As corporate America gears up for the presumptive move to expense options, chipmaker Intel ( INTC) continues to loudly protest the accounting shift. With exquisite timing, the giant chipmaker revealed Wednesday that it more than doubled the number of options awarded to CEO Craig Barrett in 2003 vs. 2002. The news came the same day the Financial Accounting Standards Board
unveiled a preliminary rule that would force companies to more openly disclose the cost of options. But amid Intel's bluster on the issue -- including Barrett's defiant op-ed piece in Wednesday's Wall Street Journal -- the company has quietly made other moves that seem calculated to reduce investor concerns about its options program. According to an annual filing with the Securities and Exchange Commission Wednesday, Intel will ask shareholders at its May 19 annual meeting to OK a new option plan that lasts only two years, rather than 10. The move aims to give stock owners more reviewing power over the company's compensation program. Intel's new options plan also would allow for a "very limited use" of restricted stock as compensation, according to the filing. Spokesman Bill Calder said the company had inserted the language to give it maximum flexibility and that it might use restricted stock "in some instances such as a critical external hire." The fact that Intel would consider even a limited use of stock is worth noting for a company that has so publicly championed the use of options. But in the same proxy filing, Intel's board gave the thumbs-down to a shareholder proposal requiring the company to expense options. The United Brotherhood of Carpenters and Joiners of America Pension Fund, which owns 110,000 shares of Intel, requested a vote on options-expensing at the company's annual meeting. A similar proposal was defeated by Intel's shareholders last year.
The board remains opposed to the measure, arguing that the disciplined use of stock options "is not an accounting issue but a corporate governance issue." Intel's board likewise opposed a shareowner measure submitted by the Service Employees International Union Master Trust asking the company to link its options grants to performance measures. In a more upbeat development, Intel predicted in the SEC document that its so-called options overhang will decline. An overhang is the number of stock options outstanding divided by a company's common stock. The gradual expansion of Intel's options program over the years has pushed up its overhang so that it now stands at 21.2%. But Intel predicted that should fall to around 18.5% over the next year because its 2004 options plan will request fewer shares. In a 2003 report, consulting firm Watson Wyatt said an options overhang of between 12% and 19% seemed to be an appropriate range for technology firms. Despite its vigorous opposition to expense options, broader changes in the tech market have led Intel to curb options grants considerably over the past few years. In 2003, net options grants stood at 70 million, down from 191 million in 2001. Net grants as a percent of outstanding shares have fallen to 1.1%, down from 2.8% in 2001. The decrease partly reflects the fact that the company's workforce has dropped 10% in the period, to 79,000 employees. Also, Intel no longer needs to issue as many stock options because its appetite for acquisitions has sharply diminished. Calder said that Intel relies less on options than many of its peers, a claim borne out by independent estimates. After
expensing options, Intel's profits would decline about 12.4% this year, estimated SG Cowen. By comparison, Texas Instruments' ( TXN) net income would slide by 23.5% and Analog Devices' ( ADI) by 39%, the firm projected.
Nonetheless, the world's biggest chipmaker will keep using its heft to fight the proposed new accounting guideline introduced by FASB. In justifying its continued adherence to options, Intel argued in its SEC filing that stock options align employees' interests directly with those of other stockholders. Without options, the company "would be forced to consider cash replacement alternatives" to offer competitive pay, which would subsequently reduce the cash it has available for R&D investments, Intel said. Skeptics, of course, would say that companies without options programs already do that and don't publicly complain over it. In any case, Intel's response underlines that it is far from surrendering on the issue. "A draft rule is just that, a draft," said Calder. "FASB and
Congress have said this debate will continue at least through the end of the year." The valuation models being considered by FASB "could force companies to use thousands of different inputs to assess options valuation, none of which ultimately produces an accurate number," Calder said. "That doesn't give you insight into a company's true performance." In Wednesday's editorial, Barrett predicted that Wall Street will simply overlook the new numbers. "No wise investor or professional analyst will pay much attention to the expense figure that's ultimately used," he wrote. The battle over FASB's proposal will no doubt rage on. Meanwhile, there's no disputing that Barrett continues to benefit from generous options grants. In its annual filing, Intel said that it awarded 1.35 million options to him in 2003, up from 584,000 in 2002. (One million of the options reflect a long-term performance incentive and do not begin to vest until 2009, while the remaining 350,000 start to vest in 2004.) The 2003 options grant would be worth $14.4 million by their expiration date in 2013, assuming a 5% appreciation rate over the period.
Calder noted that the options grant to Barrett took place in a year in which the company showed an 81% gain in net income, to $5.6 billion, while its stock price rose 106%. But options largesse was apparent in down times, too: Between 2000 and 2002, when Intel tumbled along with most tech stocks, Barrett was awarded options to buy 1.27 million shares.