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, 2008, 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.
Common Stock
We have 1.75 billion authorized shares of common stock, $1 par value. At December 31, 2008, 90 million shares were reserved for issuance under our incentive compensation plans, 48 million shares were reserved for debt to equity exchanges and 2 million shares were reserved for the conversion of convertible debt.
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.
We grant PSs and RSUs in order to continue to attract and retain employees and to better align employee interest with those of our shareholders. Each of these awards is subject to settlement with newly issued shares of our common stock. At December 31, 2008 and 2007, 15 million and 19 million shares, respectively, were available for grant of awards.
Stock-based compensation expense for the three years ended December 31, 2008 was as follows (in millions):
| 2008 | 2007 | 2006 | |||||||
|
Stock-based compensation expense, pre-tax |
$ | 85 | $ | 89 | $ | 64 | |||
|
Stock-based compensation expense, net of tax |
52 | 55 | 39 | ||||||
Restricted stock units: Compensation expense is based upon the grant date market price and is recorded over the vesting period. RSU awards vest three years from the date of the grant. A summary of the activity for RSUs as of December 31, 2008, 2007 and 2006, and changes during the years then ended, is presented below (shares in thousands):
| 2008 | 2007 | 2006 | |||||||||||||||
|
Nonvested Restricted |
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 |
11,696 | $16.78 | 8,635 | $ | 15.71 | 5,491 | $ | 15.69 | |||||||||
|
Granted |
5,923 | 13.63 | 4,444 | 18.17 | 4,256 | 15.18 | |||||||||||
|
Vested |
(3,350 | ) | 16.92 | (935 | ) | 13.65 | (686 | ) | 13.70 | ||||||||
|
Cancelled |
(232 | ) | 15.98 | (448 | ) | 16.42 | (426 | ) | 13.45 | ||||||||
|
Outstanding at December 31 |
14,037 | $15.43 | 11,696 | $ | 16.78 | 8,635 | $ | 15.71 | |||||||||
At December 31, 2008, the aggregate intrinsic value of RSUs outstanding was $112. The total intrinsic value of RSUs vested during 2008, 2007 and 2006 was $54, $16 and $10, respectively. The actual tax benefit realized for the tax deductions for vested RSUs totaled $18, $3 and $3 for the years ended December 31, 2008, 2007 and 2006, respectively.
At December 31, 2008, there was $105 of total unrecognized compensation cost related to nonvested RSUs, which is expected to be recognized ratably over a remaining weighted-average contractual term of 1.6 years.
Performance shares: We grant officers and selected executives PSs whose vesting is contingent upon meeting pre-determined Diluted Earnings per Share (“EPS”) and Core 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, 2008, 2007 and 2006, and changes during the years then ended, is presented below (shares in thousands):
| 2008 | 2007 | 2006 | ||||||||||||||||
|
Nonvested Performance |
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 |
6,585 | $ | 16.16 | 4,571 | $ | 15.04 | 2,052 | $ | 14.87 | |||||||||
|
Granted |
3,696 | 13.67 | 2,160 | 18.48 | 2,588 | 15.17 | ||||||||||||
|
Vested |
(2,734 | ) | 14.87 | — | — | — | — | |||||||||||
|
Cancelled |
(169 | ) | 16.05 | (146 | ) | 15.41 | (69 | ) | 14.95 | |||||||||
|
Outstanding at December 31 |
7,378 | $ | 15.39 | 6,585 | $ | 16.16 | 4,571 | $ | 15.04 | |||||||||
At December 31, 2008, the aggregate intrinsic value of PSs outstanding was $59. The total intrinsic value of PS’s vested during 2008 was $41. The actual tax benefit realized for the tax deductions for vested PS’s totaled $13 for the year ended December 31, 2008.
We account for PSs 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, 2008, there was $48 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 1.5 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. We have not issued any new stock options since 2004 and all options currently outstanding are fully vested and exercisable. The following table provides information relating to the status of, and changes in, outstanding stock options for each of the three years ended December 31, 2008 (stock options in thousands):
| 2008 | 2007 | 2006 | ||||||||||||||||
|
Employee Stock Options |
Stock Options |
Average Option Price |
Stock Options |
Average Option Price |
Stock Options |
Average Option Price |
||||||||||||
|
Outstanding at January 1 |
52,424 | $ | 19.73 | 60,480 | $ | 18.56 | 76,307 | $ | 19.40 | |||||||||
|
Cancelled/Expired |
(6,559 | ) | 50.08 | (922 | ) | 24.18 | (5,478 | ) | 49.44 | |||||||||
|
Exercised |
(680 | ) | 8.89 | (7,134 | ) | 9.22 | (10,349 | ) | 8.46 | |||||||||
|
Outstanding at December 31 |
45,185 | $ | 15.49 | 52,424 | $ | 19.73 | 60,480 | $ | 18.56 | |||||||||
Options outstanding and exercisable at December 31, 2008 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 |
2,526 | 2.01 | $ | 4.97 | |||
|
7.13 to 10.69 |
18,493 | 3.37 | 9.23 | ||||
|
10.72 to 15.27 |
8,024 | 2.99 | 13.68 | ||||
|
16.91 to 21.78 |
11,092 | 1.00 | 21.76 | ||||
|
25.38 to 27.00 |
3,536 | 0.94 | 26.19 | ||||
|
47.50 to 60.44 |
1,514 | 1.00 | 48.00 | ||||
| 45,185 | |||||||
At December 31, 2008, the aggregate intrinsic value of stock options outstanding and exercisable was $8.
The following table provides information relating to stock option exercises for the three years ended December 31, 2008:
|
(in millions) |
2008 | 2007 | 2006 | ||||||
|
Total intrinsic value |
$ | 4 | $ | 61 | $ | 72 | |||
|
Cash received |
6 | 65 | 82 | ||||||
|
Tax benefit realized for tax deductions |
2 | 22 | 25 | ||||||
Treasury Stock
The Board of Directors has cumulatively authorized programs for the repurchase of the Company’s common stock totaling $4.5 billion as of December 31, 2008. The $4.5 billion includes additional authorizations of $1.0 billion in both January and July of 2008.
Through December 31, 2008, we have repurchased a cumulative total of 194.1 million shares at a cost of $2,945 (including associated fees of $4) under these stock repurchase programs.