Accounting for Stock-Based Compensation

9 Months Ended

Sep. 30, 2011

Accounting for Stock-Based Compensation [Abstract]

ACCOUNTING FOR STOCK-BASED COMPENSATION

2. ACCOUNTING FOR STOCK-BASED COMPENSATION

Stock-based compensation awards are granted under the Community Health Systems, Inc. 2000 Stock Option and Award Plan, amended and restated as of March 24, 2009 (the “2000 Plan”), and the Community Health Systems, Inc. 2009 Stock Option and Award Plan, amended and restated as of March 18, 2011 (the “2009 Plan”).

The 2000 Plan allows for the grant of incentive stock options intended to qualify under Section 422 of the Internal Revenue Code (“IRC”), as well as stock options which do not so qualify, stock appreciation rights, restricted stock, restricted stock units, performance-based shares or units and other share awards. Prior to being amended in 2009, the 2000 Plan also allowed for the grant of phantom stock. Persons eligible to receive grants under the 2000 Plan include the Company’s directors, officers, employees and consultants. To date, all options granted under the 2000 Plan have been “nonqualified” stock options for tax purposes. Generally, vesting of these granted options occurs in one-third increments on each of the first three anniversaries of the award date. Options granted prior to 2005 have a 10-year contractual term, options granted in 2005 through 2007 have an eight-year contractual term and options granted in 2008 or later have a 10-year contractual term. As of September 30, 2011, 216,699 shares of unissued common stock were reserved for future grants under the 2000 Plan.

The 2009 Plan provides for the grant of incentive stock options intended to qualify under Section 422 of the IRC and for the grant of stock options which do not so qualify, stock appreciation rights, restricted stock, restricted stock units, performance-based shares or units and other share awards. Persons eligible to receive grants under the 2009 Plan include the Company’s directors, officers, employees and consultants. Options granted in 2011 have a 10-year contractual term. As of September 30, 2011, 3,054,268 shares of unissued common stock were reserved for future grants under the 2009 Plan.

The exercise price of all options granted is equal to the fair value of the Company’s common stock on the option grant date.

The following table reflects the impact of total compensation expense related to stock-based equity plans on the reported operating results for the respective periods (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Effect on income from continuing operations before income taxes	$	(10,855	)	$	(9,481	)	$	(31,588	)	$	(29,899	)
Effect on net income	$	(6,893	)	$	(5,964	)	$	(20,059	)	$	(18,806	)

At September 30, 2011, $69.6 million of unrecognized stock-based compensation expense was expected to be recognized over a weighted-average period of 24 months. Of that amount, $15.3 million related to outstanding unvested stock options was expected to be recognized over a weighted-average period of 24 months and $54.3 million related to outstanding unvested restricted stock, restricted stock units and phantom shares was expected to be recognized over a weighted-average period of 24 months. There were no modifications to awards during the three and nine months ended September 30, 2011.

The fair value of stock options was estimated using the Black Scholes option pricing model with the following assumptions and weighted-average fair values during the three and nine months ended September 30, 2011 and 2010:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Expected volatility		57.8	%		38.0	%		32.8	%		33.7	%
Expected dividends		—			—			—			—
Expected term		4 years			3 years			4 years			3.1 years
Risk-free interest rate		0.6	%		0.8	%		1.7	%		1.4	%

In determining expected term, the Company examined concentrations of option holdings and historical patterns of option exercises and forfeitures, as well as forward-looking factors, in an effort to determine if there were any discernable employee populations. From this analysis, the Company identified two primary employee populations, one consisting of certain senior executives and the other consisting of substantially all other recipients.

The expected volatility rate was estimated based on historical volatility. In determining expected volatility, the Company also reviewed the market-based implied volatility of actively traded options of its common stock and determined that historical volatility utilized to estimate the expected volatility did not differ significantly from the implied volatility.

The expected term computation is based on historical exercise and cancellation patterns and forward-looking factors, where present, for each population identified. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. The pre-vesting forfeiture rate is based on historical rates and forward-looking factors for each population identified. The Company adjusts the estimated forfeiture rate to its actual experience.

Options outstanding and exercisable under the 2000 Plan and the 2009 Plan as of September 30, 2011, and changes during each of the three-month periods following December 31, 2010, were as follows (in thousands, except share and per share data):

	Shares			Weighted - Average Exercise Price		Weighted - Average Remaining Contractual Term		Aggregate Intrinsic Value as of September 30, 2011
Outstanding at December 31, 2010		7,834,332		$	32.08
Granted		1,329,000			37.96
Exercised		(595,431	)		30.44
Forfeited and cancelled		(64,508	)		34.84
Outstanding at March 31, 2011		8,503,393			33.10
Granted		45,000			28.12
Exercised		(23,579	)		29.98
Forfeited and cancelled		(50,342	)		32.70
Outstanding at June 30, 2011		8,474,472			33.08
Granted		73,000			17.95
Exercised		(2,665	)		18.18
Forfeited and cancelled		(118,087	)		32.21
Outstanding at September 30, 2011		8,426,720		$	32.95		5.6 years	$	49
Exercisable at September 30, 2011		5,851,497		$	32.78		4.1 years	$	24

The weighted-average grant date fair value of stock options granted during the three months ended September 30, 2011 and 2010 was $7.97 and $8.52, respectively, and $10.18 and $8.20 during the nine months ended September 30, 2011 and 2010, respectively. The aggregate intrinsic value (the number of in-the-money stock options multiplied by the difference between the Company’s closing stock price on the last trading day of the reporting period ($16.64) and the exercise price of the respective stock options) in the table above represents the amount that would have been received by the option holders had all option holders exercised their options on September 30, 2011. This amount changes based on the market value of the Company’s common stock. There was substantially no aggregate intrinsic value of options exercised during the three months ended September 30, 2011. The aggregate intrinsic value of options exercised during the three months ended September 30, 2010 was $0.1 million. The aggregate intrinsic value of options exercised during the nine months ended September 30, 2011 and 2010 was $6.1 million and $28.3 million, respectively. The aggregate intrinsic value of options vested and expected to vest approximates that of the outstanding options.

The Company has also awarded restricted stock under the 2000 Plan and the 2009 Plan to its directors and employees of certain subsidiaries. The restrictions on these shares generally lapse in one-third increments on each of the first three anniversaries of the award date. Certain of the restricted stock awards granted to the Company’s senior executives contain a performance objective that must be met in addition to any vesting requirements. If the performance objective is not attained, the awards will be forfeited in their entirety. Once the performance objective has been attained, restrictions will lapse in one-third increments on each of the first three anniversaries of the award date. Notwithstanding the above-mentioned performance objectives and vesting requirements, the restrictions will lapse earlier in the event of death, disability or termination of employment by the Company for any reason other than for cause of the holder of the restricted stock, or change in control of the Company. Restricted stock awards subject to performance standards are not considered outstanding for purposes of determining earnings per share until the performance objectives have been satisfied.

Restricted stock outstanding under the 2000 Plan and the 2009 Plan as of September 30, 2011, and changes during each of the three-month periods following December 31, 2010, were as follows:

	Shares			Weighted - Average Grant Date Fair Value
Unvested at December 31, 2010		2,125,291		$	27.92
Granted		1,084,949			37.96
Vested		(962,662	)		27.27
Forfeited		—			—
Unvested at March 31, 2011		2,247,578			33.04
Granted		8,000			28.12
Vested		(12,000	)		33.49
Forfeited		—			—
Unvested at June 30, 2011		2,243,578			33.02
Granted		4,000			17.95
Vested		(9,331	)		30.26
Forfeited		(2,001	)		33.31
Unvested at September 30, 2011		2,236,246			33.00

On February 25, 2009, under the 2000 Plan, each of the Company’s outside directors received a grant of shares of phantom stock equal in value to approximately $130,000 divided by the closing price of the Company’s common stock on that date ($18.18), or 7,151 shares per director (a total of 42,906 shares of phantom stock). Pursuant to a March 24, 2009 amendment to the 2000 Plan, all subsequent grants of this type are denominated as “restricted stock unit” awards. On May 19, 2009, the newly elected outside director received a grant of 7,151 restricted stock units under the 2000 Plan, having a value at the time of $180,706 based upon the closing price of the Company’s common stock on that date of $25.27. On February 24, 2010, six of the Company’s seven outside directors each received a grant of 4,130 restricted stock units under the 2000 Plan, having a value at the time of approximately $140,000 based upon the closing price of the Company’s common stock on that date of $33.90. One outside director, who did not stand for reelection in 2010, did not receive such a grant. On February 23, 2011, each of the Company’s six outside directors received a grant of 3,688 restricted stock units under the 2009 Plan, having a value at the time of approximately $140,000 based upon the closing price of the Company’s common stock on that date of $37.96. Vesting of these shares of phantom stock and restricted stock units occurs in one-third increments on each of the first three anniversaries of the award date. During the three months ended September 30, 2011, no shares vested. During the nine months ended September 30, 2011, 22,560 shares vested at a weighted-average grant date fair value of $24.68. None of these grants were canceled during the three and nine months ended September 30, 2011. As of September 30, 2011, there were 52,956 shares of phantom stock and restricted stock units unvested at a weighted-average grant date fair value of $31.67.

Under the Directors’ Fees Deferral Plan, the Company’s outside directors may elect to receive share equivalent units in lieu of cash for their directors’ fees. These share equivalent units are held in the plan until the director electing to receive the share equivalent units retires or otherwise terminates his/her directorship with the Company. Share equivalent units are converted to shares of common stock of the Company at the time of distribution based on the closing market price of the Company’s common stock on that date. The following table represents the amount of directors’ fees which were deferred during each of the respective periods, and the number of share equivalent units into which such directors’ fees would have converted had each of the directors who had deferred such fees retired or terminated his/her directorship with the Company as of the end of the respective periods (in thousands, except share equivalent units):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Directors’ fees earned and deferred into plan	$	55	$	45	$	165	$	135
Share equivalent units		3,305		1,453		6,822		4,003

At September 30, 2011, a total of 25,623 share equivalent units were deferred in the plan with an aggregate fair value of $0.4 million, based on the closing market price of the Company’s common stock at September 30, 2011 of $16.64.