E-Z-GO 2006 Annual Report Download - page 78

Note 11. Share-Based Compensation
Summary of Share-Based Compensation Plans
Our 1999 Long-Term Incentive Plan (the “Plan”) authorizes awards to our key employees in the form of options to purchase our shares and
restricted stock. Options to purchase our shares have a maximum term of 10 years and vest ratably over a three-year period. Restricted stock
grants vest one-third each in the third, fourth and fifth year following the grant. The maximum number of shares authorized under the Plan
includes 17.5 million options to purchase our shares and 2 million shares of restricted stock. We also provide share-based compensation awards
payable in cash, including retention awards to certain executives and performance share units. Payouts under performance share units vary based
on certain performance criteria measured over a three-year period. The performance share units vest at the end of three years.
Through our Deferred Income Plan for Textron Key Executives (the “DIP”), we provide participants the opportunity to voluntarily defer up to 25%
of their base salary and up to 100% of annual and long-term incentive compensation and other compensation. Elective deferrals may be put into
either a stock unit account or an interest bearing account. We generally contribute a 10% premium on amounts deferred into the stock unit
account. Executives who are eligible to participate in the DIP who have not achieved and/or maintained the required minimum stock ownership
level are required to defer annual incentive compensation in excess of 100% of the executive’s annual target into a deferred stock unit account and
are not entitled to the 10% premium contribution on the amount deferred. Participants cannot move amounts between the two accounts while
actively employed by us and cannot receive distributions until termination of employment.
Change in Accounting for Share-Based Compensation
We adopted SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS No. 123-R”), which replaces SFAS No. 123, “Accounting for Stock-
Based Compensation” and supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No.
25”), in the first quarter of 2005 using the modified prospective transition method. SFAS No. 123-R requires companies to measure compensa-
tion costs for share-based payments to employees, including stock options, at fair value and to expense such compensation over the service
period. Under the transition method, compensation expense recognized in 2005 includes: a) compensation cost for all stock options and
restricted stock granted prior to but not yet vested as of January 1, 2005, based on the grant-date fair value estimated and recognized in accor-
dance with the provisions of SFAS No. 123 and b) compensation cost for all stock options and restricted stock granted subsequent to January 1,
2005 and all share-based compensation awards accounted for as liabilities, based upon the measurement and recognition provisions of SFAS
No. 123-R. For awards granted or modified in 2005 and prospectively, compensation costs for awards with only service conditions that vest rat-
ably are recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award. Compensation costs
for awards granted prior to 2005 are recognized using the attribution methods required under SFAS No. 123. Prior to 2005, we accounted for
share-based payments, including stock options issued under our Plan, using the intrinsic value method of APB No. 25.
Upon adoption, we remeasured our share-based compensation awards that are accounted for as liabilities at fair value. The cumulative effect of
adoption upon this remeasurement increased net income by approximately $1 million in the first quarter of 2005, which is not considered to be
material and is recorded in selling and administrative expense. SFAS No. 123-R requires that the excess tax benefits received related to stock
option exercises be presented as financing cash inflows. For 2006 and 2005, $31 million and $14 million, respectively, of these excess tax bene-
fits have been presented as cash provided by financing activities in the consolidated statement of cash flows.
The compensation expense that has been recorded in net income for our share-based compensation plans is as follows:
(In millions) 2006 2005 2004
Compensation expense, net of hedge income or expense $ 71 $ 64 $ 31
Income tax benefit (28) (24) (11)
Total net compensation cost included in net income $ 43 $ 40 $ 20
Net compensation costs included in discontinued operations (2) 2 1
Net compensation costs included in continuing operations $ 45 $ 38 $ 19
Share-based compensation costs are reflected primarily in selling and administrative expenses. For 2006 and 2005, the expense includes attribu-
tion of the fair value of options issued, as well as the portion of previously granted options for which the requisite service was rendered, totaling
approximately $16 million in 2006 and $17 million in 2005. Of this amount, approximately $18 million and $15 million, respectively, have been
recorded in continuing operations and $(2) million and $2 million, respectively, in discontinued operations. During 2006, Textron recorded
approximately $4 million of share-based award forfeitures related to discontinued operations.
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Textron Inc.