16. EARNINGS PER SHARE
The Company has outstanding two separate classes of common stock. The Common Stock reflects the performance of the Financial Services Businesses and the Class B Stock reflects the performance of the Closed Block Business. Accordingly, earnings per share is calculated separately for each of these two classes of common stock.
Net income for the Financial Services Businesses and the Closed Block Business is determined in accordance with U.S. GAAP and includes general and administrative expenses charged to each of the respective businesses based on the Company's methodology for the allocation of such expenses. Cash flows between the Financial Services Businesses and the Closed Block Business related to administrative expenses are determined by a policy servicing fee arrangement that is based upon insurance and policies in force and statutory cash premiums. To the extent reported administrative expenses vary from these cash flow amounts, the differences are recorded, on an after tax basis, as direct equity adjustments to the equity balances of the businesses. The direct equity adjustments modify the earnings available to each of the classes of common stock for earnings per share purposes.
Common Stock
A reconciliation of the numerators and denominators of the basic and diluted per share computations for the years ended December 31, is as follows:
2013 | 2012 | 2011 | |||||||||||||||||||||||||
Income | Weighted Average Shares | Per Share Amount | Income | Weighted Average Shares | Per Share Amount | Income | Weighted Average Shares | Per Share Amount | |||||||||||||||||||
(in millions, except per share amounts) | |||||||||||||||||||||||||||
Basic earnings per share | |||||||||||||||||||||||||||
Income (loss) from continuing | |||||||||||||||||||||||||||
operations attributable to the | |||||||||||||||||||||||||||
Financial Services Businesses | $ | (613) | $ | 512 | $ | 3,485 | |||||||||||||||||||||
Direct equity adjustment | 2 | 20 | 24 | ||||||||||||||||||||||||
Less: Income attributable to | |||||||||||||||||||||||||||
noncontrolling interests | 107 | 50 | 34 | ||||||||||||||||||||||||
Less: Dividends and undistributed | |||||||||||||||||||||||||||
earnings allocated to participating | |||||||||||||||||||||||||||
unvested share-based payment | |||||||||||||||||||||||||||
awards | 8 | 7 | 46 | ||||||||||||||||||||||||
Income (loss) from continuing | |||||||||||||||||||||||||||
operations attributable to the | |||||||||||||||||||||||||||
Financial Services Businesses | |||||||||||||||||||||||||||
available to holders of Common | |||||||||||||||||||||||||||
Stock after direct equity | |||||||||||||||||||||||||||
adjustment | $ | (726) | 463.1 | $ | (1.57) | $ | 475 | 465.6 | $ | 1.02 | $ | 3,429 | 480.2 | $ | 7.14 | ||||||||||||
Effect of dilutive securities and | |||||||||||||||||||||||||||
compensation programs (1) | |||||||||||||||||||||||||||
Add: Dividends and undistributed | |||||||||||||||||||||||||||
earnings allocated to participating | |||||||||||||||||||||||||||
unvested share-based payment | |||||||||||||||||||||||||||
awards - Basic | $ | 8 | $ | 7 | $ | 46 | |||||||||||||||||||||
Less: Dividends and undistributed | |||||||||||||||||||||||||||
earnings allocated to participating | |||||||||||||||||||||||||||
unvested share-based payment | |||||||||||||||||||||||||||
awards - Diluted | 8 | 7 | 46 | ||||||||||||||||||||||||
Stock options | 0.0 | 1.9 | 2.9 | ||||||||||||||||||||||||
Deferred and long-term | |||||||||||||||||||||||||||
compensation programs | 0.0 | 0.6 | 0.5 | ||||||||||||||||||||||||
Exchangeable Surplus Notes | 0 | 0.0 | 0 | 0.0 | 17 | 5.1 | |||||||||||||||||||||
Diluted earnings per share (1) (2) | |||||||||||||||||||||||||||
Income (loss) from continuing | |||||||||||||||||||||||||||
operations attributable to the | |||||||||||||||||||||||||||
Financial Services Businesses | |||||||||||||||||||||||||||
available to holders of Common | |||||||||||||||||||||||||||
Stock after direct equity | |||||||||||||||||||||||||||
adjustment | $ | (726) | 463.1 | $ | (1.57) | $ | 475 | 468.1 | $ | 1.01 | $ | 3,446 | 488.7 | $ | 7.05 |
Unvested share-based payment awards that contain nonforfeitable rights to dividends are participating securities and included in the computation of earnings per share pursuant to the two-class method. Under this method, earnings of the Financial Services Businesses attributable to Prudential Financial, Inc. are allocated between Common Stock and the participating awards, as if the awards were a second class of stock. During periods of income from continuing operations available to holders of Common Stock after direct equity adjustment, the calculation of earnings per share exclude the income attributable to participating securities in the numerator and the dilutive impact of these securities from the denominator. In the event of loss from continuing operations available to holders of Common Stock after direct equity adjustment, undistributed earnings are not allocated to participating securities and the denominator excludes the dilutive impact of these securities as they do not share in the losses of the Company. Undistributed earnings allocated to participating unvested share-based payment awards for the years ended December 31, 2013, 2012 and 2011, as applicable, were based on 4.4 million, 4.6 million and 6.5 million of such awards, respectively, weighted for the period they were outstanding.
Stock options and shares related to deferred and long-term compensation programs that are considered antidilutive are excluded from the computation of dilutive earnings per share. Stock options are considered antidilutive based on application of the treasury stock method or in the event of loss from continuing operations available to holders of Common Stock after direct equity adjustment. Shares related to deferred and long-term compensation programs are considered antidilutive in the event of loss from continuing operations available to holders of Common Stock after direct equity adjustment. For the years ended December 31, the number of stock options and shares related to deferred and long-term compensation programs that were considered antidilutive and were excluded from the computation of diluted earnings per share, weighted for the portion of the period they were outstanding, are as follows:
2013 | 2012 | 2011 | ||||||||||||||||||
Shares | Exercise Price Per Share | Shares | Exercise Price Per Share | Shares | Exercise Price Per Share | |||||||||||||||
(in millions, except per share amounts, based on weighted average) | ||||||||||||||||||||
Antidilutive stock options based on application of the | ||||||||||||||||||||
treasury stock method | 6.6 | $ | 73.51 | 13.3 | $ | 69.80 | 10.8 | $ | 73.01 | |||||||||||
Antidilutive stock options due to loss from continuing | ||||||||||||||||||||
operations available to holders of Common Stock | ||||||||||||||||||||
after direct equity adjustment | 12.2 | 0.0 | 0.0 | |||||||||||||||||
Antidilutive shares due to loss from continuing operations | ||||||||||||||||||||
available to holders of Common Stock after direct | ||||||||||||||||||||
equity adjustment | 5.2 | 0.0 | 0.0 | |||||||||||||||||
Total antidilutive stock options and shares | 24.0 | 13.3 | 10.8 |
In September 2009, the Company issued $500 million of surplus notes with an interest rate of 5.36% per annum which are exchangeable at the option of the note holders for shares of Common Stock. The initial exchange rate for the surplus notes was 10.1235 shares of Common Stock per each $1,000 principal amount of surplus notes, which represents an initial exchange price per share of Common Stock of $98.78; however, the exchange rate is subject to customary anti-dilution adjustments. In calculating diluted earnings per share under the if-converted method, the potential shares that would be issued assuming a hypothetical exchange, weighted for the period the notes are outstanding, are added to the denominator, and interest expense, net of tax, is added to the numerator, if the overall effect is dilutive.
As discussed in Note 15, Prudential Financial may, at its option, at any time, subject to a notification period, exchange all outstanding shares of Class B Stock into such number of shares of Common Stock as have an aggregate average market value equal to 120% of the appraised fair market value of the outstanding shares of Class B Stock. Holders of Class B Stock will be permitted to convert their shares of Class B Stock into such number of shares of Common Stock as have an aggregate average market value equal to 100% of the appraised fair market value of the outstanding shares of Class B Stock in the holder's sole discretion, beginning on January 1, 2016, or earlier upon certain specified events. Any conversion may have a dilutive effect on holders of Common Stock.
Class B Stock
Income from continuing operations per share of Class B Stock for the years ended December 31, are presented below. There are no potentially dilutive shares associated with the Class B Stock.
2013 | 2012 | 2011 | ||||||||||||||||||||||||
Income | Weighted Average Shares | Per Share Amount | Income | Weighted Average Shares | Per Share Amount | Income | Weighted Average Shares | Per Share Amount | ||||||||||||||||||
(in millions, except per share amounts) | ||||||||||||||||||||||||||
Basic earnings per share | ||||||||||||||||||||||||||
Income (loss) from continuing | ||||||||||||||||||||||||||
operations attributable to the | ||||||||||||||||||||||||||
Closed Block Business | $ | 46 | $ | 43 | $ | 146 | ||||||||||||||||||||
Less: Direct equity adjustment | 2 | 20 | 24 | |||||||||||||||||||||||
Income (loss) from continuing | ||||||||||||||||||||||||||
operations attributable to the | ||||||||||||||||||||||||||
Closed Block Business | ||||||||||||||||||||||||||
available to holders of Class B | ||||||||||||||||||||||||||
Stock after direct equity | ||||||||||||||||||||||||||
adjustment | $ | 44 | 2.0 | $ | 22.00 | $ | 23 | 2.0 | $ | 11.50 | $ | 122 | 2.0 | $ | 61.00 |