week 9 - shareholders' equity.pdf
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Shareholders Equity
Shareholders equity is the residual claim on assets after settlingclaims of creditors (i.e. assets liabilities)
Shareholders equity due to share issuance:
Contributed capital
Common stock
Preferred stock
Treasury Stock
Repurchased shares that may be reissued
Shareholders equity due to operations:
Retained earnings
End Retained Earnings = Beg Retained Earnings + Net Income Dividends
Accumulated Other Comprehensive Income Items that bypass the Income Statement
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Types of Stock
Preferred stock
Between debt holders and common stock holders in claim on assets
No voting r ights, but pay a fixed dividend that must be paid before common
dividends
May be callable, convertible, or redeemable
Common Stock
Voting rights, but residual claimant to assets
Par Value Stated value on shares used to compute balance in Common Stock or Preferred
Stock
Additional Paid In Capital (APIC)
Amount received in excess of par value
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Contributed Capital Terminology
Shares Authorized
Total number of shares the firm could issue
Shares Issued
Number of shares that have been sold to the public
Balance in Common Stock at Par based on this amount
Shares Outstanding
Number of shares currently held by the public
Shares issued minus treasury shares
Dividends and Earnings Per Share based on this amount
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Example: Issuing Stock - Preferred
On 1/14/2012, Stack Inc. issued 10,000 shares of no-par preferredstock for proceeds of $7 per share. The preferred stock specif iescumulative $1 annual dividends per share.
Journal entry
1/14/12 Dr. Cash (+A) 70,000 (10,000 x 7)
Cr. Preferred Stock (+SE) 70,000
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Example: Issuing Stock - Common
On 1/14/2012, Stack Inc. issued 12,000 shares of $1 par value stock forproceeds of $10 per share
Journal entry
1/14/12 Dr. Cash (+A) 120,000 (12,000 x 10)
Cr. Common Stock (+SE) 12,000 (12,000 x 1)
Cr. Addl Paid in Capital (+SE) 108,000 (Plug)
Shares issued: 12,000
Shares outstanding: 12,000
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Share Repurchases and Treasury Stock
Companies sometimes repurchase their own shares
Repurchased shares are carried in the Treasury Stock (XSE) account
Treasury stock does not have voting rights or dividend rights Treasury stock can be reissued by the firm
Reissued treasury stock is removed from the Treasury Stock account at theoriginal price paid to repurchase
APIC or Retained Earnings are used to balance the journal entry if reissue price
differs from repurchase price Companies cannot book gains or losses in trading in their own stock!
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Example: Treasury Stock Purchase
On 3/3/2012, Stack Inc. repurchased 4,000 shares of its commonstock at a price of $11 per share
Journal entry
3/3/12 Dr. Treasury Stock (+XSE) 44,000 (4,000 x 11)
Cr. Cash (-A) 44,000
Shares issued: 12,000
Shares outstanding: 8,000
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Example: Treasury Stock Sale Price Increase
On 4/4/2012, Stack Inc. sold 1,000 shares of its t reasury stock at aprice of $14 per share
Journal entry
4/4/12 Dr. Cash (+A) 14,000 (1,000 x 14)
Cr. Addl Paid in Capital (+SE) 3,000 (Plug)
Cr. Treasury Stock (-XSE) 11,000 (Original cost)
Shares issued: 12,000
Shares outstanding: 9,000
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Example: Treasury Stock Sale Price Decrease
On 5/5/2012, Stack Inc. sold 1,000 shares of its t reasury stock at aprice of $9 per share
Journal entry
5/5/12 Dr. Cash (+A) 9,000 (1,000 x 9)
Dr. Addl Paid in Capital (-SE) 2,000 (Plug)
Cr. Treasury Stock (-XSE) 11,000 (Original cost)
Shares issued: 12,000
Shares outstanding: 10,000
Note: if APIC has a zero balance, debit Retained Earnings
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Example: Treasury Stock Retirement
On 5/15/2012, Stack Inc. decided to retire 1,000 shares of its treasurystock
Journal entry
5/5/12 Dr. Common Stock (-SE) 1,000 (1,000 x 1)
Dr. Addl Paid in Capital (-SE) 10,000 (Plug)
Cr. Treasury Stock (-XSE) 11,000 (Original cost)
Shares issued: 11,000
Shares outstanding: 10,000
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Retained Earnings
Retained Earnings: Cumulative income that has not been paid out asdividends
Net income: Posit ive net income increases retained earnings; negative net
income decreases retained earnings
Dividends: Decrease retained earnings since this is a return of equity toshareholders
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Cash Dividends
Declaration date
Company declares a dividend will be paid to all investors that hold shares as ofthe date of record (e.g., 10 days after the declaration date)
Date of record Date on which investors must hold shares to be entit led to receive the dividend
An investor that sells shares after the record date is still entitled to receive thedividend
Payment date Date on which the firm pays the dividend
Note: Firms are not required to pay dividends. However, once a firmhas declared a dividend, the firm is legally obligated to pay it to its
shareholders as of the record date Create a liabili ty called Dividends Payable
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Example: Cash Dividends On 6/6/2012, Stack Inc. declares a $0.50 dividend per share to both
common and preferred shareholders of record on 6/16/2012. Thedividend will be paid on 6/26/2012.
Preferred shares issued and outstanding: 10,000
Common shares issued: 11,000; Common shares outstanding: 10,000
Journal entry
6/6/12 Dr. Retained Earnings (-SE) 10,000 (20,000 x .50)
Cr. Dividends Payable (+L) 10,000
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Example: Cash Dividends On 6/6/2012, Stack Inc. declares a $0.50 dividend per share to both
common and preferred shareholders of record on 6/16/2012. Thedividend will be paid on 6/26/2012.
Journal entries
6/16/12 No entry
6/26/12 Dr. Dividends Payable (-L) 10,000
Cr. Cash (-A) 10,000
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Stock Dividends and Splits Stock dividend
Each common shareholder is given a dividend in the form of new common shares
Each stockholders percentage ownership of the company will be identical to
what it was before the stock div idend
No cash flow involved
If dividend less than 25%: reduce Retained Earnings and increase Common Stock andAPIC using current market price of the shares
If dividend greater than 25%: reduce Retained Earnings and increase Common Stock
using the par value of the shares
Stock spilt
Each common share is replaced with a given number of new common shares
No balance sheet, income statement, or cash flow effect
Adjust number of shares authorized, issued, and outstanding, as well as the par value
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Example: Stock Dividends On 7/7/2012, Stack Inc. declared a 10% common stock dividend; i.e.,
every shareholder received new shares equal to 10% of currentshares held. The price of Stack stock on 7/7/12 was $11 per share.
Shares issued: 11,000; Shares outstanding: 10,000
Dividend will be 1,000 shares (10,000 x .10)
Journal entry
7/7/12 Dr. Retained Earnings (-SE) 11,000 (1,000 x 11)
Cr. Common Stock (+SE) 1,000 (1,000 x 1)
Cr. Addl Paid in Capital (+SE) 10,000 (Plug)
Shares issued: 12,000
Shares outstanding: 11,000
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Example: Stock Split On 8/8/2012, Stack Inc. announces a 2-for-1 common stock split
Shares issued: 12,000; Shares outstanding: 11,000; Par value: $1
Journal entry
8/8/12 No entry
Shares issued: 24,000 Shares outstanding: 22,000
Par value: $0.50 per share
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Accumulated Other Comprehensive Income Debits ( expenses , losses ) and Credits ( revenues , gains ) that
bypass the income statement and go directly into ShareholdersEquity
Rationale: Companies do not l ike volati le earnings caused by marketmovements. Some accounting methods require markingassets/liabili ties to fair value
Unrealized gains and losses would cause volatili ty in Net Income
Compromise: GAAP and IFRS require companies to mark-to-market,but allow unrealized gains/losses to bypass the income statement
But, Balance Sheet must balance, so unrealized gains/losses go intoAccumulated Other Comprehensive Income, instead of through Net Income intoRetained Earnings
Items go into AOCI on an after-tax basis
Tax effect of item goes into a Deferred Tax account
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AOCI Items Unrealized Gains/Losses on Marketable Securities
Under Available for Sale treatment, unrealized gains and losses from markingMarketable Secur ities to fair value are recorded in AOCI
Foreign Currency Translation Adjustments Converting the assets and liabilities of foreign subsidiaries from the foreign
currency to the domestic currency under the Current Method leads tounrealized gains and losses that go to AOCI
Pensions The difference between the actual gains/losses on pension assets and the
expected gains/losses on those assets goes to AOCI
Derivatives
For Cash Flow Hedges , unrealized gains and losses from marking Derivatives
to fair value are recorded in AOCI
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Statement of Shareholders Equity Report the changes in all of the shareholders equity accounts
Presents beginning and ending balances in each account and shows all increasesand decreases during the year
Common Stock, APIC, Treasury Stock Issuances and repurchases of stock, stock-based compensation
Retained Earnings
Net income, Dividends, and some effects of stock-based compensation
Accumulated Other Comprehensive IncomeAll items that af fect AOCI
Noncontrolling Interest
For consolidated subsidiaries with less than 100% ownership by company,
noncontrolling interest shows the claims on net assets by outside owners in thesubsidiaries
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Stock-based Compensation Restricted Stock Plans
Companies pay employees with shares of stock as compensation
Stock Option Plans
Companies grant employees the right to purchase a number of shares at a fixedprice (called the exercise or strike price) over a specified period of time (often10 years) as compensation
Most of the time, the exercise price is set equal to the stock price at the time theoptions are granted (called an at-the-money option)
Generally some vesting period (normally 1-3 years) must pass beforethe employee is allowed to sell the stock or exercise the option
The value of the restricted stock or options granted is treated as anexpense and recognized over the vesting period
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Example: Restricted Stock Grant On 1/1/2013, Stack Inc. grants 1,000 shares of stock to its CEO as
compensation. The stock price is $20 per share on the grant date. Thestock vests after two years. The par value is $0.50.
Journal entry
1/1/13 Dr. Deferred comp. expense (+XSE) 20,000 (1000 x 20)
Cr. Common Stock (+SE) 500 (1000 x .50)
Cr. Addl Paid in Capital (+SE) 19,500 (Plug)
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Example: Restricted Stock Vesting On 1/1/2013, Stack Inc. grants 1,000 shares of stock to its CEO as
compensation. The stock price is $20 per share on the grant date. Thestock vests after two years. The par value is $0.50.
Journal entries
12/31/13 Dr. Compensation expense (+E) 10,000
Cr. Deferred compensation expense (-XSE) 10,000
12/31/14 Dr. Compensation expense (+E) 10,000
Cr. Deferred compensation expense (-XSE) 10,000
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Example: Stock Option Exercise On 6/6/2018, the CFO exercises the 100 options to buy the stock at
the $20 exercise price. The market price of Stacks stock is $30 onthat day. Stack re-issues treasury stock to provide the shares.
The treasury stock was acquired at $11 per share
Journal entry
6/6/2018 Dr. Cash (+A) 2,000 (100 x 20)
Cr. Treasury Stock (-XSE) 1,100 (100 x 11)
Cr. Addl Paid-in-Capital (+SE) 900 (Plug)
Note: The market price is not relevant for this journal entry, but Stackwill get a tax deduction equal to ($30 - $20) x 100 shares = $1,000
These tax savings are considered a Cash Flow from Financing
This amount is taxable income for the CFO
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Earnings Per Share (EPS) Basic EPS provides a measure of how much earnings was generated for
each share of common stock held by outsiders
Reported by the company at earnings announcement
Forecasted by security analysts
Compared to price per share to get Price-Earnings (P/E) Ratio
Basic EPS =Net Income Preferred Dividends
Weighted average number of commonshares outstanding
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Example: Basic EPS For the year ended 12/31/2013, Stack reported Net Income of $25,000.
On 1/1/2013, Stack had 22,000 common shares outstanding and10,000 preferred shares outstanding. Stack issued 4,000 common
shares on 6/30/2013. Stack paid $5,000 of preferred dividends and$9,000 of common dividends during 2013
Basic EPS = Net Income Preferred Dividends
Wtd avg. number of common shares outstanding
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Example: Basic EPS For the year ended 12/31/2013, Stack reported Net Income of $25,000.
On 1/1/2013, Stack had 22,000 common shares outstanding and10,000 preferred shares outstanding. Stack issued 4,000 common
shares on 6/30/2013. Stack paid $5,000 of preferred dividends and$9,000 of common dividends during 2013
Basic EPS =
Basic EPS = =
Net Income Preferred Dividends
Wtd avg. number of common shares outstanding
25,000 5,000
(22,000 + (4,000 / 2))
20,000
24,000
25,000 5,000
((22,000 / 2) + (26,000 / 2))
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Example: Basic EPS For the year ended 12/31/2013, Stack reported Net Income of $25,000.
On 1/1/2013, Stack had 22,000 common shares outstanding and10,000 preferred shares outstanding. Stack issued 4,000 common
shares on 6/30/2013. Stack paid $5,000 of preferred dividends and$9,000 of common dividends during 2013
Basic EPS =
Basic EPS = = = $0.83
Net Income Preferred Dividends
Wtd avg. number of common shares outstanding
25,000 5,000
(22,000 + (4,000 / 2))
20,000
24,000
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Earnings Per Share (EPS) Diluted Companies with complex capital structures also report Diluted EPS
Complex capital structures includes securities that can be converted into stock atthe investors discretion
Convertible debt, stock options and warrants
Some of the value of these convertible securi ties is t ied to the value of commonstock; thus, investors holding these securities are indirect stockholders
Diluted EPS provides EPS assuming everything that could convert toa share of stock actually did so
Diluted EPS =Net Income Preferred Dividends + Adj. for convertibles
Wtd avg num of common shares outstanding + Adj. for
convertibles
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Diluted EPS Convertible Debt Convertible debt can be exchanged for common stock
Diluted EPS is computed under the assumption that the convertibledebt had been exchanged for common stock at the start of the period
This is called the if converted method
Numerator of EPS: Net Income is increased by the after-tax interestexpense on the convertible bond
If debt had converted, there would have been no Interest Expense, so i t is added
back to Net Income Denominator of EPS: Number of shares is increased as if the debt
was converted to common shares at the beginning of the period
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Example: Diluted EPS with Convertible Debt For fiscal year 2013, Stacks Net Income of $25,000 included $500 of
Interest Expense on convertible debt. The debt is convertible into2000 shares of common stock. The statutory tax rate is 35%.
Basic EPS = = $0.83
Diluted EPS =
Diluted EPS = = = $0.7820,000 + (500 x (1-.35))
24,000 + 2,000
20,000
24,000
Net Income Preferred Dividends + Adj. for convertibles
Wtd avg num of common shares outstanding + Adj. forconvertibles
20,325
26,000
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Diluted EPS Stock Options In-the-money stock options give the holder the right to acquire a
share of common stock at a pre-specified price
Diluted EPS is computed under the assumption that a fraction of the
options had converted to common shares This is called the treasury stock method
Numerator of EPS: No adjustment necessary
Denominator of EPS: Number of shares is increased by a fraction of
each outstanding option Number of addit ional shares = Number of options x Conversion fraction
Conversion fraction =(Avg. Stock Price Exercise Price)
Avg. Stock Price
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Diluted EPS Complications Diluted EPS must always be less than or equal to Basic EPS
Diluted EPS is set equal to Basic EPS in years when a firm has a loss fromcontinuing operations to common stockholders
If Diluted EPS would be greater than Basic EPS after a convertible is added to thecalculation, the convertible is considered antidilutive and is excluded fromcomputation of Diluted EPS
Options are considered antidilutive when the exercise price is greater than themarket price (i.e., when the option is out of the money ).
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Disclosure Example
PupCo manufactures health drinks for dogs and cats
Questions to answer from PupCos Shareholders Equity disclosures:
What are shares issued, shares outstanding, and par value for common stock?
How much cash did PupCo get from issuing new shares in 2012?
How much cash dividends were declared and paid in 2012?
How much did PupCo pay to repurchase shares in 2012? What was the averageprice?
What is the average price paid to acquire all treasury shares held at 12/31/2012?
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Balance Sheet - Shareholders Equity
Shares issued
1,865
Shares outstanding
Issued: 1,865
Less Treasury: - 284
Outstanding: 1,581
Par value
1 2/3 cents ($0.01667)
(millions) 12/31/2012 12/31/2011
Preferred Stock, no par value 41 41
Repurchased Preferred Stock (150) (145)
Common stock, par value 1 2/3 per share
(authorized 3,600 shares, issued 1,865 and
1,782 shares, respectively) 31 30
Capital in excess of par value 4,527 250
Retained earnings 37,090 33,805
Accumulated other comprehensive loss (3,630) (3,794)
Repurchased common stock, at cost (284
and 217 shares, respectively) (16,745) (13,383)
Total Shareholders Equity 21,164 16,804
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Statement of Shareholders Equity Preferred and Common Stock
New stock issuance
Common Stock: $1
APIC: $4,546
Total: $4,547
12/31/2012 12/31/2011
(millions) Shares Amount Shares Amount
Preferred Stock 1 41 1 41
Repurchased Preferred Stock
Balance, beginning of year (1) (145) (1) (138)Redemptions - (5) (0) (7)
Balance, end of year (1) (150) (1) (145)
Common Stock
Balance, beginning of year 1,782 30 1,782 30
Shares issued 83 1
Balance, end of year 1,865 31 1,782 30
Capital in Excess of Par Value
Balance, beginning of year 250 351
Stock-based compensation expense 299 227
Stock option exercises/RSUs converted (500) (292)
Withholding tax on RSUs converted (68) (36)Shares issued 4,546
Balance, end of year 4,527 250
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SCF Cash from Financing Section
2012 2011
Proceeds from issuances of long-term debt 6,451 1,057
Payments of long-term debt (59) (226)
Debt repurchase (500)
Short-term borrowings, by original maturity
More than three months proceeds 227 26
More than three months payments (96) (81)
Three months or less, net 2,351 (963)
Cash dividends paid (2,978) (2,732)
Share repurchases common (4,978)
Share repurchases preferred (5) (7)Proceeds from exercises of stock options 1,038 413
Excess tax benefits from share-based compensation 107 42
Acquisition of non-controlling interest (159)
Other financing (13) (26)
Net Cash Provided by/(Used for) Financing Activities 1,386 (2,497)
New stock issuance
Common Stock: $1
APIC: $4,546
Total: $4,547
But, no Cash Flowfrom issuing shares
Cash from new
stock issuance = $0Disclosure at bottom
of SCF: Shares wereissued for acquisition(a noncash activ ity)
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Statement of Shareholders Equity Retained Earnings and AOCI
(millions) 12/31/2012 12/31/2011
Retained Earnings
Balance, beginning of year 33,805 30,638
Net income 6,320 5,946
Cash dividends declared common (3,022) (2,768)Cash dividends declared preferred (1) (2)
Cash dividends declared RSUs (12) (9)
Balance, end of year 37,090 33,805
Accumulated Other Comprehensive Loss
Balance, beginning of year (3,794) (4,694)Currency translation adjustment 312 800
Cash flow hedges:
Net derivative (losses)/gains (111) (55)
Reclassification to net income 53 28
Net pension and medical (losses)/gains (114) 107
Unrealized gains/(losses) on securities 24 20Balance, end of year (3,630) (3,794)
Cash dividendsdeclared
Common: $3,022
Preferred: 1RSUs: 12
Total: $3,035
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SCF Cash from Financing Section
2012 2011
Proceeds from issuances of long-term debt 6,451 1,057
Payments of long-term debt (59) (226)
Debt repurchase (500)
Short-term borrowings, by original maturity
More than three months proceeds 227 26
More than three months payments (96) (81)
Three months or less, net 2,351 (963)
Cash dividends paid (2,978) (2,732)
Share repurchases common (4,978)
Share repurchases preferred (5) (7)Proceeds from exercises of stock options 1,038 413
Excess tax benefits from share-based compensation 107 42
Acquisition of non-controlling interest (159)
Other financing (13) (26)
Net Cash Provided by/(Used for) Financing Activities 1,386 (2,497)
Cash dividendsdeclared
Common: $3,022
Preferred: 1RSUs: 12
Total: $3,035
Cash dividends
paidTotal: $2,978
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Statement of Shareholders Equity Repurchased Stock
2012 payments torepurchase shares
$4,978
12/31/2012 12/31/2011
(millions) Shares Amount Shares Amount
Repurchased Common Stock
Balance, beginning of year (217) (13,383) (229) (14,122)
Share repurchases (76) (4,978) Stock option exercises 24 1,487 11 649
Other (15) 129 1 90
Balance, end of year (284) (16,745) (217) (13,383)
Total Shareholders Equity 21,273 16,908
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SCF Cash from Financing Section
2012 2011
Proceeds from issuances of long-term debt 6,451 1,057
Payments of long-term debt (59) (226)
Debt repurchase (500)
Short-term borrowings, by original maturity
More than three months proceeds 227 26
More than three months payments (96) (81)
Three months or less, net 2,351 (963)
Cash dividends paid (2,978) (2,732)
Share repurchases common (4,978)
Share repurchases preferred (5) (7)Proceeds from exercises of stock options 1,038 413
Excess tax benefits from share-based compensation 107 42
Acquisition of non-controlling interest (159)
Other financing (13) (26)
Net Cash Provided by/(Used for) Financing Activities 1,386 (2,497)
2012 payments torepurchase shares
$4,978
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Statement of Shareholders Equity Repurchased Stock
2012 payments torepurchase shares
$4,978
2012 average price$4,978 / 76
$65.50
12/31/2012 12/31/2011
(millions) Shares Amount Shares Amount
Repurchased Common Stock
Balance, beginning of year (217) (13,383) (229) (14,122)
Share repurchases (76) (4,978) Stock option exercises 24 1,487 11 649
Other (15) 129 1 90
Balance, end of year (284) (16,745) (217) (13,383)
Total Shareholders Equity 21,273 16,908
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Balance Sheet - Shareholders Equity
(millions) 12/31/2012 12/31/2011
Preferred Stock, no par value 41 41
Repurchased Preferred Stock (150) (145)
Common stock, par value 1 2/3 per share
(authorized 3,600 shares, issued 1,865 and
1,782 shares, respectively) 31 30
Capital in excess of par value 4,527 250
Retained earnings 37,090 33,805
Accumulated other comprehensive loss (3,630) (3,794)
Repurchased common stock, at cost (284
and 217 shares, respectively) (16,745) (13,383)
Total Shareholders Equity 21,164 16,804
2012 payments torepurchase shares
$4,978
2012 average price$4,978 / 76
$65.50
Average price all
treasury sharesheld at 12/31/2012
$16,745 / 284
$58.96
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Disclosure Example
PupCo manufactures health drinks for dogs and cats
Questions to answer from PupCos Stock-based Compensation andEPS disclosures:
What are the terms of PupCos stock options (e.g., exercise price, vesting period,length)?
What was the total fair value of stock options granted in 2012?
How much was stock-based compensation expense in 2012?
How much cash did PupCo receive from options exercised in 2012? What wasthe source of the stock sold to employees exercising options?
What type of convertibles caused Diluted EPS to be less than Basic EPS in 2012?
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Note 6 Stock-Based Compensation
Our stock-based compensation program is designed to attract andretain employees while also aligning employees interests with theinterests of our shareholders. Stock options and restricted stock units(RSU) are granted to employees under the shareholder-approvedLong-Term Incentive Plan (LTIP).
We account for our employee stock options under the fair value methodusing a Black-Scholes valuation model. All stock option grants have anexercise price equal to the fair market value of our common stock onthe date of grant and generally have a 10-year term. The fair value ofstock option grants is amortized to expense over the vesting period,
generally three years.RSU expense is based on the fair value of PupCo stock on the date ofgrant and is amortized over the vesting period, generally three years.Each RSU is settled in a share of our stock after the vesting period.
Stock option terms
Exercise price
Equal to stock priceat grant date
Length
10 years
Vesting
3 years
Valuation foraccounting purposes
Fair value based onBlack-Scholes model
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Note 6 Stock-Based Compensation
Fair value of 2012option grants
Num. granted: 26,858
Stock options
Options*Average
PriceAverage
Life**
AggregateIntrinsic
Value*Outstanding at 12/31/2011 106,011 $51.68Granted 26,858 54.09
Exercised (23,940) 43.47Forfeited/expired (2,726) 55.85
Outstanding at 12/31/2012 106,203 $54.03 5.19 $1,281,596
Exercisable at 12/31/2012 67,304 $50.26 3.44 $1,040,510
Restricted Stock Units(RSUs)RSUs*
AveragePrice
AverageLife**
AggregateIntrinsicValue*
Outstanding at 12/31/2011 6,092 $60.98Granted 8,326 65.01Exercised (3,183) 63.58
Forfeited/expired (573) 62.50Outstanding at 12/31/2012 10,662 $63.27 1.69 $700,397
* In Thousands, ** In Years
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Note 6 Stock-Based Compensation
Stock Options 12/31/2012 12/31/2013Wtd-average fair value of options granted 13.93 7.02Total intrinsic value of options exercised (000) 502,354 194,545
RSUsWtd-average intrinsic value of RSUs granted 65.01 53.22Total intrinsic value of RSUs converted (000) 202,717 124,193
As of December 25, 2012, there was $423 million of total unrecognizedcompensation cost related to nonvested share-based compensation grants.
This unrecognized compensation is expected to be recognized over aweighted-average period of 2 years.
Fair value of 2012option grants
Num. granted: 26,858
Fair value: x $13.93
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Note 6 Stock-Based Compensation
Stock options
Options*Average
PriceAverage
Life**
AggregateIntrinsic
Value*Outstanding at 12/31/2011 106,011 $51.68Granted 26,858 54.09
Exercised (23,940) 43.47Forfeited/expired (2,726) 55.85
Outstanding at 12/31/2012 106,203 $54.03 5.19 $1,281,596
Exercisable at 12/31/2012 67,304 $50.26 3.44 $1,040,510
Restricted Stock Units(RSUs)RSUs*
AveragePrice
AverageLife**
AggregateIntrinsicValue*
Outstanding at 12/31/2011 6,092 $60.98Granted 8,326 65.01Exercised (3,183) 63.58
Forfeited/expired (573) 62.50Outstanding at 12/31/2012 10,662 $63.27 1.69 $700,397
* In Thousands, ** In Years
Fair value of 2012option grants
Num. granted: 26,858
Fair value: x $13.93
Total FV: $374,132
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Statement of Shareholders Equity Preferred and Common Stock
Stock-based compexpense in 2012
$299
12/31/2012 12/31/2011(millions) Shares Amount Shares AmountPreferred Stock 1 41 1 41Repurchased Preferred Stock
Balance, beginning of year (1) (145) (1) (138)Redemptions - (5) (0) (7)Balance, end of year (1) (150) (1) (145)
Common StockBalance, beginning of year 1,782 30 1,782 30Shares issued 83 1
Balance, end of year 1,865 31 1,782 30
Capital in Excess of Par ValueBalance, beginning of year 250 351Stock-based compensation expense 299 227Stock option exercises/RSUs converted (500) (292)
Withholding tax on RSUs converted (68) (36)Shares issued 4,546
Balance, end of year 4,527 250
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SCF Cash from Operations Section
2012 2011Net income 6,338 5,979Depreciation and amortization 2,327 1,635Stock-based compensation expense 299 227Restructuring and impairment charges 36Cash payments for restructuring charges (31) (196)
Merger and integration costs 808 50Cash payments for merger and integration costs (385) (49)Gain on previously held equity interests (958)
Asset write-off 265 Excess tax benefits from share-based compensation (107) (42)Pension and retiree medical plan contributions (1,734) (1,299)
Pension and retiree medical plan expenses 453 423Equity income, net of dividends 42 (235)Deferred income taxes and other tax charges and credits 500 284Change in accounts and notes receivable (268) 188Change in inventories 276 17Change in prepaid expenses and other current assets 144 (127)Change in accounts payable and other current liabilities 488 (133)
Change in income taxes payable 123 319Other, net (132) (281)Net Cash Provided by Operating Activities 8,448 6,796
Stock-based compexpense in 2012
$299
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Note 6 Stock-Based Compensation
Stock options
Options*Average
PriceAverage
Life**
AggregateIntrinsic
Value*Outstanding at 12/31/2011 106,011 $51.68Granted 26,858 54.09
Exercised (23,940) 43.47Forfeited/expired (2,726) 55.85
Outstanding at 12/31/2012 106,203 $54.03 5.19 $1,281,596
Exercisable at 12/31/2012 67,304 $50.26 3.44 $1,040,510
Restricted Stock Units(RSUs)RSUs*
AveragePrice
AverageLife**
AggregateIntrinsicValue*
Outstanding at 12/31/2011 6,092 $60.98Granted 8,326 65.01Exercised (3,183) 63.58
Forfeited/expired (573) 62.50Outstanding at 12/31/2012 10,662 $63.27 1.69 $700,397
* In Thousands, ** In Years
Cash from exercise
Num. exercised: 23,940
Avg. Price: x 43.47
Total Cash: $1,041
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SCF Cash from Financing Section
2012 2011Proceeds from issuances of long-term debt 6,451 1,057Payments of long-term debt (59) (226)Debt repurchase (500) Short-term borrowings, by original maturity
More than three months proceeds 227 26More than three months payments (96) (81)Three months or less, net 2,351 (963)
Cash dividends paid (2,978) (2,732)Share repurchases common (4,978) Share repurchases preferred (5) (7)Proceeds from exercises of stock options 1,038 413Excess tax benefits from share-based compensation 107 42
Acquisition of non-controlling interest (159) Other financing (13) (26)Net Cash Provided by/(Used for) Financing Activities 1,386 (2,497)
Cash from exercise
Num. exercised: 23,940
Avg. Price: x 43.47
Total Cash: $1,041
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Statement of Shareholders Equity Repurchased Stock
12/31/2012 12/31/2011(millions) Shares Amount Shares AmountRepurchased Common StockBalance, beginning of year (217) (13,383) (229) (14,122)
Share repurchases (76) (4,978) Stock option exercises 24 1,487 11 649Other (15) 129 1 90
Balance, end of year (284) (16,745) (217) (13,383)
Total Shareholders Equity 21,273 16,908
Cash from exercise
Num. exercised: 23,940
Avg. Price: x 43.47
Total Cash: $1,041
Source of stock
Treasury shares: $1,487
Avg price = $61.96
($1,487 / 24)
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Note 11 Earnings per Common Share
2012 2011Earnings Shares Earnings Shares
Net income $6,320 $5,946Preferred dividends and redemptions (6) (6)
Net income for common shareholders $6,314 1,590 $5,940 1,558
Basic earnings per share $3.97 $3.81
Dilutive securities:Stock options and RSUs 23 17ESOP convertible preferred stock 6 1 6 2
Diluted $6,320 1,614 $5,946 1,577
Diluted earnings per share $3.91 $3.77
Basic earnings per share is net income available for common shareholders divided by the weighted average ofcommon shares outstanding during the period. Diluted earnings per share is calculated using the weighted average ofcommon shares outstanding adjusted to include the effect that would occur if in-the-money employee stock optionswere exercised and RSUs and preferred shares were converted into common shares. Options to purchase 24.4 million
shares in 2012 and 39.0 million shares in 2011 were not included in the calculation of diluted earnings per commonshare because these options were out-of-the-money.
Why Diluted EPS< Basic EPS
Convertiblepreferred stock
Stock options andRSUs
But note thanmany moreoptions are out-of-
the-money!