Proctor and Gamble 2010 Annual Report Download - page 65

Notes to Consolidated Financial Statements The Procter & Gamble Company 63
Amounts in millions of dollars except per share amounts or as otherwise specified.
NOTE 6
EARNINGS PER SHARE
Net earnings less preferred dividends (net of related tax benefits) are
divided by the weighted average number of common shares out-
standing during the year to calculate basic net earnings per common
share. Diluted net earnings per common share are calculated to give
effect to stock options and other stock-based awards (see Note 7)
and assume conversion of preferred stock (see Note 8).
Net earnings and common shares used to calculate basic and diluted
net earnings per share were as follows:
Years ended June 30 2010 2009 2008
NET EARNINGS FROM
CONTINUING OPERATIONS $ 10,946 $ 10,680 $ 11,291
Preferred dividends, net of tax
benefit (219) (192) (176)
NET EARNINGS FROM
CONTINUING OPERATIONS
AVAILABLE TO COMMON
SHAREHOLDERS 10,727 10,488 11,115
Preferred dividends, net of tax
benefit 219 192 176
DILUTED NET EARNINGS FROM
CONTINUING OPERATIONS 10,946 10,680 11,291
Net earnings from discontinued
operations 1,790 2,756 784
NET EARNINGS 12,736 13,436 12,075
Shares in millions; Years ended June 30 2010 2009 2008
Basic weighted average common
shares outstanding 2,900.8 2,952.2 3,080.8
Effect of dilutive securities
Conversion of preferred
shares (1) 134.0 139.2 144.2
Exercise of stock options and
other unvested equity
awards (2) 64.5 62.7 91.8
DILUTED WEIGHTED AVERAGE
COMMON SHARES
OUTSTANDING 3,099.3 3,154.1 3,316.8
(1) Despite being included currently in diluted net earnings per common share, the actual
conversion to common stock occurs pursuant to the repayment of the ESOPs’ obligations
through 2035.
(2) Approximately 101 million in 2010, 92 million in 2009 and 40 million in 2008 of the
Company’s outstanding stock options were not included in the diluted net earnings per
share calculation because the options were out of the money or to do so would have
been antidilutive (i.e., the total proceeds upon exercise would have exceeded the market
value of the underlying common shares).
NOTE 7
STOCK-BASED COMPENSATION
We have stock-based compensation plans under which we annually
grant stock option and restricted stock awards to key managers and
directors. Exercise prices on options granted have been, and continue
to be, set equal to the market price of the underlying shares on the
date of the grant. Since September 2002, the key manager stock option
awards granted are vested after three years and have a 10-year life.
The key manager stock option awards granted from July 1998
through August 2002 vested after three years and have a 15-year life.
Key managers can elect to receive up to 50% of the value of their
option award in restricted stock units (RSUs). Key manager RSUs are
vested and settled in shares of common stock five years from the grant
date. The awards provided to the Company’s directors are in the form
of restricted stock and RSUs. In addition to our key manager and
director grants, we make other minor stock option and RSU grants
to employees for which the terms are not substantially different.
A total of 180million shares of common stock were authorized for
issuance under stock-based compensation plans approved by share-
holders in 2003 and 2009. The number of shares available for award
under the 2009 plan includes the shares previously authorized but
not awarded under the shareholder approved plan in 2001 and the
shares available for issuance under a plan approved by Gillette share-
holders in 2004. A total of 155million shares remain available for
grant under the 2003 and 2009 plans.
Total stock-based compensation expense for stock option grants was
$417, $460 and $522 for 2010, 2009 and 2008, respectively. Total
compensation cost for restricted stock, RSUs and other stock-based
grants was $36, $56 and $33 in 2010, 2009 and 2008, respectively.
The total income tax benefit recognized in the income statement for
stock options, restricted stock, RSUs and other stock-based grants
was $118, $137 and $147 in 2010, 2009 and 2008, respectively.
In calculating the compensation expense for stock options granted,
we utilize a binomial lattice-based valuation model. Assumptions
utilized in the model, which are evaluated and revised, as necessary,
to reflect market conditions and experience, were as follows:
Years ended June 30 2010 2009 2008
Interest rate 0.3 – 4.0% 0.7– 3.8% 1.3 – 3.8%
Weighted average interest rate 3.7% 3.6% 3.4%
Dividend yield 2.2% 2.0% 1.9%
Expected volatility 15 – 20% 18 – 34% 19 –25%
Weighted average volatility 18% 21% 20%
Expected life in years 8.8 8.7 8.3