Stock-Based Compensation:

Engility Acquisition Assumed Awards

Upon the acquisition of Engility, all Engility outstanding and unvested equity awards were converted into SAIC vesting stock awards using the same exchange ratio as Engility’s common shareholders (0.45 SAIC share per Engility share). The Company assumed approximately 642,000 converted vesting stock awards with a fair value of $65.03 per share for a total of $42 million, which was bifurcated between pre- and post-combination periods of service in the amount of $22 million and $20 million, respectively. The amount attributable to the pre-combination service period is included in the purchase consideration of Engility. The remaining $20 million attributable to the post-combination service period will be recognized as post-combination service expense over the remaining vesting periods of the underlying awards. During fiscal 2019, subsequent to the acquisition, the Company completed certain integration activities that accelerated the recognition of $14 million of the post-combination service period expense, which has been included in the amounts reported within acquisition and integration costs on the consolidated statements of income.

Plan Summaries

Certain of the Company’s employees participate in the following four stock-based compensation plans: “2013 Equity Incentive Plan” (EIP), “Management Stock Compensation Plan,” “Employee Stock Purchase Plan” (ESPP), and the "2012 Long Term Performance Plan" (LTPP) for Engility assumed awards, which are herein referred to together as the “Plans.” The Company issues new shares on the vesting of stock awards or exercise of stock options under these Plans.

The EIP provides the Company’s employees and directors the opportunity to receive various types of stock-based compensation and cash awards. The terms of the stock-based awards granted to employees and directors are the same, except that those for directors cliff vest within one year of the grant date. As of February 1, 2019, the Company has outstanding stock options, vested and vesting stock awards, and performance share awards under this plan. Vesting stock awards and stock options granted under the EIP prior to fiscal 2015 generally vest or become exercisable 20%, 20%, 20%, and 40% after one, two, three and four years, respectively. Stock options granted under the EIP in fiscal 2015 and thereafter generally become exercisable 33%, 33%, and 33% after one, two and three years, respectively, while vesting stock awards granted in fiscal 2015 and thereafter generally vest 25%, 25%, 25% and 25% after one, two, three and four years, respectively. The maximum contractual term for stock options granted under the EIP is ten years, but historically the Company has granted stock options with a seven-year contractual term. Vesting may be accelerated for employees meeting retirement eligibility conditions. Stock-based awards generally provide for accelerated vesting if there is a change in control (as defined in the EIP). Vesting stock awards and performance share awards have forfeitable rights to dividends. In June 2014, the EIP was amended and restated to increase the total authorized shares of common stock for issuance under the EIP from 5.7 million to 8.5 million.

The Company grants performance-based stock awards to certain officers and key employees under the EIP. Performance shares are rights to receive shares of the Company’s stock on the satisfaction of service requirements and performance conditions. These awards cliff vest at the end of the third fiscal year following the grant date, subject to meeting the minimum service requirements and the achievement of certain annual and cumulative financial metrics of the Company’s performance, with the number of shares ultimately issued, if any, ranging up to 150% of the specified target shares. If performance is below the minimum threshold level of performance, no shares will be issued. For all performance share awards granted, the annual financial metrics are based on operating cash flows and the cumulative financial metrics are based on operating income.

The Management Stock Compensation Plan provides for awards in share units to eligible employees. Benefits from these plans are payable in shares of the Company’s stock that are held in a trust for the purpose of funding benefit payments to the participants. During fiscal 2017 all remaining outstanding awards in the Management Stock Compensation Plan vested. The Board of Directors may at any time amend or terminate the Management Stock Compensation Plan. In the event of a change in control of the Company (as defined by the Management Stock Compensation Plan), participant accounts will be immediately distributed, otherwise will generally be distributed upon retirement, based on the participant’s payout election, or upon termination. The Management Stock Compensation Plan does not provide for a maximum number of shares available for future issuance.

The Company’s ESPP allows eligible employees to purchase shares of the Company’s stock at a discount of up to 15% of the fair market value on the date of purchase. During the three years ended February 1, 2019, the discount was 5% of the fair market value on the date of purchase for purchases made under the Company’s ESPP, thereby resulting in the ESPP being non-compensatory. As of February 1, 2019, 3.4 million shares of the Company’s stock are authorized for issuance under the ESPP.

The LTPP provides certain employees of the Company the opportunity to receive various types of stock-based compensation awards. As of February 1, 2019, the Company has vesting stock awards assumed from the Engility acquisition under this plan. These remaining outstanding vesting stock awards assumed under the LTPP will continue to vest under their original vesting schedule, when granted by Engility prior to the acquisition, and generally cliff vest at the end of the third fiscal year following the grant date. Vesting may be accelerated for employees meeting retirement eligibility conditions. Vesting stock awards under the LTPP have forfeitable rights to dividends.

Expense and Related Tax Benefits Recognized

Stock-based compensation expense and related tax benefits recognized under the Plans were:



	Year Ended
	February 1, 2019		February 2, 2018		February 3, 2017
	(in millions)
Stock-based compensation expense:
Stock options	$	3	$	3	$	4
Vesting stock awards	37		21		24
Performance share awards	5		3		3
Total stock-based compensation expense	$	45	$	27	$	31
Tax benefits recognized from stock-based compensation	$	20	$	32	$	12

Stock Options

Stock options are granted with their exercise price equal to the closing market price of the Company’s stock on the last trading day preceding the grant date, except for those stock options outstanding as of September 27, 2013, for which the exercise prices (and number of stock options) were adjusted for the conversion at separation.

Stock option activity for the year ended February 1, 2019 was:



	Shares of stocks under stock options		Weighted average exercise price		Weighted average remaining contractual term	Aggregate intrinsic value
	(in millions)				(in years)	(in millions)
Outstanding at February 2, 2018	1.4		$	43.07	3.5	$	46
Options granted	0.1		85.62
Options forfeited or expired	—		—
Options exercised	(0.4	)	32.78
Outstanding at February 1, 2019	1.1		$	53.67	3.6	$	18
Options exercisable at February 1, 2019	0.8		$	45.78	2.8	$	17
Vested and expected to vest as of February 1, 2019	1.0		$	53.43	3.5	$	18

As of February 1, 2019 there was $2 million of unrecognized compensation cost, net of estimated forfeitures, related to stock options, which is expected to be recognized over a weighted average period of 0.9 years.

The following table summarizes activity related to exercises of stock options:



	Year Ended
	February 1, 2019		February 2, 2018		February 3, 2017
	(in millions)
Cash received from exercises of stock options	$	—	$	—	$	—
Stock exchanged at fair value upon exercises of stock options	$	1	$	1	$	3
Tax benefits from exercises of stock options	$	7	$	8	$	8
Total intrinsic value of options exercised	$	24	$	22	$	21

The fair value of stock option awards granted under the Company’s plan were valued using the Black-Scholes option-pricing model based on the following assumptions:

Expected Term--For options granted during fiscal 2019, the expected term was calculated from the Company's historical data using the midpoint method. For options granted prior to fiscal 2019, the expected term was calculated using the U.S. Security and Exchange Commission’s “simplified method” as the midpoint between the vesting term and contractual term.

Expected Volatility--For options granted in fiscal 2017 and after, the expected volatility is based on the historical volatility of the Company since the separation from former Parent. For options granted during fiscal 2016 and prior, the expected volatility is based on the volatilities of selected peer group companies over a period consistent with the expected term. Peer group companies were selected from companies within the Company’s industry that most closely match the Company’s business, including size, capital structure and customer base.

Risk-Free Interest Rate--The risk-free interest rate is based on the yield curve of a zero-coupon U.S. Treasury bond with a maturity equal to the expected term of the stock option on the date of grant.

Dividend Yield--The dividend yield assumed over the expected term of the option is calculated based on the most recently announced dividend as of the grant date.

The weighted average grant date fair value and assumptions used to determine the fair value of stock options granted for the periods presented were:



	Year Ended
	February 1, 2019			February 2, 2018			February 3, 2017
Weighted average grant-date fair value	$	19.48		$	16.34		$	10.20
Expected term (in years)	4.0			4.4			4.4
Expected volatility	29.0		%	28.2		%	28.9		%
Risk-free interest rate	2.5		%	1.7		%	1.2		%
Dividend yield	1.6		%	1.5		%	2.7		%

Vesting Stock Awards

Vesting stock award activity for the year ended February 1, 2019 was:



	Shares of stock under stock awards		Weighted average grant date fair value
	(in millions)
Unvested February 2, 2018	0.9		$	59.93
Awards granted	0.4		84.28
Awards assumed	0.6		65.03
Awards forfeited	(0.1	)	72.28
Awards vested	(0.8	)	60.36
Unvested February 1, 2019	1.0		$	70.76

The grant date fair value of vesting stock awards is based on the closing market price of the Company’s stock on the last trading day preceding the grant date. The weighted average grant date fair value of the vesting stock awards granted for fiscal 2019, fiscal 2018 and fiscal 2017 was $84.28, $72.90 and $53.62, respectively. As of February 1, 2019 there was $37 million of unrecognized compensation cost, net of estimated forfeitures, related to vesting stock awards, which is expected to be recognized over a weighted average period of 1.6 years. The fair value of vesting stock awards that vested in fiscal 2019, fiscal 2018 and fiscal 2017 was $60 million, $58 million and $64 million, respectively.

Performance Share Awards

Performance share award activity for the year ended February 1, 2019 was:



	Shares of stock under performance shares		Weighted average grant date fair value
	(in millions)
Unvested performance shares at February 2, 2018	0.2		$	62.96
Performance shares granted	0.1		85.31
Performance shares forfeited	(0.1	)	64.62
Performance shares vested	(0.1	)	53.34
Performance shares adjustment	—		—
Unvested performance shares at February 1, 2019	0.1		$	79.12

The actual number of shares to be issued upon vesting range between 0-150% of the specified target shares. The number of performance shares are presented at 100% of the specified target shares in the table above, except for performance shares that vested and performance shares adjustment. Performance shares vested reflects the number of shares to be issued based on the actual achievement of the performance goals for shares that vested during the period. Performance shares adjustment reflects the increase or decrease in the number of performance shares vested compared to the number of performance shares that would have vested at target. The fair value of performance share awards that vested in fiscal 2019 was $3 million. For unvested performance shares as of February 1, 2019 the Company expects to issue 0.1 million shares of stock in the future based on estimated future achievement of the performance goals. The grant date fair value of the performance share awards granted for fiscal 2019, fiscal 2018, and fiscal 2017 was $85.31, $72.91 and $53.34, respectively. The grant date fair value of performance share awards is based on the closing market price of the Company’s common stock on the last trading day preceding the grant date. As of February 1, 2019 there was $5.7 million of unrecognized compensation cost, net of estimated forfeitures, related to performance share awards, which is expected to be recognized over a weighted average period of 1.7 years.