Stock-Based Compensation

3 Months Ended

May 02, 2014

Stock-Based Compensation:

Plan Summaries: At May 2, 2014, the Company had stock-based compensation awards outstanding under the following plans: the 2006 Equity Incentive Plan, the Management Stock Compensation Plan, the Stock Compensation Plan and the 2006 Employee Stock Purchase Plan (ESPP). Leidos issues new shares upon the issuance of stock awards or exercise of stock options under these plans.

The 2006 Equity Incentive Plan provides the Company's and its affiliates' employees, directors and consultants the opportunity to receive various types of stock-based compensation and cash awards. The Company has issued stock options, vested stock awards, restricted stock awards including stock units, performance-based awards and cash awards under this plan.

Stock awards granted under the plan prior to fiscal 2015 generally vest or became exercisable 20%, 20%, 20% and 40% after one, two, three and four years, respectively. In fiscal 2015, the Company has begun granting awards that generally vest or become exercisable 25% after one year, two, three and four years.

Total Stock-Based Compensation. Total stock-based compensation expense and related tax benefits recognized for the periods presented was as follows:



	Three Months Ended
	May 2, 2014		May 3, 2013
	(in millions)
Stock-based compensation expense:
Stock options	$	2	$	2
Vesting stock awards	9		13
Total stock-based compensation expense recorded in continuing operations	$	11	$	15
Total stock-based compensation expense recorded in discontinued operations	$	—	$	9
Tax benefits recognized from stock-based compensation	$	4	$	6

Stock Options

Stock options granted during the three months ended May 2, 2014 and May 3, 2013 have terms of seven years and a vesting period of four years based upon required service conditions, except for stock options granted to the Company’s outside directors, which have a vesting period of one year.

The fair value of the Company’s stock option awards is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted average grant date fair value and assumptions used to determine the fair value of stock options granted for the periods presented were as follows:



	Three Months Ended
	May 2, 2014			May 3, 2013
Options Granted (in millions)	0.5			1.3			*
Weighted average grant-date fair value	$	6.23		$	6.81		*
Expected term (in years)	4.8			5.0
Expected volatility	25.1		%	25.0		%
Risk-free interest rate	1.6		%	0.8		%
Dividend yield	2.8		%	3.9		%

*Adjusted for additional awards granted for the $4.00 Special Dividend

As of May 2, 2014, compensation cost related to unvested stock options not yet recognized in the income statement was $8.2 million and is expected to be recognized over an average period of 1.8 years.

Vesting Stock

Compensation expense is measured at the grant date fair value and generally vests over a four-year vesting period, or seven-year for certain stock awards, based upon required service conditions and in some cases performance conditions. The grant date fair value is based on the closing price of the Company's common stock generally on the day before the date of grant.

During the three months ended May 2, 2014, the Company granted 0.6 million shares of vesting stock at a weighted average grant date fair value of $36.85.

As of May 2, 2014, compensation cost related to unvested shares not yet recognized in the income statement was $73.9 million and is expected to be recognized over an average period of 2.0 years.

Performance-Based Awards

The Company grants performance-based stock awards to certain officers and key employees of the Company under the 2006 Equity Incentive Plan. The Company’s performance-based stock awards vest and the stock is issued at the end of a three-year period based upon the achievement of specific performance criteria, with the number of shares ultimately awarded, if any, ranging up to 150% of the specified target awards. If performance is below the threshold level of performance, no shares will be issued. The performance period for performance-based stock awards granted in fiscal 2013 was deemed completed as of the last fiscal quarter prior to the separation of New SAIC with the target shares prorated for the completed period earned. For all of the remaining target shares in the original award, the performance condition was removed and the awards are subject to vesting based on continued employment through the original performance period.

There were no performance-based stock awards granted in fiscal 2014. For the fiscal 2015 awards granted, one-third of the target number of shares of stock granted under the awards will be allocated to each fiscal year over the three-year performance period and the actual number of shares to be issued with respect to each fiscal year will be based upon the achievement of that fiscal year’s performance criteria.

During the three months ended May 2, 2014, the Company granted approximately 40 thousand shares of performance based awards at a weighted average grant date fair value of $36.85.

As of May 2, 2014, compensation cost related to unvested performance-based awards not yet recognized in the income statement was $1.2 million and is expected to be recognized over an average period of 2.0 years.

Leidos, Inc.

Stock-Based Compensation