Note I – Stock-Based Compensation

Stock-Based Compensation Plans

Under our employee and non-employee director stock-based compensation plans, we may grant incentive or non-qualified stock options, restricted common shares and performance shares to employees and non-qualified stock options and restricted common shares to non-employee directors. We classify share-based compensation expense within SG&A expense to correspond with the same financial statement caption as the majority of the cash compensation paid to employees. A total of 23,249,000 of our common shares have been authorized for issuance in connection with the stock-based compensation plans in place at May 31, 2012.

We recognized pre-tax stock-based compensation expense for stock options and restricted share awards of $11,742,000 ($7,871,000 after-tax), $6,173,000 ($4,163,000 after-tax) and $4,570,000 ($2,826,000 after-tax) during fiscal 2012, fiscal 2011 and fiscal 2010, respectively. At May 31, 2012, the total unrecognized compensation cost related to non-vested awards was $21,044,000, which will be expensed over the next four fiscal years.

Stock options may be granted to purchase common shares at not less than 100% of fair market value on the date of the grant. All outstanding stock options are non-qualified stock options. The exercise price of all stock options granted has been set at 100% of the fair market value of the underlying common shares on the date of grant. Generally, stock options granted to employees vest and become exercisable at the rate of (i) 20% per year for options issued before June 30, 2011, and (ii) 33% per year for options issued on or after June 30, 2011, in each case beginning one year from the date of grant and expire ten years after the date of grant. Non-qualified stock options granted to non-employee directors vest and become exercisable on the earlier of (a) the first anniversary of the date of grant or (b) the date on which the next annual meeting of shareholders is held following the date of grant for any stock option granted as of the date of an annual meeting of shareholders of Worthington Industries, Inc. Stock options can be exercised through net-settlement, at the election of the option holder.

In addition to stock options, we have awarded performance shares to certain key employees that are contingent (i.e., vest) upon achieving corporate targets for cumulative corporate economic value added, earnings per share growth and, in the case of business unit executives, business unit operating income targets for the three-year periods ending May 31, 2012, 2013 and 2014. These performance share awards will be paid, to the extent earned, in common shares of Worthington Industries, Inc. in the fiscal quarter following the end of the applicable three-year performance period.

We have also awarded restricted shares to certain employees and non-employee directors. These restricted shares are valued at the closing market price of common shares of Worthington Industries, Inc. on the date of the grant. Service-based restricted shares vest under the same parameters as the stock options discussed above. Vesting of market-based restricted shares is contingent upon our common shares reaching a specific price per share for a specific period of time as discussed more fully below,

Non-Qualified Stock Options

U.S. GAAP requires that all share-based awards, including grants of stock options, be recorded as expense in the statement of earnings based on their grant-date fair value. We calculate the fair value of our non-qualified stock options using the Black-Scholes option pricing model and certain assumptions. The computation of fair values for all stock options incorporates the following assumptions: expected volatility (based on the historical volatility of our common shares); risk-free interest rate (based on the United States Treasury strip rate for the expected term of the stock options); expected term (based on historical exercise experience); dividend yield (based on annualized current dividends and an average quoted price of our common shares over the preceding annual period).

The table below sets forth the non-qualified stock options granted during each of the last three fiscal years ended May 31. For each grant, the exercise price was equal to the closing market price of the underlying common shares at each respective grant date. The fair values of these stock options were based on the Black-Scholes option-pricing model, calculated at the respective grant dates. The calculated pre-tax stock-based compensation expense for these stock options, which is after an estimate of forfeitures, will be recognized on a straight-line basis over the respective vesting periods of the stock options.


(in thousands, except per share amounts)	2012		2011		2010
Granted		600		2,437		993
Weighted average exercise price, per share	$	21.15	$	12.27	$	13.36
Weighted average grant date fair value, per share	$	7.42	$	4.88	$	4.85
Pre-tax stock-based compensation	$	4,456	$	9,715	$	3,968

The weighted average fair value of stock options granted in fiscal 2012, fiscal 2011 and fiscal 2010 was based on the Black-Scholes option pricing model with the following weighted average assumptions:


	2012			2011			2010
Assumptions used:
Dividend yield		2.70	%		2.80	%		3.10	%
Expected volatility		51.70	%		53.80	%		47.90	%
Risk-free interest rate		1.90	%		2.10	%		2.90	%
Expected life (years)		6.0			6.0			6.0

The following tables summarize our stock option activity for the years ended May 31:


	2012					2011					2010
(in thousands, except per share)	Stock Options			Weighted Average Exercise Price		Stock Options			Weighted Average Exercise Price		Stock Options			Weighted Average Exercise Price
Outstanding, beginning of year		7,852		$	16.29		6,172		$	17.67		5,750		$	18.16
Granted		600			21.15		2,437			12.27		993			13.36
Exercised		(675	)		16.87		(422	)		12.96		(227	)		12.75
Expired		-			-		-			-		-			-
Forfeited		(266	)		15.55		(335	)		16.00		(344	)		16.69

Outstanding, end of year		7,511			16.65		7,852			16.29		6,172			17.67

Exercisable at end of year		4,404			17.72		3,917			18.24		3,631			17.79


	Number of Stock Options (in thousands)		Weighted Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value (in thousands)
May 31, 2012
Outstanding		7,511		5.53	$	11,786
Exercisable		4,404		4.12		3,381

May 31, 2011
Outstanding		7,852		6.30	$	43,876
Exercisable		3,917		4.27		14,312

May 31, 2010
Outstanding		6,172		5.89	$	2,671
Exercisable		3,631		4.41		1,268

During fiscal 2012, the total intrinsic value of stock options exercised was $3,220,000. The total amount of cash received from the exercise of stock options was $11,116,000 during fiscal 2012, and the related excess tax benefit realized from the exercise of these stock options was $578,000.

The following table summarizes information about non-vested stock option awards for the year ended May 31, 2012:


	Number of Stock Options (in thousands)			Weighted Average Grant Date Fair Value Per Share
Non-vested, beginning of year		3,935		$	5.14
Granted		600			7.50
Vested		(1,160	)		5.29
Forfeited		(268	)		5.36

Non-vested, end of year		3,107		$	5.52

Service-Based Restricted Common Shares

The table below sets forth the restricted common shares we granted during each of the last three fiscal years ended May 31. The fair values of these restricted common shares were equal to the closing market prices of the underlying common shares at their respective grant dates. The calculated pre-tax stock-based compensation expense for these restricted common shares will be recognized on a straight-line basis over their respective vesting periods.


	2012		2011		2010
Granted		514,974		26,100		21,750
Weighted average grant date fair value, per share	$	14.57	$	15.33	$	13.90
Pre-tax stock-based compensation (in thousands)	$	7,501	$	400	$	302

Market-Based Restricted Common Shares

During the first quarter of fiscal 2012, we granted 370,000 restricted common shares to certain key employees under our stock-based compensation plans. Vesting of these restricted common share awards is contingent upon the price of our common shares reaching $30.00 per share and remaining at or above that price for 30 consecutive days. The grant-date fair value of these restricted common shares, as determined by a Monte Carlo simulation model, was $19.53 per share. The Monte Carlo simulation model is a statistical technique that incorporates multiple assumptions to determine the probability that the market condition will be achieved. The following assumptions were used to determine the grant-date fair value and the derived service period for these restricted common shares:


Dividend yield	2.3	%
Expected volatility	52.6	%
Risk-free interest rate	1.8	%

The calculated pre-tax stock-based compensation expense for these restricted common shares was determined to be $7,226,000 and the derived service period was determined to be 0.81 years.

On September 14, 2011, the award agreements for these restricted common shares were amended to include a three-year service-based vesting condition in addition to the market-based vesting condition established in the original agreements. The amended awards were accounted for as a modification of the original awards in accordance with the applicable accounting guidance. No incremental compensation expense was recognized in connection with the modification, as the fair value of the modified awards did not exceed the fair value of the original awards. Accordingly, the remaining unrecognized compensation expense of the original awards as of the modification date, or $5,739,000, will be recorded on a straight-line basis over the modified service period, or approximately three years.