NOTE 10. EMPLOYEE BENEFIT PLANS
A. Stock-based Compensation Plans. Stock-based compensation consists of the following:
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• | Stock Options. Stock options are granted to employees at exercise prices equal to the fair market value of the Company's common stock on the dates of grant. Stock options are issued under a graded vesting schedule and have a term of 10 years. Options granted prior to July 1, 2008 generally vest ratably over five years and options granted after July 1, 2008 generally vest ratably over four years. Compensation expense is measured based on the fair value of the stock option on the grant date and recognized over the requisite service period for each separately vesting portion of the stock option award. Stock options are forfeited if the employee ceases to be employed by the Company prior to vesting. |
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• | Time-Based Restricted Stock and Time-Based Restricted Stock Units. Time-based restricted stock and restricted stock units granted prior to fiscal 2013 are subject to vesting periods of up to five years and awards granted during fiscal 2013 are subject to a vesting period of two years. Awards are forfeited if the employee ceases to be employed by the Company prior to vesting. |
Time-based restricted stock cannot be transferred during the vesting period. Compensation expense relating to the issuance of time-based restricted stock is measured based on the fair value of the award on the grant date and recognized on a straight-line basis over the vesting period. Employees are eligible to receive dividends on shares awarded under the time-based restricted stock program.
Time-based restricted stock units are settled in cash. Compensation expense relating to the issuance of time-based restricted stock units is recorded over the vesting period and is initially based on the fair value of the award on the grant date; and is subsequently remeasured at each reporting date during the vesting period. No dividend equivalents are paid on units awarded under the time-based restricted stock unit program.
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• | Performance-Based Restricted Stock and Performance-Based Restricted Stock Units. Performance-based restricted stock and performance-based restricted stock units generally vest over a one year performance period and a subsequent service period ranging from 6 months to 26 months. Under these programs, the Company communicates "target awards" at the beginning of the performance period with possible payouts at the end of the performance period ranging from 0% to 150% of the "target awards." Awards are forfeited if the employee ceases to be employed by the Company prior to vesting. |
Performance-based restricted stock cannot be transferred during the vesting period. Compensation expense relating to the issuance of performance-based restricted stock is measured based upon the fair value of the award on the grant date and recognized on a straight-line basis over the vesting period, based upon the probability that the performance target will be met. After the performance period, if the performance targets are achieved, employees are eligible to receive dividends on shares awarded under the performance-based restricted stock program.
Performance-based restricted stock units are settled in cash. Compensation expense relating to the issuance of performance-based restricted stock units is recorded over the vesting period and is initially based on the fair value of the award on the grant date; and is subsequently remeasured at each reporting date during the one-year performance period, based upon the probability that the performance target will be met. No dividend equivalents are paid on awards under the performance-based restricted stock unit program.
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• | Employee Stock Purchase Plan. The Company offers an employee stock purchase plan that allows eligible employees to purchase shares of common stock at a price equal to 95% of the market value for the Company's common stock on the last day of the offering period. This plan has been deemed non-compensatory and therefore, no compensation expense has been recorded. |
The Company currently utilizes treasury stock to satisfy stock option exercises, issuances under the Company's employee stock purchase plan, and restricted stock awards. From time to time, the Company may repurchase shares of its common stock under its authorized share repurchase programs. The Company repurchased 10.4 million shares in fiscal 2013 as compared to 14.6 million shares repurchased in fiscal 2012. The Company considers several factors in determining when to execute share repurchases, including, among other things, actual and potential acquisition activity, cash balances and cash flows, issuances due to employee benefit plan activity, and market conditions. Cash payments related to the settlement of vested time-based restricted stock units and performance-based restricted stock units were approximately $17.8 million, $15.4 million, and $10.3 million during fiscal years 2013, 2012, and 2011.
The following table represents stock-based compensation expense and related income tax benefits in each of fiscal 2013, 2012, and 2011, respectively:
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Years ended June 30, | | 2013 | | 2012 | | 2011 |
Operating expenses | | $ | 17.9 |
| | $ | 17.2 |
| | $ | 16.5 |
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Selling, general and administrative expenses | | 64.0 |
| | 62.6 |
| | 59.9 |
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System development and programming costs | | 14.5 |
| | 14.3 |
| | 13.9 |
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Total pretax stock-based compensation expense | | $ | 96.4 |
| | $ | 94.1 |
| | $ | 90.3 |
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Income tax benefit | | $ | 34.3 |
| | $ | 33.5 |
| | $ | 32.3 |
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As of June 30, 2013, the total remaining unrecognized compensation cost related to non-vested stock options, restricted stock units, and restricted stock awards amounted to $9.7 million, $18.2 million, and $63.8 million, respectively, which will be amortized over the weighted-average remaining requisite service periods of 2.0 years, 1.3 years, and 1.4 years, respectively.
In fiscal 2013, the following activity occurred under the Company’s existing plans:
Stock Options:
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Year ended June 30, 2013 | | Number of Options (in thousands) | | Weighted Average Price (in dollars) |
Options outstanding, beginning of year | | 16,187 |
| | $ | 41 |
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Options granted | | 1,168 |
| | $ | 60 |
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Options exercised | | (6,070 | ) | | $ | 38 |
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Options canceled | | (175 | ) | | $ | 41 |
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Options outstanding, end of year | | 11,110 |
| | $ | 44 |
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Options exercisable, end of year | | 8,662 |
| | $ | 41 |
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Shares available for future grants, end of year | | 28,459 |
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Shares reserved for issuance under stock option plans, end of year | | 39,569 |
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Time-Based Restricted Stock and Time-Based Restricted Stock Units:
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Year ended June 30, 2013 | | Number of Shares (in thousands) | | Number of Units (in thousands) |
Restricted shares/units outstanding at July 1, 2012 | | 358 |
| | — |
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Restricted shares/units granted | | 1,171 |
| | 284 |
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Restricted shares/units vested | | (168 | ) | | — |
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Restricted shares/units forfeited | | (48 | ) | | (4 | ) |
Restricted shares/units outstanding at June 30, 2013 | | 1,313 |
| | 280 |
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Performance-Based Restricted Stock and Performance-Based Restricted Stock Units:
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Year ended June 30, 2013 | | Number of Shares (in thousands) | | Number of Units (in thousands) |
Restricted shares/units outstanding, beginning of year | | 1,474 |
| | 295 |
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Restricted shares/units granted | | 542 |
| | 30 |
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Restricted shares/units vested | | (1,329 | ) | | (275 | ) |
Restricted shares/units forfeited | | (166 | ) | | (12 | ) |
Restricted shares/units outstanding, end of year | | 521 |
| | 38 |
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The aggregate intrinsic value of stock options outstanding and exercisable as of June 30, 2013 was $276.8 million and $242.7 million, respectively, which has a remaining life of 4.6 years and 3.4 years, respectively. The aggregate intrinsic value for stock options exercised in fiscal 2013, 2012, and 2011 was $135.1 million, $83.8 million, and $95.7 million, respectively.
The fair value of each stock option issued is estimated on the date of grant using a binomial option pricing model. The binomial model considers a range of assumptions related to volatility, risk-free interest rate, and employee exercise behavior. Expected volatilities utilized in the binomial model are based on a combination of implied market volatilities, historical volatility of the Company’s stock price, and other factors. Similarly, the dividend yield is based on historical experience and expected future changes. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of grant. The binomial model also incorporates exercise and forfeiture assumptions based on an analysis of historical data. The expected life of the stock option grant is derived from the output of the binomial model and represents the period of time that options granted are expected to be outstanding.
The fair value for stock options granted was estimated at the date of grant using the following assumptions:
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| 2013 | | 2012 | | 2011 |
Risk-free interest rate | 0.8% - 1.0% |
| | 0.8% - 1.0% |
| | 1.4% - 2.4% |
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Dividend yield | 2.7% - 2.9% |
| | 2.8% - 3.1% |
| | 2.9% - 3.3% |
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Weighted average volatility factor | 23.5% - 24.4% |
| | 24.9% - 25.9% |
| | 24.5% - 24.9% |
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Weighted average expected life (in years) | 5.3 - 5.4 |
| | 5.2 - 5.3 |
| | 5.1 - 5.2 |
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Weighted average fair value (in dollars) | $ | 8.63 |
| | $ | 8.46 |
| | $ | 7.59 |
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The weighted average fair values of shares granted were as follows:
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Year ended June 30, | 2013 |
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Performance-based restricted stock | $ | 55.13 |
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Time-based restricted stock | $ | 58.72 |
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B. Pension Plans
The Company has a defined benefit cash balance pension plan covering substantially all U.S. employees, under which employees are credited with a percentage of base pay plus interest. The plan interest credit rate varies from year-to-year based on the ten-year U.S. Treasury rate. Employees are fully vested upon completion of three years of service. The Company's policy is to make contributions within the range determined by generally accepted actuarial principles. In addition, the Company has various retirement plans for its non-U.S. employees and maintains a Supplemental Officers Retirement Plan (“SORP”). The SORP is a defined benefit plan pursuant to which the Company pays supplemental pension benefits to certain key officers upon retirement based upon the officers' years of service and compensation.
A June 30 measurement date was used in determining the Company's benefit obligations and fair value of plan assets.
The Company is required to (a) recognize in its Consolidated Balance Sheets an asset for a plan's net overfunded status or a liability for a plan's net underfunded status, (b) measure a plan's assets and its obligations that determine its funded status as of the end of the employer's fiscal year, and (c) recognize changes in the funded status of a defined benefit plan in the year in which the changes occur in accumulated other comprehensive income (loss).
The Company's pension plans' funded status as of June 30, 2013 and 2012 is as follows:
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June 30, | | 2013 | | 2012 |
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Change in plan assets: | | | | |
Fair value of plan assets at beginning of year | | $ | 1,469.5 |
| | $ | 1,313.3 |
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Actual return on plan assets | | 121.0 |
| | 106.6 |
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Employer contributions | | 135.3 |
| | 91.6 |
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Currency translation adjustments | | (1.5 | ) | | (4.6 | ) |
Benefits paid | | (48.2 | ) | | (37.4 | ) |
Fair value of plan assets at end of year | | $ | 1,676.1 |
| | $ | 1,469.5 |
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Change in benefit obligation: | | | | |
Benefit obligation at beginning of year | | $ | 1,412.1 |
| | $ | 1,178.8 |
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Service cost | | 67.2 |
| | 57.2 |
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Interest cost | | 55.1 |
| | 62.1 |
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Actuarial (gains)/losses | | (58.6 | ) | | 159.4 |
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Currency translation adjustments | | 0.2 |
| | (10.8 | ) |
Benefits paid | | (48.2 | ) | | (37.4 | ) |
Acquisitions | | — |
| | 2.8 |
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Projected benefit obligation at end of year | | $ | 1,427.8 |
| | $ | 1,412.1 |
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Funded status - plan assets less benefit obligations | | $ | 248.3 |
| | $ | 57.4 |
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The amounts recognized on the Consolidated Balance Sheets as of June 30, 2013 and 2012 consisted of:
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June 30, | | 2013 | | 2012 |
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Noncurrent assets | | $ | 362.6 |
| | $ | 170.3 |
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Current liabilities | | (4.7 | ) | | (4.3 | ) |
Noncurrent liabilities | | (109.6 | ) | | (108.6 | ) |
Net amount recognized | | $ | 248.3 |
| | $ | 57.4 |
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The accumulated benefit obligation for all defined benefit pension plans was $1,412.8 million and $1,399.9 million at June 30, 2013 and 2012, respectively.
The Company's pension plans with accumulated benefit obligations in excess of plan assets as of June 30, 2013 and 2012 had the following projected benefit obligation, accumulated benefit obligation and fair value of plan assets:
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June 30, | | 2013 | | 2012 |
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Projected benefit obligation | | $ | 127.7 |
| | $ | 171.5 |
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Accumulated benefit obligation | | $ | 115.3 |
| | $ | 161.8 |
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Fair value of plan assets | | $ | 14.2 |
| | $ | 60.8 |
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The components of net pension expense were as follows:
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| | 2013 | | 2012 | | 2011 |
Service cost – benefits earned during the period | | $ | 67.2 |
| | $ | 57.2 |
| | $ | 52.3 |
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Interest cost on projected benefits | | 55.1 |
| | 62.1 |
| | 56.6 |
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Expected return on plan assets | | (109.5 | ) | | (97.6 | ) | | (88.5 | ) |
Net amortization and deferral | | 30.9 |
| | 15.0 |
| | 20.1 |
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Net pension expense | | $ | 43.7 |
| | $ | 36.7 |
| | $ | 40.5 |
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The net actuarial loss, prior service cost, and transition obligation for the defined benefit pension plans that are included in accumulated other comprehensive income that have not yet been recognized as components of net periodic benefit cost are $311.2 million, $4.9 million, and $0.6 million, respectively, at June 30, 2013. The estimated net actuarial loss, prior service cost, and transition obligation for the defined benefit pension plans that will be amortized from accumulated other comprehensive income into net periodic pension cost over the next fiscal year are $18.8 million, $0.9 million, and $0.2 million, respectively, at June 30, 2013.
Assumptions used to determine the actuarial present value of benefit obligations were: |
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Years ended June 30, | | 2013 | | 2012 |
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Discount rate | | 4.50 | % | | 3.90 | % |
Increase in compensation levels | | 4.00 | % | | 4.00 | % |
Assumptions used to determine the net pension expense generally were:
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Years ended June 30, | | 2013 | | 2012 | | 2011 |
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Discount rate | | 3.90 | % | | 5.40 | % | | 5.25 | % |
Expected long-term rate of return on assets | | 7.25 | % | | 7.25 | % | | 7.25 | % |
Increase in compensation levels | | 4.00 | % | | 4.00 | % | | 5.50 | % |
The discount rate is based upon published rates for high-quality fixed-income investments that produce cash flows that approximate the timing and amount of expected future benefit payments.
The expected long-term rate of return on assets is determined based on historical and expected future rates of return on plan assets considering the target asset mix and the long-term investment strategy.
Plan Assets
The Company's pension plans' asset allocations at June 30, 2013 and 2012 by asset category were as follows:
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| | 2013 | | 2012 |
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U.S. fixed income securities | | 31 | % | | 41 | % |
U.S. equity securities | | 21 | % | | 41 | % |
International equity securities | | 21 | % | | 18 | % |
Global equity securities | | 27 | % | | — | % |
| | 100 | % | | 100 | % |
The Company's pension plans' asset investment strategy is designed to ensure prudent management of assets, consistent with long-term return objectives and the prompt fulfillment of all pension plan obligations. The investment strategy and asset mix were developed in coordination with an asset liability study conducted by external consultants to maximize the funded ratio with the least amount of volatility. In fiscal 2013, the Company revised the target asset allocation of the U.S. pension plan to include global equities as a separate asset class to enhance the diversification of overall pension plan investments.
The pension plans' assets are currently invested in various asset classes with differing expected rates of return, correlations and volatilities, including large capitalization and small capitalization U.S. equities, international equities, U.S. fixed income securities and cash.
The target asset allocation ranges are generally as follows:
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U.S. fixed income securities | 35% - 45% |
U.S. equity securities | 14% - 24% |
International equity securities | 11% - 21% |
Global equity securities | 20% - 30% |
The pension plans' fixed income portfolio is designed to match the duration and liquidity characteristics of the pension plans' liabilities. In addition, the pension plans invest only in investment-grade debt securities to ensure preservation of capital. The pension plans' equity portfolios are subject to diversification guidelines to reduce the impact of losses in single investments. Investment managers are prohibited from buying or selling commodities and from the short selling of securities.
None of the pension plans' assets are directly invested in the Company's stock, although the pension plans may hold a minimal amount of Company stock to the extent of the Company's participation in the S&P 500 Index.
The pension plans' investments included in Level 1 are valued using closing prices for identical instruments that are traded on active exchanges. The pension plans' investments included in Level 2 are valued utilizing inputs obtained from an independent pricing service, which are reviewed by the Company for reasonableness. To determine the fair value of our Level 2 plan assets, a variety of inputs are utilized, including benchmark yields, reported trades, non-binding broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, new issue data, and monthly payment information. The pension plans have no Level 3 investments at June 30, 2013.
The following table presents the investments of the pension plans measured at fair value at June 30, 2013:
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| | Level 1 | | Level 2 | | Level 3 | | Total |
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Commingled trusts | | $ | — |
| | $ | 1,050.7 |
| | $ | — |
| | $ | 1,050.7 |
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U.S. government securities | | — |
| | 228.3 |
| | — |
| | 228.3 |
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Mutual funds | | 79.2 |
| | — |
| | — |
| | 79.2 |
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Corporate and municipal bonds | | — |
| | 252.5 |
| | — |
| | 252.5 |
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Mortgage-backed security bonds | | — |
| | 22.7 |
| | — |
| | 22.7 |
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Total pension assets | | $ | 79.2 |
| | $ | 1,554.2 |
| | $ | — |
| | $ | 1,633.4 |
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In addition to the investments in the above table, the pension plans also held cash and cash equivalents of $42.7 million as of June 30, 2013, which have been classified as Level 2 in the fair value hierarchy.
The following table presents the investments of the pension plans measured at fair value at June 30, 2012:
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| | Level 1 | | Level 2 | | Level 3 | | Total |
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Commingled trusts | | $ | — |
| | $ | 583.5 |
| | $ | — |
| | $ | 583.5 |
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U.S. government securities | | — |
| | 272.5 |
| | — |
| | 272.5 |
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Mutual funds | | 269.6 |
| | — |
| | — |
| | 269.6 |
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Corporate and municipal bonds | | — |
| | 272.8 |
| | — |
| | 272.8 |
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Mortgage-backed security bonds | | — |
| | 13.9 |
| | — |
| | 13.9 |
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Total pension assets | | $ | 269.6 |
| | $ | 1,142.7 |
| | $ | — |
| | $ | 1,412.3 |
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In addition to the investments in the above table, the pension plans also held cash and cash equivalents of $57.2 million as of June 30, 2012, which have been classified as Level 2 in the fair value hierarchy.
Contributions
During fiscal 2013, the Company contributed $135.3 million to the pension plans. In July 2013, the Company contributed $75.0 million to the pension plans and expects to contribute an additional $8.7 million to the pension plans during its fiscal year ended June 30, 2014 ("fiscal 2014").
Estimated Future Benefit Payments
The benefits expected to be paid in each year from fiscal 2014 to 2018 are $54.1 million, $60.5 million, $67.1 million, $77.0 million and $86.0 million, respectively. The aggregate benefits expected to be paid in the five fiscal years from 2019 to 2023 are $568.6 million. The expected benefits to be paid are based on the same assumptions used to measure the Company's pension plans' benefit obligations at June 30, 2013 and includes estimated future employee service.
C. Retirement and Savings Plan. The Company has a 401(k) retirement and savings plan, which allows eligible employees to contribute up to 50% of their compensation annually and allows highly compensated employees to contribute up to 12% of their compensation annually. The Company matches a portion of employee contributions, which amounted to approximately $72.0 million, $65.9 million, and $57.5 million for the calendar years ended December 31, 2012, 2011, and 2010, respectively.
