NOTE 10—STOCK‑BASED COMPENSATION AND EMPLOYEE BENEFIT PLANS

Stock‑Based Compensation Plans

The HD Supply Holdings, Inc. Omnibus Incentive Plan, approved by Holdings’ stockholders on May 17, 2017, (the “Plan”) provides for stock based awards to employees, consultants and directors, including stock options, stock purchase rights, restricted stock, restricted stock units, deferred stock units, performance shares, performance units, stock appreciation rights, dividend equivalents and other stock based awards. The Plan is an amendment and restatement of the HD Supply Holdings, Inc. 2013 Omnibus Incentive Plan, which replaced and succeeded the HDS Investment Holding, Inc. Stock Incentive Plan (the “Stock Incentive Plan”), and, from and after June 26, 2013, no further awards may be made under the Stock Incentive Plan. As of February 3, 2019 approximately 13.9 million registered shares were available for issuance under the Plan. The ratio at which awards are counted against the Plan’s authorized share pool is 2.30 to 1 for full value awards and 1 to 1 for option awards, and any shares returned to the pool are returned at the same ratio.

The HD Supply Holdings, Inc. Employee Stock Purchase Plan (the “ESPP”) permits HD Supply’s eligible associates to purchase Holdings common stock at a 5% discount on the closing stock price at the end of each offering period. There are two six month offering periods during a calendar year beginning each January and July. During fiscal 2018, fiscal 2017, and fiscal 2016, eligible associates purchased approximately 77,000 shares, 105,000 shares, and 96,000 shares, respectively, under the ESPP. As of February 3, 2019, approximately 1.5 million registered shares were available for issuance under the ESPP.

Stock Options

Under the terms of the Plan and the Stock Incentive Plan (collectively, the “HDS Plans”), non‑qualified stock options are to carry exercise prices at, or above, the fair market value of Holdings’ stock on the date of the grant.

The non‑qualified stock options under the HDS Plans generally vest at the rate of 25% per year commencing on the first anniversary date of the grant or 100% on the third anniversary of the grant and expire on the tenth anniversary date of the grant. Additionally, non-qualified stock options may become non-forfeitable upon the associate reaching age 62, provided the associate has had five years of continuous service.

A summary of option activity under the HDS Plans is presented below (shares in thousands):


	Number of	Weighted Average
	Shares	Option Price
Outstanding at January 31, 2016	4,737	$	15.95
Granted	1,362		28.22
Exercised	(1,782)		16.44
Forfeited	(154)		24.83
Outstanding at January 29, 2017	4,163	$	19.42
Granted	920		42.34
Exercised	(2,308)		16.45
Forfeited	(356)		34.43
Outstanding at January 28, 2018	2,419	$	28.77
Granted	773		36.93
Exercised	(476)		20.32
Forfeited	(219)		37.68
Outstanding at February 3, 2019	2,497	$	32.13

The total intrinsic value of options exercised was approximately $9 million, $51 million, and $33 million in fiscal 2018, fiscal 2017, and fiscal 2016, respectively. As of February 3, 2019, there were approximately 2.5 million stock options outstanding with a weighted-average remaining life of 7.1 years and an aggregate intrinsic value of approximately $25 million. As of February 3, 2019, there were approximately 0.9 million options exercisable with a weighted-average exercise price of $24.56, a weighted-average remaining life of 5.1 years and an aggregate intrinsic value of approximately $16 million. As of February 3, 2019, there were approximately 2.2 million options vested or expected to ultimately vest with a weighted-average exercise price of $31.56, a weighted-average remaining life of 7.0 years and an aggregate intrinsic value of approximately $23 million.

The estimated fair value of the options when granted is amortized to expense over the options’ vesting or required service period. The fair value for these options was estimated by management, after considering a third‑party valuation specialist’s assessment, at the date of grant based on the expected life of the option and historical exercise experience, using a Black‑Scholes option pricing model with the following weighted‑average assumptions:


	Fiscal Year Ended
	February 3,		January 28,		January 29,
	2019		2018		2017
Risk-free interest rate	2.74	%	2.08	%	1.54	%
Dividend yield	0.0	%	0.0	%	0.0	%
Expected volatility factor	29.1	%	29.8	%	36.2	%
Expected option life in years	6.25		6.25		6.25

The risk free interest rate was determined based on an analysis of U.S. Treasury zero coupon market yields as of the date of the option grant for issues having expiration lives similar to the expected option life. The expected volatility was based on an analysis of the historical volatility of Holdings and HD Supply’s competitors over the expected life of the HD Supply options. These competitors’ volatilities were adjusted to reflect the leverage of HD Supply. As insufficient data exists to determine the historical life of options issued under the HDS Plans, the expected option life was determined based on the vesting schedule of the options and their contractual life taking into consideration the expected time in which the share price of Holdings would exceed the exercise price of the option. The weighted average fair value of each option granted during fiscal 2018 was $12.83. HD Supply recognized $8 million, $5 million, and $5 million of stock‑based compensation expense related to stock options during fiscal 2018, fiscal 2017, and fiscal 2016, respectively. As of February 3, 2019 the unamortized compensation expense related to stock options was $14 million, which is expected to be recognized over a weighted-average period of 2.2 years.

Restricted Stock, Restricted Stock Units, and Performance Awards

Restricted stock awards (“RSAs”) and restricted stock unit awards (“RSUs”) granted under the Plan are settled by issuing shares of common stock at the vesting date. Generally, the RSAs and RSUs granted to employees vest on a pro rata basis on each of the first four or five anniversaries of the grant, except in the case of death or disability, in which case the RSAs and RSUs vest as of the date of the event. Generally, the RSUs granted to members of the Company’s Board of Directors vest on the earliest of the one year anniversary of the grant date, the next annual meeting of stockholders after the grant date, or a change in control. The grant date fair value of the RSAs and RSUs is expensed over the vesting period. The shares represented by restricted stock awards are considered outstanding at the grant date, as the recipients are entitled to dividends and voting rights, which are subject to the same restrictions (including the risk of forfeiture) as the restricted stock awards. Additionally, RSAs and RSUs may become non-forfeitable upon the associate reaching age 62, provided the associate has had five years of continuous service.

The Company also granted performance awards (“PAs”) under the Plan, the payout of which is dependent on the Company’s performance against target Cumulative Adjusted Earnings Per Share and Cumulative Free Cash Flow (as defined in the award agreements) over a three-year performance cycle. The payout ranges from zero to 200% of original award. The grant date fair value of the PAs is expensed over the vesting period. Additionally, certain awards may become non-forfeitable upon the associate's attainment of age 62, provided the associate has had five years of continuous service.

A summary of RSA, RSU, and PA activity under the HDS Plans is presented below (shares in thousands):


	Number of	Weighted Average
	Shares	Grant Date Fair Value
Non-vested at January 31, 2016	1,731	$	26.08
Granted	590		28.46
Vested	(539)		26.03
Forfeited	(232)		27.33
Non-vested at January 29, 2017	1,550	$	27.07
Granted	464		41.50
Vested	(644)		27.51
Forfeited	(301)		31.39
Non-vested at January 28, 2018	1,069	$	32.02
Granted	491		37.23
Vested	(570)		30.00
Forfeited	(94)		35.63
Non-vested at February 3, 2019	896	$	35.82

The total fair value of RSAs, RSUs, and PAs vested during the year was $17 million, $18 million, and $16 million for fiscal 2018, fiscal 2017, and fiscal 2016, respectively. HD Supply recognized $18 million, $20 million, and $15 million of stock based compensation expense related to RSAs, RSUs, and PAs during fiscal 2018, fiscal 2017, and fiscal 2018, respectively. As of February 3, 2019 the unamortized compensation expense related to RSAs, RSUs, and PAs was $19 million, which is expected to be recognized over a weighted-average period of 1.7 years.

Employee Benefit Plans

HD Supply offers a comprehensive Health & Welfare Benefits Program which allows employees who satisfy certain eligibility requirements to choose among different levels and types of coverage. The Health & Welfare Benefits program provides employees healthcare coverage in which the employer and employee share costs. In addition, the program offers employees the opportunity to participate in various voluntary coverages, including flexible spending accounts.

HD Supply maintains a 401(k) defined contribution plan that is qualified under Sections 401(a) and 501(a) of the Internal Revenue Code. Employees who satisfy the plan’s eligibility requirements may elect to contribute a portion of their compensation to the plan on a pre-tax basis. HD Supply may match a percentage of the employees’ contributions to the plan. A portion of the matching contributions are generally made shortly after the end of each pay period with the remaining portion made after the Company’s fiscal year end if an additional annual matching contribution based on the Company’s fiscal year financial results is approved. Effective January 1, 2019, all of HD Supply’s matching contributions will be made shortly after the end of each pay period. HD Supply paid matching contributions of $14 million, $17 million, and $17 million during fiscal 2018, fiscal 2017, and fiscal 2016, respectively.