Freeport-McMoRan 2013 Annual Report Download - page 106

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
104 | FREEPORT-McMoRan
historical data to estimate future option and SARs exercises,
forfeitures and expected life. When appropriate, separate groups
of employees who have similar historical exercise behavior are
considered separately for valuation purposes. The expected
dividend rate is calculated using the annual dividend (excluding
supplemental dividends) at the date of grant. The risk-free interest
rate is based on Federal Reserve rates in effect for bonds with
maturity dates equal to the expected term of the option or SAR.
Information related to stock options during the years ended
December 31 follows:
2013 2012 2011
Weighted-average assumptions used
to value stock option awards:
Expected volatility 48.9% 52.0% 50.9%
Expected life of options (in years) 4.66 4.54 4.34
Expected dividend rate 3.3% 3.1% 1.8%
Risk-free interest rate 0.7% 0.7% 1.6%
Weighted-average grant date fair value
(per share) $ 10.98 $ 15.60 $ 20.58
Intrinsic value of options exercised $ 10 $ 34 $ 101
Fair value of options vested $ 101 $ 77 $ 89
As of December 31, 2013, FCX had $76 million of total unrecognized
compensation cost related to unvested stock options expected
to be recognized over a weighted-average period of 1.5 years.
The assumptions used to value SARs as of December 31, 2013,
ranged from 28.8 percent to 34.8 percent for expected volatility;
one to four years for expected life; 0.1 percent to 1.1 percent for
expected risk-free interest rate; and an expected dividend rate of
3.6 percent. The weighted-average grant-date fair value of SARs
granted was $7.00 for the period from June 1, 2013, to December 31,
2013, and $7.94 for the PXP awards that were converted to FCX
SARs based on the acquisition-date fair value. The total intrinsic
value of SARs exercised during 2013 was $3 million. As of
December 31, 2013, FCX had $6 million of total unrecognized
compensation cost related to unvested SARs expected to be
recognized over a weighted-average period of 2.1 years. As of
December 31, 2013, FCX had $16.0 million associated with SARs
included in accounts payable and accrued liabilities.
Stock-Settled RSUs. FCX has an annual incentive plan for its
executive officers that requires a portion of each executive
officer’s annual bonus be paid in performance-based RSUs. The
maximum annual incentive award pool is a percentage of FCX’s
consolidated operating cash flows adjusted for changes in
working capital and other tax payments for the preceding year
and funding of the pool is subject to a performance condition.
Grants of RSUs before 2012 vest ratably over three years and
provide that the FCX executive officers will receive the following
year’s vesting upon retirement provided the performance
condition is met. The fair value of these restricted stock unit
grants was estimated based on projected operating cash flows for
the applicable year and was charged to expense ratably over three
years, beginning with the year during which the cash flows were
Stock Options and SARs. Stock options granted under the plans
generally expire 10 years after the date of grant and vest in 25
percent annual increments beginning one year from the date of
grant. The plans and award agreements provide that participants
will receive the following year’s vesting after retirement.
Therefore, FCX accelerates one year of amortization for
retirement-eligible employees. Stock options granted prior to
February 2012 provide for accelerated vesting if there is a change
in control (as defined in the award agreements). Stock options
granted after that date provide for accelerated vesting only upon
certain qualifying termination of employment within one year
following a change in control. SARs that were converted in
connection with the PXP acquisition generally expire within five
years after the date of grant and vest in one-third annual
increments beginning one year from the date of grant. SARs are
similar to stock options, but are settled in cash rather than in
shares of common stock and are classified as liability awards.
A summary of options and SARs outstanding as of December 31,
2013, including 1,927,037 SARs, and changes during the year
ended December 31, 2013, follows:
Weighted-
Average
Weighted- Remaining Aggregate
Number of Average Contractual Intrinsic
Options and SARs Exercise Price Term (years) Value
Balance at January 1 31,472,559 $ 37.40
Conversion of MMR options 7,203,392 27.64
Conversion of PXP SARs 2,374,601 27.34
Granted 5,479,930 35.00
Exercised (976,220) 18.77
Expired/Forfeited (423,601) 41.83
Balance at December 31 45,130,661 35.39 5.6 $ 239
Vested and exercisable
at December 31 31,748,346 $ 33.40 4.7 $ 210
Summaries of options and SARs outstanding and changes during
the years ended December 31 follow:
2012 2011
Number Weighted- Number Weighted-
of Options Average of Options Average
and SARs Exercise Price and SARs Exercise Price
Balance at January 1 27,967,145 $ 34.90 26,930,444 $ 30.22
Granted 5,050,500 46.32 4,230,500 55.43
Exercised (1,300,273) 16.68 (3,044,174) 21.88
Expired/Forfeited (244,813) 45.23 (149,625) 37.61
Balance at December 31 31,472,559
a
37.40 27,967,145
a
34.90
a. Included 39,336 SARs at December 31, 2012, and 69,672 SARs at December 31, 2011.
The fair value of each stock option is estimated on the date of grant
using the Black-Scholes-Merton option valuation model. The fair
value of each SAR is determined using the Black-Scholes-Merton
option valuation model and remeasured at each reporting date
until the date of settlement. Expected volatility is based on
implied volatilities from traded options on FCX’s common stock
and historical volatility of FCX’s common stock. FCX uses