Share-Based Compensation and Equity

Stock Option and Equity Plans

As of the end of 2014, we had five fixed stock option and equity plans in effect for associates and directors. This includes one plan from which we could issue grants, the Cerner Corporation 2011 Omnibus Equity Incentive Plan (the Omnibus Plan); and four plans from which no new grants are permitted, but some awards remain outstanding (Plans D, E, F, and G).

Awards under the Omnibus Plan may consist of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, performance grants and bonus shares. At the end of 2014, 8.1 million shares remain available for awards. Stock options granted under the Omnibus Plan are exercisable at a price not less than fair market value on the date of grant. Stock options under the Omnibus Plan typically vest over a period of five years and are exercisable for periods of up to 10 years.

Stock Options

The fair market value of each stock option award is estimated on the date of grant using a lattice option-pricing model. The pricing model requires the use of the following estimates and assumptions:

•

Expected volatilities under the lattice model are based on an equal weighting of implied volatilities from traded options on our shares and historical volatility. We use historical data to estimate the stock option exercise and associate departure behavior used in the lattice model; groups of associates (executives and non-executives) that have similar historical behavior are considered separately for valuation purposes.


•	The expected term of stock options granted is derived from the output of the lattice model and represents the period of time that stock options granted are expected to be outstanding.


•	The risk-free rate is based on the zero-coupon U.S. Treasury bond with a term equal to the contractual term of the awards.

The weighted-average assumptions used to estimate the fair market value of stock options are as follows:



	2014		2013		2012

Expected volatility (%)	29.7	%	30.5	%	34.8	%
Expected term (yrs)	9.1		9.1		9.1
Risk-free rate (%)	2.9	%	1.9	%	2.1	%

Stock option activity for 2014 was as follows:



(In thousands, except per share data)	Number of Shares		Weighted- Average Exercise Price		Aggregate Intrinsic Value		Weighted-Average Remaining Contractual Term (Yrs)
Outstanding at beginning of year	24,407		$	22.24
Granted	3,271		52.19
Exercised	(2,719	)	12.70
Forfeited and expired	(330	)	42.31
Outstanding at end of year	24,629		27.00		$	936,584	6.00

Exercisable at end of year	14,387		$	14.39	$	728,611	4.50



	For the Years Ended
(In thousands, except for grant date fair values)	2014		2013		2012

Weighted-average grant date fair values	$	22.59	$	19.57	$	18.52

Total intrinsic value of options exercised	$	124,828	$	118,051	$	152,117

Cash received from exercise of stock options	31,879		31,403		38,147

Tax benefit realized upon exercise of stock options	44,029		43,523		55,952

As of the end of 2014, there was $136.1 million of total unrecognized compensation cost related to stock options granted under all plans. That cost is expected to be recognized over a weighted-average period of 3.10 years.

Non-vested Shares

Non-vested shares are valued at fair market value on the date of grant and will vest provided the recipient has continuously served on the Board of Directors through such vesting date or, in the case of an associate, provided that performance measures are attained. The expense associated with these grants is recognized over the period from the date of grant to the vesting date, when achievement of the performance condition is deemed probable.

Non-vested share activity for 2014 was as follows:



(In thousands, except per share data)	Number of Shares		Weighted-Average Grant Date Fair Value

Outstanding at beginning of year	552		$	38.54
Granted	167		55.27
Vested	(208	)	33.38
Forfeited	(5	)	34.48

Outstanding at end of year	506		$	46.21



	For the Years Ended
(In thousands, except for grant date fair values)	2014		2013		2012

Weighted average grant date fair values for shares granted during the year	$	55.27	$	46.66	$	38.28

Total fair value of shares vested during the year	$	11,294	$	13,649	$	2,612

As of the end of 2014, there was $11.0 million of total unrecognized compensation cost related to non-vested share awards granted under all plans. That cost is expected to be recognized over a weighted-average period of 1.29 years.

Associate Stock Purchase Plan

We established an Associate Stock Purchase Plan (ASPP) in 2001, which qualifies under Section 423 of the Internal Revenue Code. Each individual employed by us and associates of our United States based subsidiaries, except as provided below, are eligible to participate in the ASPP (Participants). The following individuals are excluded from participation: (a) persons who, as of the beginning of a purchase period under the Plan, have been continuously employed by us or our domestic subsidiaries for less than two weeks; (b) persons who, as of the beginning of a purchase period, own directly or indirectly, or hold options or rights to acquire under any agreement or Company plan, an aggregate of 5% or more of the total combined voting power or value of all outstanding shares of all classes of Company Common Stock; and, (c) persons who are customarily employed by us for less than 20 hours per week or for less than five months in any calendar year. Participants may elect to make contributions from 1% to 20% of compensation to the ASPP, subject to annual limitations determined by the Internal Revenue Service. Participants may purchase Company Common Stock at a 15% discount on the last business day of the option period. The purchase of Company Common Stock is made through the ASPP on the open market and subsequently reissued to Participants. The difference between the open market purchase and the Participant’s purchase price is recognized as compensation expense, as such difference is paid by Cerner, in cash.

Share Based Compensation Cost

Our stock option and non-vested share awards qualify for equity classification. The costs of our ASPP, along with participant contributions, are recorded as a liability until open market purchases are completed. The amounts recognized in the consolidated statements of operations with respect to stock options, non-vested shares and ASPP are as follows:



	For the Years Ended
(In thousands)	2014			2013			2012

Stock option and non-vested share compensation expense	$	59,292		$	46,295		$	36,113
Associate stock purchase plan expense	4,603			3,704			2,859
Amounts capitalized in software development costs, net of amortization	(930		)	(1,045		)	(860		)

Amounts charged against earnings, before income tax benefit	$	62,965		$	48,954		$	38,112

Amount of related income tax benefit recognized in earnings	$	22,101		$	18,607		$	14,578

Preferred Stock

As of the end of 2014 and 2013, we had 1.0 million shares of authorized but unissued preferred stock, $0.01 par value.

Treasury Stock

In May 2014, our Board of Directors approved an amendment to the stock repurchase program that was authorized in December 2013. Under the amendment, the Company may repurchase shares of our common stock up to an additional $100.0 million. This increase authorizes repurchases of up to $317.0 million, in the aggregate, excluding transaction costs. The repurchases are to be effectuated in the open market, by block purchase, or possibly through other transactions managed by broker-dealers. No time limit was set for completion of the program.

During 2014, we repurchased 4.1 million shares for consideration of $217.0 million, excluding transaction costs. These shares were recorded as treasury stock and accounted for under the cost method. No repurchased shares have been retired. At January 3, 2015, $100.0 million remains available for purchases under the program.

In December 2012, our Board of Directors authorized a stock repurchase program of up to $170.0 million, excluding transaction costs, of our common stock. During 2013, we repurchased 3.6 million shares for total consideration of $170.0 million. All of the repurchased shares at the time of our June 2013 stock split were utilized to settle a portion of the stock split distribution. This program is now complete.