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Notes to Consolidated Financial Statements
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Share-Based Compensation
The Company adopted SFAS No. 123(R) effective October 1, 2004. This statement requires compensation expense relating to share-based payments to be recognized in net income using a fair-value measurement method. Under the fair value method, the estimated fair value of awards is charged to income on a straight-line basis over the requisite service period, which is generally the vesting period. The Company elected the modified prospective method as prescribed in SFAS No. 123(R) and therefore, prior periods were not restated. Under the modified prospective method, this statement was applied to new awards granted after the time of adoption, as well as to the unvested portion of previously granted equity-based awards for which the requisite service had not been rendered as of October 1, 2004. The Company granted stock options and restricted stock unit awards in November 2004 under the 2004 Employee and Director Equity-Based Compensation Plan (the “2004 Plan”), its new long-term incentive program. See Note 13 for further discussion.
Share-based compensation expense in 2005 reduced the Company’s results of operations as follows:
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2005 |
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| Income From Continuing Operations |
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| Before Income Taxes |
$ |
70,199 |
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| Net Income(A) |
$ |
50,258 |
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| Basic Earnings Per Share(A) |
$ |
0.20 |
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| Diluted Earnings Per Share(A) |
$ |
0.19 |
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| (A) |
Share-based compensation attributable to discontinued operations was not material.
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Prior to October 1, 2004, the Company accounted for share-based employee compensation under the provisions of SFAS No. 123 using the intrinsic value method prescribed by APB No. 25 and related interpretations. Under the intrinsic value method, no compensation expense was recognized for stock options, as the exercise price of employee stock options equaled the market value of the Company’s stock on the date of grant. The following pro-forma net income and earnings per share information has been determined as if the Company had accounted for its share-based compensation awards issued using the fair value method in 2004 and 2003.
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2004 |
2003 |
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| Net Income, as reported |
$ |
467,402 |
(A) |
$ |
547,056 |
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| Less share-based compensation expense, net of tax |
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32,027 |
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|
35,941 |
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| Pro-forma net income |
$ |
435,375 |
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$ |
511,115 |
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| Reported earnings per share: |
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| Basic |
$ |
1.85 |
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$ |
2.14 |
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| Diluted |
$ |
1.77 |
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$ |
2.07 |
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| Pro-forma earnings per share: |
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| Basic |
$ |
1.72 |
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$ |
2.00 |
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| Diluted |
$ |
1.66 |
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$ |
1.95 |
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| (A) |
Includes $2,466 of share-based compensation expense relating to restricted stock units granted in November 2003.
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The pro-forma amounts and fair value of each option grant were estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 2004 and 2003: risk-free interest rates of 3.85% and 3.66%, respectively; expected volatility of 32.5% and 33.2%, respectively; expected dividend yields of 1.16% and 1.21%, respectively; and expected lives of six years for each year presented. The Black-Scholes model is a trading pricing model that does not reflect either the non-traded nature of employee stock options or the limited transferability of such options. This model also does not consider restrictions on trading for all employees, including certain restrictions imposed on senior management of the Company. Therefore, if the Company had used an option pricing model other than Black-Scholes, pro-forma results different from those shown above may have been reported.
Other Postretirement Benefits
The Company adopted Financial Accounting Standards Board Staff Position (“FSP”) 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (the “Act”), on a prospective basis effective January 1, 2004. The Act introduces a prescription drug benefit under Medicare, as well as a federal subsidy to sponsors of retiree healthcare benefit plans that provide a benefit that is at least actuarially equivalent to Medicare. This adoption resulted in a reduction of the Company’s accumulated postretirement benefit obligation of $26,409 at October 1, 2003 and a reduction of the net periodic benefit cost of $3,654 and $2,053 for the years ended September 30, 2005 and 2004, respectively. See Note 4 for more information about the Company’s benefit plans.
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