Share-Based Compensation and Equity

Stock Option and Equity Plans

As of the end of 2017, 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 2017, 11.8 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 granted in 2017 is estimated on the date of grant using the Black-Scholes-Merton ("BSM") pricing model. The pricing model requires the use of the following estimates and assumptions:


•	Expected volatilities under the BSM model are based on an equal weighting of implied volatilities from traded options on our common shares and historical volatility.

•

The expected term of stock options granted is the period of time for which an option is expected to be outstanding beginning on the grant date. Our calculation of expected term takes into account the contractual term of the option, as well as the effects of employees' historical exercise patterns; groups of associates (executives and non-executives) that have similar historical behavior are considered separately for valuation purposes.


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

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



	For the Years Ended
	2017		2016		2015

Expected volatility (%)	26.7	%	29.4	%	27.6	%
Expected term (yrs)	7		7		7
Risk-free rate (%)	2.1	%	1.5	%	1.8	%

Stock option activity for 2017 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	23,601		$	40.33
Granted	4,301		63.33
Exercised	(5,693	)	21.08
Forfeited and expired	(877	)	57.40
Outstanding at end of year	21,332		49.40		$	386,339	6.45

Exercisable at end of year	10,242		$	38.45	$	297,546	4.53



	For the Years Ended
(In thousands, except for grant date fair values)	2017		2016		2015

Weighted-average grant date fair values	$	20.50	$	18.31	$	21.51

Total intrinsic value of options exercised	$	252,277	$	177,375	$	196,127

Cash received from exercise of stock options	76,705		63,794		51,475

Tax benefit realized upon exercise of stock options	85,657		64,347		66,868

As of the end of 2017, there was $155 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 3.33 years.

Non-vested Shares and Share Units

Non-vested shares and share units 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 service and/or performance measures are attained. The expense associated with these grants is recognized over the period from the date of grant to the vesting date.

Non-vested share and share unit activity for 2017 was as follows:



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

Outstanding at beginning of year	354		$	61.12
Granted	626		66.97
Vested	(170	)	56.40
Forfeited	(11	)	57.35

Outstanding at end of year	799		$	66.76



	For the Years Ended
(In thousands, except for grant date fair values)	2017		2016		2015

Weighted average grant date fair values for shares granted during the year	$	66.97	$	57.22	$	68.57

Total fair value of shares vested during the year	$	11,050	$	12,221	$	13,730

As of the end of 2017, there was $32 million of total unrecognized compensation cost related to non-vested share and share unit awards granted under all plans. That cost is expected to be recognized over a weighted-average period of 1.54 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 U.S. 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 and share unit 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 share units and ASPP are as follows:



	For the Years Ended
(In thousands)	2017			2016			2015

Stock option and non-vested share and share unit compensation expense	$	83,019		$	74,536		$	70,121
Associate stock purchase plan expense	6,277			6,537			5,393
Amounts capitalized in software development costs, net of amortization	(327		)	(482		)	(588		)

Amounts charged against earnings, before income tax benefit	$	88,969		$	80,591		$	74,926

Amount of related income tax benefit recognized in earnings	$	25,265		$	24,749		$	23,435

Preferred Stock

As of the end of 2017 and 2016, we had 1.0 million shares of authorized but unissued preferred stock, $0.01 par value.

Treasury Stock

In November 2016, our Board of Directors authorized a share repurchase program that allowed the Company to repurchase up to $500 million of shares of our common stock, excluding transaction costs. That program was completed in November 2017. In May 2017, our Board of Directors authorized a new share repurchase program that allows the Company to repurchase up to $500 million of shares of our common stock, excluding transaction costs. The repurchases are to be effectuated in the open market, by block purchase, in privately negotiated transactions, or through other transactions managed by broker-dealers. No time limit was set for the completion of the current program. During 2017, we repurchased 2.7 million shares for total consideration of $173 million under these programs. The shares were recorded as treasury stock and accounted for under the cost method. No repurchased shares have been retired. At December 30, 2017, $427 million remains available for repurchase under the outstanding program.

During 2016 and 2015, we repurchased 13.7 million and 5.7 million shares of our common stock for total consideration of $700 million and $345 million, respectively, under share repurchase programs that are now complete. These shares were recorded as treasury stock and accounted for under the cost method. No repurchased shares have been retired.