Stock-Based Compensation Plans

6 Months Ended

Jun. 30, 2013

Stock-Based Compensation Plans

Stock-Based Compensation Plans

7.  Stock-Based Compensation Plans

Covance sponsors several employee stock-based compensation plans which are described more fully in Note 10 to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2012.

In May 2013, Covance’s shareholders approved the 2013 Employee Equity Participation Plan (the “2013 EEPP”) in replacement of the 2010 Employee Equity Participation Plan (the “2010 EEPP”).  Effective upon approval of the 2013 EEPP, no further grants or awards were permitted under the 2010 EEPP.  Shares remaining available for grant under the 2010 EEPP are available for grant under the 2013 EEPP.  The 2013 EEPP became effective on May 7, 2013 and will expire on May 6, 2023. The 2013 EEPP authorizes the Compensation and Organization Committee of the Board of Directors (the “Compensation Committee”), or such committee as is appointed by the Covance Board of Directors, to administer the 2013 EEPP and to grant awards to employees of Covance. The 2013 EEPP authorizes the Compensation Committee to grant the following awards: options to purchase common stock; stock appreciation rights; and other stock awards either singly or in combination. Shares granted, other than options or SARs, shall be counted against the shares available for grant based upon the ratio of 2.09 for every one share granted. The exercise period for stock options granted under the 2013 EEPP is determined by the Compensation Committee at the time of grant, and is generally ten years from the date of grant. The vesting period for stock options and stock awards granted under the 2013 EEPP is determined by the Compensation Committee at the time of grant. Beginning in 2012, options and restricted stock awards are generally granted with a pro rata four year vesting period, whereas previously, they were generally granted with a pro rata three year vesting period. Performance-based restricted stock awards generally vest over a three year period. The number of shares of Covance common stock initially available for grant under the 2013 EEPP totaled 2.8 million plus approximately 0.8 million shares remaining available under the 2010 EEPP at the time the 2013 EEPP was approved.  All grants and awards under the 2010 EEPP remaining outstanding are administered in accordance with the provisions of the 2010 EEPP out of shares issuable under the 2013 EEPP. The Company may issue authorized but previously unissued shares or treasury shares when options are exercised or for stock awards. There have been no grants of stock appreciation rights under the 2010 EEPP or the 2013 EEPP. At June 30, 2013 there were approximately 3.5 million shares remaining available for grants under the 2013 EEPP.

The grant-date fair value of stock option awards is estimated using an option pricing model as more fully described in Note 10 to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2012.  The grant-date fair value of options expected to vest is expensed on a straight-line basis over the vesting period of the related awards.

The following table sets forth the weighted average assumptions used to calculate the fair value of options granted for both the three and six month periods ended June 30, 2013 and 2012:

	Three and Six Months Ended June 30
	2013	2012
Expected stock price volatility	36%	38%
Range of risk free interest rates	0.09% - 2.03%	0.03% - 2.01%
Expected life of options (years)	5.4	5.2

Restricted stock awards are granted subject to either service conditions (restricted stock) or service and performance conditions (performance-based shares).  The grant-date fair value of restricted stock and performance-based share awards, which has been determined based upon the market value of Covance’s shares on the grant date, is expensed on a straight-line basis over the vesting period of the related awards.

Results of operations for the three month period ended June 30, 2013 include total stock-based compensation expense of $8.3 million ($5.7 million net of tax benefit of $2.6 million), $3.4 million of which has been included in cost of revenue and $4.9 million of which has been included in selling, general and administrative expenses.  Results of operations for the six month period ended June 30, 2013 include total stock-based compensation expense of $19.3 million ($13.3 million net of tax benefit of $6.0 million), $8.5 million of which has been included in cost of revenue and $10.8 million of which has been included in selling, general and administrative expenses.  Results of operations for the three month period ended June 30, 2012 include total stock-based compensation expense of $9.0 million ($6.1 million net of tax benefit of $2.9 million), $4.8 million of which has been included in cost of revenue and $4.2 million of which has been included in selling, general and administrative expenses.  Results of operations for the six month period ended June 30, 2012 include total stock-based compensation expense of $19.4 million ($13.3 million net of tax benefit of $6.1 million), $10.1 million of which has been included in cost of revenue and $9.3 million of which has been included in selling, general and administrative expenses