Freeport-McMoRan 2007 Annual Report Download - page 96

FREEPORT-McMoRan COPPER & GOLD INC.
2007 Annual Report
94 Financial & Operating Information
Notes to Consolidated Financial Statements
Plan, 0.3 million shares under the 2004 Plan, 0.1 million shares under
the 2003 Plan and less than 6,000 shares under the 1999 Plan available
for the grant of new awards.
FCX also has a restricted stock program that allows FCX senior
executives to elect to receive restricted stock units under each of the
employee plans in lieu of all or part of their cash incentive compensation.
These restricted stock unit grants vest over three years, may be subject
to a performance measure, and are valued on the date of grant at 50
percent above the cash incentive compensation that the employee
elects to replace. Dividends on restricted stock units accrue and are
subject to the award’s vesting. Stock option and SAR awards do not
receive dividends.
In connection with the Phelps Dodge acquisition, former Phelps Dodge
stock options and restricted stock awards were converted into 806,595
FCX stock options and 87,391 FCX restricted stock awards, which retain
the terms by which they were originally granted under Phelps Dodge’s
plans. The stock options carry a maximum term of 10 years with 672,134
stock options vested upon acquisition of Phelps Dodge and 134,461 stock
options that vest ratably over a three-year period or the period until the
participant becomes retirement-eligible, whichever is shorter. Restricted
stock awards generally become fully vested in five years, with a majority
of these shares having graded-vesting features in which 25 percent of the
shares will vest on the third and fourth anniversaries of the award with
the remaining 50 percent in the fifth year. The fair value of the restricted
stock awards was determined based on the quoted market price at the
time of the acquisition. FCX uses the graded-vesting method to amortize
the fair value of the restricted stock awards, and for retirement-eligible
participants, amortization is accelerated.
Stock-Based Compensation Cost. Compensation cost charged against
earnings for stock-based awards is shown below for the years ended
December 31, 2007, 2006 and 2005. FCX did not capitalize any
stock-based compensation costs during the years ended December 31,
2007, 2006 and 2005.
2007 2006 2005
Stock options awarded to employees
(including directors) $ 71 $ 28 $ 2
Stock options awarded to nonemployees 5 3 1
Restricted stock units in lieu of cash awards 67 23 18
Restricted stock awards to employees 6 – –
Restricted stock units awarded to directors 3 1 –
Stock appreciation rights 7 1 2
Total stock-based compensation costa 159 56 23
Tax benefit (62) (20) (7)
Minority interest share (4) (3) (1)
Impact on net income $ 93 $ 33 $ 15
a. Amounts are before Rio Tinto’s share of the cost of employee exercises of in-the-money stock
options, which decreased consolidated selling, general and administrative expenses by $4 million
in 2007, $7 million in 2006 and $9 million in 2005.
Options and SARs. A summary of options outstanding as of
December 31, 2007, including 90,145 SARs, and changes during the year
ended December 31, 2007, follow:
Weighted
Weighted Average
Average Remaining Aggregate
Number of Option Contractual Intrinsic
Options Price Term (years) Value
Balance at January 1 5,801,716 $ 39.70
Granted 6,641,500 69.89
Conversion of
Phelps Dodge options 806,595 28.38
Exercised (2,276,391) 34.45
Expired/Forfeited (213,622) 59.29
Balance at December 31 10,759,798 58.17 8.4 $ 476
Vested and exercisable
at December 31 1,008,152 29.57 5.8 $ 73
Summaries of options outstanding, including SARs, and changes during
the years ended December 31, 2006 and 2005, follow:
2006 2005
Weighted Weighted
Average Average
Number of Option Number of Option
Options Price Options Price
Balance at January 1 7,355,612 $ 31.43 6,866,805 $ 23.20
Granted 1,126,250 62.88 4,490,750 37.03
Exercised (2,614,273) 26.51 (3,838,554) 23.24
Expired/Forfeited (65,873) 39.12 (163,389) 31.51
Balance at December 31 5,801,716 39.70 7,355,612 31.43
The fair value of each option award is estimated on the date of grant
using the Black-Scholes-Merton option valuation model. Expected volatility
is based on implied volatilities from traded options on FCX’s stock and
historical volatility of FCX’s stock. FCX uses historical data to estimate
future option exercises, forfeitures and expected life of the options. When
appropriate, separate groups of employees that have similar historical
exercise behavior are considered separately for valuation purposes. The
expected dividend rate is calculated as the annual dividend (excludes
supplemental dividends) at the date of grant divided by the average stock
price for the one-year period preceding the grant date. The risk-free
interest rate is based on Federal Reserve rates in effect for bonds with
maturity dates equal to the expected term of the option at the grant date.
The weighted-average assumptions used to value stock option awards
during the years ended December 31, 2007 and 2006, are noted in the
following table.
2007 2006
Expected volatility 37.3% 37.7%
Expected life of options (in years) 4.25 4.0
Expected dividend rate 2.2% 2.9%
Risk-free interest rate 4.6% 4.4%