HCA Holdings, Inc. | 2013 | FY | 3


NOTE 2 — SHARE-BASED COMPENSATION

Stock Incentive Plan

The 2006 Stock Incentive Plan for Key Employees of HCA Holdings Inc. and its Affiliates, as Amended and Restated (the “Stock Incentive Plan”) is designed to promote the long term financial interests and growth of the Company by attracting and retaining management and other personnel and to motivate them to achieve long range goals and further the alignment of interests of participants with those of our stockholders through opportunities for increased stock, or stock-based, ownership in the Company. Portions of the options, stock appreciation rights (“SARs”) and restricted share units (“RSUs”) granted under the Stock Incentive Plan vest solely based upon continued employment over a specific period of time, and portions of the options, SARs and RSUs vest based both upon continued employment over a specific period of time and upon the achievement of predetermined financial targets over time. We granted 4,864,000 and 6,348,000 SARs and 4,858,800 and 4,647,400 RSUs under the Stock Incentive Plan during 2013 and 2012, respectively. At December 31, 2013, there were 25,088,200 stock options and SARs outstanding and exercisable, and there were 32,269,100 shares available for future grants under the Stock Incentive Plan.

Stock Option, SAR and RSU Activity

The fair value of each stock option and SAR award is estimated on the grant date, using valuation models and the weighted average assumptions indicated in the following table. Awards under the Stock Incentive Plan generally vest based on continued employment (“Time Stock Options and SARs” and “Time RSUs”) and based upon achievement of certain financial targets (“Performance Stock Options and SARs” and “Performance RSUs”). Each grant is valued as a single award with an expected term equal to the average expected term of the component vesting tranches. We use historical exercise behavior data and other factors to estimate the expected term of the options and SARs. The expected term of the share-based award is limited by the contractual term, and employee post-vesting termination behavior is incorporated in the historical exercise behavior data.

 

Compensation cost is recognized on the straight-line attribution method. The straight-line attribution method requires that total compensation expense recognized must at least equal the vested portion of the grant-date fair value. The expected volatility is derived using historical stock price information for our common stock and that of certain peer group companies. The risk-free interest rate is the approximate yield on United States Treasury Strips having a life equal to the expected share-based award life on the date of grant. The expected life is an estimate of the number of years a share-based award will be held before it is exercised.

 

     2013     2012     2011  

Risk-free interest rate

     1.20     1.18     0.89

Expected volatility

     45     50     41

Expected life, in years

     6.25        6.25        5.00   

Expected dividend yield

                     

Information regarding Time Stock Options and SARs and Performance Stock Options and SARs activity during 2013, 2012 and 2011 is summarized below (share amounts in thousands):

 

     Time
Stock
Options
and
SARs
    Performance
Stock
Options and
SARs
    Total
Stock
Options
and
SARs
    Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual Term
     Aggregate
Intrinsic Value
(dollars in millions)
 

Options outstanding, December 31, 2010

     24,517        26,009        50,526      $ 8.58         

Granted

     644        644        1,288        23.35         

Exercised

     (3,312     (1,732     (5,044     6.31         

Cancelled

     (110     (348     (458     5.88         
  

 

 

   

 

 

   

 

 

         

Options outstanding, December 31, 2011

     21,739        24,573        46,312        9.26         

Granted

     3,174        3,174        6,348        27.03         

Exercised

     (5,530     (5,128     (10,658     7.60         

Cancelled

     (192     (568     (760     9.49         
  

 

 

   

 

 

   

 

 

         

Options and SARs outstanding, December 31, 2012

     19,191        22,051        41,242        11.56         

Granted

     2,432        2,432        4,864        37.49         

Exercised

     (4,498     (5,843     (10,341     8.49         

Cancelled

     (316     (263     (579     25.50         
  

 

 

   

 

 

   

 

 

         

Options and SARs outstanding, December 31, 2013

     16,809        18,377        35,186        15.82         5.4 years       $ 1,122   
  

 

 

   

 

 

   

 

 

         

Options and SARs exercisable, December 31, 2013

     11,960        13,527        25,487      $ 10.55         4.1 years       $ 947   

The weighted average fair values of stock options and SARs granted during 2013, 2012 and 2011 were $16.68, $13.16 and $8.53 per share, respectively. The total intrinsic value of stock options and SARs exercised in the year ended December 31, 2013 was $334 million. As of December 31, 2013, the unrecognized compensation cost related to nonvested stock options and SARs was $104 million.

 

Information regarding Time RSUs and Performance RSUs activity during 2013, 2012 and 2011 is summarized below (share amounts in thousands):

 

     Time RSUs     Performance
RSUs
    Total RSUs     Weighted
Average
Grant
Date Fair
Value
 

RSUs outstanding, December 31, 2010

                            

Granted

     80               80      $ 30.00   

Vested

                            

Cancelled

                            
  

 

 

   

 

 

   

 

 

   

RSUs outstanding, December 31, 2011

     80               80        30.00   

Granted

     3,162        1,485        4,647        26.98   

Vested

     (4            (4     30.00   

Cancelled

     (164     (75     (239     26.99   
  

 

 

   

 

 

   

 

 

   

RSUs outstanding, December 31, 2012

     3,074        1,410        4,484        27.03   

Granted

     3,305        1,554        4,859        37.43   

Vested

     (831     (352     (1,183     27.30   

Cancelled

     (449     (213     (662     31.91   
  

 

 

   

 

 

   

 

 

   

RSUs outstanding, December 31, 2013

     5,099        2,399        7,498        33.30   
  

 

 

   

 

 

   

 

 

   

As of December 31, 2013, the unrecognized compensation cost related to RSUs was $185 million.

During 2012, our Board of Directors declared three distributions to the Company’s stockholders and holders of certain vested share-based awards. The distributions totaled $6.50 per share and vested share-based award (subject to limitations for certain awards), or $3.142 billion in the aggregate. Pursuant to the terms of our share-based award plans, the holders of nonvested stock options and SARs received $6.50 per share reductions to the exercise price of the applicable share-based awards (subject to certain limitations for certain share-based awards that resulted in deferred distributions for a portion of the declared distribution, which will be paid upon the vesting of the applicable share-based award). The holders of any nonvested RSUs will be paid the applicable distribution amounts upon the vesting of the applicable RSUs. There were no distributions declared during 2013 and 2011.


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