Baker Hughes 2010 Annual Report Download - page 127

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2 0 1 0 F o r m 1 0 - K 45
Stock Options
Our stock option plans provide for the issuance of incen-
tive and non-qualified stock options to directors, officers and
other key employees at an exercise price equal to the fair mar-
ket value of the stock at the date of grant. Although subject
to the terms of the stock option agreement, substantially all
of the stock options become exercisable in three equal annual
installments, beginning a year from the date of grant, and
generally expire ten years from the date of grant. The stock
option plans provide for the acceleration of vesting upon the
employee’s retirement; therefore, the service period is reduced
for employees that are or will become retirement eligible dur-
ing the vesting period and, accordingly, the recognition of
compensation expense for these employees is accelerated.
Compensation cost related to stock options is recognized on
a straight-line basis over the vesting or service period and is
net of forfeitures.
The fair value of each stock option granted is estimated
using the Black-Scholes option pricing model. The following
table presents the weighted average assumptions used in the
option pricing model for options granted. The expected life
of the options represents the period of time the options are
expected to be outstanding. The expected life is based on
our historical exercise trends and post-vest termination data
incorporated into a forward-looking stock price model. The
expected volatility is based on our implied volatility, which is
the volatility forecast that is implied by the prices of our actively
traded options to purchase our stock observed in the market.
The risk-free interest rate is based on the observed U.S. Trea-
sury yield curve in effect at the time the options were granted.
The dividend yield is based on our history of dividend payouts.
2010 2009 2008
Expected life (years) 5.0 6.0 5.5
Risk-free interest rate 2.2% 2.6% 3.1%
Volatility 39.8% 41.2% 31.4%
Dividend yield 1.2% 1.8% 0.8%
Weighted average
fair value per share
at grant date $ 16.24 $ 12.66 $ 23.64
The following table presents the changes in stock options
outstanding and related information (in thousands, except per
option prices):
Weighted Average
Number of Exercise Price
Options Per Option
Outstanding at
December 31, 2009 5,676 $ 50.16
Granted 1,488 48.38
Assumed on acquisition
of BJ Services 4,840 48.61
Exercised (962) 34.29
Forfeited (86) 43.74
Expired (54) 41.05
Outstanding at
December 31, 2010 10,902 $ 50.72
The total intrinsic value of stock options (defined as the
amount by which the market price of our common stock on
the date of exercise exceeds the exercise price of the option)
exercised in 2010, 2009 and 2008 was $18 million, $0.4 mil-
lion and $13 million, respectively. The income tax benefit real-
ized from stock options exercised was $0.9 million, $0.1 million
and $7 million in 2010, 2009 and 2008, respectively.
The total fair value of options vested in 2010, 2009 and
2008 was $20 million, $17 million and $17 million, respec-
tively. As of December 31, 2010, there was $15 million of
total unrecognized compensation cost related to nonvested
stock options which is expected to be recognized over a
weighted average period of two years.