-year vesting period by our stock price on the grant date, with the resulting quotient capped at two.  This quotient is then multiplied by the number of MSUs granted to yield the number of shares awarded.  MSUs do not have voting rights.

 

Stock-Settled Performance Stock Units.  Also referred to as performance stock units, or PSUs, these are restricted stock unit awards with performance conditions granted to eligible key associates that are converted into between zero and two shares of common stock for each unit granted.  Conversion generally occurs at the end of a three-year vesting period.  The conversion ratio is based on the company reaching certain target levels set by the board of directors for cumulative three-year earnings before interest and taxes at the end of the three-year vesting period, with the resulting quotient subject to meeting a minimum 25% threshold and capped at 200%.  This quotient is then multiplied by the number of PSUs granted to yield the number of shares awarded.  PSUs do not have voting rights.

 

 

Restricted Stock Awards.  Restricted stock awards (RSAs) are awards of our common stock that are subject to specified restrictions that generally lapse after a one year period from date of grant.  Participants holding restricted stock are entitled to vote on matters submitted to holders of our common stock for a vote.  No RSAs were granted during the three months ended May 31, 2015 or 2014.  As of May 31, 2015, 22,860 shares of RSAs, which vested in June 2015, remained outstanding.  No RSAs were outstanding during the three months ended May 31, 2014.  The unrecognized compensation costs related to nonvested RSAs was minimal as of May 31, 2015.

 

(C)Share-Based Compensation

 

Composition of Share-Based Compensation Expense

 

Composition of Share-Based Compensation Expense – By Grant Type

 

We recognize compensation expense for stock options, MSUs, PSUs and RSAs on a straight-line basis (net of estimated forfeitures) over the requisite service period, which is generally the vesting period of the award.  The PSU expense is adjusted for any change in management’s assessment of the performance target level that is probable of being achieved.  The variable expense associated with RSUs is recognized over their vesting period (net of estimated forfeitures) and is calculated based on the volume-weighted average price of our common stock on the last trading day of each reporting period.  The total costs for matching contributions for our employee stock purchase plan are included in share-based compensation expense.  There were no capitalized share-based compensation costs as of or for the three months ended May 31, 2015 or 2014.  

Stock Option Activity

 

During the three months ended May 31, 2015 and 2014, we granted nonqualified options to purchase 1,374,013 and 2,003,238 shares of common stock, respectively.  The total cash received as a result of stock option exercises for the three months ended May 31, 2015 and 2014, was $34.3 million and $6.8 million, respectively.  We settle stock option exercises with authorized but unissued shares of our common stock.  The total intrinsic value of options exercised for the three months ended May 31, 2015 and 2014, was $53.0 million and $10.6 million, respectively.  We realized related tax benefits of $21.2 million and $4.2 million during the three months ended May 31, 2015 and 2014, respectively.

 

Outstanding Stock Options

 

For stock options, the fair value of each award is estimated as of the date of grant using a binomial valuation model.  In computing the value of the option, the binomial model considers characteristics of fair-value option pricing that are not available for consideration under a closed-form valuation model (for example, the Black-Scholes model), such as the contractual term of the option, the probability that the option will be exercised prior to the end of its contractual life and the probability of termination or retirement of the option holder.  For this reason, we believe that the binomial model provides a fair value that is more representative of actual experience and future expected experience than the value calculated using a closed-form model.  Estimates of fair value are not intended to predict actual future events or the value ultimately realized by the recipients of share-based awards.

 

The weighted average fair value per share at the date of grant for options granted during the three months ended May 31, 2015 and 2014, was $20.61 and $13.21, respectively.  The unrecognized compensation costs related to nonvested options totaled $50.6 million as of May 31, 2015.  These costs are expected to be recognized on a straight-line basis over a weighted average period of 2.7 years.

 

Assumptions Used to Estimate Option Values

 

(1)Measured using historical daily price changes of our stock for a period corresponding to the term of the options and the implied volatility derived from the market prices of traded options on our stock.

(2)Based on the U.S. Treasury yield curve at the time of grant.

(3)Represents the estimated number of years that options will be outstanding prior to exercise.

 

Cash-Settled Restricted Stock Unit Activity

 

During the three months ended May 31, 2015 and 2014, we granted 418,070 and 587,186 RSUs, respectively.  The initial fair market value per RSU at the date of grant for the RSUs granted during the three months ended May 31, 2015 and 2014, was $73.76 and $44.96, respectively.  The RSUs are cash-settled upon vesting.  During the three months ended May 31, 2015, we paid $32.6 million (before payroll tax withholdings) to RSU holders upon the vesting of RSUs, and realized tax benefits of $13.1 million.

 

Expected Cash Settlement Range Upon Restricted Stock Unit Vesting

 

(1)Net of estimated forfeitures.

Stock-Settled Market Stock Unit Activity

 

During the three months ended May 31, 2015 and 2014, we granted 105,529 and 245,190 MSUs, respectively.  The weighted average fair value per MSU at the date of grant during the three months ended May 31, 2015 and 2014, was $90.46 and $55.37, respectively.  The fair values were determined using a Monte-Carlo simulation and were based on the expected market price of our common stock on the vesting date and the expected number of converted common shares.  We realized related tax benefits of $16.3 million for the three months ended May 31, 2015, from the vesting of market stock units.  The unrecognized compensation costs related to nonvested MSUs totaled $19.2 million as of May 31, 2015.  These costs are expected to be recognized on a straight-line basis over a weighted average period of 1.6 years.

 

Stock-Settled Performance Stock Unit Activity

 

 

 

 

During the three months ended May 31, 2015, we granted 66,446 PSUs.  No PSUs were granted in fiscal 2015.  The weighted average fair value per PSU at the date of grant for PSUs granted during the three months ended May 31, 2015, was $72.58.  The fair value was the fair market value of a share of common stock on the date of the grant.  The unrecognized compensation costs related to nonvested PSUs totaled $3.9 million as of May 31, 2015.  These costs are expected to be recognized on a straight-line basis over a weighted average period of 2.9 years.