ADT 2013 Annual Report Download - page 158

FORM 10-K
of an award (“2012 Award Modification”) in accordance with the authoritative guidance for share-based
payments and affected all holders of Tyco incentive equity awards. As a result, the Company compared the fair
value of the awards immediately prior to the Separation to the fair value immediately after the Separation to
measure incremental compensation cost. The conversion resulted in an increase in the fair value of the awards
and, accordingly, the Company recorded non-cash compensation expense, the amount of which was immaterial.
The following table provides details on the ADT incentive equity awards issued in conjunction with the 2012
Award Modification:
Shares
Weighted-Average
Grant-Date
Fair Value
Stock options ............................ 7,837,941 $ 7.78
Restricted stock units ...................... 3,169,241 20.86
Stock Compensation Plans
Prior to the Separation, the Company adopted the ADT Corporation 2012 Stock Incentive Plan (the “Plan”).
The Plan provides for the award of stock options, stock appreciation rights, annual performance bonuses, long-
term performance awards, restricted units, restricted stock, deferred stock units, promissory stock and other
stock-based awards (collectively, “Awards”). In addition to the incentive equity awards converted from Tyco
awards, the Plan provides for a maximum of 8 million common shares to be issued as Awards, subject to
adjustment as provided under the terms of the Plan.
Total stock-based compensation cost recognized during fiscal years 2013, 2012 and 2011 was $19 million,
$7 million and $9 million, respectively, all of which is included in selling, general and administrative expenses in
the Consolidated and Combined Statements of Operations. The tax benefit associated with the Company’s
stock-based compensation arrangements during fiscal years 2013, 2012 and 2011 was $7 million, $3 million and
$3 million, respectively.
Stock Options—Options are granted to purchase common shares at prices that are equal to the fair market
value of the common shares on the date the option is granted. Conditions of vesting are determined at the time of
grant under the Plan. Options granted under the Plan generally vest in equal annual installments over a period of
four years and generally expire 10 years after the date of grant. The grant-date fair value of each option grant is
estimated using the Black-Scholes option pricing model and amortized on a straight-line basis over the requisite
service period of the awards, which is generally the vesting period. The compensation expense recognized is net
of estimated forfeitures. Forfeitures are estimated based on expected termination behavior, as well as an analysis
of actual option forfeitures.
Use of a valuation model requires management to make certain assumptions with respect to selected model
inputs. When measuring the fair value immediately before and after the 2012 Award Modification, the Company
gave specific consideration to the assumptions used in the Black-Scholes option pricing model. Fair value
immediately before the modification was measured based on the assumptions of Tyco whereas the fair value of
ADT options immediately after the modification, and from there on, was representative of ADT as a standalone
company. The weighted-average assumptions used in the Black-Scholes option pricing model for fiscal years
2013 and 2012 are as follows:
2013 2012
Risk-free interest rate ......................... 0.81 – 1.62% 1.01 – 1.21%
Expected life of options (years) ................. 5.75 – 6.00 5.50 – 6.50
Expected annual dividend yield ................. 1.09% 1.42%
Expected stock price volatility .................. 33% 33%
The weighted-average grant-date fair value of options granted during fiscal year 2013 was $13.06, and the
intrinsic value of options exercised during fiscal year 2013 was $59 million.
94