General Dynamics 2013 Annual Report Download - page 57

Stock Options. We recognize compensation expense related to
stock options on a straight-line basis over the vesting period of the
awards, which is generally two years. We estimate the fair value of
options on the date of grant using the Black-Scholes option pricing
model with the following assumptions for each of the past three years:
Year Ended December 31 2011 2012 2013
Expected volatility 28.4-31.5% 27.9-31.3% 21.6-27.3%
Weighted average expected volatility 30.1% 30.7% 23.5%
Expected term (in months) 43-53 43-53 43-53
Risk-free interest rate 1.2-1.9% 0.6-0.8% 0.5-1.0%
Expected dividend yield 2.0% 2.7% 3.0%
We determine the above assumptions based on the following:
•Expected volatility is based on the historical volatility of our common
stock over a period equal to the expected term of the option.
•Expected term is based on historical option exercise data used to
determine the expected employee exercise behavior. Based on
historical option exercise data, we have estimated different expected
terms and determined a separate fair value for options granted for
two employee populations.
•Risk-free interest rate is the yield on a U.S. Treasury zero-coupon
issue with a remaining term equal to the expected term of the
option at the grant date.
•Expected dividend yield is based on our historical dividend yield level.
The resulting weighted average fair value per option granted was
$15.63 in 2011, $13.23 in 2012 and $8.90 in 2013. Stock option
expense reduced pretax operating earnings (and on a per-share basis)
by $90 ($0.16) in 2011, $88 ($0.16) in 2012 and $74 ($0.14) in
2013. Compensation expense for stock options is reported as a
Corporate expense for segment reporting purposes (see Note Q). On
December 31, 2013, we had $46 of unrecognized compensation cost
related to stock options, which is expected to be recognized over a
weighted average period of one year.
A summary of option activity during 2013 follows:
Shares
Under Option
Weighted Average
Exercise Price Per Share
Outstanding on December 31, 2012 26,124,759 $ 72.19
Granted 7,566,031 67.77
Exercised (9,079,434) 65.55
Forfeited/cancelled (6,973,245) 81.62
Outstanding on December 31, 2013 17,638,111 $ 69.99
Vested and expected to vest on
December 31, 2013 17,314,425 $ 70.03
Exercisable on December 31, 2013 7,550,972 $ 71.85
Summary information with respect to our stock options’ intrinsic value
and remaining contractual term on December 31, 2013, follows:
Weighted Average Remaining
Contractual Term (in years)
Aggregate Intrinsic
Value
Outstanding 4.8 $ 451
Vested and expected to vest 4.8 441
Exercisable 3.4 179
In the table above, intrinsic value is calculated as the excess, if any,
between the market price of our stock on the last trading day of the year
and the exercise price of the options. For options exercised, intrinsic
value is calculated as the difference between the market price on the
date of exercise and the exercise price. The total intrinsic value of
options exercised was $113 in 2011, $112 in 2012 and $154 in 2013.
We received cash from the exercise of stock options of $198 in 2011,
$146 in 2012 and $583 in 2013.
Restricted Stock/Restricted Stock Units. We determine the fair
value of restricted stock and RSUs as the average of the high and low
market prices of our stock on the date of grant. We generally recognize
compensation expense related to restricted stock and RSUs on a
straight-line basis over the period during which the restriction lapses,
which is generally four years.
Compensation expense related to restricted stock and RSUs reduced
pretax operating earnings (and on a per-share basis) by $38 ($0.07) in
2011, $26 ($0.05) in 2012 and $46 ($0.09) in 2013. On December 31,
2013, we had $48 of unrecognized compensation cost related to
restricted stock and RSUs, which is expected to be recognized over a
weighted average period of 2.3 years.
A summary of restricted stock and RSU activity during 2013 follows:
Shares/
Share-Equivalent Units
Weighted Average
Grant-Date Fair Value
Per Share
Nonvested at December 31, 2012 2,493,449 $ 61.23
Granted 1,000,541 67.99
Vested (903,731) 40.46
Forfeited (82,862) 70.33
Nonvested at December 31, 2013 2,507,397 $ 71.11
The total fair value of shares vested was $28 in 2011, $28 in 2012
and $63 in 2013.
General Dynamics Annual Report 2013 53