RED HAT INC | 2013 | FY | 3


NOTE 13—Share-based Awards

Overview

The Company’s 2004 Long-Term Incentive Plan, as amended and restated (the “2004 Plan”), provides for the granting of stock options, service-based share awards and performance-based share awards, among other awards. As of February 28, 2013, there were 23.6 million shares of common stock reserved for issuance under future share-based awards to be granted to any employee, officer or director or consultant of the Company at terms and prices to be determined by the Board of Directors.

The following table summarizes share-based awards, by type, granted during the years ended February 28, 2013, February 29, 2012 and February 28, 2011:

 

     Awards Granted
Year Ended
February 28, 2013
     Awards Granted
Year Ended
February 29, 2012
     Awards Granted
Year Ended
February 28, 2011
 
     Shares  and
Shares
Underlying
Awards
     Weighted
Average
Per Share
Award
Fair Value
     Shares  and
Shares
Underlying
Awards
     Weighted
Average
Per Share
Award
Fair Value
     Shares  and
Shares
Underlying
Awards
     Weighted
Average
Per Share
Award
Fair Value
 

Stock options

     114,361       $ 15.16         51,563       $ 15.41         83,891       $ 17.32   

Service-based shares and share units

     2,471,872       $ 54.62         2,148,070       $ 45.35         2,542,479       $ 37.98   

Performance-based shares and share units—Maximum

     613,800       $ 52.23         633,336       $ 43.60         626,672       $ 29.31   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total share-based awards

     3,200,033       $ 52.75         2,832,969       $ 44.41         3,253,042       $ 35.78   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following summarizes share-based compensation expense recognized in the Company’s Consolidated Financial Statements for the years ended February 28, 2013, February 29, 2012 and February 28, 2011 (in thousands):

 

     Year Ended
February 28,
2013
     Year Ended
February 29,
2012
     Year Ended
February 28,
2011
 

Cost of revenue

   $ 9,433       $ 7,880       $ 6,053   

Sales and marketing

     32,906         25,060         18,971   

Research and development

     29,647         21,570         15,639   

General and administrative

     26,712         24,757         19,934   
  

 

 

    

 

 

    

 

 

 

Total share-based compensation expense

   $ 98,698       $ 79,267       $ 60,597   
  

 

 

    

 

 

    

 

 

 

Share-based compensation expense qualifying for capitalization was insignificant for each of the Company’s fiscal years ended February 28, 2013, February 29, 2012 and February 28, 2011. Accordingly, no share-based compensation expense was capitalized during these years.

Estimated annual forfeitures—An estimated forfeiture rate of 10.0% per annum, which approximates the Company’s historical rate, was applied to options and service-based share awards. Awards are adjusted to actual forfeiture rates at vesting. The Company reassesses its estimated forfeiture rate annually or when new information, including actual forfeitures, indicate a change is appropriate.

Stock Options

The 2004 Plan provides that the purchase price per share for each option shall not be less than the fair market value of the underlying share on the date of grant. Options granted under the 2004 Plan to date include contract terms of five years and generally vest 25% upon completion of one full year of service and 6.25% on the first day of each subsequent three-month period of service. The maximum contract term for an option granted under the 2004 Plan is seven years from the date of grant.

 

The total fair value of stock options recognized in the Consolidated Financial Statements for the years ended February 28, 2013, February 29, 2012 and February 28, 2011 was as follows (in thousands):

 

     Year Ended
February 28,
2013
     Year Ended
February 29,
2012
     Year Ended
February 28,
2011
 

Total fair value of stock options recognized

   $ 2,791       $ 3,104       $ 6,038   
  

 

 

    

 

 

    

 

 

 

The following table summarizes the activity for the Company’s stock options for the years ended February 28, 2013, February 29, 2012 and February 28, 2011:

 

     Shares  Underlying
Options
    Weighted Average
Exercise  Price Per
Share
 

Outstanding at February 28, 2010

     9,224,309      $ 13.03   
  

 

 

   

 

 

 

Granted

     83,891        33.59   

Exercised

     (7,071,001     11.94   

Forfeited

     (207,711     19.25   
  

 

 

   

 

 

 

Outstanding at February 28, 2011

     2,029,488      $ 16.88   
  

 

 

   

 

 

 

Granted

     51,563        45.08   

Exercised

     (1,059,191     15.87   

Forfeited

     (123,618     17.16   

Assumed (1)

     204,911        1.13   
  

 

 

   

 

 

 

Outstanding at February 29, 2012

     1,103,153      $ 16.21   
  

 

 

   

 

 

 

Granted

     114,361        55.17   

Exercised

     (735,086     15.61   

Forfeited

     (29,741     25.10   
  

 

 

   

 

 

 

Outstanding at February 28, 2013

     452,687      $ 26.43   
  

 

 

   

 

 

 

 

(1) Amount represents partially vested options assumed as part of a business combination.

As described above, options are typically granted with an exercise price equal to the fair market value of the Company’s common stock on the date of grant. No options were granted by the Company during the three years ended February 28, 2013 with exercise prices less than the grant date fair value of the Company’s common stock.

The following summarizes information, as of February 28, 2013, about the Company’s outstanding and exercisable stock options:

 

     Options Outstanding      Options Exercisable  

Exercise Prices

   Number
Outstanding
     Weighted
Average
Remaining
Contractual Life
     Weighted
Average
Exercise Price
     Number
Exercisable
     Weighted
Average
Exercise Price
 

$0.00 – $10.00

     149,625         4.9       $ 3.30         87,916       $ 4.18   

$10.01 – $20.00

     85,401         1.2       $ 15.65         85,127       $ 15.64   

$20.01 – $30.00

     35,551         1.6       $ 27.24         28,303       $ 27.01   

$30.01 – $40.00

     29,664         2.6       $ 39.45         15,083       $ 39.52   

$40.01 and over

     152,446         4.3       $ 52.44         12,505       $ 45.06   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     452,687         3.6       $ 26.43         228,934       $ 15.83   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

The following summarizes the intrinsic value, as of February 28, 2013, of the Company’s outstanding, exercisable and expected to vest stock options:

 

Intrinsic Value of Stock Options

   Number of
Stock Options
     Weighted  Average
Remaining
Contractual Life
     Intrinsic Value  at
February 28, 2013
(in thousands)
 

Outstanding

     452,687         3.6       $ 11,527,364   

Exercisable

     228,934         2.0       $ 8,010,217   

Expected to vest (assuming annual forfeiture rate of 10%)

     203,026         5.2       $ 3,641,216   

The intrinsic value of stock options exercised during the years ended February 28, 2013, February 29, 2012 and February 28, 2011 was as follows (in thousands):

 

     Year Ended
February 28,
2013
     Year Ended
February 29,
2012
     Year Ended
February 28,
2011
 

Total intrinsic value of stock options exercised

   $ 29,598       $ 31,736       $ 161,796   
  

 

 

    

 

 

    

 

 

 

As of February 28, 2013, compensation cost related to unvested stock options not yet recognized in the Company’s Consolidated Financial Statements totaled $4.8 million. The weighted average period over which these unvested stock options are expected to be recognized is approximately 2.5 years.

The fair values of options granted during the years ended February 28, 2013, February 29, 2012 and February 28, 2011 were estimated on the date of grant using the Black-Scholes-Merton option-pricing model based on the following weighted average assumptions:

 

     Year Ended
February 28,
2013
    Year Ended
February 29,
2012
    Year Ended
February 28,
2011
 

Expected dividend yield

            

Risk-free interest rate

     0.41     0.61     0.70

Expected volatility (1)

     38.13     47.91     46.84

Expected life (in years) (2)

     3.27        3.27        3.27   

Weighted average fair value of options granted during the period

   $ 15.16      $ 15.41      $ 17.32   

 

(1) The expected volatility rates for options granted during the years ended February 28, 2013, February 29, 2012 and February 28, 2011 were estimated based on an approximate equal weighting of the historical volatility of the Company’s common stock over a period of approximately 3.27 years and the implied volatility of publicly traded options for the Company’s common stock.

 

(2) The expected term for options granted during the years ended February 28, 2013, February 29, 2012 and February 28, 2011 was determined based on the Company’s historical exercise data. The Company reassesses its estimate of expected term annually or when new information indicates a change is appropriate.

Service-based Share Awards

Service-based share awards include nonvested shares, nonvested share units and deferred share units granted under the 2004 Plan. Nonvested shares and share units generally vest, subject to continued service to the Company, 25% on the first anniversary of the date of grant and (i) 6.25% on the first day of each subsequent three-month period for nonvested shares and (ii) 25% each year over a four-year period beginning on the date of grant for nonvested share units. Nonvested shares and nonvested share units are generally amortized to expense on a straight-line basis over four years. Deferred share units are awarded to directors and generally vest within one year when issued in lieu of annual share awards or immediately when issued in lieu of cash.

 

The total fair value of service-based share awards recognized in the Company’s Consolidated Financial Statements for the three years ended February 28, 2013 was as follows (in thousands):

 

     Year Ended
February 28,
2013
     Year Ended
February 29,
2012
     Year Ended
February 28,
2011
 

Total fair value of service-based awards recognized

   $ 76,460       $ 61,818       $ 44,050   
  

 

 

    

 

 

    

 

 

 

The following table summarizes the activity for the Company’s service-based share awards for the years ended February 28, 2013, February 29, 2012 and February 28, 2011:

 

     Nonvested
Shares and
Share Units
    Weighted  Average
Grant-date
Fair Value
 

Service-based share awards at February 28, 2010

     5,784,926      $ 21.03   
  

 

 

   

 

 

 

Granted

     2,542,479        37.98   

Vested

     (1,800,281     20.43   

Forfeited

     (733,786     21.52   
  

 

 

   

 

 

 

Service-based share awards at February 28, 2011

     5,793,338      $ 28.60   
  

 

 

   

 

 

 

Granted

     2,148,070        45.35   

Vested

     (2,162,667     25.78   

Forfeited

     (431,900     32.22   

Assumed (1)

     139,798        43.34   
  

 

 

   

 

 

 

Service-based share awards at February 29, 2012

     5,486,639      $ 36.36   
  

 

 

   

 

 

 

Granted

     2,471,872        54.62   

Vested

     (2,184,588     31.33   

Forfeited

     (580,490     41.56   
  

 

 

   

 

 

 

Service-based share awards at February 28, 2013

     5,193,433      $ 46.59   
  

 

 

   

 

 

 

 

(1) Amount represents partially vested share awards assumed as part of a business combination.

The following summarizes the intrinsic value, as of February 28, 2013, of the Company’s service-based awards outstanding and expected to vest:

 

Intrinsic Value of

Service-based Awards

   Number of
Shares and
Share Units
     Weighted  Average
Remaining
Vesting Period
     Intrinsic Value  at
February 28, 2013
(in thousands)
 

Outstanding

     5,193,433         1.6       $ 263,878   

Expected to vest (assuming annual forfeiture rate of 10%)

     4,379,416         1.6       $ 222,518   

The intrinsic value of service-based awards vesting during the three years ended February 28, 2013 was as follows (in thousands):

 

     Year Ended
February 28,
2013
     Year Ended
February 29,
2012
     Year Ended
February 28,
2011
 

Total intrinsic value of service-based awards vesting

   $ 118,299       $ 96,536       $ 70,493   
  

 

 

    

 

 

    

 

 

 

 

As of February 28, 2013, compensation cost related to service-based share awards not yet recognized in the Company’s Consolidated Financial Statements totaled $207.8 million. The weighted average period over which these nonvested awards are expected to be recognized is approximately 2.9 years.

Performance-based Share Awards

Under the 2004 Plan, certain executive officers and senior management were awarded a target number of performance share units (“PSUs”). The PSU payouts are either based on (i) the Company’s financial performance (“performance condition”) or (ii) the performance of the Company’s common stock (“market condition”). Set forth below are general descriptions of the two types of performance-based awards granted to certain members of senior management:

PSUs with Performance Conditions

Depending on the Company’s financial performance relative to the financial performance of specified peer companies, PSU grantees may earn up to 200% of the target number of PSUs (the “Maximum PSUs”) over a performance period with three separate performance segments corresponding to three fiscal years of the Company. Up to 25% of the Maximum PSUs may be earned in respect of the first performance segment; up to 50% of the Maximum PSUs may be earned in respect of the second performance segment, less the amount earned in the first performance segment; and up to 100% of the Maximum PSUs may be earned in respect of the third performance segment, less the amount earned in the first and second performance segments.

PSUs with Market Conditions

Depending on the performance of the Company’s common stock over a performance period of approximately three years, PSU grantees may earn up to 200% of the target number of PSUs. The number of PSUs earned is determined based on a comparison of the performance of the Company’s stock price relative to the performance of the stock price of specified peer companies during the performance period. Each grantee will receive a number of shares of common stock equal to the number of PSUs earned in a single payout following the end of the performance period.

 

The following table summarizes the activity for the Company’s PSUs for the years ended February 28, 2013, February 29, 2012 and February 28, 2011:

 

     Maximum  

Activity

   Shares
Underlying
Performance
Share Units
    Weighted Average
Grant  Date
Fair Value
 

Outstanding at February 28, 2010

     1,273,668      $ 20.94   
  

 

 

   

 

 

 

Granted

     626,672      $ 29.31   

Vested

     (451,725   $ 21.35   

Forfeited

     (18,610     21.00   
  

 

 

   

 

 

 

Outstanding at February 28, 2011

     1,430,005      $ 24.48   
  

 

 

   

 

 

 

Granted

     633,336      $ 43.60   

Vested

     (337,734   $ 23.98   

Forfeited

     —          —     
  

 

 

   

 

 

 

Outstanding at February 29, 2012

     1,725,607      $ 31.60   
  

 

 

   

 

 

 

Granted

     613,800      $ 52.23   

Vested

     (634,384   $ 23.62   

Forfeited

     (200,353   $ 32.81   
  

 

 

   

 

 

 

Outstanding at February 28, 2013

     1,504,670      $ 43.22   
  

 

 

   

 

 

 

 

(1) Vested and forfeited amounts represent the actual number of shares vesting and forfeited during the year. Outstanding represents the remaining maximum potential shares available to vest as of the period ended.

The total fair value of performance-based share awards recognized in the Company’s Consolidated Financial Statements for the three years ended February 28, 2013 was as follows (in thousands):

 

     Year Ended
February 28,
2013
     Year Ended
February 29,
2012
     Year Ended
February 28,
2011
 

Total fair value of performance-based awards recognized

   $ 19,447       $ 14,345       $ 10,509   
  

 

 

    

 

 

    

 

 

 

The total intrinsic value of performance-based share awards vesting during the three years ended February 28, 2013 was as follows (in thousands):

 

     Year Ended
February 28,
2013
     Year Ended
February 29,
2012
     Year Ended
February 28,
2011
 

Total intrinsic value of performance-based awards vesting

   $ 37,872       $ 16,032       $ 13,904   
  

 

 

    

 

 

    

 

 

 

As of February 28, 2013, the number of shares subject to PSU awards expected to vest was 1.1 million shares. Compensation expense related to PSUs expected to vest but not yet recognized in the Consolidated Financial Statements totaled $18.8 million as of February 28, 2013. The weighted average period over which these awards are expected to be recognized is approximately 2.1 years.


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