Northrop Grumman 2009 Annual Report Download - page 109

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The significant weighted-average assumptions relating to the valuation of the company’s stock options for the
years ended December 31, 2009, 2008, and 2007, was as follows:
2009 2008 2007
Dividend yield 3.6% 1.8% 2.0%
Volatility rate 25% 20% 20%
Risk-free interest rate 1.7% 2.8% 4.6%
Expected option life (years) 5-6 66
In 2007 and 2008, the company granted stock options almost exclusively to executives, and the expected term of
six years was based on these employees’ exercise behavior. Beginning in 2009, the company began granting
options to non-executives and assigned an expected term of five years for valuing these options. The company
believes that this stratification of expected terms best represents future expected exercise behavior between the
two employee groups.
The weighted-average grant date fair value of stock options granted during the years ended December 31, 2009,
2008, and 2007, was $7, $15, and $15, per share, respectively.
In connection with the September 2009 announcement that the company’s CEO would retire in June 2010, the
board of directors modified the CEO’s stock option grants by vesting the remaining unvested option grants to
purchase 192,271 shares of company stock. The incremental expense associated with these modifications is
$2 million of which $743,000 was recognized during 2009. The remaining unrecognized modification expense
will be recognized ratably through June 2010.
Stock option activity for the year ended December 31, 2009, was as follows:
Shares
Under Option
(in thousands)
Weighted-
Average
Exercise Price
Weighted-Average
Remaining
Contractual Term
Aggregate
Intrinsic Value
($ in millions)
Outstanding at January 1, 2009 13,481 $54 4.2 years $18
Granted 2,711 45
Exercised (1,241) 42
Cancelled and forfeited (509) 55
Outstanding at December 31, 2009 14,442 $53 3.8 years $88
Vested and expected to vest in the
future at December 31, 2009 14,252 $53 3.8 years $87
Exercisable at December 31, 2009 10,646 $53 3.1 years $59
Available for grant at December 31, 2009 8,936
The total intrinsic value of options exercised during the years ended December 31, 2009, 2008, and 2007, was
$11 million, $66 million, and $153 million, respectively. Intrinsic value is measured using the fair market value at
the date of exercise (for options exercised) or at December 31, 2009 (for outstanding options), less the applicable
exercise price.
Stock Awards – Compensation expense for stock awards is measured at the grant date based on fair value and
recognized over the vesting period, generally three years. The fair value of stock awards is determined based on
the closing market price of the company’s common stock on the grant date. For purposes of measuring
compensation expense, the amount of shares ultimately expected to vest is estimated at each reporting date based
on management’s expectations regarding the relevant performance criteria.
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NORTHROP GRUMMAN CORPORATION
eBP - v54508-i003_a.pdf - Page 103 of 124 - March 11, 2010 - 20:02:40