Honeywell 2008 Annual Report Download - page 114

HONEYWELL INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share amounts)
expense over the employee's requisite service period (generally the vesting period of the award). Options
generally vest over a four-year period and expire after ten years.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing
model. Expected volatility is based on implied volatilities from traded options on Honeywell common stock. We
used a Monte Carlo simulation model to derive an expected term. Such model uses historical data to estimate
option exercise activity and post-vest termination behavior. The expected term represents an estimate of the time
options are expected to remain outstanding. The risk-free rate for periods within the contractual life of the option
is based on the U.S. treasury yield curve in effect at the time of grant.
Compensation cost on a pre-tax basis related to stock options recognized in operating results (included in
selling, general and administrative expenses) under SFAS No. 123R in 2008, 2007 and 2006 was $51, $65 and
$77 million, respectively. The associated future income tax benefit recognized in 2008, 2007 and 2006 was $19,
$25 and $28 million, respectively. Compensation cost related to stock options recognized in our Consolidated
Statement of Operations in 2008, 2007 and 2006 includes (1) compensation cost for stock option awards granted
prior to, but not yet vested as of December 31, 2005, based on the grant-date fair value estimated in accordance
with the pro forma provisions of SFAS No. 123 and (2) compensation cost for stock option awards granted
subsequent to December 31, 2005, based on the grant-date fair value estimated in accordance with the
provisions of SFAS No. 123R.
The following table sets forth fair value per share information, including related weighted-average
assumptions, used to determine compensation cost consistent with the requirements of SFAS No. 123R.
Years Ended December 31,
2008 2007 2006
Weighted average fair value per share of options granted
during the year(1) $ 13.81 $ 10.27 $ 9.44
Assumptions:
Expected annual dividend yield 1.88% 2.09% 2.15%
Expected volatility 26.35% 20.18% 22.32%
Risk-free rate of return 3.09% 4.66% 4.63%
Expected option term (years) 5.2 5.3 5.0
(1) Estimated on date of grant using Black-Scholes option-pricing model.
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