NOTE 14. EQUITY BASED COMPENSATION
2005 Long-Term Incentive Plan
The Company has adopted the 2005 Long-Term Incentive Plan (the “2005 Plan”), as amended, under which equity based compensation, including stock options, performance stock units (“PSUs”), restricted stock, restricted stock units (“RSUs”) and other types of awards, may be granted. The Company's employees and directors are eligible to participate in the 2005 Plan. The Compensation Committee of the Board (the “Compensation Committee”) determines the recipients, type of award to be granted and amounts of awards to be granted under the 2005 Plan. Stock options awarded under the 2005 Plan will be granted at exercise prices which are equal to or exceed the market price at the date of grant. The 2005 Plan replaced the 2004 Stock Option Plan under which no additional stock options will be granted. The maximum number of shares of Class A Common Stock that may be issued under the 2005 Plan is 165 million shares. At June 30, 2013, the remaining number of shares available for issuance under the 2005 Plan was approximately 102 million. However, a maximum of approximately 20 million shares may be issued in connection with awards of restricted stock, RSUs and PSUs. The Company will issue new shares of Class A Common Stock upon exercises of stock options or vesting of stock-settled RSUs and PSUs.
The fair value of equity-based compensation under the 2005 Plan is calculated according to the type of award issued. Cash settled awards are marked-to-market at each reporting period.
Separation-Related Adjustments
In connection with the Separation, the Company entered into an Employee Matters Agreement with News Corp, which generally provides that employees of News Corp no longer participate in benefit plans sponsored or maintained by the Company. Pursuant to the Employee Matters Agreement, the Company made certain adjustments to the exercise price and number of our share-based compensation awards, using the closing price of the Company's Class A Common Stock on the final day of trading prior to the effective date of the Separation and the volumetric weighted-average prices for the first day of trading for the Company immediately following the Separation, with the intention of preserving the intrinsic value of the awards immediately prior to the Separation. These adjustments are summarized as follows and are reflected in the activity tables below:
The Separation-related adjustments did not have a material impact on either compensation expense or the potentially dilutive securities to be considered in the calculation of diluted earnings per share of common stock.
Performance Stock Units
PSUs are fair valued on the date of grant and expensed using a straight-line method as the awards cliff vest at the end of the three-year performance period. The Company also estimates the number of shares expected to vest which is based on management's determination of the probable outcome of the performance condition, which requires considerable judgment. The Company records a cumulative adjustment in periods that the Company's estimate of the number of shares expected to vest changes. Additionally, the Company ultimately adjusts the expense recognized to reflect the actual vested shares following the resolution of the performance conditions. The number of shares that will be issued upon vesting of PSUs can range from 0% to 200% (certain executives are limited to 150%) of the target award, based on the Company's three-year total shareholder return (“TSR”) as measured against the three-year TSR of the companies that comprise the Standard and Poor's 500 Index (excluding financial and energy sector companies) and other performance measures. The fair value of the TSR condition is determined using a Monte Carlo simulation model.
In fiscal 2013 and 2012, certain executives of the Company responsible for various business units within the Company each received a grant of PSUs that has a three-year performance measurement period beginning in July 2012 and 2011, respectively. The awards are subject to the achievement of pre-defined goals for operating profit, cash flow and key divisional performance indicators for the applicable performance period. The majority of these awards will be settled in shares of Class A Common Stock upon vesting and are subject to the participants' continued employment with the Company. Any person who holds PSUs shall have no ownership interest in the shares of Class A Common Stock to which such PSUs relate until and unless shares of Class A Common Stock are delivered to the holder. All shares of Class A Common Stock reserved for cancelled or forfeited equity-based compensation awards become available for future grants.
In August 2012, 2011 and 2010, the Compensation Committee approved a grant of PSUs that has a three year performance measurement period beginning July 1 of fiscal years 2013, 2012 and 2011, respectively, for most executive directors of the Company, each PSU represents the right to receive the U.S. dollar value of one share of Class A Common Stock in cash after the completion of the three year performance period, subject to the satisfaction of one or more pre-established objective performance measures determined by the Compensation Committee. These awards have a graded vesting and the expense recognition is accelerated.
The PSUs were awarded under the Company's 2005 Long-Term Incentive Plan. In fiscal 2013, 2012 and 2011, a total of 8.2 million, 9.1 million and 1.8 million target PSUs were granted, respectively, of which 6.3 million, 6.9 million and nil, respectively, will be settled in shares of Class A Common Stock. The fiscal 2011 award vests in August 2013.
Restricted Stock Units
RSU awards are grants that entitle the holder to shares of Class A Common Stock or the value of shares of Class A Common Stock as the award vests, subject to the 2005 Plan and such other terms and conditions as the Compensation Committee may establish. RSUs issued under the 2005 Plan are fair valued based upon the fair market value of Class A Common Stock on the grant date. Any person who holds RSUs shall have no ownership interest in the shares of Class A Common Stock to which such RSUs relate until and unless shares of Class A Common Stock are delivered to the holder. All shares of Class A Common Stock reserved for cancelled or forfeited equity-based compensation awards become available for future grants. Certain RSU awards are settled in cash and are subject to terms and conditions of the 2005 Plan and such other terms and conditions as the Compensation Committee may establish.
Certain executives, who are not named executive officers of the Company, responsible for various business units within the Company had the opportunity to earn a grant of RSUs under the 2005 Plan in fiscal 2013, 2012 and 2011. These awards (the “Performance Awards”) were conditioned upon the attainment of pre-determined operating profit goals for fiscal 2013, 2012 and 2011 by the executive's particular business unit. If the actual fiscal 2013, 2012 and 2011 operating profit of the executive's business unit as compared to its pre-determined target operating profit for the fiscal year was within a certain performance goal range, the executive was entitled to receive a grant of RSUs pursuant to a Performance Award. To the extent that it was determined that the business unit's actual fiscal 2013, 2012 and 2011 operating profit fell within the performance goal range for that fiscal year, the executive received a percentage of his or her annualized base salary, ranging from 0% to 100%, in time-vested RSUs representing shares of Class A Common Stock. The RSUs are generally payable in shares of Class A Common Stock upon vesting and are subject to the participants' continued employment with the Company.
During the fiscal years ended June 30, 2013, 2012 and 2011, 1.4 million, 6.7 million and 13.4 million RSUs were granted, respectively, which primarily vest over four years. Outstanding RSUs as of June 30, 2013 are payable in shares of the Class A Common Stock, upon vesting, except for approximately 595,000 RSUs outstanding that will be settled in cash. RSUs granted to executive directors and certain awards granted to employees in certain foreign locations are settled in cash. During the fiscal years ended June 30, 2013, 2012 and 2011, approximately 925,000, 1,189,000 and 1,630,000 cash-settled RSUs vested, respectively. Cash paid for vested cash-settled RSUs was approximately $22 million, $19 million and $22 million in the fiscal years ended June 30, 2013, 2012 and 2011, respectively.
The following table summarizes the activity related to the Company's RSUs and target PSUs to be settled in stock (RSUs and PSUs in thousands):
| Fiscal 2013 | Fiscal 2012 | Fiscal 2011 | ||||||||||||||||
| Weighted | Weighted | Weighted | ||||||||||||||||
| average | average | average | ||||||||||||||||
| Number | grant- | Number | grant- | Number | grant- | |||||||||||||
| of | date fair | of | date fair | of | date fair | |||||||||||||
| shares | value | shares | value | shares | value | |||||||||||||
| RSUs and PSUs | ||||||||||||||||||
| Unvested units at beginning of the year | 18,197 | $ | 14.51 | 13,377 | $ | 13.04 | 10,803 | $ | 13.43 | |||||||||
| Granted | 7,680 | 24.21 | 13,389 | 15.12 | 11,599 | 13.54 | ||||||||||||
| Vested (a) | (6,208) | 14.90 | (7,859) | 13.06 | (8,569) | 14.20 | ||||||||||||
| Cancelled | (1,071) | 15.59 | (710) | 14.44 | (456) | 13.22 | ||||||||||||
| Separation of News Corp | (2,586) | 20.34 | - | - | - | - | ||||||||||||
| Shares granted in conversion, as a result of the Separation | 1,782 | 16.19 | - | - | - | - | ||||||||||||
| Unvested units at the end of the year(b) | 17,794 | $ | 16.19 | 18,197 | $ | 14.51 | 13,377 | $ | 13.04 | |||||||||
2004 Stock Option Plan and 2004 Replacement Stock Option Plan
As a result of the Company's reorganization in November 2004, all preferred limited voting ordinary shares which the Company issued stock options over were cancelled and holders received in exchange stock options for shares of Class A Common Stock on a one-for-two basis with no change in the original terms under the 2004 Stock Option Plan and 2004 Replacement Stock Option Plan (collectively, the “2004 Plan”). In addition, all other outstanding stock options to purchase preferred limited voting ordinary shares were adjusted to be exercisable into shares of Class A Common Stock subject to the one-for-two share exchange. Prior to the Company's reorganization in November 2004, stock options were granted to employees with Australian dollar exercise prices.
Under the 2004 Plan, equity grants generally vest over a four-year period and expire ten years from the date of grant. The equity awards were granted with exercise prices that are equal to or exceed the market price at the date of grant and were valued, in Australian dollars. The 2004 Plan automatically terminates in 2014.
The following table summarizes information about the Company's stock option transactions for all the Company's stock option plans (options in thousands):
| Fiscal 2013 | Fiscal 2012 | Fiscal 2011 | |||||||||||||||||||||
| Options | Weighted average exercise price | Options | Weighted average exercise price | Options | Weighted average exercise price | ||||||||||||||||||
| (in US$) | (in A$) | (in US$) | (in A$) | (in US$) | (in A$) | ||||||||||||||||||
| Outstanding at the beginning of the year | 11,742 | $ | 12.31 | $ | 18.84 | 32,587 | $ | 11.78 | $ | 19.85 | 45,121 | $ | 13.56 | $ | 22.99 | ||||||||
| Exercised | (9,026) | 12.23 | 18.87 | (9,857) | 9.15 | 16.08 | (938) | 10.17 | 16.02 | ||||||||||||||
| Cancelled | (266) | 12.52 | 19.07 | (10,988) | 13.57 | 24.31 | (11,596) | 18.84 | 32.38 | ||||||||||||||
| Separation of News Corp | (466) | 10.70 | 14.11 | - | - | - | - | - | - | ||||||||||||||
| Options granted in conversion, as a result of the Separation | 221 | 11.71 | 17.82 | - | - | - | - | - | - | ||||||||||||||
| Outstanding at the end of the year(a) | 2,205 | $ | 11.71 | $ | 17.82 | 11,742 | $ | 12.31 | $ | 18.84 | 32,587 | $ | 11.78 | $ | 19.85 | ||||||||
The fair value of each outstanding stock option award under the 2004 Plan was estimated on the date of grant using the Black-Scholes option valuation model that uses the following assumptions: expected volatility was based on historical volatility of the Class A Common Stock; expected term of stock options granted was derived from the historical activity of the Company's stock options and represented the period of time that stock options granted were expected to be outstanding; weighted average risk-free interest rate was an average of the interest rates of U.S. government bonds with similar lives on the dates of the stock option grants; and dividend yield was calculated as an average of a ten year history of the Company's yearly dividend divided by the fiscal year's closing stock price.
The exercise prices for the stock options issued prior to the Company's reorganization in November 2004 are in Australian dollars. The U.S. dollar equivalents presented above have been converted at historical exchange rates; therefore, the proceeds from the exercise of these stock options may differ due to fluctuations in exchange rates in periods subsequent to the date of the grant.
The following table summarizes the Company's equity-based compensation:
| For the years ended June 30, | ||||||||
| 2013 | 2012 | 2011 | ||||||
| (in millions) | ||||||||
| Equity-based compensation from continuing operations | $ | 241 | $ | 198 | $ | 147 | ||
| Cash received from exercise of equity-based compensation | $ | 181 | $ | 147 | $ | 12 | ||
| Total intrinsic value of stock options exercised(a) | $ | 73 | $ | 34 | $ | 2 | ||
At June 30, 2013, the Company's total compensation cost related to non-vested stock options, RSUs and PSUs not yet recognized for all plans presented was approximately $128 million and is expected to be recognized over a weighted average period between one and two years.
The Company recognized a tax benefit (expense) on vested RSUs and stock options exercised of $38 million, $20 million and $(1) million for the fiscal years ended June 30, 2013, 2012 and 2011, respectively.
At June 30, 2013 and 2012, the liability for cash-settled awards was approximately $185 million and $119 million, respectively.