SYSCO CORP | 2013 | FY |

 

 

17. SHARE-BASED COMPENSATION

 

Sysco provides compensation benefits to employees and non-employee directors under several share-based payment arrangements including various employee stock option plans, the Employees’ Stock Purchase Plan, the Management Incentive Plan and various non-employee director plans.

 

Stock Incentive Plans

 

In November 2009, Sysco’s 2007 Stock Incentive Plan was  amended and provides for the issuance of up to 55,000,000 shares of Sysco common stock for share-based awards to officers and other employees of the company.  Of the 55,000,000 authorized shares, the full 55,000,000 shares  may be issued as options or stock appreciation rights and up to 10,000,000 shares may be issued as restricted stock, restricted stock units or other types of stock-based awards.  To date, Sysco has issued options, restricted stock and restricted stock units under this plan.  Vesting requirements for awards under this plan will vary by individual grant and may include either time-based vesting or time-based vesting subject to acceleration based on performance criteria for fiscal periods of at least one year.  The contractual life of all options granted under this plan will be no greater than seven years.  As of June 29, 2013, there were 10,159,110 remaining shares authorized and available for grant in total under the amended 2007 Stock Incentive Plan, of which the full 10,159,110 shares may be issued as options or stock appreciation rights, or as a combination of up to 5,530,402 shares that may be issued as restricted stock, restricted stock units or other types of stock-based awards with the remainder available for issuance as options or stock appreciation rights. 

 

Sysco has also granted employee options under several previous employee stock option plans for which previously granted options remain outstanding as of June 29, 2013.  No new options will be issued under any of the prior plans, as future grants to employees will be made through the amended 2007 Stock Incentive Plan or subsequently adopted plans.  Vesting requirements for awards under these plans vary by individual grant and include either time-based vesting or time-based vesting subject to acceleration based on performance criteria.  The contractual life of all options granted under these plans through July 3, 2004 is 10 years; options granted after July 3, 2004 have a contractual life of seven years.

 

In November 2009, Sysco’s 2009 Non-Employee Directors Stock Plan was adopted and provides for the issuance of up to 750,000 shares of Sysco common stock for share-based awards to non-employee directors.  The authorized shares may be granted as restricted stock, restricted stock units, elected shares or additional shares.  In addition, options and unvested common shares also remained outstanding as of June 29, 2013 under previous non-employee director stock plans.  No further grants will be made under these previous plans, as all future grants to non-employee directors will be made through the 2009 Non-Employee Directors Stock Plan or subsequently adopted plans.  Vesting requirements for awards under these plans vary by individual grant and include either time-based vesting or vesting based on performance criteria.  The contractual life of all options granted under these plans through July 3, 2004 is 10 years; options granted after July 3, 2004 have a contractual life of seven years.  As of June 29, 2013, there were 483,096 remaining shares authorized and available for grant in total under the 2009 Non-Employee Directors Stock Plan.

 

Stock Options

 

Sysco’s option awards are subject to graded vesting over a service period.  Sysco recognizes compensation cost on a straight-line basis over the requisite service period for the entire award.

 

In addition, certain of Sysco’s options provide that the options continue to vest as if the optionee continued to be an employee or director if the optionee meets certain age and years of service thresholds upon retirement.  In these cases, Sysco will recognize compensation cost for such awards over the period from the grant date to the date the employee or director first becomes eligible to retire with the options continuing to vest after retirement.

 

The fair value of each option award is estimated as of the date of grant using a Black-Scholes option pricing model.  The weighted average assumptions for the periods indicated are noted in the following table.  Expected volatility is based on historical volatility of Sysco’s stock, implied volatilities from traded options on Sysco’s stock and other factors.  Sysco utilizes historical data to estimate option exercise and employee termination behavior within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes.  Expected dividend yield is estimated based on the historical pattern of dividends and the average stock price for the year preceding the option grant.  The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

 

The following weighted-average assumptions were used for each fiscal year presented:

 

 

The following summary presents information regarding outstanding options as of June 29, 2013 and changes during the fiscal year then ended with regard to options under all stock incentive plans:

 

 

The total number of employee options granted was 6,212,716,  7,015,952 and 7,190,250 in fiscal years 2013,  2012 and 2011, respectively.  During fiscal 2013,  2,351,720 options were granted to 11 executive officers and 3,860,996 options were granted to approximately 152 other key employees.  During fiscal 2012,  2,898,854 options were granted to 11 executive officers and 4,117,098 options were granted to approximately 180 other key employees.  During fiscal 2011,  1,423,000 options were granted to 11 executive officers and 5,767,250 options were granted to approximately 1,500 other key employees.

 

The weighted average grant-date fair value of options granted in fiscal 2013,  2012 and 2011 was $3.20,  $3.69 and $3.96, respectively.  The total intrinsic value of options exercised during fiscal 2013,  2012 and 2011 was $24.1 million, $8.3 million and $45.5 million, respectively.

 

Restricted Stock Units

 

During fiscal 2013, 2012 and 2011,  1,722,835,  1,528,734 and 656,000 restricted stock units, respectively, were granted to employees, the majority of which will vest ratably over a three-year period.  Some of these restricted stock units were granted with dividend equivalents.  The fair value of each restricted stock unit award granted with a dividend equivalent is based on the company’s stock price as of the date of grant.  For restricted stock unit awards granted without dividend equivalents, the fair value was reduced by the present value of expected dividends during the vesting period.  The weighted average grant-date fair value per share of restricted stock units granted during  fiscal 2013, 2012 and 2011 was $29.75, $27.35 and $28.72, respectively.  The total fair value of restricted stock units vested during fiscal 2013, 2012 and 2011 was $27.6 million,  $11.8 million and $6.2 million, respectively. 

 

Restricted Stock

 

In fiscal 2009, 75,822 shares of restricted stock were granted to an executive officer.  The fair value of these shares was $23.74 per share, which was based on the stock price on the grant date.  These shares were to vest ratably over a three-year period.  In fiscal 2010, this executive officer announced his retirement, and 37,911 of the shares were forfeited according to the terms of the agreement.  The remaining shares have vested according to the terms of the agreement as amended in connection with the executive officer’s retirement.  The total fair value of restricted stock vested during fiscal 2011 was $0.4 million.  There were no vestings of restricted stock in fiscal 2013 or 2012.

 

Non-Employee Director Awards

 

The 2009 Non-Employee Directors Stock Plan, as well as previous plans, provides for the issuance of restricted awards to current non-employee directors.  During fiscal 2013,  2012 and 2011,  48,069,  63,657 and 60,973 shares, respectively, of restricted awards were granted to non-employee directors that will vest over a one-year period.  Beginning in fiscal 2011, the non-employee directors may elect to receive these awards in restricted stock shares that will vest at the end of the award’s stated vesting period or as deferred units which convert into shares of Sysco common stock upon a date selected by the non-employee director that is subsequent to the award’s stated vesting date.  The fair value of the restricted awards is based on the company’s stock price as of the date of grant.  The weighted average grant-date fair value of the shares granted during fiscal 2013,  2012 and 2011 was $29.96, $27.65 and $28.87, respectively.    The total fair value of restricted stock shares vested and deferred units distributed during fiscal 2013, 2012 and 2011 was $1.9 million, $2.2 million and $1.7 million, respectively.  Restricted stock shares are valued on their vesting date.  Vested deferred units are valued on their subsequent conversion and distribution date.

 

Under the 2009 Non-Employee Directors Stock Plan, non-employee directors may elect to receive up to 100% of their annual directors’ fees in Sysco common stock on either an annual or deferred basis.  Sysco provides a matching grant of 50% of the number of shares received for the stock election subject to certain limitations.  As a result of such elections, a total of 26,702,  31,397 and 27,979 shares with a weighted-average grant date fair value of $30.38, $28.46 and $29.26 per share were issued in fiscal 2013,  2012 and 2011, respectively, in the form of fully vested common stock or deferred units.    The total fair value of common stock issued as a result of election shares and deferred units distributed during fiscal 2013, 2012 and 2011 was $0.5 million,  $0.5 million and $0.4 million, respectively.  Common stock shares are valued on their vesting date.  Vested deferred units are valued on their subsequent conversion and distribution date.

 

As of June 29, 2013, there were 74,153 fully vested deferred units outstanding which will convert into shares of Sysco common stock upon dates selected by the respective non-employee directors.

 

 

Summary of Nonvested Awards

 

The following summary presents information regarding outstanding nonvested awards as of June 29, 2013 and changes during the fiscal year then ended with regard to these awards under all stock incentive plans.  Award types represented include:  restricted stock units granted to employees and restricted awards granted to non-employee directors.

 

 

Employees’ Stock Purchase Plan

 

Sysco has an Employees’ Stock Purchase Plan that permits employees to invest in Sysco common stock by means of periodic payroll deductions at a  discount of 15% from the closing price on the last business day of each calendar quarter.  In November 2010, the Employees’ Stock Purchase Plan was amended to reserve an additional 5,000,000 shares of Sysco common stock for issuance under the plan.  Including the additional 5,000,000 shares reserved in fiscal 2011, the total number of shares which may be sold pursuant to the plan may not exceed 79,000,000 shares, of which 3,770,467 remained available as of June 29, 2013.

 

During fiscal 2013,  1,470,271 shares of Sysco common stock were purchased by the participants as compared to 1,661,758 shares purchased in fiscal 2012 and 1,655,100 shares purchased in fiscal 2011.  The weighted average fair value of employee stock purchase rights issued pursuant to the Employees’ Stock Purchase Plan was $4.78, $4.33 and $4.28 per share during fiscal 2013,  2012 and 2011, respectively.  The fair value of the stock purchase rights was calculated as the difference between the stock price at date of issuance and the employee purchase price.

 

 

All Share-Based Payment Arrangements

 

The total share-based compensation cost that has been recognized in results of operations was $70.1 million, $70.3 million and $59.2 million for fiscal 2013,  2012 and 2011, respectively, and is included within operating expenses in the consolidated results of operations.  The total income tax benefit recognized in results of operations for share-based compensation arrangements was $29.9 million, $21.7 million and $18.2 million for fiscal 2013,  2012 and 2011, respectively.

 

As of June 29, 2013, there was $69.4 million of total unrecognized compensation cost related to share-based compensation arrangements.  That cost is expected to be recognized over a weighted-average period of 2.41 years.

 

Cash received from option exercises and purchases of shares under the Employees’ Stock Purchase Plan was $628.7 million, $99.4 million and $332.7 million during fiscal 2013,  2012 and 2011, respectively.  The actual tax benefit realized for the tax deductions from option exercises totaled $24.0 million, $3.0 million and $15.9 million during fiscal 2013,  2012 and 2011, respectively.