Note O — Stock-based Compensation

VF is authorized to grant nonqualified stock options, restricted stock units (“RSUs”) and restricted stock to officers, key employees and nonemployee members of VF’s Board of Directors under the amended and restated 1996 Stock Compensation Plan approved by stockholders. Substantially all stock-based compensation awards are classified as equity awards, which are accounted for in stockholders’ equity in the Consolidated Balance Sheets. On a limited basis, cash-settled stock appreciation rights are granted to employees and accounted for as liabilities in the Consolidated Balance Sheets. Liability-classified awards are remeasured to fair value each reporting period until the award is settled. Compensation cost for all awards expected to vest is recognized over the shorter of the requisite service period or the vesting period. Awards that do not vest are forfeited. VF has elected to compute income tax benefits associated with stock option awards under the short-cut method as allowed by the applicable accounting literature.

Total stock-based compensation cost and the associated income tax benefits related to stock-based compensation arrangements recognized in the Consolidated Statements of Income, and stock-based compensation costs included in inventory in the Consolidated Balance Sheets, are as follows:

 

		2014				2013				2012
		In thousands
Stock-based compensation cost		$	104,313			$	87,118			$	92,814
Income tax benefits			41,725				32,059				34,156
Stock-based compensation costs included in inventory			797				119				221

 

At the end of 2014, there was $49.7 million of total unrecognized compensation cost related to all stock-based compensation arrangements that will be recognized over a weighted average period of 1 year.

At the end of 2014, there were 26,218,230 shares available for future grants of stock options and stock awards under the 1996 Stock Compensation Plan. Shares for option exercises are issued from VF’s authorized but unissued Common Stock. VF has a practice of repurchasing shares of Common Stock in the open market to offset, on a long-term basis, dilution caused by awards under equity compensation plans.

Stock Options

Stock options are granted with an exercise price equal to the fair market value of VF Common Stock on the date of grant. Employee stock options vest in equal annual installments over three years, and compensation cost is recognized ratably over the shorter of the requisite service period or the vesting period. Stock options granted to nonemployee members of the Board of Directors become exercisable one year from the date of grant. All options have ten-year terms. The grant date fair value of each option award is calculated using a lattice option-pricing valuation model, which incorporates a range of assumptions for inputs as follows:

 

		2014		2013		2012
Expected volatility		23% to 29%		24% to 29%		27% to 31%
Weighted average expected volatility		26%		27%		30%
Expected term (in years)		5.5 to 7.3		5.6 to 7.4		5.6 to 7.5
Dividend yield		2.1%		2.3%		2.5%
Risk-free interest rate		0.1% to 2.7%		0.1% to 2.0%		0.1% to 2.1%
Weighted average fair value at date of grant		$12.01		$8.34		$8.36

Expected volatility over the contractual term of an option was based on a combination of the implied volatility from publicly traded options on VF Common Stock and the historical volatility of VF Common Stock. The expected term represents the period of time over which options that vest are expected to be outstanding before exercise. VF used historical data to estimate option exercise behaviors and to estimate the number of options that would vest. Groups of employees that have historically exhibited similar option exercise behaviors were considered separately in estimating the expected term for each employee group. Dividend yield represents expected dividends on VF Common Stock for the contractual life of the options. Risk-free interest rates for the periods during the contractual life of the option were the implied yields at the date of grant from the U.S. Treasury zero coupon yield curve.

Stock option activity for 2014 is summarized as follows:

 

		Number of Shares				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term (Years)				Aggregate Intrinsic Value (In thousands)
Outstanding, December 2013			16,045,308			$	27.25
Granted			2,825,207				56.86
Exercised			(3,410,967	)			22.44
Forfeited/cancelled			(324,520	)			47.81
Outstanding, December 2014			15,135,028				33.42				6.6				610,572
Exercisable, December 2014			9,324,005				24.74				5.5				457,018

 

The total fair value of stock options that vested during 2014, 2013 and 2012 was $22.6 million, $23.4 million and $20.4 million, respectively. The total intrinsic value of stock options exercised during 2014, 2013 and 2012 was $143.7 million, $127.3 million and $112.9 million, respectively.

Restricted Stock Units

VF grants performance-based RSUs to key employees as a long-term incentive. These RSUs enable the recipients to receive shares of VF Common Stock at the end of a three-year period. Each RSU has a potential final value ranging from zero to two shares of VF Common Stock. The number of shares earned by participants, if any, is based on achievement of a three-year baseline profitability goal and annually established performance goals set by the Compensation Committee of the Board of Directors. Shares are issued to participants in the year following the conclusion of each three-year performance period.

The actual number of shares earned may also be adjusted upward or downward by 25% of the target award, based on how VF’s total shareholder return (“TSR”) over the three-year period compares to the TSR for companies included in the Standard & Poor’s 500 Index. The weighted average grant date fair value of the TSR-based adjustment was determined using a Monte Carlo simulation technique that incorporates option-pricing model inputs, and was $1.41, $3.16 and $3.02 per share for the 2014, 2013 and 2012 RSU grants, respectively.

VF also grants nonperformance-based RSUs to a smaller group of key employees and nonemployee members of the Board of Directors. Each RSU entitles the holder to one share of VF Common Stock. The employee RSUs generally vest four years after the date of grant. The RSUs granted to nonemployee members of the Board of Directors vest upon grant and will be settled in shares of VF Common Stock one year from the date of grant.

Dividend equivalents on the RSUs accrue without compounding and are payable in additional shares of VF Common Stock when the RSUs vest. Dividend equivalents are subject to the same risk of forfeiture as the RSUs.

RSU activity for 2014 is summarized as follows:

 

		Performance-based								Nonperformance-based
		Number Outstanding				Weighted Average Grant Date Fair Value				Number Outstanding				Weighted Average Grant Date Fair Value
Outstanding, December 2013			2,303,192			$	33.04				614,324			$	28.99
Granted			586,769				56.86				29,595				58.00
Issued as Common Stock			(865,445	)			23.94				(244,324	)			22.86
Forfeited/cancelled			(83,855	)			46.36				(13,000	)			35.90
Outstanding, December 2014			1,940,661				43.73				386,595				34.86
Vested, December 2014			1,169,587				40.78				12,595				56.79

The weighted average fair value of performance-based RSUs granted during 2014, 2013 and 2012 was $56.86, $40.64 and $36.37 per share, respectively, which was equal to the fair market value of the underlying VF Common Stock on each grant date. The total fair market value of awards outstanding at the end of 2014 was $143.1 million. Awards earned and vested for the three-year performance period ended in 2014 and distributable in early 2015 totaled 1,290,354 shares of VF Common Stock having a value of $88.4 million, as approved by the Compensation Committee of the Board of Directors. Similarly, 1,457,159 shares of Common Stock having a value of $85.8 million were earned for the performance period ended in 2013, and 2,160,868 shares of VF Common Stock having a value of $82.1 million were earned for the performance period ended in 2012.

The weighted average fair value of nonperformance-based RSUs granted during 2014, 2013 and 2012 was $58.00, $39.21 and $35.52 per share, respectively, which was equal to the fair market value of the underlying VF Common Stock on each grant date. The total market value of awards outstanding at the end of 2014 was $28.5 million.

Restricted Stock

VF grants restricted shares of VF Common Stock to certain members of management. The fair value of the restricted shares, equal to the fair market value of VF Common Stock at the grant date, is recognized ratably over the vesting period. Restricted shares generally vest four years after the date of grant. Dividends accumulate in the form of additional restricted shares and are subject to the same risk of forfeiture as the restricted stock.

Restricted stock activity for 2014 is summarized below:

 

		Nonvested Shares Outstanding				Weighted Average Grant Date Fair Value
Nonvested shares, December 2013			839,442			$	30.66
Granted			151,100				60.14
Dividend equivalents			13,075				65.99
Vested			(272,482	)			22.03
Forfeited			(26,645	)			40.26
Nonvested shares, December 2014			704,490				40.62

Nonvested shares of restricted stock had a market value of $52.0 million at the end of 2014. The market value of the shares that vested during 2014, 2013 and 2012 was $20.1 million, $9.7 million and $2.5 million, respectively.