Proctor and Gamble 2011 Annual Report Download - page 65

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Notes to Consolidated Financial StatementsThe 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 )
and assume conversion of preferred stock (see Note ).
Net earnings and common shares used to calculate basic and diluted
net earnings per share were as follows:
Years ended June 0 2010 2009
NET EARNINGS FROM
CONTINUING OPERATIONS $11,797 $10,946$10,680
Preferred dividends, net of tax
benefit (233)(219)(192)
NET EARNINGS FROM
CONTINUING OPERATIONS
AVAILABLE TO COMMON
SHAREHOLDERS 11,564 10,727 10,488
Preferred dividends, net of tax
benefit 233 219 192
DILUTED NET EARNINGS FROM
CONTINUING OPERATIONS 11,797 10,946 10,680
Net earnings from discontinued
operations —1,790 2,756
NET EARNINGS 11,797 12,736 13,436
Shares in millions; Years ended June30 2010 2009
Basic weighted average common
shares outstanding 2,804.0 2,900.8 2,952.2
Effect of dilutive securities
Conversion of preferred
shares(1)128.5 134.0 139.2
Exercise of stock options and
other unvested equity
awards(2)69.4 64.5 62.7
DILUTED WEIGHTED AVERAGE
COMMON SHARES
OUTSTANDING 3,001.9 3,099.3 3,154.1
(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 93 million in 2011, 101 million in 2010 and 92million in 2009 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, restricted stock, restricted stock unit (RSU) and
performance stock unit (PSU) 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
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.
Inaddition 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. In 2011, we implemented a performance
stock program (PSP) and granted PSUs to senior level executives. Under
this program, the number of PSUs that will vest three years after the
respective grant date is based on the Company’s performance relative
to pre-established performance goals during that three year period.
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 shareholders
in 2004. A total of 122 million shares remain available for grant under
the 2003 and 2009 plans.
Total stock-based compensation expense for stock option grants was
$358, $417 and $460 for 2011,2010 and 2009, respectively. Total
compensation cost for restricted stock, RSUs and PSUs was $56, $36
and $56 in 2011,2010 and 2009, respectively. The total income tax
benefit recognized in the income statement for stock options, restricted
stock, RSUs and PSUs was $117, $118 and $137 in 2011,2010 and
2009, 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
Interest rate 0.3–3.7% 0.3–4.0%0.7–3.8%
Weighted average interest rate 3.4% 3.7% 3.6%
Dividend yield 2.4% 2.2% 2.0%
Expected volatility 14–18% 15–20%18–34%
Weighted average volatility 16% 18% 21%
Expected life in years 8.88.8 8.7