Note 20. Stock-Based Compensation Plans
We have stock-based compensation plans available to grant non-qualified stock options, incentive stock options, stock appreciation rights, restricted units and restricted stock to key employees. Under the terms of the 2011 Stock Incentive Plan of Honeywell International Inc. and its Affiliates (the Plan) there were 25,913,501 shares of Honeywell common stock available for future grants at December 31, 2013. Additionally, under the 2006 Stock Plan for Non-Employee Directors of Honeywell International Inc. (the Directors Plan) there were 145,367 shares of Honeywell common stock available for future grant at December 31, 2013.
Stock Options—The exercise price, term and other conditions applicable to each option granted under our stock plans are generally determined by the Management Development and Compensation Committee of the Board. The exercise price of stock options is set on the grant date and may not be less than the fair market value per share of our stock on that date. The fair value is recognized as an expense over the employee's requisite service period (generally the vesting period of the award). Options generally vest over a four-year period and expire after ten years.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. Expected volatility is based on implied volatilities from traded options on our common stock and historical volatility of our common stock. We used a Monte Carlo simulation model to derive an expected term. Such model uses historical data to estimate option exercise activity and post-vest termination behavior. The expected term represents an estimate of the time options are expected to remain outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. treasury yield curve in effect at the time of grant.
Compensation cost on a pre-tax basis related to stock options recognized in operating results (included in selling, general and administrative expenses) in 2013, 2012 and 2011 was $70, $65 and $59 million, respectively. The associated future income tax benefit recognized in 2013, 2012 and 2011 was $24, $23 and $19 million, respectively.
The following table sets forth fair value per share information, including related weighted-average assumptions, used to determine compensation cost:
| Years Ended December 31, | ||||||||||
| 2013 | 2012 | 2011 | ||||||||
| Weighted average fair value per share of options | ||||||||||
| granted during the year(1) | $ | 11.85 | $ | 13.26 | $ | 12.56 | ||||
| Assumptions: | ||||||||||
| Expected annual dividend yield | 2.55 | % | 2.57 | % | 2.68 | % | ||||
| Expected volatility | 24.73 | % | 30.36 | % | 27.60 | % | ||||
| Risk-free rate of return | 0.91 | % | 1.16 | % | 2.47 | % | ||||
| Expected option term (years) | 5.5 | 5.8 | 5.8 | |||||||
| (1) Estimated on date of grant using Black-Scholes option-pricing model. | ||||||||||
The following table summarizes information about stock option activity for the three years ended December 31, 2013:
| Weighted | ||||||||
| Average | ||||||||
| Number of | Exercise | |||||||
| Options | Price | |||||||
| Outstanding at December 31, 2010 | 40,791,531 | $ | 39.05 | |||||
| Granted | 7,625,950 | 57.08 | ||||||
| Exercised | (7,984,840) | 36.39 | ||||||
| Lapsed or canceled | (1,516,271) | 42.38 | ||||||
| Outstanding at December 31, 2011 | 38,916,370 | 43.01 | ||||||
| Granted | 5,788,734 | 59.86 | ||||||
| Exercised | (8,347,313) | 36.52 | ||||||
| Lapsed or canceled | (788,770) | 49.76 | ||||||
| Outstanding at December 31, 2012 | 35,569,021 | 47.13 | ||||||
| Granted | 6,041,422 | 69.89 | ||||||
| Exercised | (10,329,611) | 41.91 | ||||||
| Lapsed or canceled | (616,995) | 53.84 | ||||||
| Outstanding at December 31, 2013 | 30,663,837 | $ | 53.27 | |||||
| Vested and expected to vest at December 31, 2013(1) | 28,190,580 | $ | 52.20 | |||||
| Exercisable at December 31, 2013 | 15,594,410 | $ | 45.76 | |||||
| (1) Represents the sum of vested options of 15.6 million and expected to vest options of 12.6 million. Expected to vest options are derived by applying the pre-vesting forfeiture rate assumption to total outstanding unvested options of 15.1 million. | ||||||||
The following table summarizes information about stock options outstanding and exercisable at December 31, 2013:
| Options Outstanding | Options Exercisable | |||||||||||||||
| Weighted | Weighted | |||||||||||||||
| Weighted | Average | Aggregate | Average | Aggregate | ||||||||||||
| Range of | Number | Average | Exercise | Intrinsic | Number | Exercise | Intrinsic | |||||||||
| Exercise prices | Outstanding | Life(1) | Price | Value | Exercisable | Price | Value | |||||||||
| $28.35-$39.99 | 3,526,437 | 3.69 | $ | 31.29 | $ | 212 | 3,526,437 | $ | 31.29 | $ | 212 | |||||
| $40.00-$49.99 | 8,018,738 | 4.69 | 42.25 | 394 | 6,368,574 | 42.75 | 310 | |||||||||
| $50.00-$59.99 | 13,067,490 | 7.02 | 58.35 | 431 | 5,624,099 | 58.04 | 187 | |||||||||
| $60.00-$75.00 | 6,051,172 | 9.11 | 69.70 | 131 | 75,300 | 60.54 | 2 | |||||||||
| 30,663,837 | 6.43 | 53.27 | $ | 1,168 | 15,594,410 | 45.76 | $ | 711 | ||||||||
| (1) Average remaining contractual life in years. | ||||||||||||||||
There were 19,468,017 and 21,672,281 options exercisable at weighted average exercise prices of $43.64 and $40.71 at December 31, 2012 and 2011, respectively.
The total intrinsic value of options (which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise) exercised during 2013, 2012 and 2011 was $367, $202 and $164 million, respectively. During 2013, 2012 and 2011, the amount of cash received from the exercise of stock options was $432, $305 and $290 million, respectively, with an associated tax benefit realized of $129, $74 and $54 million, respectively. In 2013, 2012 and 2011 we classified $99, $56 and $42 million, respectively, of this benefit as a financing cash inflow in the Consolidated Statement of Cash Flows, and the balance was classified as cash from operations.
At December 31, 2013 there was $120 million of total unrecognized compensation cost related to non-vested stock option awards which is expected to be recognized over a weighted-average period of 2.28 years. The total fair value of options vested during 2013, 2012 and 2011 was $67, $63 and $52 million, respectively.
Restricted Stock Units—Restricted stock unit (RSU) awards entitle the holder to receive one share of common stock for each unit when the units vest. RSUs are issued to certain key employees at fair market value at the date of grant as compensation. RSUs typically become fully vested over periods ranging from three to seven years and are payable in Honeywell common stock upon vesting.
The following table summarizes information about RSU activity for the three years ended December 31, 2013:
| Weighted | |||||||
| Average | |||||||
| Number of | Grant Date | ||||||
| Restricted | Fair Value | ||||||
| Stock Units | Per Share | ||||||
| Non-vested at December 31, 2010 | 9,973,953 | $ | 39.89 | ||||
| Granted | 1,887,733 | 55.11 | |||||
| Vested | (1,509,528) | 49.48 | |||||
| Forfeited | (605,725) | 40.11 | |||||
| Non-vested at December 31, 2011 | 9,746,433 | 41.35 | |||||
| Granted | 2,156,753 | 59.52 | |||||
| Vested | (3,380,251) | 31.84 | |||||
| Forfeited | (427,196) | 45.78 | |||||
| Non-vested at December 31, 2012 | 8,095,739 | 49.91 | |||||
| Granted | 1,904,504 | 75.73 | |||||
| Vested | (2,995,553) | 42.17 | |||||
| Forfeited | (312,470) | 56.58 | |||||
| Non-vested at December 31, 2013 | 6,692,220 | $ | 60.04 | ||||
As of December 31, 2013, there was approximately $191 million of total unrecognized compensation cost related to non-vested RSUs granted under our stock plans which is expected to be recognized over a weighted-average period of 3.42 years. Compensation expense related to RSUs was $100, $105 and $109 million in 2013, 2012, and 2011, respectively. The associated future income tax benefit recognized in 2013, 2012 and 2011 was $35, $37, and $36 million, respectively.
Non-Employee Directors' Plan—Under the Directors' Plan each new non-employee director receives a one-time grant of 3,000 restricted stock units that will vest on the fifth anniversary of continuous Board service.
In 2011, each non-employee director received an annual grant to purchase 5,000 shares of common stock at the fair market value on the date of grant. In 2012, the annual equity grant changed from a fixed number of shares to a target value of $75,000 and consists of 50 percent options and 50 percent RSUs. Options become exercisable over a four-year period and expire after ten years. RSUs generally vest on the third anniversary of the date of grant.