us-gaap:DisclosureOfShareBasedCompensationArrangementsByShareBasedPaymentAwardTextBlock

Note 8: Share-Based Compensation

The Company recognizes compensation expense for all share-based awards made to employees and directors. The fair value of share-based awards is estimated at the grant date using the Black-Scholes option-pricing model and the portion that is ultimately expected to vest is recognized as compensation cost over the requisite service period using the straight-line single option method. The fair value of modifications to share-based awards is generally estimated using a lattice model.

The determination of fair value using the Black-Scholes and lattice option-pricing models is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables, including expected stock price volatility, risk-free interest rate, expected dividends and projected employee stock option exercise behaviors. The Company estimates stock price volatility based on an equal weighting of the historical average over the expected life of the award and the average implied volatility of at-the-money options traded in the open market. The Company estimates employee stock option exercise behavior based on actual historical exercise activity and assumptions regarding future exercise activity of unexercised, outstanding options.

Share-based compensation expense is recognized only for those awards that are ultimately expected to vest, and the Company has applied an estimated forfeiture rate to unvested awards for the purpose of calculating compensation cost. These estimates will be revised in future periods if actual forfeitures differ from the estimates. Changes in forfeiture estimates impact compensation cost in the period in which the change in estimate occurs.

For the three and nine month periods ended September 30, 2009 and 2008, share-based compensation expense was as follows:

 

		Three months ended						Nine months ended
		September 30, 2009			September 30, 2008			September 30, 2009			September 30, 2008
		(in millions)						(in millions)
Cost of sales		$	1.1		$	1.6		$	9.3		$	5.8
Selling, general and administrative			11.7			15.1			89.8			46.5
Research and development			4.1			5.7			34.2			17.3
Pre-tax share-based compensation expense			16.9			22.4			133.3			69.6
Income tax benefit			5.7			8.3			43.6			25.2
Net share-based compensation expense		$	11.2		$	14.1		$	89.7		$	44.4

 

Share-based compensation expense for the three and nine month periods ended September 30, 2009 includes $0.7 million and $78.3 million, respectively, of pre-tax compensation expense from stock option modifications related to the 2009 restructuring plan.

As of September 30, 2009, total compensation cost related to non-vested stock options and restricted stock not yet recognized was approximately $116.1 million, which is expected to be recognized over the next 48 months (33 months on a weighted-average basis). The Company has not capitalized as part of inventory any share-based compensation costs because such costs were negligible as of September 30, 2009.

8.	Stock-Based Compensation

The Company recognized non-cash stock-based compensation expense during the three and nine months ended September 30, 2009 of approximately $13.0 million and $50.1 million, respectively, and non-cash stock-based compensation expense during the three and nine months ended September 30, 2008 of approximately $13.2 million and $43.1 million, respectively. Non-cash stock-based compensation expense for the nine months ended September 30, 2009 includes $6.6 million related to the modification of certain stock option awards during the nine months ended September 30, 2009. The Company did not capitalize any non-cash stock-based compensation during the nine months ended September 30, 2009 and 2008.

 

Stock Options—During the nine months ended September 30, 2009, the Company granted stock options to purchase 1.7 million shares of its Common Stock pursuant to its 2007 Equity Incentive Plan (2007 Plan).

The following table summarizes the Company’s option activity for the nine months ended September 30, 2009:

 

		Number of Options
Outstanding as of January 1, 2009		13,185,866
Granted		1,672,050
Exercised		(1,803,288	)
Forfeited		(361,603	)
Outstanding as of September 30, 2009		12,693,025

The Company estimates the fair value of each option grant on the date of grant using the Black-Scholes option pricing model. The following assumptions were used to determine the grant date fair value for options granted during the nine months ended September 30, 2009:

 

Range of risk-free interest rate		1.41% - 2.04%
Weighted average risk-free interest rate		1.71%
Expected life of option grants		4.00 years
Range of expected volatility of underlying stock price		36.16% - 36.63%
Weighted average expected volatility of underlying stock price		36.23%
Expected annual dividends		N/A

As of September 30, 2009, total unrecognized compensation expense related to unvested stock options was $39.7 million, and is expected to be recognized over a weighted average period of approximately two years. A summary of the weighted average grant date fair value and the fair value of options vested during the nine months ended September 30, 2009 is as follows:

 

Weighted average grant date fair value per share		$	8.92
Weighted average fair value of options vested (in millions)		$	40.43

Restricted Stock Units—During the nine months ended September 30, 2009, the Company granted restricted stock units with respect to 1.3 million shares of its Common Stock pursuant to the 2007 Plan.

The following table summarizes the Company’s restricted stock unit activity during the nine months ended September 30, 2009:

 

		Number of Units
Outstanding as of January 1, 2009		1,138,268
Granted		1,294,313
Vested		(285,111	)
Forfeited		(101,613	)
Outstanding as of September 30, 2009		2,045,857

 

The total fair value of the restricted stock units that vested during the nine months ended September 30, 2009 was $10.6 million. As of September 30, 2009, total unrecognized compensation expense related to unvested restricted stock units granted under the 2007 Plan was $48.9 million, and is expected to be recognized over a weighted average period of approximately three years.

Employee Stock Purchase Plan—The Company maintains an employee stock purchase plan (ESPP) for all eligible employees as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. The offering periods run from June 1 through November 30 and from December 1 through May 31 of each year. During the nine months ended September 30, 2009, 46,639 shares were purchased by employees under the ESPP and the fair value of such shares was $5.98.

Key assumptions used to apply the Black-Scholes pricing model for shares purchased through the ESPP during the nine months ended September 30, 2009 are as follows:

 

		December 2008 Offering
Approximate risk-free interest rate		0.44%
Expected life of shares		6 months
Expected volatility of underlying stock price		35.31%
Expected annual dividends		N/A

9. Share-Based Compensation Plans

The company may grant a variety of share-based payments under the 2003 Long Term Incentive Plan of C. R. Bard, Inc. (the “2003 Plan”) and the 2005 Directors’ Stock Award Plan of C. R. Bard, Inc. (the “Directors’ Plan”) to certain directors, officers and employees. The total number of remaining shares at September 30, 2009 that may be issued under the 2003 Plan was 4,353,290 and under the Directors’ Plan was 90,366. Shares remaining under the 2003 Plan include 1,600,000 shares authorized by the shareholders at the company’s Annual Meeting of Shareholders on April 15, 2009. Awards under the 2003 Plan may be in the form of stock options, stock appreciation rights, limited stock appreciation rights, restricted stock, unrestricted stock and other stock-based awards. Awards under the Directors’ Plan may be in the form of stock awards, stock options or stock appreciation rights. The company has two employee share purchase programs.

 

Amounts recognized for share-based compensation are as follows:

 

		Quarter Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
(dollars in millions)
Total cost of share-based compensation plans		$	10.8			$	18.8			$	37.4			$	38.4
Amounts capitalized in inventory and fixed assets			(0.2	)			(0.8	)			(1.0	)			(1.4	)
Amounts recognized in income for amounts previously capitalized in inventory and fixed assets			0.4				0.5				1.3				1.2
Amounts charged against income		$	11.0			$	18.5			$	37.7			$	38.2

In 2009, the company changed the timing of its annual grant of share-based compensation from July to November. The company granted approximately 1.2 million stock options as part of its annual share-based compensation grant in July 2008 and the fair value per stock option granted was $29.58. The fair value of these stock options was estimated on the date of grant using a binomial-lattice option model based on the following assumptions: risk-free interest rate of 3.28%; expected volatility of 26%; dividend yield of 0.7%; and expected life of 7.5 years.

The anticipated purchases for 2010 and 2009 under the Management Stock Purchase Program (the “MSPP”) as of July 2009 and July 2008, respectively, were approximately 0.2 million shares in each year and the fair value per share related to these purchases was $28.20 and $32.53, respectively. The fair value of the 2009 and 2008 annual MSPP purchases was estimated in July 2009 and July 2008, respectively, using the Black-Scholes model based on the following assumptions: risk-free interest rate of 0.35% and 2.21%, respectively; expected volatility of 27% and 24%, respectively; dividend yield of 0.8% and 0.7%, respectively; and expected life of 0.6 years for both valuations.

As of September 30, 2009, there was approximately $62.1 million of unrecognized compensation expense related to share-based payment arrangements, which is expected to be recognized over a weighted-average period of approximately three years. The company repurchases shares, from time-to-time, on the open market to satisfy share-based payment arrangements. The company has sufficient treasury shares to satisfy expected share-based payment arrangements for the remainder of the year.

NOTE 11. Equity-Based Compensation Plans

BB&T has options, restricted shares of common stock and restricted share units outstanding from the following equity-based compensation plans: the 2004 Stock Incentive Plan (“2004 Plan”), the 1995 Omnibus Stock Incentive Plan, the Non-Employee Directors’ Stock Option Plan, and plans assumed from acquired entities. All plans generally allow for accelerated vesting of awards for holders who retire and have met all retirement eligibility requirements and in connection with certain other events. BB&T’s shareholders have approved all equity-based compensation plans with the exception of plans assumed from acquired companies. As of September 30, 2009, the 2004 Plan is the only plan that has awards available for future grants. Please refer to BB&T’s Annual Report on Form 10-K for the year ended December 31, 2008 for further disclosures related to equity-based awards issued by BB&T.

BB&T measures the fair value of each option award on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants awarded during the first nine months of 2009 and 2008. Substantially all of BB&T’s option awards are granted in February of each year. Therefore, the assumptions noted below are weighted accordingly.

 

		2009				2008
Assumptions:
Risk-free interest rate			3.1	%			3.7	%
Dividend yield			6.0				4.5
Volatility factor			29.1				15.5
Expected life			7.1	yrs			6.9	yrs
Fair value of options per share		$	2.59			$	3.43

BB&T measures the fair value of restricted shares based on the price of BB&T’s common stock on the grant date and the fair value of restricted share units based on the price of BB&T’s common stock on the grant date less the present value of expected dividends that are foregone during the vesting period.

The following table details the activity during the first nine months of 2009 related to stock options awarded by BB&T:

 

		For the Nine Months Ended September 30, 2009
		Options			Wtd. Avg. Exercise Price
Outstanding at beginning of period		41,837,504			$	36.55
Granted		2,832,038				16.89
Exercised		(218,469	)			27.60
Forfeited or expired		(1,587,428	)			35.47
Outstanding at end of period		42,863,645				35.36
Exercisable at end of period		30,078,604				36.25

 

The following table details the activity during the first nine months of 2009 related to restricted shares and restricted share units awarded by BB&T:

 

		For the Nine Months Ended September 30, 2009
		Shares/Units			Wtd. Avg. Grant Date Fair Value
Nonvested at beginning of period		6,259,349			$	29.15
Granted		5,002,692				7.46
Vested		(171,325	)			27.39
Forfeited		(153,848	)			21.76
Nonvested at end of period		10,936,868				19.36

14. Stock-Based Compensation

The components of the Company’s stock-based compensation expense are comprised of the following:

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2009			2008			2009			2008
Stock-based compensation:
Restricted stock and restricted stock units (“RSUs”)		$	55		$	54		$	178		$	153
Stock options			3			3			9			7
Long-term incentive plans to be funded by PNC			15			14			45			44
Total stock-based compensation		$	73		$	71		$	232		$	204

 

Stock Options

Options outstanding at September 30, 2009 and changes during the nine months ended September 30, 2009 were as follows:

 

Outstanding at		Shares Under Option			Weighted Average Exercise Price
December 31, 2008		3,140,517			$	88.82
Exercised		(447,882	)		$	34.44
Forfeited		(8,064	)		$	167.76
September 30, 2009		2,684,571			$	97.65

The aggregate intrinsic value of options exercised during the nine months ended September 30, 2009 was $55.

At September 30, 2009, the Company had $25 in unrecognized stock-based compensation expense related to unvested stock options. The unrecognized compensation cost is expected to be recognized over a remaining weighted-average period of 2.1 years.

Restricted Stock and RSUs

Restricted stock and RSU activity at September 30, 2009 and changes during the nine months ended September 30, 2009 were as follows:

 

Outstanding at		Unvested Restricted Stock and Units			Weighted Average Grant Date Fair Value
December 31, 2008		4,603,953			$	174.24
Granted		1,861,275			$	117.97
Converted		(829,781	)		$	179.41
Forfeited		(214,527	)		$	157.18
September 30, 2009		5,420,920			$	154.81

 

The Company values restricted stock and RSUs at their grant-date fair value as measured by BlackRock’s common stock price.

In January 2009, the Company granted 23,417 RSUs as long-term incentive compensation, which will be partially funded by shares currently held by PNC (see Long-Term Incentive Plans to be Funded by PNC below). The awards cliff vest five years from the date of grant.

In January 2009, the Company granted 1,789,685 RSUs to employees as part of annual incentive compensation under the BlackRock, Inc. 1999 Stock Award and Incentive Plan (the “Award Plan”) that vest ratably over three years from the date of grant.

At September 30, 2009, there was $365 in total unrecognized compensation cost related to unvested restricted stock and RSUs. The unrecognized compensation cost is expected to be recognized over the remaining weighted average period of 2.0 years.

Long-Term Incentive Plans to be Funded by PNC

Under a share surrender agreement, PNC committed to provide up to 4,000,000 shares of BlackRock common stock, held by PNC, to fund certain BlackRock long-term incentive plans (“LTIP”). In February 2009, the share surrender agreement was amended for PNC to provide BlackRock series C non-voting preferred stock to fund the remaining committed shares.

During 2007, the Company granted additional long-term incentive awards, out of the Award Plan of approximately 1,600,000 RSUs that will be settled using BlackRock shares held by PNC in accordance with the share surrender agreement. The RSU awards vest on September 29, 2011 provided that BlackRock has actual GAAP earnings per share of at least $5.20 in 2009, $5.52 in 2010 or $5.85 in 2011 or has attained an alternative performance hurdle based on the Company’s earnings per share growth rate versus certain peers over the term of the awards. The value of the RSUs was calculated using BlackRock’s closing stock price on the date of grant. The grant date fair value of the RSUs is being amortized as an expense on the straight-line method over the vesting period, net of expected forfeitures. The maximum value of awards that may be funded by PNC, prior to the earlier of September 29, 2011 or the date the performance criteria are met is approximately $271, all of which has been granted as of September 30, 2009.

 

11. Stock Option and Incentive Plan

During the nine months ended September 30, 2009, the Company issued 62,876 shares of restricted common stock and 515,007 LTIP Units to employees and directors under the 1997 Stock Option and Incentive Plan (the “1997 Plan”). Employees and directors paid $0.01 per share of restricted common stock and $0.25 per LTIP Unit. The shares of restricted stock were valued at approximately $2.8 million ($43.89 per share weighted-average). The LTIP Units were valued at approximately $21.1 million ($41.05 per unit fair value weighted-average) using a Monte Carlo simulation method model in accordance with the provisions of SFAS No. 123R. The per unit fair value of each LTIP Unit granted was estimated on the date of grant using the following assumptions: an expected life of 5.6 years, a risk-free interest rate of 1.87% and an expected price volatility of 40.0%. An LTIP Unit is generally the economic equivalent of a share of restricted stock in the Company. The aggregate value of the LTIP Units is included in noncontrolling interests in the Consolidated Balance Sheets. The restricted stock and LTIP Units granted to employees between January 1, 2004 and November 2006 vest over a five-year term. Grants of restricted stock and LTIP Units made in and after November 2006 vest in four equal annual installments. Restricted stock and LTIP Units are measured at fair value on the date of grant based on the number of shares or units granted, as adjusted for forfeitures, and the closing price of the Company’s common stock on the date of grant as quoted on the New York Stock Exchange. Such value is recognized as an expense ratably over the corresponding employee service period. Dividends paid on both vested and unvested shares of restricted stock are charged directly to Earnings in Excess of Dividends in the Consolidated Balance Sheets. Stock-based compensation expense associated with restricted stock, LTIP Units and 2008 OPP Units was approximately $6.2 million and $6.2 million for the three months ended September 30, 2009 and 2008, respectively, and approximately $19.4 million and $16.8 million for the nine months ended September 30, 2009 and 2008, respectively. At September 30, 2009, there was $39.6 million of unrecognized compensation expense related to unvested restricted stock and LTIP Units and $10.3 million of unrecognized compensation expense related to unvested 2008 OPP Units that is expected to be recognized over a weighted-average period of approximately 2.6 years.

11. Stock Option and Incentive Plan

During the nine months ended September 30, 2009, Boston Properties, Inc. issued 62,876 shares of restricted common stock and the Company issued 515,007 LTIP Units to employees and directors under the 1997 Stock Option and Incentive Plan (the “1997 Plan”). Employees and directors paid $0.01 per share of restricted common stock and $0.25 per LTIP Unit. The shares of restricted stock were valued at approximately $2.8 million ($43.89 per share weighted-average). The LTIP Units were valued at approximately $21.1 million ($41.05 per unit fair value weighted-average) using a Monte Carlo simulation method model in accordance with the provisions of SFAS No. 123R. The per unit fair value of each LTIP Unit granted was estimated on the date of grant using the following assumptions: an expected life of 5.6 years, a risk-free interest rate of 1.87% and an expected price volatility of 40.0%. An LTIP Unit is generally the economic equivalent of a share of restricted stock in Boston Properties, Inc. The aggregate value of the LTIP Units is included in noncontrolling interests in the Consolidated Balance Sheets. The restricted stock and LTIP Units granted to employees between January 1, 2004 and November 2006 vest over a five-year term. Grants of restricted stock and LTIP Units made in and after November 2006 vest in four equal annual installments. Restricted stock and LTIP Units are measured at fair value on the date of grant based on the number of shares or units granted, as adjusted for forfeitures, and the closing price of Boston Properties, Inc.’s common stock on the date of grant as quoted on the New York Stock Exchange. Such value is recognized as an expense ratably over the corresponding employee service period. Dividends paid on both vested and unvested shares of restricted stock are charged directly to Partners’ Capital in the Consolidated Balance Sheets. Stock-based compensation expense associated with restricted stock, LTIP Units and 2008 OPP Units was approximately $6.2 million and $6.2 million for the three months ended September 30, 2009 and 2008, respectively, and approximately $19.4 million and $16.8 million for the nine months ended September 30, 2009 and 2008, respectively. At September 30, 2009, there was $39.6 million of unrecognized compensation expense related to unvested restricted stock and LTIP Units and $10.3 million of unrecognized compensation expense related to unvested 2008 OPP Units that is expected to be recognized over a weighted-average period of approximately 2.6 years.

Note 20. Employee Stock Benefit Plans

The following table summarizes stock-based compensation expense, net of taxes:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
Dollars in Millions		2009				2008				2009				2008
Stock options		$	18			$	17			$	54			$	56
Restricted stock			20				21				55				61
Long-term performance awards			4				6				21				15
Total stock-based compensation expense			42				44				130				132
Less tax benefit			(13	)			(14	)			(42	)			(43	)
Stock-based compensation expense, net of taxes		$	29			$	30			$	88			$	89

In the nine months ended September 30, 2009, the Company granted 23.8 million stock options, 6.3 million restricted stock units and 1.6 million long-term performance awards. The weighted-average grant date fair value of stock options granted was $3.70 per share. The weighted-average grant date fair value for restricted stock and long-term performance awards granted during the nine months ended September 30, 2009 was $17.97 and $16.52, respectively.

Total compensation costs, related to nonvested awards not yet recognized and the weighted-average period over which such awards are expected to be recognized at September 30, 2009 were as follows:

 

Dollars in Millions		Stock Options			Restricted Stock			Long-Term Performance Awards
Unrecognized compensation cost		$	121		$	191		$	29
Expected weighted-average period of compensation cost to be recognized			2.4 years			2.8 years			1.4 years

9. Stock-Based Compensation

The Company recognizes compensation expense for nonvested shares, stock appreciation rights (“SARs”) and stock options over the requisite service period for vesting of the award. Total stock-based compensation expense included in the Company’s Consolidated Condensed Statements of Earnings was $2.6 million and $7.6 million for the quarter and nine months ended September 30, 2009, respectively, and $1.1 million and $5.1 million for the quarter and nine months ended September 30, 2008, respectively.

 

During the first nine months of 2009, the Company granted nonvested shares to certain employees pursuant to the Bucyrus International, Inc. Omnibus Incentive Plan 2007 (the “Omnibus Plan”). These shares fully cliff vest on December 31, 2012. Nonvested share activity during the nine months ended September 30, 2009 was as follows:

 

		Number of Shares			Weighted-Average Grant Date Fair Value
Nonvested at January 1, 2009		206,688			$	31.59
Granted		301,350			$	13.80
Forfeited		(10,200	)		$	21.29
Vested		—				—
Nonvested at September 30, 2009		497,838			$	21.03

Compensation expense related to nonvested shares was $1.0 million and $2.8 million for the quarter and nine months ended September 30, 2009, respectively, and $0.4 million and $2.0 million for the quarter and nine months ended September 30, 2008, respectively. At September 30, 2009, there was $5.2 million of unrecognized compensation expense related to nonvested share grants. This cost is expected to be recognized over a weighted-average period of approximately 2.5 years. The grant date fair value was based on the fair market value of the Company’s common stock on the date of grant. At September 30, 2009, the Company expected approximately 429,000 shares to vest and these shares had an aggregate intrinsic value of $15.3 million and a weighted-average remaining contractual term of 2.3 years.

Premium nonvested shares granted pursuant to the Omnibus Plan partially vest if specific performance levels are attained by the Company. Any premium nonvested shares credited to employees will fully cliff vest on December 31, 2009, provided the employee remains employed by the Company until such date. Premium nonvested share activity during the nine months ended September 30, 2009 was as follows:

 

		Number of Shares			Weighted-Average Grant Date Fair Value
Nonvested at January 1, 2009		178,498			$	21.72
Granted		—				—
Forfeited		(3,600	)		$	28.50
Vested		—				—
Nonvested at September 30, 2009		174,898			$	21.47

Compensation expense related to premium nonvested shares was $0.1 million and $0.4 million for the quarter and nine months ended September 30, 2009, respectively, and $0.1 million and $0.4 million for the quarter and nine months ended September 30, 2008, respectively. At September 30, 2009, there was $0.1 million of unrecognized compensation expense related to premium nonvested share grants. This cost is expected to be recognized in 2009. The grant date fair value was based on the fair market value of the Company’s common stock on the date of grant. At September 30, 2009, the Company expected 174,898 shares to vest and these shares had an aggregate intrinsic value of $6.2 million and a weighted-average remaining contractual term of three months.

 

During the first nine months of 2009, the Company granted SARs to certain employees pursuant to the Omnibus Plan. The SARs vest incrementally and can be settled in shares only. SAR activity during the nine months ended September 30, 2009 was as follows:

 

		Number of Shares			Weighted-Average Grant Date Fair Value
Outstanding at January 1, 2009		1,207,540			$	14.20
Granted		1,223,100			$	7.53
Forfeited		(40,750	)		$	10.73
Exercised		(10,360	)		$	13.95
Outstanding at September 30, 2009		2,379,530			$	10.84
Vested and exercisable at September 30, 2009		393,775			$	11.55

Compensation expense related to SARs was $1.5 million and $4.4 million for the quarter and nine months ended September 30, 2009, respectively, and $0.6 million and $2.7 million for the quarter and nine months ended September 30, 2008, respectively. At September 30, 2009, there was $10.8 million of unrecognized compensation expense related to SARs that are vested or expected to vest. This expense is expected to be recognized over a weighted-average period of approximately 2.6 years. The grant date fair value of the SARs was calculated using the Black-Scholes pricing model. The assumptions used in this model were as follows:

 

Risk-free interest rate		2.82	%
Expected stock price volatility		58.0	%
Expected life		6.5 years
Dividend yield		0.70	%

The risk-free interest rate was based on the U.S. Government Treasury strips rate on the date of grant and with a maturity equal to the expected life of the SARs. The expected stock price volatility was based on the historical activity of the Company’s common stock. The expected life was calculated using the simplified method for “plain-vanilla” issuances. The expected dividend yield was based on the annual dividends which have been paid on the Company’s common stock.

5. Stock Award Plans

Stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period. Total compensation expense recognized in our statements of operations for stock-based compensation awards was $5.5 million and $4.0 million for the three months ended September 30, 2009 and 2008 and $17.2 million and $16.6 million for the nine months ended September 30, 2009 and 2008.

Our 1997 Omnibus Stock Plan allows us to grant certain stock awards, including stock options at fair market value and restricted shares and units, to our key employees and outside directors. A maximum of 28,000,000 shares can be granted under this plan; approximately 8,900,000 shares were available for stock awards as of September 30, 2009, which cover stock options and restricted stock awards. Awards that expire or are cancelled without delivery of shares generally become available for issuance under the plans.

Stock Options—The contractual lives of all options as originally granted are ten years. Options vested over a five-year period from the date of grant, with none vesting the first year and one quarter vesting each year after that. Recipients are able to exercise options using a stock swap which results in a new, fully-vested restoration option with a grant price established based on the date of the swap and a remaining contractual life equal to the remaining life of the original option. Options issued to non-employee directors vest immediately. The fair value per option is established using the Black-Scholes option pricing model, with the resulting expense being recorded over the vesting period of the award. Other than restoration options, we have not issued any new stock options since 2003. As of September 30, 2009, there was no unrecognized compensation expense related to stock options since all outstanding options were fully vested.

Restricted Stock Awards—We have awarded performance-based restricted shares and restricted units to certain key employees and non-employee directors. These restricted shares and restricted units are subject to certain vesting requirements over a five-year period, based on the operating performance of the company. The awards also contain restrictions on the awardees’ ability to sell or transfer vested shares or units for a specified period of time. The fair value of these shares is established based on the market price on the date of grant, discounted for post-vesting holding restrictions. The discounts have varied from 12 percent to 22 percent and are calculated using the Black-Scholes option pricing model. Increased stock price volatility is the primary reason that the discount increased. These grants are being expensed based on the terms of the awards.

We have also awarded to certain key employees restricted shares and units that vest primarily based on continued employment. The value of these awards is established by the market price on the date of the grant and is being expensed over the vesting period of the award.

As of September 30, 2009, there was unrecognized compensation expense of $116.0 million related to previously granted restricted equity. The amount of future expense will be based primarily on company performance.

We have also issued to certain key employees and non-employee directors restricted shares and units which are fully vested upon issuance. These shares and units contain restrictions on the awardees’ ability to sell or transfer vested shares and units for a specified period of time. The fair value of these shares is established using the same method discussed above. These grants have been expensed during the year they were earned.

Employee Stock Purchase Plan—Our 1997 Employee Stock Purchase Plan allows our employees to contribute up to $10,000 of their annual cash compensation to purchase company stock. Purchase price is determined using the closing price on the last day of the quarter, discounted by 15 percent. Shares are vested immediately. Employees purchased approximately 43,000 shares of our common stock at an aggregate cost of $2.1 million during the quarter ended September 30, 2009. The 15 percent discount resulted in an expense to the company of approximately $370,000 during the quarter.

NOTE 13 – STOCK COMPENSATION PLANS

Employees’ Plans

On March 9, 2009, the Compensation and Organization Committee (“Committee”) of the Board of Directors approved a grant under our shareholder approved 2007 ICE Plan (“Plan”) for the performance period 2009-2011. A total of 552,100 shares were granted under the award on that date, consisting of 406,170 in performance shares and 145,930 in restricted share units. On August 31, 2009 and September 1, 2009, an additional 5,100 shares and 15,900 shares, respectively, were granted under the Plan, consisting of performance shares and units, restricted share units, retention units and restricted stock.

Each performance share, if earned, entitles the holder to receive a number of common shares within the range between a threshold and maximum number of shares, with the actual number of common shares earned dependent upon whether the Company achieves certain objectives and performance goals as established by the Committee. The restricted share units are subject to continued employment, are retention based, will vest at the end of the performance period for the performance shares, and are payable in shares at a time determined by the Committee at its discretion. The performance shares granted under the Plan vest over a period of three years and measure performance on the basis of two factors: 1) relative TSR for the period, as measured against a predetermined peer group of mining and metals companies, and 2) three-year cumulative free cash flow, and are intended to be paid out in common shares.

Determination of Fair Value

The fair value of each performance share grant is estimated on the date of grant using a Monte Carlo simulation to forecast relative TSR performance. A correlation matrix of historic and projected stock prices was developed for both the Company and its predetermined peer group of mining and metals companies. The fair value assumes that performance goals will be achieved. If such goals are not met, no compensation cost is recognized and any recognized compensation cost is reversed.

 

The expected term of the grant represents the time from the grant date to the end of the service period. We estimated the volatility of our common shares and that of the peer group of mining and metals companies using daily price intervals for all companies. The risk-free interest rate is the rate at the grant date on zero-coupon government bonds, with a term commensurate with the remaining life of the performance plans.

The following assumptions were utilized to estimate the fair value for the 2009 performance share grants:

 

Grant Date Market Price		Average Expected Term (Years)		Expected Volatility		Risk-Free Interest Rate		Dividend Yield		Fair Value		Fair Value (Percent of Grant Date Market Price)
$  12.96 - $25.31		2.81		85.8%		1.43%		2.72%		$4.90		19.36% - 37.83%

The fair value of the restricted share units is determined based on the closing price of the Company’s shares on the grant date. The restricted share units granted under the Plan vest over a period of three years.

Upon the occurrence of a change in control, all performance shares and restricted share units granted to a participant will vest and become nonforfeitable and will be paid out in cash.

Nonemployee Directors

On May 12, 2009 and September 1, 2009, annual equity grants were awarded under our Directors’ Plan to all Nonemployee Directors elected or re-elected by the shareholders as follows:

 

Date of Grant		Unrestricted Equity Grant Shares		Restricted Equity Grant Shares		Deferred Equity Grant Shares
May 12, 2009		7,788		12,980		2,596
September 1, 2009		-		2,138		-

The Directors’ Plan provides for an annual equity grant, which is awarded at our Annual Meeting each year to all Nonemployee Directors elected or re-elected by the shareholders. The value of the equity grant is payable in restricted shares with a three-year vesting period from the date of grant. The closing market price of our common shares on our Annual Meeting date is divided into the equity grant to determine the number of restricted shares awarded. Effective May 1, 2008, Nonemployee Directors received an annual retainer fee of $50,000 and an annual equity award of $75,000. Effective July 1, 2009, the Directors’ annual retainer fee was reduced by 10 percent in conjunction with the Company’s compensation reductions across the organization. The Directors’ Plan offers the Nonemployee Director the opportunity to defer all or a portion of the Annual Directors’ Retainer fees, Chair retainers, meeting fees, and the Equity Grant into the Compensation Plan. A Director who is 69 or older at the equity grant date will receive common shares with no restrictions.

NOTE 4. STOCK-BASED COMPENSATION

Stock options and restricted stock units (RSUs) have been issued to directors, officers and other employees under the Company’s 1998 Stock Option Plan and the 2007 Stock Incentive Plan, and RSUs have been issued to the Company’s CEO pursuant to an award approved by shareholders in 2003. In addition, in connection with the November 2007 Tektronix acquisition, the Company assumed the Tektronix 2005 Stock Incentive Plan and the Tektronix 2002 Stock Incentive Plan (the “Tektronix Plans”) and assumed certain outstanding stock options, restricted stock and RSUs that had been awarded to Tektronix employees under the plans. These plans operate in a similar manner to the Company’s 2007 Stock Incentive Plan and 1998 Stock Option Plan. No further equity awards will be issued under the 1998 Stock Option Plan or the Tektronix Plans. The 2007 Stock Incentive Plan provides for the grant of stock options, stock appreciation rights, RSUs, restricted stock or any other stock based award. In May 2009, the Company’s shareholders approved amendments to the 2007 Stock Incentive Plan that, among other items, authorized the issuance of an additional 7 million shares pursuant to the Plan bringing the total number of shares authorized for issuance under the Plan to 19 million. No more than 6 million of the 19 million authorized shares may be granted in any form other than stock options or stock appreciation rights.

 

Stock options granted under the 2007 Stock Incentive Plan, the 1998 Stock Option Plan and the Tektronix Plans generally vest pro-rata over a five-year period and terminate ten years from the issuance date, though the specific terms of each grant are determined by the Compensation Committee of the Company’s Board of Directors (Compensation Committee). The Company’s executive officers and certain other employees have been awarded options with different vesting criteria. Option exercise prices for options granted by the Company under these plans equal the closing price on the NYSE of the Company’s common stock on the date of grant. Option exercise prices for the options outstanding under the Tektronix Plans were based on the closing price of Tektronix common stock on the date of grant. In connection with the Company’s assumption of these options, the number of shares underlying each option and exercise price of each option were adjusted to reflect the substitution of Danaher stock for the Tektronix stock underlying these awards.

RSUs issued under the 2007 Stock Incentive Plan and the 1998 Stock Option Plan provide for the issuance of a share of the Company’s common stock at no cost to the holder. They are generally subject to performance criteria determined by the Compensation Committee, as well as time-based vesting. Most RSU awards granted prior to the third quarter of 2009 vest (subject to satisfaction of the performance criteria) 50% on each of the fourth and fifth anniversaries of the grant date. These vesting terms continue to apply to most RSU awards to senior management. However, for other RSU award recipients who were granted RSU awards during the third quarter of 2009, vesting (subject to satisfaction of the performance criteria) occurs 1/3 on each of the third, fourth and fifth anniversaries of the grant date. Certain of the Company’s executive officers and other employees have been awarded RSUs with different vesting criteria. Prior to vesting, RSUs do not have dividend equivalent rights, do not have voting rights and the shares underlying the RSUs are not considered issued and outstanding.

Restricted shares issued under the Tektronix 2005 Stock Incentive Plan were granted subject to certain time-based vesting restrictions such that the restricted share awards are fully vested after a period of five years. Holders of restricted shares have the right to vote such shares and receive dividends. The restricted shares are considered issued and outstanding at the date the award is granted.

The options, RSUs and restricted shares generally vest only if the employee is employed by the Company on the vesting date or in other limited circumstances and unvested options and RSUs are forfeited upon retirement before age 65 unless the Compensation Committee determines otherwise. To cover the exercise of options and vesting of RSUs, the Company generally issues new shares from its authorized but unissued share pool. As of October 2, 2009, approximately 11 million shares of the Company’s common stock were reserved for issuance under the 2007 Stock Incentive Plan.

The Company accounts for stock-based compensation by measuring the cost of employee services received in exchange for all equity awards granted, including stock options, RSUs and restricted shares, based on the fair value of the award as of the grant date. The estimated fair value of the options granted was calculated using a Black-Scholes Merton option pricing model (Black-Scholes). The following summarizes the assumptions used in the Black-Scholes model to value options granted during the nine months ended October 2, 2009:

 

Risk-free interest rate		2.08% - 3.68%
Weighted average volatility		22% - 35%
Dividend yield		0.20%
Expected years until exercise		6 - 9.5

The Black-Scholes model incorporates assumptions to value stock-based awards. The risk-free rate of interest for periods within the contractual life of the option is based on a zero-coupon U.S. government instrument over the expected term of the equity instrument. Expected volatility is based on implied volatility from traded options on the Company’s stock and historical volatility of the Company’s stock. The expected volatility used to value option grants in the first half of 2009 was significantly higher than the expected volatility used in recent periods as a result of the volatility in the overall equity markets. To estimate the option exercise timing to be used in the valuation model, in addition to considering the vesting period and contractual term of the option, the Company analyzes and considers actual historical exercise data for previously granted options. At the time of grant, the Company estimates the number of options that it expects will be forfeited based on the Company’s historical experience. Separate groups of employees that have similar behavior with regard to holding options for longer periods and different forfeiture rates are considered separately for valuation and attribution purposes.

 

The following table summarizes the components of the Company’s stock-based compensation programs reported as a component of selling, general and administrative expenses in the accompanying Consolidated Condensed Financial Statements ($ in thousands):

 

		Three Months Ended								Nine Months Ended
		October 2, 2009				September 26, 2008				October 2, 2009				September 26, 2008
Restricted Stock Units and Restricted Shares:
Pre-tax compensation expense		$	8,000			$	5,794			$	21,510			$	18,730
Tax benefit			(2,800	)			(2,028	)			(7,528	)			(6,556	)
Restricted stock unit and restricted share expense, net of tax		$	5,200			$	3,766			$	13,982			$	12,174
Stock Options:
Pre-tax compensation expense		$	13,234			$	15,826			$	45,414			$	45,289
Tax benefit			(4,057	)			(4,454	)			(13,147	)			(12,587	)
Stock option expense, net of tax		$	9,177			$	11,372			$	32,267			$	32,702
Total Share-Based Compensation:
Pre-tax compensation expense		$	21,234			$	21,620			$	66,924			$	64,019
Tax benefit			(6,857	)			(6,482	)			(20,675	)			(19,143	)
Total share-based compensation expense, net of tax		$	14,377			$	15,138			$	46,249			$	44,876

As of October 2, 2009, $83 million of total unrecognized compensation cost related to RSUs and restricted shares is expected to be recognized over a weighted average period of approximately 3 years. As of October 2, 2009, $165 million of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted average period of approximately 3 years.

Option activity under the Company’s stock plans as of October 2, 2009 and changes during the nine months ended October 2, 2009 were as follows:

 

		Shares in 000’s			Weighted Average Exercise Price			Weighted Average Remaining Contractual Term (in Years)		Aggregate Intrinsic Value in ($000’s)
Outstanding at January 1, 2009		22,084			$	50.49
Granted		2,451			$	56.60
Exercised		(2,511	)		$	33.25
Forfeited		(571	)		$	67.25
Outstanding at October 2, 2009		21,453			$	52.76		6		$	318,673
Vested and Expected to Vest at October 2, 2009		20,798			$	52.28		6		$	316,718
Vested and Exercisable at October 2, 2009		12,416			$	42.86		4		$	285,615

 

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the third quarter of 2009 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on October 2, 2009. The amount of aggregate intrinsic value will change based on the fair market value of the Company’s common stock.

The aggregate intrinsic value of options exercised during the nine months ended October 2, 2009 and September 26, 2008 was $70 million and $58 million, respectively. Exercise of options during the first nine months of 2009 and 2008 resulted in cash receipts of $70 million and $55 million, respectively. The Company realized a tax benefit of approximately $28 million in the nine months ended October 2, 2009 related to the exercise of employee stock options, which has been recorded as an increase to additional paid-in capital.

The following table summarizes information on unvested RSUs and restricted shares outstanding as of October 2, 2009:

 

		Number of RSUs / Restricted Shares (in thousands)			Weighted-Average Grant-Date Fair Value
Unvested at January 1, 2009		2,064			$	60.57
Forfeited		(62	)		$	69.10
Vested and issued		(109	)		$	56.17
Granted		926			$	56.79
Unvested at October 2, 2009		2,819			$	59.31

In connection with the vesting of certain restricted stock units and restricted shares previously issued by the Company, the Company has elected to withhold from the total shares issued or released to the award holder a number of shares sufficient to fund minimum tax withholding requirements (though under the terms of the applicable plan, the shares are considered to have been issued and are not added back to the pool of shares available for grant). During the three and nine months ended October 2, 2009, approximately 12 thousand and 39 thousand shares with an aggregate value of approximately $731 thousand and $2.4 million, respectively, were withheld to satisfy the requirement.

4.	Stock-based compensation and other common stock transactions

Stock-based compensation recognized during a period is based on the estimated grant-date fair value of the portion of the stock-based awards vesting during that period, adjusted for expected forfeitures. Stock-based compensation recognized in these condensed consolidated financial statements for the three and nine months ended September 30, 2009 and 2008 includes compensation cost for stock-based awards granted prior to, but not fully vested as of, January 1, 2006 and subsequent stock-based awards granted through September 30, 2009 and 2008, respectively. Shares issued upon exercise of stock awards are generally issued from shares in treasury. The Company has used the Black-Scholes-Merton valuation model for estimating the grant-date fair value of stock options and stock-settled stock appreciation rights granted in all periods. During the first nine months of 2009, the Company granted 3,991 stock-settled stock appreciation rights with a grant-date fair value of $47,833 and a weighted-average expected life of approximately 3.5 years, and also granted 14 stock units with a grant-date fair value of $647 and a weighted-average expected life of approximately 0.6 of a year.

For the nine months ended September 30, 2009 and 2008, the Company recognized $33,850 and $29,975, respectively, in stock-based compensation expense for stock options, stock-settled stock appreciation rights, stock units and discounted employee stock plan purchases, which are primarily included in general and administrative expenses. The estimated tax benefit recorded for stock-based compensation through September 30, 2009 and 2008 was $12,820 and $11,306, respectively. As of September 30, 2009, there was $88,023 of total estimated unrecognized compensation cost related to nonvested stock-based compensation arrangements under our equity compensation and stock purchase plans. The Company expects to recognize this cost over a weighted average remaining period of 1.5 years.

During the nine months ended September 30, 2009 and 2008, the Company received $27,304 and $29,876, respectively, in cash proceeds from stock option exercises and $12,434 and $10,174, respectively, in actual tax benefits upon the exercise of stock awards.

During the third quarter of 2009, the Company repurchased 1,109 shares of its common stock for $62,373 or an average price of $56.25 per share. For the first nine months of 2009, the Company repurchased a total of 1,853 shares of its common stock for $94,388 or an average price of $50.93 per share. As of September 30, 2009, a total of $33,165 of share repurchases had not yet been settled in cash. In addition, the Company repurchased 1,049 additional shares of its common stock from October 1, 2009 through October 7, 2009 for $59,107, or an average price of $56.32 per share. All of these share repurchases were consummated pursuant to previously announced authorizations by the Company’s Board of Directors. On October 8, 2009, the Company’s Board of Directors authorized an additional $500,000 for share repurchases. The Company has not repurchased any additional shares of its common stock from October 8, 2009 through November 5, 2009 under this Board authorization. Therefore, the total outstanding authorization for share repurchases as of November 5, 2009 was $500,000. This stock repurchase program has no expiration date.

 

Note 17. Stock-Based Awards

Our results for the three months ended September 30, 2009 and 2008 include $9 million and $10 million, respectively, of compensation costs and $3 million and $4 million, respectively, of income tax benefits related to our stock-based compensation arrangements. Our results for the nine months ended September 30, 2009 and 2008 include $32 million and $29 million, respectively, of compensation costs and $12 million and $11 million, respectively, of income tax benefits related to our stock-based compensation arrangements. Stock-based compensation cost is reported in other operations and maintenance expense in our Consolidated Statements of Income. Benefits from tax deductions in excess of the compensation cost recognized for stock-based compensation (excess tax benefits) are classified as a financing cash flow. Approximately $3 million and $9 million of excess tax benefits were realized for the nine months ended September 30, 2009 and 2008, respectively.

 

Stock Options

The following table provides a summary of changes in amounts of stock options outstanding during 2009:

 

		Shares			Weighted- Average Exercise Price			Weighted- Average Remaining Contractual Life		Aggregated Intrinsic Value(1)
		(thousands)						(years)		(millions)
Outstanding and exercisable at January 1, 2009		5,558			$	30.53
Exercised		(863	)			28.39				$	4
Forfeited/expired		(30	)			28.89
Outstanding and exercisable at September 30, 2009		4,665			$	30.93		1.66		$	17

 

(1)	Intrinsic value represents the difference between the exercise price of the option and the market value of our stock.

We issue new shares to satisfy stock option exercises. We received cash proceeds from the exercise of stock options of approximately $27 million and $30 million in the nine months ended September 30, 2009 and 2008, respectively.

Restricted Stock

The fair value of our restricted stock awards is equal to the market price of our stock on the date of grant. New shares are issued for these awards. Restricted stock generally vests over a three year service period. The following table provides a summary of restricted stock activity during 2009:

 

		Shares			Weighted-Average Grant Date Fair Value
		(thousands)
Nonvested at January 1, 2009		1,756			$	38.55
Granted		530				33.84
Vested		(887	)			34.63
Cancelled and forfeited		(70	)			38.36
Converted from goal-based stock to restricted stock		185				44.18
Nonvested at September 30, 2009		1,514			$	39.90

As of September 30, 2009, unrecognized compensation cost related to nonvested restricted stock awards totaled approximately $27 million and is expected to be recognized over a weighted-average period of 1.5 years.

Goal-Based Stock

Goal-based stock awards are generally granted to key non-officer employees on an annual basis. Goal-based stock awards are also granted in lieu of cash-based performance grants to certain officers who have not achieved a certain targeted level of share ownership. The issuance of awards is based on the achievement of multiple performance metrics during a two-year period, including return on invested capital, book value per share and total shareholder return relative to that of a peer group of companies.

The actual number of shares issued will vary between zero and 200% of targeted shares depending on the level of performance metrics achieved. The fair value of goal-based stock is equal to the market price of our stock on the date of grant. Goal-based stock awards granted to key non-officer employees convert to restricted stock at the end of the two-year performance period and generally vest three years from the original grant date. Awards to officers vest at the end of the two-year performance period. All goal-based stock awards are settled by issuing new shares. Current outstanding goal-based shares include awards granted in April 2008, February 2009 and April 2009.

After the performance period for the April 2007 grants ended on December 31, 2008, the Compensation, Governance and Nominating Committee determined the actual performance against metrics established for those awards. For awards to key non-officer employees, 127 thousand shares of the outstanding goal-based stock awards granted in April 2007 were converted to 185 thousand shares of restricted stock for the remaining term of the vesting period ending in April 2010. For awards to officers, 27 thousand shares of the outstanding goal-based stock awards were converted to 38 thousand non-restricted shares and issued to the officers.

 

For remaining goal-based stock awards, at September 30, 2009, the targeted number of shares to be issued is 324 thousand. The following table provides a summary of goal-based stock activity during 2009:

 

		Targeted Number of Shares			Weighted-Average Grant Date Fair Value
		(thousands)
Nonvested at January 1, 2009		315			$	42.56
Granted		165				31.43
Vested		(28	)			44.33
Cancelled and forfeited		(1	)			38.33
Converted from goal-based stock to restricted stock		(127	)			44.18
Nonvested at September 30, 2009		324			$	36.12

At September 30, 2009, unrecognized compensation cost related to nonvested goal-based stock awards totaled approximately $7 million and is expected to be recognized over a weighted-average period of 1.6 years.

Cash-Based Performance Grant

The actual payout of our cash-based performance grants will vary between zero and 200% of the targeted amount based on the level of performance metrics achieved.

The targeted amount of the cash-based performance grant made to officers in April 2007 was $11 million, but the actual payout of the award in February 2009 determined by the Compensation, Governance and Nominating Committee was $16 million, based on the level of performance metrics achieved. At December 31, 2008, a liability of $16 million had been accrued for this award.

In April 2008, a cash-based performance grant was made to officers. Payout of the performance grant will occur by March 15, 2010 and is based on the achievement of three performance metrics during 2008 and 2009: return on invested capital, book value per share and total shareholder return relative to that of a peer group of companies. At September 30, 2009, the targeted amount of the grant was $12 million and a liability of $10 million had been accrued for this award.

In February 2009, a cash-based performance grant was made to officers. Payout of the performance grant will occur by March 15, 2011 and is based on the achievement of three performance metrics during 2009 and 2010: return on invested capital, book value per share and total shareholder return relative to that of a peer group of companies. At September 30, 2009, the targeted amount of the grant was $11 million and a liability of $4 million had been accrued for this award.

Note 10 — Stock-Based Plans

Stock Option Exchange Program

On August 10, 2009, the Company launched a one-time stock option exchange program (the “Program”) pursuant to which eligible employees were able to exchange certain outstanding stock options with an exercise price greater than or equal to $27.01 per share, a grant date on or before August 10, 2008 and an expiration date after September 11, 2010, for a lesser amount of new restricted stock units (“RSUs”) or, under certain circumstances, for new stock options or a cash payment. Our named executive officers and members of our Board of Directors were not eligible to participate in the Program. The Program expired on September 11, 2009. As a result of the Program, 42.6 million shares of our common stock were accepted for exchange (representing approximately 75% of the total options eligible for exchange). All surrendered options were cancelled effective as of the expiration of the Program, and in exchange for those options, we issued a total of approximately 5.0 million new RSUs. The number of new stock options granted, and the amount of cash payments issued, in exchange for outstanding stock options were insignificant. In general, the new RSUs have a vesting period that is at least one year longer than the original vesting period for the corresponding exchanged option grant. The Program did not result in any significant incremental stock-based compensation expense.

Stock Options

The following table summarizes stock option activity for the nine-month period ended September 30, 2009 (in thousands):

 

		Shares
Outstanding at January 1, 2009		116,060
Granted and assumed		9,347
Exercised		(4,336	)
Options exchanged in connection with the stock option exchange program		(42,630	)
Forfeited/expired/cancelled		(19,801	)
Outstanding at September 30, 2009		58,640

Stock options granted under our equity incentive plans generally vest 25% one year from the date of grant (for new hires) and 12.5% six months from the date of grant (for existing employees) and the remainder generally vest at a rate of 2.08% per month thereafter, in either case based on the recipient’s continuing service to eBay, and generally expire seven to 10 years from the date of grant. The weighted average exercise price of stock options granted and assumed during the period was $12.64 per share and the related weighted average grant date fair value was $4.36 per share.

Restricted Stock Units

The following table summarizes RSU activity for the nine-month period ended September 30, 2009 (in thousands):

 

		Units
Outstanding at January 1, 2009		26,821
Awarded		22,916
Awarded in connection with the stock option exchange program		5,047
Vested		(6,387	)
Forfeited		(3,017	)
Outstanding at September 30, 2009		45,380

In general, RSUs vest over four years at the rate of 25% a year on each anniversary of the grant date, subject to the recipient’s continuing service to eBay. The cost of RSUs is determined using the fair value of our common stock on the date of grant. The weighted average grant date fair value for RSUs awarded during the period was $11.21 per share, excluding those RSUs awarded in connection with the one-time stock option exchange program.

 

Stock-based Compensation Expense

The impact on our results of operations of recording stock-based compensation expense for the three and nine months ended September 30, 2008 and 2009 was as follows (in thousands):

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2008			2009			2008			2009
Cost of net revenues		$	10,395		$	11,134		$	31,908		$	37,614
Sales and marketing			23,745			28,265			72,096			91,154
Product development			23,458			22,795			71,627			78,546
General and administrative			32,653			30,296			93,850			95,455
Total stock-based compensation expense		$	90,251		$	92,490		$	269,481		$	302,769

Total stock-based compensation expense included in capitalized development costs was $3.4 million and $2.6 million for the three months ended September 30, 2008 and 2009, respectively. Total stock-based compensation expense included in capitalized development costs was $8.2 million and $7.0 million for the nine months ended September 30, 2008 and 2009, respectively.

Valuation Assumptions

We calculated the fair value of each stock option award on the date of grant using the Black-Scholes option pricing model. The following weighted average assumptions were used for the three and nine months ended September 30, 2008 and 2009:

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2008			2009			2008			2009
Risk-free interest rates		2.9	%		2.0	%		2.3	%		1.6	%
Expected lives (in years)		3.9			3.7			3.8			3.8
Dividend yield		0	%		0	%		0	%		0	%
Expected volatility		40	%		43	%		34	%		47	%

Our computation of expected volatility is based on a combination of historical and market-based implied volatility from traded options on our common stock. Our computation of expected life was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior. The interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant.

7. STOCK COMPENSATION

1997 Stock Incentive Plan

The 1997 Stock Incentive Plan provided for the grant of incentive stock options, non-qualified stock options, or a combination thereof to officers and key employees. Options granted under the Plan provide for the purchase of Company common stock at not less than the fair market value on the date the option is granted. The sale or transfer of the shares is limited during certain periods. All outstanding options vest within three years from date of grant and expire 10 years from the grant date. The Company granted 538,492 non-qualified option shares during the first quarter of 2009 with a grant-date fair value of $8.83. In August 2009, the Company granted 4,750 non-qualified option shares with grant-date fair value of $15.00.

Additionally, the 1997 Stock Incentive Plan provided for the grant of restricted stock. In August 2009, 6,150 shares of restricted stock were awarded. These awards were valued based on the quoted market price of the Company’s common stock at the date of grant and have a three year vesting period.

2004 Stock Appreciation Rights Plan

The Energen 2004 Stock Appreciation Rights Plan provided for the payment of cash incentives measured by the long-term appreciation of Company stock. These awards are liability awards which settle in cash and are re-measured each reporting period until settlement and have a three year vesting period. The Company granted 305,257 and 3,292 awards during the first quarter of 2009. These awards had fair values of $19.98 and $19.28, respectively, as of September 30, 2009.

Petrotech Incentive Plan

The Energen Resources’ Petrotech Incentive Plan provided for the grant of stock equivalent units. These awards are liability awards which settle in cash and are re-measured each reporting period until settlement. In the first quarter of 2009, Energen Resources awarded 900 Petrotech units with a two year vesting period and 2,911 Petrotech units with a three year vesting period. These awards had a fair value of $42.48 and $42, respectively, as of September 30, 2009. During the third quarter of 2009, Energen Resources awarded 938 Petrotech units with a three year vesting period and a fair value of $42 as of September 30, 2009.

1997 Deferred Compensation Plan

During the nine months ended September 30, 2009, the Company had noncash purchases of approximately $0.6 million of Company common stock in conjunction with tax withholdings on its non-qualified deferred compensation plan and other stock compensation. The Company utilized internally generated cash flows in payment of the related tax withholdings.

Note 3. Stock-based Compensation

Stock-based compensation expense and related tax benefit recognized in the Consolidated Statements of Income are as follows (in thousands):

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
Cost of goods sold		$	824			$	701			$	2,425			$	1,945
Research and development			1,298				1,325				3,641				3,530
Selling, general and administrative			4,001				3,343				11,574				9,685
Stock-based compensation expense before income taxes			6,123				5,369				17,640				15,160
Income tax benefit			(1,866	)			(1,524	)			(5,287	)			(3,980	)
Total stock-based compensation expense after income taxes		$	4,257			$	3,845			$	12,353			$	11,180

Stock-based compensation costs capitalized in inventory are as follows (in thousands):

 

		September 30,
		2009			2008
Stock-based compensation costs capitalized in inventory		$	879		$	962

As of September 30, 2009, the Company had $38.3 million of total unrecognized stock-based compensation costs, net of estimated forfeitures, to be recognized over a weighted average period of 2.0 years.

 

The fair value of the stock-based awards, as determined under the Black-Scholes model, granted in the three months and nine months ended September 30, 2009 and 2008 was estimated with the following weighted-average assumptions:

 

		Three Months Ended September 30,					Nine Months Ended September 30,
		2009			2008		2009			2008
Stock Option Awards:
Risk-free interest rate		1.6	%		—		1.5	%		2.8	%
Expected dividend yield		0.0	%		—		0.0	%		0.0	%
Expected term		3.3 years			—		4.3 years			4.1 years
Expected volatility		48.1	%		—		46.9	%		40.8	%
Employee Stock Purchase Plan:
Risk-free interest rate		—			—		0.3	%		1.7	%
Expected dividend yield		—			—		0.0	%		0.0	%
Expected term		—			—		6 months			6 months
Expected volatility		—			—		60.9	%		50.0	%

The fair value of stock-based compensation awards granted and vested, and the intrinsic value of options exercised during the period were (in thousands, except per share amounts):

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2009			2008			2009			2008
Stock Option Awards:
Weighted average grant date fair value per share		$	7.63		$	—		$	9.96		$	12.25
Total fair value of awards granted		$	140		$	—		$	10,534		$	7,175
Total fair value of awards vested		$	215		$	177		$	6,924		$	8,243
Total intrinsic value of options exercised		$	6,655		$	12,039		$	17,825		$	76,709
Restricted Stock Unit Awards:
Weighted average grant date fair value per share		$	21.49		$	39.37		$	25.37		$	34.31
Total fair value of awards granted		$	774		$	83		$	16,749		$	18,981
Total fair value of awards vested		$	237		$	364		$	17,047		$	15,371
Employee Stock Purchase Plan:
Weighted average grant date fair value per share		$	—		$	—		$	8.37		$	10.32
Total fair value of shares estimated to be issued		$	—		$	—		$	1,073		$	1,039

The total amount of cash received from the exercise of stock options in the three months ended September 30, 2009 and 2008 was $4.0 million and $3.7 million, respectively, and the related tax benefit realized from the exercise of the stock options was $1.9 million and $4.5 million, respectively. The total amount of cash received from the exercise of stock options in the nine months ended September 30, 2009 and 2008 was $10.4 million and $28.1 million, respectively, and the related tax benefit realized from the exercise of the stock options was $6.1 million and $22.3 million, respectively.

 

Information with respect to stock option activity is as follows:

 

		Shares (in thousands)			Weighted Average Exercise Price			Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2008		9,218			$	13.34		5.7
Granted		1,057				25.57
Exercised		(1,075	)			9.67
Forfeited		(12	)			22.10
Outstanding at September 30, 2009		9,188			$	15.17		5.7		$	121,314
Exercisable at September 30, 2009		7,640			$	12.83		5.0		$	117,211
Vested and expected to vest at September 30, 2009		9,111			$	15.07		5.7		$	121,109

Information with respect to restricted stock unit activity is as follows:

 

		Shares (in thousands)			Weighted Average Grant Date Fair Value
Outstanding at December 31, 2008		1,356			$	23.98
Granted		660			$	25.37
Vested		(755	)		$	19.50
Forfeited		(22	)		$	26.04
Outstanding at September 30, 2009		1,239			$	27.42

There were approximately 135,000 shares issued under the 1999 Employee Stock Purchase Plan (the “1999 ESPP”) during the nine months ended September 30, 2009. The 1999 ESPP expired for new offerings in January 2009. On May 1, 2009, the Company’s shareholders approved the FLIR Systems, Inc. 2009 Employee Stock Purchase Plan (the “2009 ESPP”). The first offering period under the 2009 ESPP commenced on May 4, 2009. The Company has reserved 5,000,000 shares of common stock for issuance under the 2009 ESPP.

 

Note 11: Stock-Based Compensation

We sponsor a stock-based compensation plan and have granted awards primarily in the form of nonvested stock awards (also known as restricted stock in the plan document). We recognize compensation expense for awards under the plan and the corresponding income tax benefits related to the expense. Stock-based compensation expense for nonvested stock awards was $7.2 million and $7.7 million for the three months ended September 30, 2009 and 2008, respectively, and $23.9 million and $21.0 million for the nine months ended September 30, 2009 and 2008, respectively.

In the nine months ended September 30, 2009, we granted the following restricted stock awards to employees:

 

(Number of restricted stock shares in thousands)		Shares			Weighted- average grant date fair value
Time-based		435
Performance-based		195	*
Market-based		98	*
Granted during the nine months ended September 30, 2009		728			$	27.51

 

*	Assumes target payout

We granted time-based restricted stock awards that cliff vest after three years. The fair value of these time-based awards was determined using the market value of our common stock on the grant date. We also granted restricted stock awards with performance-based and market-based conditions. The vesting period for these awards is three years. Compensation cost is recognized over the lesser of the stated vesting period or the period until the employee reaches age 62, the retirement-eligible age under the plan.

For current-year performance-based awards, actual payouts may vary from zero to 391 thousand shares and will be dependent upon our performance relative to a peer group of companies with respect to earnings growth and return on investment for the year ending December 31, 2009. Compensation cost is measured based on the current expected outcome of the performance conditions and may be adjusted until the performance period ends.

For current-year market-based awards, actual payouts may vary from zero to 196 thousand shares, contingent upon our performance relative to the same peer group of companies with respect to total shareholder return (“TSR”) and whether the TSR is positive or negative for the year ending December 31, 2009. Compensation cost for these awards is calculated using the grant date fair market value, as estimated using a Monte Carlo simulation, and is not subject to change based on future events.

 

Note 12. Stockholders’ Equity

The following table presents the weighted-average assumptions used to estimate the fair values of the stock options granted (excluding options granted in connection with the Exchange, see below) in the periods presented:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2008				2009				2008				2009
		(unaudited)
Risk-free interest rate			3.3	%			2.8	%			3.2	%			2.6	%
Expected volatility			35	%			35	%			35	%			37	%
Expected life (in years)			5.3				5.8				5.3				5.8
Dividend yield			—				—				—				—
Weighted-average estimated fair value of options granted during the period		$	196.86			$	168.23			$	205.27			$	160.05

The following table summarizes the activities for our options for the nine months ended September 30, 2009:

 

		Options Outstanding
		Number of Shares			Weighted- Average Exercise Price			Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in millions) (1)
		(unaudited)
Balance at December 31, 2008		13,971,438			$	391.40
Options granted (2)		9,240,669			$	323.69
Exercised		(1,149,380	)		$	142.37
Canceled/forfeited (2)		(8,356,919	)		$	510.31
Balance at September 30, 2009		13,705,808			$	294.54		6.7		$	2,771.3
Vested and exercisable as of September 30, 2009		5,765,879			$	249.49		5.8		$	1,417.5
Vested and exercisable as of September 30, 2009 and expected to vest thereafter (3)		12,966,292			$	292.74		6.7		$	2,644.3

 

 

(1)	The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the closing stock price of $495.85 of our Class A common stock on September 30, 2009.

(2)	The number of options granted and canceled/forfeited includes options granted and canceled in connection with the Exchange (see below).

(3)	Options expected to vest reflect an estimated forfeiture rate.

The following table summarizes additional information regarding outstanding, exercisable, and exercisable and vested stock options at September 30, 2009:

 

Options Outstanding									Options Exercisable					Options Exercisable and Vested
Range of Exercise Prices		Number of Shares		Weighted- Average Remaining Life (Years)		Weighted- Average Exercise Price			Number of Shares		Weighted- Average Exercise Price			Number of Shares		Weighted- Average Exercise Price
(unaudited)
$0.30–$94.80		738,923		4.1		$	21.71		712,064		$	20.45		660,273		$	21.48
$117.84–$198.41		1,318,970		3.6		$	177.38		1,318,124		$	177.37		1,318,124		$	177.37
$205.96–$298.91		1,207,938		4.5		$	274.96		1,185,360		$	274.69		1,185,360		$	274.69
$300.97–$399.00		8,894,394		7.5		$	309.98		2,228,126		$	311.28		2,228,126		$	311.28
$401.78–$499.07		1,255,861		8.8		$	437.42		157,397		$	439.96		157,397		$	439.96
$500.00–$594.05		285,798		3.7		$	532.10		214,065		$	528.02		214,065		$	528.02
$615.95–$699.35		3,844		5.5		$	649.12		2,499		$	647.79		2,499		$	647.79
$707.00–$732.94		80		8.2		$	710.84		35		$	710.84		35		$	710.84
$0.30–$732.94		13,705,808		6.7		$	294.54		5,817,670		$	249.49		5,765,879		$	249.49

The above tables include 1.5 million warrants held by selected financial institutions that were options purchased from employees under our Transferable Stock Option (TSO) program.

The total grant date fair value of stock options vested during the three and nine months ended September 30, 2009 was $280.5 million and $423.1 million. The total grant date fair value of stock options vested during the three and nine months ended September 30, 2008 was $141.2 million and $461.2 million. The aggregate intrinsic value of all options and warrants exercised during the three and nine months ended September 30, 2009 was $72.6 million and $283.9 million. The aggregate intrinsic value of all options exercised during the three and nine months ended September 30, 2008 was $64.4 million and $424.2 million. These amounts do not include the aggregate sales price of options sold under our TSO program.

During the nine months ended September 30, 2009, the number of shares underlying TSOs sold to selected financial institutions under the TSO program was 488,249 at a total value of $79.1 million, or an average of $161.95 per share, including an average premium of $33.78 per share. The premium is calculated as the difference between (a) the sale price of the TSO and (b) the intrinsic value of the TSO, which we define as the excess, if any, of the price of our Class A common stock at the time of the sale over the exercise price of the TSO. At September 30, 2009, the number of options eligible for participation under the TSO program was approximately 11 million.

In March 2009, we completed an offer to exchange certain employee stock options issued under Google’s 2004 Stock Plan (the Exchange). Certain previously granted options were exchanged for new options with a lower exercise price granted on a one-for-one basis. Options for an aggregate of approximately 7.6 million shares of Google’s Class A common stock were exchanged. Options granted pursuant to the Exchange have an exercise price of $308.57 per share, the closing price of Google’s Class A common stock as reported by The Nasdaq Global Select Market on March 6, 2009. Options granted pursuant to the Exchange have a new vesting schedule determined by adding 12 months to each vesting date under the exchanged options’ original vesting schedule. In addition, new options will vest no sooner than six months after the date of the Exchange. The Exchange resulted in a modification charge of approximately $360 million which is being recognized over the vesting periods of the new options. These vesting periods range from six months to five years. We recorded approximately $36 million and $89 million of the modification charge in the three and nine months ended September 30, 2009.

As of September 30, 2009, there was $1,202.8 million of unrecognized compensation cost related to outstanding employee stock options. This amount is expected to be recognized over a weighted-average period of 3.3 years. To the extent the actual forfeiture rate is different from what we have anticipated, stock-based compensation related to these awards will be different from our expectations.

 

The following table summarizes the activities for our unvested restricted stock units and restricted shares for the nine months ended September 30, 2009:

 

		Unvested Restricted Stock Units and Restricted Shares
		Number of Shares			Weighted- Average Grant-Date Fair Value
		(unaudited)
Unvested at December 31, 2008		3,268,089			$	514.56
Granted		2,111,843			$	409.90
Vested		(1,035,069	)		$	484.41
Canceled		(285,855	)		$	468.48
Unvested at September 30, 2009		4,059,008			$	471.40
Expected to vest after September 30, 2009 (1)		3,678,273			$	471.40

 

(1)	Restricted stock units and restricted shares expected to vest reflect an estimated forfeiture rate.

As of September 30, 2009, there was $1,566.3 million of unrecognized compensation cost related to employee unvested restricted stock units and restricted shares. This amount is expected to be recognized over a weighted-average period of 2.9 years. To the extent the actual forfeiture rate is different from what we have anticipated, stock-based compensation related to these awards will be different from our expectations.