E-Z-GO 2008 Annual Report Download - page 88

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Textron Inc.
The compensation expense that has been recorded in net income for our share-based compensation plans is as follows:
(In millions) 2008 2007 2006
Compensation (income) expense $ (78) $ 150 $ 92
Hedge expense (income) on forward contracts 100 (53) (21)
Income tax expense (benefit) 29 (51) (28)
Total net compensation cost included in net income $ 51 $ 46 $ 43
Less net compensation costs included in discontinued operations — 1 (1)
Net compensation costs included in continuing operations $ 51 $ 45 $ 44
Share-based compensation costs are reflected primarily in selling and administrative expenses. Compensation expense includes approximately
$20 million, $23 million and $16 million in 2008, 2007 and 2006, respectively, representing the attribution of the fair value of options issued and
the portion of previously granted options for which the requisite service has been rendered. During 2006, we recorded approximately $4 million
of share-based award forfeitures related to discontinued operations.
Stock Options
The stock option compensation cost calculated under the fair value approach is recognized over the vesting period of the stock options. The
weighted-average fair value of options granted per share was $14, $14 and $12 for 2008, 2007 and 2006, respectively. We estimate the fair value
of options granted on the date of grant using the Black-Scholes option-pricing model. Expected volatilities are based on implied volatilities from
traded options on our common stock, historical volatilities and other factors. We use historical data to estimate option exercise behavior, adjusted
to reflect anticipated increases in expected life.
The weighted-average assumptions used in our Black-Scholes option-pricing model for awards issued during the respective periods are
as follows:
2008 2007 2006
Dividend yield 2% 2% 2%
Expected volatility 30% 30% 25%
Risk-free interest rate 3% 5% 4%
Expected term (in years) 5.1 5.5 6.0
The following table summarizes information related to stock option activity for the respective periods:
(In millions) 2008 2007 2006
Intrinsic value of options exercised $ 28 $ 85 $ 120
Cash received from option exercises 40 103 173
Actual tax benefit realized for tax deductions from option exercises 10 27 38
Our income taxes payable for federal and state purposes have been reduced by the tax benefits we receive from employee stock options. The
income tax benefits we receive for certain stock options are calculated as the difference between the fair market value of the stock issued at the
time of exercise and the option price, tax effected. The tax impact of the tax deduction in excess of the related deferred taxes is presented in the
Consolidated Statements of Cash Flows as financing activities.
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