Notes to the Consolidated Financial Statements
(Dollars in millions, except per-share data and unless otherwise indicated)
Note 17 – Shareholders’ Equity
Preferred Stock
As of December 31, 2007, we had no preferred stock shares or preferred stock purchase rights outstanding. We are authorized to issue approximately 22 million shares of cumulative preferred stock, $1.00 par value.
Series C Mandatory Convertible Preferred Stock Automatic Conversion: In 2006, all 9.2 million shares of 6.25% Series C Mandatory Convertible Preferred Stock were converted at a rate of 8.1301 shares of our common stock, or 74.8 million common stock shares. The recorded value of outstanding shares at the time of conversion was $889. The conversion occurred pursuant to the mandatory automatic conversion provisions set at original issuance of the Series C Preferred Stock. As a result of the automatic conversion, there are no remaining outstanding shares of our Series C Mandatory Convertible Preferred Stock.
Common Stock
We have 1.75 billion authorized shares of common stock, $1 par value. At December 31, 2007, 97 million shares were reserved for issuance under our incentive compensation plans, 48 million shares were reserved for debt to equity exchanges, 15 million shares were reserved for the conversion of the Series C Mandatory Convertible Preferred Stock and 2 million shares were reserved for the conversion of convertible debt. The 15 million shares reserved for the conversion of the Series C Mandatory Convertible Preferred Stock were released in January 2008.
Stock-Based Compensation: We have a long-term incentive plan whereby eligible employees may be granted restricted stock units (“RSUs”), performance shares (“PSs”) and non-qualified stock options.
In 2005, we implemented changes in our stock-based compensation programs designed to help us continue to attract and retain employees and to better align employee interests with those of our shareholders. With these changes, in lieu of stock options we began granting PSs and expanded the use of RSUs. Each of these awards is subject to settlement with newly issued shares of our common stock. At December 31, 2007 and 2006, 19 million and 25 million shares, respectively, were available for grant of awards.
Total compensation related to these programs was $89, $64 and $40 for the years ended December 31, 2007, 2006 and 2005, respectively. The related income tax benefit recognized was $34, $25 and $16 for 2007, 2006 and 2005, respectively. A description of each of our stock-based compensation programs follows:
Restricted Stock Units: Prior to 2005, the RSUs were generally subject to a three-year ratable vesting period from the date of grant and entitled the holder to one share of common stock. In 2005, the terms of newly-issued RSUs were changed such that the entire award vests three years from the date of grant. Compensation expense is based upon the grant date market price and is recorded over the vesting period. A summary of the activity for RSUs as of December 31, 2007, 2006 and 2005, and changes during the years then ended, is presented below (shares in thousands):
| 2007 | 2006 | 2005 | ||||||||||||||||
| Nonvested Restricted Stock Units | Shares |
Weighted Average Grant Date Fair Value |
Shares |
Weighted Average Grant Date Fair Value |
Shares |
Weighted Average Grant Date Fair Value |
||||||||||||
|
Outstanding at January 1 |
8,635 | $ | 15.71 | 5,491 | $ | 15.69 | 2,804 | $ | 13.86 | |||||||||
|
Granted |
4,444 | 18.17 | 4,256 | 15.18 | 3,750 | 16.89 | ||||||||||||
|
Vested |
(935 | ) | 13.65 | (686 | ) | 13.70 | (977 | ) | 15.01 | |||||||||
|
Cancelled |
(448 | ) | 16.42 | (426 | ) | 13.45 | (86 | ) | 16.21 | |||||||||
|
Outstanding at December 31 |
11,696 | 16.78 | 8,635 | 15.71 | 5,491 | 15.69 | ||||||||||||
At December 31, 2007, the aggregate intrinsic value of RSUs outstanding was $189. The total intrinsic value of RSUs vested during 2007, 2006 and 2005 was $16, $10 and $13, respectively. The actual tax benefit realized for the tax deductions for vested RSUs totaled $3, $3 and $4 for the years ended December 31, 2007, 2006 and 2005, respectively.
At December 31, 2007, there was $89 of total unrecognized compensation cost related to nonvested RSUs, which is expected to be recognized ratably over a remaining weighted-average contractual term of 1.9 years.
Performance Shares:We grant officers and selected executives PSs whose vesting is contingent upon meeting pre-determined Diluted Earnings per Share (“EPS”) and Cash Flow from Operations targets. These shares entitle the holder to one share of common stock, payable after a three-year period and the attainment of the stated goals. If the cumulative three-year actual results for EPS and Cash Flow from Operations exceed the stated targets, then the plan participants have the potential to earn additional shares of common stock. This overachievement can not exceed 50% for officers and 25% for non-officers of the original grant.
A summary of the activity for PSs as of December 31, 2007, 2006 and 2005, and changes during the years then ended, is presented below (shares in thousands):
| 2007 | 2006 | 2005 | ||||||||||||||||
| Nonvested Performance Shares | Shares |
Weighted Average Grant Date Fair Value |
Shares |
Weighted Average Grant Date Fair Value |
Shares |
Weighted Average Grant Date Fair Value |
||||||||||||
|
Outstanding at January 1 |
4,571 | $ | 15.04 | 2,052 | $ | 14.87 | – | $ | – | |||||||||
|
Granted |
2,160 | 18.48 | 2,588 | 15.17 | 2,070 | 14.87 | ||||||||||||
|
Vested |
– | – | – | – | – | – | ||||||||||||
|
Cancelled |
(146 | ) | 15.41 | (69 | ) | 14.95 | (18 | ) | 14.87 | |||||||||
|
Outstanding at December 31 |
6,585 | 16.16 | 4,571 | 15.04 | 2,052 | 14.87 | ||||||||||||
At December 31, 2007, the aggregate intrinsic value of PSs outstanding was $107.
Prior to 2006, the PSs were accounted for as variable awards requiring that the shares be adjusted to market value at each reporting period. Effective January 1, 2006, upon the adoption of FAS 123(R), PSs were recorded prospectively using fair value determined as of the grant date. If the stated targets are not met, any recognized compensation cost would be reversed. As of December 31, 2007, there was $63 of total unrecognized compensation cost related to nonvested PSs; this cost is expected to be recognized ratably over a remaining weighted-average contractual term of 1.8 years.
Stock Options: Stock options generally vest over a period of three years and expire between eight and ten years from the date of grant. The following table provides information relating to the status of, and changes in, stock options granted for each of the three years ended December 31, 2007 (stock options in thousands):
| 2007 | 2006 | 2005 | ||||||||||||||||
| Employee Stock Options |
Stock
Options |
Average
Option Price |
Stock
Options |
Average
Option Price |
Stock
Options |
Average
Option Price |
||||||||||||
|
Outstanding at January 1 |
60,480 | $ | 18.56 | 76,307 | $ | 19.40 | 91,833 | $ | 20.98 | |||||||||
|
Granted |
– | – | – | – | – | – | ||||||||||||
|
Cancelled/Expired |
(922 | ) | 24.18 | (5,478 | ) | 49.44 | (10,291 | ) | 39.41 | |||||||||
|
Exercised |
(7,134 | ) | 9.22 | (10,349 | ) | 8.46 | (5,235 | ) | 7.74 | |||||||||
|
Outstanding at December 31 |
52,424 | 19.73 | 60,480 | 18.56 | 76,307 | 19.40 | ||||||||||||
|
Exercisable at December 31 |
52,424 |
60,180 |
|
66,928 |
|
|||||||||||||
Options outstanding and exercisable at December 31, 2007 were as follows (stock options in thousands):
| Number Outstanding and Exercisable |
Weighted Average
Remaining Contractual Life |
Weighted Average
Exercise Price |
|||||
| Range of Exercise Prices | |||||||
|
$4.75 to $6.98 |
2,656 | 3.01 | $ | 4.97 | |||
|
7.13 to 10.69 |
19,374 | 4.37 | 9.24 | ||||
|
10.72 to 15.27 |
8,164 | 3.99 | 13.68 | ||||
|
16.91 to 22.88 |
11,414 | 2.00 | 21.77 | ||||
|
25.38 to 31.94 |
3,627 | 1.93 | 26.29 | ||||
|
42.83 to 60.95 |
7,189 | 1.21 | 53.75 | ||||
| 52,424 | |||||||
At December 31, 2007, the aggregate intrinsic value of stock options outstanding and stock options exercisable was $185.
The following table provides information relating to stock option exercises for the three years ended December 31, 2007:
| (in millions) | 2007 | 2006 | 2005 | ||||||
|
Total intrinsic value |
$ | 61 | $ | 72 | $ | 36 | |||
|
Cash received |
65 | 82 | 40 | ||||||
|
Tax benefit realized for tax deductions |
22 | 25 | 12 | ||||||
Treasury Stock: The Board of Directors has authorized programs for the repurchase of the Company’s common stock totaling $2.5 billion as of December 31, 2007. In January 2008, the Board of Directors authorized an additional $1 billion for share repurchases.
Through December 31, 2007, we have repurchased a cumulative total of 137,251,165 shares at a cost of $2,133 (including associated fees of $3) under these stock repurchase programs. Subsequent to December 31, 2007 and through February 14, 2008, 19,677,005 shares were repurchased at an aggregate cost of $301, (including associated fees of less than $1). Additionally, in February 2008, 3,605,610 repurchased shares were cancelled upon the approval of the Board of Directors and were recorded as a reduction to both Common stock of $4 and Additional paid-in-capital of $53.
