Stock-Based Compensation

9 Months Ended

Nov. 01, 2013

Stock-Based Compensation:

Total Stock-Based Compensation. Total stock-based compensation expense for the periods presented was as follows:



	Three Months Ended				Nine Months Ended
	November 1, 2013		October 31, 2012		November 1, 2013		October 31, 2012
	(in millions)
Stock options	$	4	$	1	$	9	$	5
Vesting stock awards	10		13		35		37
Total stock-based compensation expense	$	14	$	14	$	44	$	42

New SAIC Separation Adjustments. As a result of the separation of New SAIC, effective September 27, 2013, all outstanding equity awards related to New SAIC employees were assumed by New SAIC. Also in connection with the separation, adjustments were made to the share amounts and exercise prices of all remaining outstanding Leidos stock options, and the share amounts for vesting stock awards and performance-based stock awards as of the Distribution Date such that the adjustments were generally made to preserve the aggregate intrinsic value at the distribution date pursuant to the terms of the stock based compensation plans under which they were issued. Taking into account the change in the value of the Company’s common stock as a result of the distribution of the New SAIC shares, the conversion ratio applied to all outstanding equity awards at the distribution date was 1.4523. In addition, all outstanding equity awards reflected the Company’s one-for-four reverse stock split. Awards held by non-employee directors were modified so that the directors’ awards were bifurcated into awards in both companies in a manner intended to preserve the aggregate intrinsic value.

As a result of the separation adjustments, a modification was made on September 27, 2013 to Leidos and New SAIC stock options outstanding as of the distribution date by which additional stock-based compensation expense was recognized, as the fair value of the outstanding options immediately following the separation was greater than the fair value immediately prior to the separation. An increase of expense related to the modification of $3 million was recorded for awards that were fully vested on the modification date, and an additional $3 million of incremental fair value will be recorded in future periods for unvested awards that will continue to vest, resulting in a total additional stock compensation cost of $6 million with a weighted average modification fair value of $1.02 related to continuing Leidos stock options outstanding.

Under the terms of the Employee Matters Agreement, the performance period for certain performance-based stock awards was deemed completed as of the last fiscal quarter prior to the separation with the target shares prorated for the completed period earned based on actual performance as determined by the Company’s compensation committee. For the remaining target shares in the original award for which the performance period was not deemed completed, the performance condition was removed and the awards are subject to vesting based on continued employment through the original performance period. These modifications resulted in approximately $1 million of incremental fair value to be expensed in future periods over the remaining vesting period.

The separation adjustments are reflected in the tables below.

Stock Options. Stock options granted during the nine months ended November 1, 2013 and October 31, 2012 have terms of seven years and a vesting period of four years based upon required service conditions, except for stock options granted to the Company’s outside directors, which have a vesting period of one year.

In connection with the special cash dividend, anti-dilutive adjustments were made to all outstanding stock options on the dividend record date to preserve their value following the special cash dividend, as required by the Company’s 2006 Equity Incentive Plan. The modifications were made to reduce the exercise prices of the outstanding stock options and to increase the number of shares issuable upon the exercise of each option such that the aggregate difference between the market price and exercise price times the number of shares issuable upon exercise was substantially the same immediately before and after the payment of the special dividend. To affect these modifications, on June 12, 2013, the Company increased the shares of stock subject to stock options by a factor of 1.0713, which is the ratio of the closing price of $59.48 on June 11, 2013, the last trading date prior to ex-dividend date, to the opening price of $55.52 on the ex-dividend date, June 12, 2013, and decreased the exercise price of each of the stock options by a factor of 0.9334, which is the ratio of the opening price on the ex-dividend date to the closing price on June 11, 2013. These adjustments did not result in additional share-based compensation expense, as the fair value of the outstanding options immediately following the payment of the special cash dividend was equal to the fair value immediately prior to such distribution. These adjustments are reflected in the “Special Dividend Adjustment” line in the stock option activity table below.

The fair value of the Company’s stock option awards is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted average grant date fair value and assumptions used to determine the fair value of stock options granted for the periods presented were as follows:



	Nine Months Ended
	October 2013 Grants			2013 Grants Before Spin				October 31, 2012
Weighted average grant-date fair value**	$	9.48		$	6.96		**	$	6.75		**
Expected term (in years)	5.0			5.0				5.0
Expected volatility	30.0		%	25.0		%		24.5		%
Risk-free interest rate	1.4		%	0.8		%		1.0		%
Dividend yield	2.8		%	3.8		%		3.7		%

**Adjusted for additional awards granted for the $4.00 Special Dividend

Stock option activity for the nine months ended November 1, 2013 was as follows:



	Shares of stock under stock options		Weighted average exercise price		Weighted average remaining contractual term	Aggregate intrinsic value
	(in millions)				(in years)	(in millions)
Outstanding at January 31, 2013	4.9		$	67.24	3.0	$	—
Options granted	1.4		54.86
Special dividend adjustments	0.4
Options forfeited or expired	(1.3	)	71.80
Separation Adjustment	(1.9	)	57.85
Outstanding at September 27, 2013	3.5		59.25		3.9	24.0
Exercisable at September 27, 2013	1.5		64.17		2.0	4.0



	Shares of stock under stock options			Weighted average exercise price			Weighted average remaining contractual term	Aggregate intrinsic value
	(in millions)						(in years)	(in millions)
Outstanding at September 28, 2013	4.9		**	$	40.20	**	3.9	$	24.0
Options granted	0.1			46.19
Options forfeited or expired	(0.1	)		42.84
Outstanding at November 1, 2013	4.9			40.31			4.0	35.0
Exercisable at November 1, 2013	2.0			44.30			2.0	6.0

** Adjusted for Conversion Ratio of 1.4523

Vesting Stock Awards. Vesting stock award activity for the nine months ended November 1, 2013 was as follows:



	Shares of stock under stock awards		Weighted average grant- date fair value
	(in millions)
Unvested stock awards at January 31, 2013	3.1		$	60.78
Awards granted	2.1		53.51
Awards forfeited	(0.4	)	58.28
Awards vested	(0.9	)	64.76
Separation Adjustment	(1.5	)	57.04
Unvested stock awards at September 27, 2013	2.4		59.98



	Shares of stock under stock awards		Weighted average grant- date fair value
	(in millions)
Unvested stock awards at September 28, 2013	3.5	**	$	42.98	**
Awards granted	0.4	*	33.44		*
Unvested stock awards at November 1, 2013	3.9		42.37

* Includes Modified Performance-Based Stock Awards

** Adjusted for Conversion Ratio of 1.4523

Vesting stock awards generally vest over a four-year vesting period, or seven for certain stock awards, based upon required service conditions and in some cases performance conditions. The fair value of vesting stock awards that vested during each of the nine months ended November 1, 2013 and October 31, 2012 was $57 million and $64 million, respectively.

Performance-Based Stock Awards. The Company’s performance-based stock awards vest and the stock is issued at the end of a three-year period based upon the achievement of specific performance criteria, with the number of shares ultimately awarded, if any, ranging up to 150% of the specified target awards. If performance is below the threshold level of performance, no shares will be issued. As discussed above in New SAIC Separation Adjustments, the performance period for certain performance-based stock awards was deemed completed as of the last fiscal quarter prior to the separation with the target shares prorated for the completed period earned. For all of the remaining target shares in the original award, the performance condition was removed and the awards are subject to vesting based on continued employment through the original performance period and reflected in the vesting stock awards table above. In the table below, the outstanding awards represent the awards whose performance conditions were completed in the last fiscal quarter prior to the separation and continue to vest over the original service period of the award. Performance-based stock award activity for the nine months ended November 1, 2013 was as follows:



	Expected number of shares of stock to be issued under performance-based stock awards			Weighted average grant-date fair value
	(in millions)
Outstanding at January 31, 2013	0.3			$	52.96
Awards canceled	(0.2	)	*	53.23		*
Outstanding at November 1, 2013	0.1		**	36.59		**

* Includes Modified Performance-Based Stock Awards

** Adjusted for Conversion Ratio of 1.4523

Leidos, Inc.

Stock-Based Compensation

Stock-Based Compensation:

Total Stock-Based Compensation. Total stock-based compensation expense for the periods presented was as follows:



	Three Months Ended				Nine Months Ended
	November 1, 2013		October 31, 2012		November 1, 2013		October 31, 2012
	(in millions)
Stock options	$	4	$	1	$	9	$	5
Vesting stock awards	10		13		35		37
Total stock-based compensation expense	$	14	$	14	$	44	$	42

The separation adjustments are reflected in the tables below.



	Nine Months Ended
	October 2013 Grants			2013 Grants Before Spin				October 31, 2012
Weighted average grant-date fair value**	$	9.48		$	6.96		**	$	6.75		**
Expected term (in years)	5.0			5.0				5.0
Expected volatility	30.0		%	25.0		%		24.5		%
Risk-free interest rate	1.4		%	0.8		%		1.0		%
Dividend yield	2.8		%	3.8		%		3.7		%

**Adjusted for additional awards granted for the $4.00 Special Dividend

Stock option activity for the nine months ended November 1, 2013 was as follows:



	Shares of stock under stock options		Weighted average exercise price		Weighted average remaining contractual term	Aggregate intrinsic value
	(in millions)				(in years)	(in millions)
Outstanding at January 31, 2013	4.9		$	67.24	3.0	$	—
Options granted	1.4		54.86
Special dividend adjustments	0.4
Options forfeited or expired	(1.3	)	71.80
Separation Adjustment	(1.9	)	57.85
Outstanding at September 27, 2013	3.5		59.25		3.9	24.0
Exercisable at September 27, 2013	1.5		64.17		2.0	4.0



	Shares of stock under stock options			Weighted average exercise price			Weighted average remaining contractual term	Aggregate intrinsic value
	(in millions)						(in years)	(in millions)
Outstanding at September 28, 2013	4.9		**	$	40.20	**	3.9	$	24.0
Options granted	0.1			46.19
Options forfeited or expired	(0.1	)		42.84
Outstanding at November 1, 2013	4.9			40.31			4.0	35.0
Exercisable at November 1, 2013	2.0			44.30			2.0	6.0

** Adjusted for Conversion Ratio of 1.4523

Vesting Stock Awards. Vesting stock award activity for the nine months ended November 1, 2013 was as follows:



	Shares of stock under stock awards		Weighted average grant- date fair value
	(in millions)
Unvested stock awards at January 31, 2013	3.1		$	60.78
Awards granted	2.1		53.51
Awards forfeited	(0.4	)	58.28
Awards vested	(0.9	)	64.76
Separation Adjustment	(1.5	)	57.04
Unvested stock awards at September 27, 2013	2.4		59.98



	Shares of stock under stock awards		Weighted average grant- date fair value
	(in millions)
Unvested stock awards at September 28, 2013	3.5	**	$	42.98	**
Awards granted	0.4	*	33.44		*
Unvested stock awards at November 1, 2013	3.9		42.37

* Includes Modified Performance-Based Stock Awards

** Adjusted for Conversion Ratio of 1.4523



	Expected number of shares of stock to be issued under performance-based stock awards			Weighted average grant-date fair value
	(in millions)
Outstanding at January 31, 2013	0.3			$	52.96
Awards canceled	(0.2	)	*	53.23		*
Outstanding at November 1, 2013	0.1		**	36.59		**

* Includes Modified Performance-Based Stock Awards

** Adjusted for Conversion Ratio of 1.4523

- Definition

The entire disclosure for compensation-related costs for equity-based compensation, which may include disclosure of policies, compensation plan details, allocation of equity compensation, incentive distributions, equity-based arrangements to obtain goods and services, deferred compensation arrangements, employee stock ownership plan details and employee stock purchase plan details.

+ References

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-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

+ Details

Leidos, Inc. 10-Q