Note 16 – Share-Based Compensation
The ‘Share-based plans expense’ caption on the Consolidated Statements of Operations represents the total expense we recognized for all our plans that are payable only in stock. These plans are described below.
The following summarizes share-based expense for the years ended December 31, 2003, 2002 and 2001, respectively:
Certain deferred stock compensation plans are reflected in general and administrative expense. We had issued 7,828,212 stock units as of December 31, 2003, that are convertible to either stock or a cash equivalent, of which 6,991,476 are vested, and the remainder vest with employee service. These stock units principally represent a method of deferring employee compensation by which a liability is established based upon the current stock price. An expense or reduction in expense is recognized associated with the change in that liability balance. The (increase)/reduction in expense related to deferred stock compensation was $(68), $42 and $163 in 2003, 2002 and 2001, respectively.
Performance Shares
Performance Shares are stock units that are convertible to common stock
contingent upon stock price performance. If, at any time up to five years
after award, the stock price reaches and maintains a price equal to 161.0%
of the stock issue price at the date of the award (representing a growth
rate of 10% compounded annually for five years), 25% of the Performance
Shares awarded are convertible to common stock. Likewise, at stock prices
equal to 168.5%, 176.2%, 184.2%, 192.5% and 201.1% of the stock price
at the date of award, the cumulative portion of awarded Performance Shares
convertible to common stock are 40%, 55%, 75%, 100% and 125%, respectively.
Performance Shares awards not converted to common stock expire five years
after the date of the award; however, the Compensation Committee of the
Board of Directors may, at its discretion, allow vesting of up to 100%
of the target Performance Shares if our total shareholder return (stock
price appreciation plus dividends) during the five-year performance period
exceeds the average total shareholder return of the S&P 500 over
the same period.
Beginning with our 2003 grants, all new Performance Shares awarded are subject to different terms and conditions from those previously reported. If at any time up to five years after award the stock price reaches and maintains for twenty consecutive days a price equal to a cumulative growth rate of 40% above the grant price, 15% of the Performance Shares awarded are convertible to common stock. Likewise, at cumulative growth rates above the grant price equal to 50%, 60%, 70%, 80%, 90%, 100%, 110%, 120% and 125%, the cumulative portion of awarded shares convertible to common stock are 30%, 45%, 60%, 75%, 90%, 100%, 110%, 120% and 125%, respectively. Performance Share awards not converted to common stock expire five years after the date of the award. In the event all stock price hurdles have not been met, at the end of the performance period, unvested shares may vest based on our Total Shareholder Return (TSR) performance relative to the S&P 500. If less than 125% of the grant has vested at the end of the five-year performance period, an award formula will be applied to the initial grant based on the percentile rank of our TSR relative to the S&P 500. This can result in a vesting of the Performance Shares award up to a total of 125% and only applies if (1) our total shareholder return during the five-year performance period meets or exceeds the median total shareholder return of the S&P 500 over the same period and (2) total shareholder return is in excess of the five-year Treasury Bill rate at the start of the five-year period.
No Performance Share awards were converted to common stock or deferred stock units in 2003, 2002 or 2001. In January 2004, our stock price met the 40% cumulative growth rate level for grants made in 2003. Accordingly, 15% of the 2003 Performance Shares awarded were converted to common stock.
The following table summarizes information about Performance Shares outstanding at December 31, 2003, 2002 and 2001, respectively.
ShareValue Trust
The ShareValue Trust, established effective July 1, 1996, is a 14-year
irrevocable trust that holds Boeing common stock, receives dividends
and distributes to employees appreciation in value above a 3% per annum
threshold rate of return. As of December 31, 2003, the Trust held 41,203,693
shares of our common stock, split equally between two funds, “fund
1” and “fund 2”. If on June 30, 2004, the market value
of fund 2 exceeds $913 (the threshold representing a 3% per annum rate
of return), the amount in excess of the threshold will be distributed
to employees. The June 30, 2004, market value of fund 2 after distribution
(if any) will be the basis for determining any potential distribution
on June 30, 2008. Similarly, if on June 30, 2006, the market value of
fund 1 exceeds $1,004, the amount in excess of the threshold will be
distributed to employees. Shares held by the Trust on June 30, 2010,
after final distribution will revert back to us.
The ShareValue Trust is accounted for as a contra-equity account and stated at market value. Market value adjustments are offset to additional paid-in capital.
Stock options
Our 1997 Incentive Stock Plan (1997 Plan) permits the grant of stock options,
stock appreciation rights (SARs) and restricted stock awards (denominated
in stock or stock units) to any employee of ours or our subsidiaries
and contract employees. Under the terms of the plan, 64 million shares
are authorized for issuance upon exercise of options, as payment of SARs
and as restricted stock awards, of which no more than an aggregate of
6,000,000 shares are available for issuance as restricted stock awards
and no more than an aggregate of 3,000,000 shares are available for issuance
as restricted stock that is subject to restrictions based on continuous
employment for less than three years. This authorization for issuance
under the 1997 Plan will terminate on April 30, 2007. As of December
31, 2003, no SARs have been granted under the 1997 Plan. The 1993 Incentive
Stock Plan permitted the grant of options, SARs and stock to employees
of ours or our subsidiaries. The 1988 and 1984 stock option plans permitted
the grant of options or SARs to officers or other key employees of ours
or our subsidiaries. No further grants may be awarded under these three
plans.
On April 28, 2003, the shareholders approved The Boeing Company 2003 Incentive Stock Plan (2003 Plan). The 2003 Plan will permit awards of incentive stock options, nonqualified stock options, restricted stock, stock units, Performance Shares, performance units and other incentives. The aggregate number of shares of Boeing stock available for issuance under the 2003 Plan will not exceed 30 million and no participant may receive more than 2,000,000 shares in any one calendar year. Under the terms of the 2003 plan, no more than an aggregate of 6,000,000 shares are available for issuance as restricted stock awards and no more than an aggregate of 3,000,000 shares are available for issuance as restricted stock that is subject to restrictions based on continuous employment for less than three years. A summary of the principal features is provided in our 2003 Proxy Statement. As of December 31, 2003, no awards have been granted under the 2003 Plan.
Options have been granted with an exercise price equal to the fair market value of our stock on the date of grant and expire ten years after the date of grant. Vesting is generally over a five-year period with portions of a grant becoming exercisable at one year, three years and five years after the date of grant.
Information concerning stock options issued to directors, officers and other employees is presented in the following table:
As of December 31, 2003, 5,997,572 shares were available for grant under the 1997 Plan, and 3,465,168 shares were available for grant under the Incentive Compensation Plan.
The following table summarizes information about stock options outstanding at December 31, 2003 (shares in thousands):
We have determined the weighted average fair values of stockbased arrangements granted, including ShareValue Trust, during 2003, 2002 and 2001 to be $13.76, $16.78 and $21.35, respectively. The fair values of stock-based compensation awards granted and of potential distributions under the ShareValue Trust arrangement were estimated using a binomial option-pricing model with the following assumptions:
Other stock unit awards
The total number of stock unit awards that are convertible only to common
stock and not contingent upon stock price were 1,910,293, 1,823,591 and
1,597,343 as of December 31, 2003, 2002 and 2001, respectively.
In December 2000, a stock repurchase program was authorized by our Board of Directors, authorizing the repurchase of up to 85 million shares of our stock. We did not repurchase any shares during the years ended December 31, 2003 and 2002. During 2001, we repurchased 40,734,500 shares.
Twenty million shares of authorized preferred stock remain unissued.
Note 18 – Derivative Financial Instruments
Derivative and hedging activities
We account for derivatives pursuant to SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended. This standard
requires that all derivative instruments be recognized in the financial
statements and measured at fair value regardless of the purpose or intent
for holding them. The adoption of SFAS No. 133 in 2001 resulted in a transition
gain of $1 on the Consolidated Statements of Operations shown under the
caption ‘Cumulative effect of accounting change, net of tax,’ and
a net loss of $18 ($11 net of tax) recorded to accumulated other comprehensive
income.
We are exposed to a variety of market risks, including the effects of changes in interest rates, foreign currency exchange rates and commodity prices. These exposures are managed, in part, with the use of derivatives. The following is a summary of our risk management strategies and the effect of these strategies on the consolidated financial statements.
Fair value hedges
Interest rate swaps under which we agree to pay variable rates of interest
are designated as fair value hedges of fixed-rate debt. The net change
in fair value of the derivatives and the hedged items is reported in
earnings. Ineffectiveness related to the interest rate swaps was insignificant
for the years ended December 31, 2003, 2002 and 2001.
We also hold forward-starting interest rate swap agreements to fix the cost of funding a firmly committed lease for which payment terms are determined in advance of funding. As of March 31, 2003, the forward-starting interest rate swaps no longer qualified for fair value hedge accounting treatment. As a result, during the three months ended March 31, 2003, we recognized a pre-tax charge of $21. For the years ended December 31, 2003 and 2002, ineffectiveness losses of $1 and $8 were recorded in interest expense related to the forwardstarting interest rate swaps. Ineffectiveness was insignificant for the year ended December 31, 2001.
For the years ended December 31, 2003, 2002 and 2001, $13, $5 and $1 of gains related to the basis adjustment of certain terminated interest rate swaps and forward-starting interest rate swaps were amortized to earnings, respectively. During the next twelve months, we expect to amortize a $16 gain, from the amount recorded in the basis adjustment of certain terminated fair value hedge relationships, to earnings.
Cash flow hedges
Our cash flow hedges include certain interest rate swaps, cross currency
swaps, foreign currency forward contracts, and commodity purchase contracts.
Interest rate swap contracts under which we agree to pay fixed rates
of interest are designated as cash flow hedges of variable-rate debt
obligations. We use foreign currency forward contracts to manage currency
risk associated with certain forecasted transactions, specifically sales
and purchase commitments made in foreign currencies. Our foreign currency
forward contracts hedge forecasted transactions principally occurring
up to five years in the future. We use commodity derivatives, such as
fixed-price purchase commitments, to hedge against potentially unfavorable
price changes for items used in production. These include commitments
to purchase electricity at fixed prices through December 2005. The changes
in fair value of the percentage of the commodity derivatives that are
not designated in a hedging relationship are recorded in earnings immediately.
There were no significant changes in fair value reported in earnings
for the years ended December 31, 2003, 2002 and 2001.
At December 31, 2003 and 2002, net (gains)/losses of $(7) ($(5) net of tax) and $74 ($47 net of tax) were recorded in accumulated other comprehensive income associated with our cash flow hedging transactions. Ineffectiveness for cash flow hedges was insignificant for the years ended December 31, 2003, 2002 and 2001. For the years ended December 31, 2003, 2002 and 2001, losses of $20, $46 and $14 (net of tax) were reclassified to cost of products and services. During the next year, we expect to reclassify to cost of products and services a gain of $9 (net of tax).
Derivative financial instruments not receiving
hedge treatment
We also hold certain non-hedging instruments, such as interest exchange
agreements, interest rate swaps, warrants, conversion feature of convertible
debt and foreign currency forward contracts. The changes in fair value
of these instruments are recorded in earnings. For the years ended December
31, 2003, 2002 and 2001, these non-hedging instruments resulted in gains
of $38, $25 and $15, respectively.