Cardinal Health 2008 Annual Report Download - page 136

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shares as of June 30, 2008, of which 11.4 million shares have been granted. Employee restricted shares and
restricted share units granted under the Plans during fiscal 2006, 2007 and 2008 generally vest in equal
installments over three years and entitle holders to dividends or cash dividend equivalents. Restricted shares and
restricted share units that were awarded after August 1, 2006 accrue dividends or cash dividend equivalents that
are payable upon vesting of the awards.
During the first quarter of fiscal 2006, the Company adopted SFAS No. 123(R), “Share-Based Payment,”
applying the modified prospective method. This Statement requires all equity-based payments to employees,
including grants of employee options, to be recognized in the consolidated statement of earnings based on the
grant date fair value of the award. Under the modified prospective method, the Company is required to record
equity-based compensation expense for all awards granted after the date of adoption and for the unvested portion
of previously granted awards outstanding as of the date of adoption.
The fair values of options granted after the Company adopted this Statement were determined using a lattice
valuation model. The Company believes the lattice model provides for better estimates because it has the ability
to take into account employee exercise patterns based on changes in the Company’s stock price and other
variables and it provides for a range of input assumptions. In anticipation of the adoption of SFAS No. 123(R),
the Company did not modify the terms of any previously-granted options.
The fair values of restricted shares and restricted share units is determined by the number of shares granted
and the grant date market price of the Company’s Common Shares. The compensation expense recognized for all
equity-based awards is net of estimated forfeitures and is recognized using the straight-line method over the
awards’ service period. In accordance with SAB No. 107, the Company classified equity-based compensation
within SG&A expense to correspond with the same line item as the majority of the cash compensation paid to
employees.
The following table illustrates the impact of equity-based compensation on reported amounts for the fiscal
years ended June 30, 2008, 2007 and 2006:
2008 2007 2006
(in millions, except per share amounts)
As
Reported
Impact of
Equity-Based
Compensation
As
Reported
Impact of
Equity-Based
Compensation
As
Reported
Impact of
Equity-Based
Compensation
Operating earnings (1)(2)(3)(4) .......... $2,121.2 $(122.3) $1,373.7 $(138.1) $1,844.9 $(207.8)
Earnings from continuing operations ...... 1,315.9 (81.0) 839.7 (90.0) 1,163.3 (135.5)
Net earnings ......................... 1,300.6 (81.0) 1,931.1 (114.0) 1,000.1 (157.7)
Net basic earnings per Common Share .... 3.63 (0.23) 4.89 (0.29) 2.38 (0.37)
Net diluted earnings per Common Share . . . 3.57 (0.22) 4.77 (0.28) 2.33 (0.37)
(1) The total equity-based compensation expense for the fiscal years ended June 30, 2008, 2007 and 2006 includes
gross SAR income/(expense) of approximately $6.6 million, ($4.0) million, and ($36.9) million, respectively.
The SARs were granted on March 3, 2005 and August 3, 2005 to the Company’s then Chairman and Chief
Executive Officer. Equity-based compensation expense was recognized from the vesting of the August 3, 2005
SARs upon issuance with an exercise price below the then-current price of the Company’s Common Shares. In
quarters subsequent to issuing the SARs, the fair value has been remeasured using a Black-Scholes model and
will continue to be remeasured each quarter until the unexercised SARs are exercised. Any increase in fair
value is recorded as equity-based compensation. Any decrease in the fair value of the SARs is only recognized
to the extent of the expense previously recorded. Of the 1.0 million SARs granted, 0.6 million SARs were
exercised in fiscal 2007 and 0.3 million SARs were exercised in fiscal 2008.
(2) The total equity-based compensation expense for fiscal years ended June 30, 2008, 2007 and 2006 also
includes gross restricted share and restricted share unit expense of approximately $57.7 million,
$36.2 million and $22.0 million respectively, gross employee option expense of approximately
$60.1 million, $88.4 million and $138.5, respectively, and gross employee stock purchase plan expense of
approximately $11.1 million, $9.5 million and $10.4 million, respectively.
112