NOTE 14 — STOCK-BASED COMPENSATION AND BENEFIT PLANS
Stock-based Compensation
Description of the Plans
Employee Stock Plans — Dell is currently issuing stock awards under the Dell Inc. 2012 Long-Term Incentive Plan (the “2012 Incentive Plan”), which was approved by stockholders at the annual meeting on July 13, 2012. Previous plans, including the Amended and Restated 2002 Long-Term Incentive Plan, have been terminated, except for administration of awards previously granted under those plans that remain outstanding. In Fiscal 2013 and Fiscal 2012, in connection with Dell's business acquisitions, Dell assumed some stock incentive plans of its acquired companies. No future grants will be made under the assumed plans. The 2012 Incentive Plan, all previous plans, and the assumed plans are all collectively referred to as the “Stock Plans.” The 2012 Incentive Plan and all previous plans are collectively referred to as "Dell's Incentive Plans."
The 2012 Incentive Plan provides for the grant of stock-based incentive awards to Dell's employees and non-employee directors. Equity awards issued under the 2012 Incentive Plan can include stock options, stock appreciation rights, restricted stock units, unrestricted stock, performance based restricted stock units, or other equity awards. In connection with Dell's dividend policy, which was adopted in Fiscal 2013, all restricted stock units and performance based restricted stock units granted under Dell's Incentive Plans are entitled to dividend equivalent rights ("DERs"). DERs have the same dividend value per share as holders of common stock and are subject to the same terms and conditions as the corresponding unvested award. DERs are accumulated and paid when the underlying shares vest.
There were approximately 98 million, 342 million, and 344 million shares of Dell's common stock available for future grants under the Stock Plans as of February 1, 2013, February 3, 2012, and January 28, 2011, respectively. The above decrease is due to approval of the 2012 Incentive Plan, under which fewer shares of common stock are available for issuance. No future grants will be made under previous plans that have been terminated. To satisfy stock option exercises and vested restricted stock awards, Dell has a policy of issuing new shares rather than repurchasing shares on the open market.
Stock Option Agreements — Stock options granted under Dell's Incentive Plans typically vest pro-rata at each option anniversary date over a three to five year period. These options, which are granted with option exercise prices equal to the fair market value of Dell's common stock on the date of grant, generally expire up to ten years from the date of grant. In connection with business acquisitions, during Fiscal 2013 and Fiscal 2012, Dell converted or assumed stock options granted under the stock incentive plans of acquired companies, which are collectively referred to as the "assumed options." These assumed options vest over a period of up to six years and generally expire within ten years from the date of grant. Compensation expense for all stock options is recognized on a straight-line basis over the requisite service period.
Restricted Stock Awards — Awards of restricted stock may be either grants of restricted stock, restricted stock units, or performance-based restricted stock units that are issued at no cost to the recipient. For restricted stock units, legal ownership of the shares is not transferred to the employee until the units vest, which is generally over a three year period. The cost of these awards is determined using the fair market value of Dell's common stock on the date of the grant. Dell also grants performance-based restricted stock units as a long-term incentive in which an award recipient receives shares contingent upon Dell achieving performance objectives and the employee's continuing employment through the vesting period, which is generally over a three year period. Compensation costs recorded in connection with these performance-based restricted stock units are based on Dell's best estimate of the number of shares that will eventually be issued upon achievement of the specified performance objectives and when it becomes probable that such performance objectives will be achieved.
Compensation costs for restricted stock awards with a service condition is recognized on a straight-line basis over the requisite service period. Compensation costs for performance-based restricted stock units is recognized on an accelerated multiple-award approach based on the most probable outcome of the performance condition.
Stock Option Activity
The following table summarizes stock option activity for the Stock Plans during Fiscal 2013, Fiscal 2012, and Fiscal 2011:
|
| | | | | | | | | | | | | |
| | Number of Options | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Term | | Aggregate Intrinsic Value |
| | (in millions) | | (per share) | | (in years) | | (in millions) |
Options outstanding — January 29, 2010 | | 205 |
| | $ | 30.00 |
| | | | |
Granted (a) | | 17 |
| | 14.82 |
| | | | |
Exercised | | (1 | ) | | 9.18 |
| | | | |
Forfeited | | (2 | ) | | 13.85 |
| | | | |
Cancelled/expired | | (58 | ) | | 36.44 |
| | | | |
Options outstanding — January 28, 2011 | | 161 |
| | 26.49 |
| | | | |
Granted and assumed through acquisitions | | 28 |
| | 13.79 |
| | | | |
Exercised | | (4 | ) | | 9.38 |
| | | | |
Forfeited | | (5 | ) | | 13.35 |
| | | | |
Cancelled/expired | | (37 | ) | | 24.85 |
| | | | |
Options outstanding — February 3, 2012 | | 143 |
| | 25.37 |
| | | | |
|
Granted and assumed through acquisitions | | 23 |
| | 7.18 |
| | | | |
|
Exercised | | (6 | ) | | 9.40 |
| | | | |
|
Forfeited | | (5 | ) | | 13.63 |
| | | | |
|
Cancelled/expired | | (37 | ) | | 26.96 |
| | | | |
|
Options outstanding — February 1, 2013 (b) | | 118 |
| | 22.51 |
| | 4.7 | | $ | 175 |
|
Vested and expected to vest (net of estimated forfeitures) — February 1, 2013 (b) | | 113 |
| | $ | 23.12 |
| | 4.5 | | $ | 146 |
|
Exercisable — February 1, 2013 (b) | | 80 |
| | $ | 28.16 |
| | 3.1 | | $ | 25 |
|
____________________
| |
(a) | In Fiscal 2011, Dell did not convert or assume any options in connection with business acquisitions. |
| |
(b) | For options vested and expected to vest, options exercisable, and options outstanding, the aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between Dell's closing stock price on February 1, 2013 and the exercise price multiplied by the number of in-the-money options) that would have been received by the option holders had the holders exercised their options on February 1, 2013. The intrinsic value changes based on changes in the fair value of Dell's common stock. |
In connection with Fiscal 2013 and Fiscal 2012 acquisitions, Dell assumed approximately 21 million and 6 million stock options, respectively, with a weighted-average exercise price per share of $6.47 and $7.38, respectively.
Information about options outstanding and exercisable at February 1, 2013 is as follows:
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| | | | | | | | | | | | | | | | |
| | Options Outstanding | | Options Exercisable |
Range of Exercise Prices | | Number Outstanding | | Weighted-Average Exercise Price per Share | | Weighted-Average Remaining Contractual Life | | Number Exercisable | | Weighted-Average Exercise Price Per Share |
| | (in millions) | | | | (in years) | | (in millions) | | |
$ 0 - $9.99 | | 24 |
| | $ | 6.59 |
| | 9.6 | | 3 |
| | $ | 6.78 |
|
$10.00 - $19.99 | | 35 |
| | 15.52 |
| | 7.5 | | 18 |
| | 15.80 |
|
$20.00 - $29.99 | | 17 |
| | 25.22 |
| | 2.4 | | 17 |
| | 25.22 |
|
$30.00 - $39.99 | | 27 |
| | 34.29 |
| | 1.2 | | 27 |
| | 34.29 |
|
$40 and over | | 15 |
| | 40.22 |
| | 2.1 | | 15 |
| | 40.22 |
|
Total | | 118 |
| | $ | 22.51 |
| | 4.7 | | 80 |
| | $ | 28.16 |
|
Other information pertaining to stock options for the Stock Plans is as follows:
|
| | | | | | | | | | | | |
| | Fiscal Year Ended |
| | February 1,
2013 | | February 3,
2012 | | January 28,
2011 |
| | (in millions, except per option data) |
Total fair value of options vested | | $ | 83 |
| | $ | 56 |
| | $ | 13 |
|
Total intrinsic value of options exercised(a) | | $ | 33 |
| | $ | 27 |
| | $ | 7 |
|
____________________
| |
(a) | The total intrinsic value of options exercised represents the total pre-tax intrinsic value (the difference between the stock price at exercise and the exercise price multiplied by the number of options exercised) that was received by the option holders who exercised their options during the fiscal year. |
At February 1, 2013, February 3, 2012, and January 28, 2011, there was $83 million, $114 million, and $65 million of total unrecognized stock-based compensation expense, net of estimated forfeitures, related to unvested stock options expected to be recognized over a weighted-average period of 1.6 years, 1.9 years, and 2.0 years, respectively.
Valuation of Awards
For stock options granted under Dell's Incentive Plans, Dell typically uses the Black-Scholes option pricing model to estimate the fair value of stock options at grant date. The Black-Scholes option pricing model incorporates various assumptions, including volatility, expected term risk-free interest rates, and dividend yields. The assumptions utilized in this model as well as the weighted-average grant date fair value of stock options granted during Fiscal 2013, Fiscal 2012, and Fiscal 2011 are presented below.
|
| | | | | | | | | | | | |
| | Fiscal Year Ended |
| | February 1,
2013 | | February 3,
2012 | | January 28,
2011 |
Weighted-average grant date fair value of stock options granted per option | | $ | 4.88 |
| | $ | 5.13 |
| | $ | 5.01 |
|
Expected term (in years) | | 4.8 |
| | 4.6 |
| | 4.5 |
|
Risk-free interest rate (U.S. Government Treasury Note) | | 1.0 | % | | 1.9 | % | | 2.2 | % |
Volatility | | 37 | % | | 36 | % | | 37 | % |
Dividend Yield | | 2.7 | % | | — | % | | — | % |
Expected volatility is based on a blend of implied and historical volatility of Dell's common stock over the most recent period commensurate with the estimated expected term of Dell's stock options. Dell uses this blend of implied and historical volatility, as well as other economic data, because management believes such volatility is more representative of prospective trends. The expected term of an award is based on historical experience and on the terms and conditions of the stock awards granted to employees. During Fiscal 2013, Dell's Board of Directors adopted a dividend policy under which Dell paid quarterly cash dividends of $0.08 per share in the third and fourth quarters of Fiscal 2013. For options granted on or subsequent to Dell's initial declaration of a dividend, the Company used the above dividend yield assumptions. The expected dividend yield is based on an annualized dividend rate and uses a historical three-month average stock price.
For stock options assumed through business acquisitions, Dell uses the lattice binomial valuation model to estimate the fair value of the award. The use of the lattice binomial model requires extensive actual employee exercise behavior data for the purpose of estimating the expected term of the award. The lattice binomial valuation model includes various assumptions, including volatility, risk-free interest rate, expected term, and dividend yield. Below are the underlying assumptions used to value stock options assumed through business acquisitions in Fiscal 2013. Stock-based compensation expense recognized for stock options awards assumed in Fiscal 2012 was not material.
|
| | | | |
Fiscal Year Ended |
| | February 1, 2013 |
Weighted-average grant date fair value of stock options assumed per option | | $ | 3.09 |
|
Expected term (in years) | | 4.5 |
|
Risk-free interest rate (U.S. Government Treasury Note) | | 1.3 | % |
Volatility | | 36 | % |
Dividend Yield | | 3.2 | % |
For a limited number of performance-based restricted stock units that include a market-based condition, Dell uses the Monte Carlo simulation valuation model to estimate fair value. Stock-based compensation expense recognized for awards that include a market-based condition was not material for Fiscal 2013, Fiscal 2012, or Fiscal 2011.
Restricted Stock Awards
Non-vested restricted stock awards and activities For Fiscal 2013, Fiscal 2012, and Fiscal 2011 were as follows:
|
| | | | | | | |
| | Number of Shares | | Weighted- Average Grant Date Fair Value |
| | (in millions) | | (per share) |
Non-vested restricted stock: | | |
| | |
|
Non-vested restricted stock balance as of January 29, 2010 | | 40 |
| | $ | 16.84 |
|
Granted | | 26 |
| | 14.53 |
|
Vested(a) | | (17 | ) | | 19.10 |
|
Forfeited | | (7 | ) | | 15.21 |
|
Non-vested restricted stock balance as of January 28, 2011 | | 42 |
| | 14.71 |
|
Granted | | 22 |
| | 15.19 |
|
Vested(a) | | (18 | ) | | 16.47 |
|
Forfeited | | (4 | ) | | 14.05 |
|
Non-vested restricted stock balance as of February 3, 2012 | | 42 |
| | 14.29 |
|
Granted | | 27 |
| | 16.97 |
|
Vested(a) | | (19 | ) | | 13.39 |
|
Forfeited | | (8 | ) | | 16.71 |
|
Non-vested restricted stock balance as of February 1, 2013 | | 42 |
| | $ | 15.95 |
|
____________________
| |
(a) | Upon vesting of restricted stock units, some of the underlying shares are generally sold to cover the required withholding taxes. However, select participants may choose the net shares settlement method to cover withholding tax requirements. Total shares withheld were approximately 930,000, 426,000, and 354,000 for Fiscal 2013, Fiscal 2012, and Fiscal 2011, respectively. Total payments for the employee's tax obligations to the taxing authorities were $16 million, $6 million, and $5 million in Fiscal 2013, Fiscal 2012, and Fiscal 2011, respectively, and are reflected as a financing activity within the Consolidated Statements of Cash Flows. |
For Fiscal 2013, Fiscal 2012, and Fiscal 2011, the total estimated vest date fair value of restricted stock awards was $297 million, $273 million, and $250 million, respectively.
At February 1, 2013, February 3, 2012, and January 28, 2011, there was $354 million, $348 million, and $341 million, respectively, of unrecognized stock-based compensation expense, net of estimated forfeitures, related to non-vested restricted stock awards expected to be recognized over a weighted-average period of approximately 1.8, 1.8, and 1.9 years, respectively.
Stock-based Compensation Expense
Stock-based compensation expense was allocated as follows:
|
| | | | | | | | | | | | |
| | Fiscal Year Ended |
| | February 1,
2013 | | February 3,
2012 | | January 28,
2011 |
| | (in millions) |
Stock-based compensation expense: | | |
| | |
| | |
|
Cost of net revenue | | $ | 59 |
| | $ | 59 |
| | $ | 57 |
|
Operating expenses | | 288 |
| | 303 |
| | 275 |
|
Stock-based compensation expense before taxes | | 347 |
| | 362 |
| | 332 |
|
Income tax benefit | | (104 | ) | | (108 | ) | | (97 | ) |
Stock-based compensation expense, net of income taxes | | $ | 243 |
| | $ | 254 |
| | $ | 235 |
|
Employee Benefit Plans
401(k) Plan — Dell has a defined contribution retirement plan (the “401(k) Plan”) that complies with Section 401(k) of the Internal Revenue Code. Substantially all employees in the U.S. are eligible to participate in the 401(k) Plan. Effective January 1, 2008, Dell matches 100% of each participant's voluntary contributions, subject to a maximum contribution of 5% of the participant's compensation, and participants vest immediately in all Dell contributions to the 401(k) Plan. Dell's contributions during Fiscal 2013, Fiscal 2012, and Fiscal 2011 were $175 million, $168 million, and $132 million, respectively. Dell's contributions are invested according to each participant's elections in the investment options provided under the Plan. Investment options include Dell common stock, but neither participant nor Dell contributions are required to be invested in Dell common stock.
Deferred Compensation Plan — Dell has a non-qualified deferred compensation plan (the “Deferred Compensation Plan”) for the benefit of certain management employees and non-employee directors. The Deferred Compensation Plan permits the deferral of base salary and annual incentive bonus. The deferrals are held in a separate trust, which has been established by Dell to administer the Plan. The assets of the trust are subject to the claims of Dell's creditors in the event that Dell becomes insolvent. Consequently, the trust qualifies as a grantor trust for income tax purposes (known as a “Rabbi Trust”). In accordance with the accounting provisions for deferred compensation arrangements where amounts earned are held in a Rabbi Trust and invested, the assets and liabilities of the Deferred Compensation Plan are presented in long-term investments and accrued and other liabilities, respectively, in the Consolidated Statements of Financial Position. The assets held by the trust are classified as trading securities with changes recorded to interest and other, net. These assets were valued at $112 million at February 1, 2013, and are disclosed in Note 2 and 3 of the Notes to Consolidated Financial Statements. Changes in the deferred compensation liability are recorded to compensation expense.
