Stock-Based Compensation

The Company’s shareholder-approved stock-based incentive compensation plans provide for the granting of awards in the form of stock options, deferred stock, restricted stock or stock appreciation rights (“SARs”). The awards may be subject to the achievement of certain performance goals, generally based on market conditions, as determined by the Plan Committee designated by the Company’s Board of Directors. Shares awarded under the plans are issued from the Company’s treasury shares. As of December 31, 2012, 1.6 million shares are available for future awards under the Company’s 2006 stock-based incentive compensation plan. There have been no awards of SARs or deferred stock.

Stock-based compensation expense was as follows:



	2012		2011		2010
Stock options	$	5	$	5	$	5
Restricted stock	12		12		14

Stock Options

A summary of stock option activity follows:



			2012
	Shares			Weighted average exercise price
Options outstanding at January 1	3,786,419			$	19.12
Granted	—			—
Exercised	(1,140,255	)		13.59
Forfeited	(82,900	)		25.15
Expired	(7,150	)		21.89
Options outstanding at December 31	2,556,114			21.38
Options fully vested or expected to vest at December 31	2,543,874			$	21.31

The following table summarizes outstanding and exercisable options at December 31, 2012:



Options Outstanding					Options Exercisable
Range of exercise prices	Number outstanding	Weighted average remaining contractual life in years	Weighted average exercise price		Number exercisable	Weighted average exercise price
$8.60 to $8.75	453,568	1.3	$	8.61	453,568	$	8.61
$13.20 to $23.19	26,500	3.5	18.18		22,500	17.29
$23.45	1,936,046	4.0	23.45		1,441,846	23.45
$23.88 to $40.01	140,000	7.3	34.73		34,000	25.17
	2,556,114	3.7	21.38		1,951,914	19.96

Outstanding stock options have a contractual term of ten years, are fixed-price and non-qualified. Options granted in 2007 or later vest over six years at 20% per year with initial vesting on the second anniversary of the grant.

Options outstanding at December 31, 2012 had an aggregate intrinsic value (which is the amount by which the stock price exceeded the exercise price of the options as of December 31, 2012) of $40. The aggregate intrinsic value of options exercised during the years ended December 31, 2012, 2011 and 2010 was $27, $15 and $24, respectively. Cash received from exercise of stock options during 2012 was $15.

At December 31, 2012, shares that were fully vested or expected to vest had an aggregate intrinsic value of $40 and a weighted average remaining contractual term of 3.7 years, and shares exercisable had an aggregate intrinsic value of $33 and a weighted average remaining contractual term of 3.4 years. Also at December 31, 2012, there was $2 of unrecognized compensation expense related to outstanding nonvested stock options with a weighted average recognition period of 0.8 years.

Stock options are valued at their grant date fair value using the Black-Scholes option pricing model. Valuations incorporate several variables, including expected term, expected volatility, and a risk-free interest rate. The expected term (which is the timeframe over which an award is exercised after grant) is derived from historical data about participant exercise and post-vesting employment termination patterns. Volatility is the expected fluctuation of the Company’s stock price in the market and is derived from a combination of historical data about the Company’s stock price and implied volatilities based on market data. The risk-free interest rate is the U.S. Treasury yield curve rate in effect at the date of the grant which has a contractual life similar to the option’s expected term.

There were no stock option grants in 2012. The fair values of stock option grants during 2011 and 2010 were estimated using the following weighted average assumptions:



	2011		2010
Risk-free interest rate	2.4	%	2.6	%
Expected life of option (years)	6.8		6.0
Expected stock price volatility	31.7	%	33.2	%
Expected dividend yield	—	%	—	%

The weighted average grant-date fair values for options granted during 2011 and 2010 were $14.98 and $10.14, respectively. The Company has assumed an annual forfeiture rate of between three and five percent in each year based on historical data of the forfeiture of nonvested share-based awards through the termination of service by plan participants.

Restricted Stock

Each year the Company awards shares to certain senior executives in the form of time-vested restricted stock and performance-based shares. The restricted stock vests ratably over three years on the anniversary date of the award. The performance-based shares cliff vest at the end of three years on the anniversary date of the award. The number of performance-based shares that will ultimately vest is based on the level of performance achieved, ranging between 0% and 200% of the shares originally awarded and will be settled in shares of common stock. The market performance criteria is the Company’s Total Shareholder Return (“TSR”), which includes share price appreciation and dividends paid, during the three-year term of the award measured against the TSR of a peer group of companies. Participants who terminate employment because of retirement, disability or death receive accelerated vesting of their time-vested awards to the date of termination. However, performance-based awards, for such participants, will not be issued until the original vesting date.

A summary of restricted stock activity follows:



	Number of shares
Non-vested shares outstanding at January 1, 2012	997,497
Awarded:
Time-vesting	126,582
Performance-based	216,188
Performance-based – achieved 149% level (grant-date fair value of $33.98)	125,552
Released:
Time-vesting shares awarded in 2009 through 2011	(185,848	)
Performance-based shares awarded in 2009	(256,229	)
Performance-based awards – achieved 149% level	(125,552	)
Non-vested shares outstanding at December 31, 2012	898,190

The average grant-date fair value of restricted stock awarded in 2012, 2011 and 2010 follows:



	2012		2011		2010
Time-vested restricted stock	$	33.75	$	33.70	$	26.80
Performance-based shares	$	39.52	$	41.69	$	36.25

The fair values of the performance-based shares awarded were calculated using a Monte Carlo valuation model and the following weighted average assumptions:



	2012		2011		2010
Risk-free interest rate	0.4	%	1.0	%	1.4	%
Expected term (years)	3		3		3
Expected stock price volatility	27.8	%	37.9	%	38.8	%

During 2012, the Company issued 125,552 additional performance-based shares under its 2009 award because it exceeded the target level (100%) of performance-based shares, established on the original date of the related award, by 49%. These shares were issued without restriction.

At December 31, 2012, unrecognized compensation cost related to outstanding restricted stock was $6. The weighted average period over which the expense is expected to be recognized is 1.2 years. The aggregate market value of the shares released and issued on the vesting dates was $19.

The Company maintains a Stock-Based Compensation Plan for Non-Employee Directors. Under the plan a portion of the non-employee directors' quarterly compensation is provided in the form of restricted stock. During 2012, $1 of stock-based compensation was recognized under this plan.