Avon 2006 Annual Report Download - page 67

We recognized compensation cost of $62.9, $10.1 and $8.8 for
stock options, restricted stock, restricted stock units, and stock
appreciation rights, all of which was recorded in selling, general
and administrative expenses, during the three years ended
December 31, 2006, 2005 and 2004, respectively. The total
income tax benefit recognized for share-based arrangements
was $21.5, $3.5 and $3.1 during the three years ended
December 31, 2006, 2005 and 2004, respectively.
As discussed in Note 1, Description of the Business and Sig-
nificant Accounting Policies, effective January 1, 2006, we
adopted the fair value recognition provisions of SFAS 123R using
the modified prospective application method. The following
table summarizes the proforma effects on net income and earn-
ings per share as if we had applied the fair value recognition
provisions of SFAS 123 to share-based compensation for the
years ended December 31, 2005 and 2004.
2005 2004
Net income, as reported $847.6 $846.1
Add: compensation expense
recognized for restricted stock and
restricted stock units, net of taxes 6.6 5.7
Less: share-based compensation
expense determined under FAS
No. 123, net of taxes (37.7) (32.0)
Pro forma net income $816.5 $819.8
Earnings per share:
Basic – as reported $ 1.82 $ 1.79
Basic – pro forma $ 1.75 $ 1.74
Diluted – as reported $ 1.81 $ 1.77
Diluted – pro forma $ 1.74 $ 1.72
Stock Options
The fair value of each option award is estimated on the date of
grant using a Black-Scholes-Merton option pricing model with
the following weighted-average assumptions for options granted
during the years ended December 31, :
2006 2005 2004
Risk-free rate (1) 5.1% 4.2% 2.4%
Expected term (2) 4 years 4 years 4 years
Expected volatility (3) 26% 25% 30%
Expected dividends (4) 2.3% 1.6% 1.5%
(1) The risk-free rate is based upon the rate on a zero coupon U.S. Treasury
bill, for periods within the contractual life of the option, in effect at the
time of grant.
(2) The expected term of the option is based on historical employee
exercise behavior, the vesting terms of the respective option and a
contractual life of ten years.
(3) Expected volatility is based on the weekly historical volatility of our
stock price, over a period similar to the expected life of the option.
(4) Assumes the current cash dividends of $.175, $.165 and $.14 per share
each quarter on Avon’s common stock for options granted during
2006, 2005 and 2004, respectively.
The weighted-average grant-date fair values per share of options
granted during 2006, 2005 and 2004, were $6.75, $9.07 and
$8.54, respectively.
A summary of stock options as of December 31, 2006, and changes during 2006, is as follows:
Shares
(in 000's)
Weighted-
Average
Exercise
Price
Weighted-
Average
Contractual
Term
Aggregate
Intrinsic
Value
Outstanding at January 1, 2006 24,044 $31.66
Granted 3,075 30.90
Exercised (1,434) 22.93
Forfeited (626) 37.59
Expired (401) 36.56
Outstanding at December 31, 2006 24,658 $31.85 6.7 $101.6
Exercisable at December 31, 2006 15,951 $28.99 5.8 $ 94.7
As of December 31, 2006, there was approximately $23.6 of
unrecognized compensation cost related to stock options out-
standing. That cost is expected to be recognized over a
weighted-average period of 1.3 years. We recognize expense on
stock options using a graded vesting method, which recognizes
the associated expense based on the timing of option vesting
dates.
A V O N 2006 F-17