Share-Based Compensation

6 Months Ended

Jun. 30, 2011

Note 18 — Share-Based Compensation

Share-based compensation expense consists of:


	Second Quarter					First Six Months
	2011			2010		2011		2010
				(In thousands)
Cash-settled awards	$	(1,488	)	$	640	$	681	$	2,765
Equity-settled awards		262			—		411		—
Restricted stock		607			912		1,270		1,615
Stock options		471			467		1,590		1,173

	$	(148	)	$	2,019	$	3,952	$	5,553

Share-based compensation expense is included in:


	Second Quarter					First Six Months
	2011			2010		2011		2010
				(In thousands)
General and administrative expense	$	(232	)	$	1,080	$	1,823	$	2,118
Other operating expense		84			939		2,129		3,435

	$	(148	)	$	2,019	$	3,952	$	5,553

In second quarter and first six months 2011, the decrease in share-based compensation expense is primarily due to the impact of stock price changes on vested cash-settled awards.

The fair value of awards granted to retirement eligible employees and expensed at the date of grant was $654,000 in first six months 2011 and $286,000 in first six months 2010. Unrecognized share-based compensation expense related to non-vested equity-settled awards, restricted stock and stock options is $9,519,000 at second quarter-end 2011. The weighted average period over which this amount will be recognized is estimated to be two years. We did not capitalize any share-based compensation in first six months 2011 or 2010.

In first six months 2011, we withheld 64,437 shares having a value of $1,216,000 in connection with vesting of restricted stock awards and exercises of stock options. In first six months 2010, we withheld 2,601 shares having a value of $49,000 in connection with vesting of restricted stock awards and exercises of stock options. These shares are included in treasury stock and are reflected in financing activities in our consolidated statement of cash flows.

A summary of the awards granted under our 2007 Stock Incentive Plan follows:

Cash-settled awards

Cash-settled awards granted to our employees in the form of restricted stock units or stock appreciation rights generally vest over three to four years from the date of grant and generally provide for accelerated vesting upon death, disability or if there is a change in control. Vesting for some restricted stock unit awards is also conditioned upon achievement of a minimum one percent annualized return on assets over a three-year period. Cash-settled stock appreciation rights have a ten-year term, generally become exercisable ratably over three to four years and provide for accelerated or continued vesting upon retirement, death, disability or if there is a change in control. Stock appreciation rights were granted with an exercise price equal to the market value of our stock on the date of grant.

Cash-settled awards granted to our directors in the form of restricted stock units are fully vested at the time of grant and payable upon retirement.

The following table summarizes the activity of cash-settled restricted stock unit awards in first six months 2011:


				Weighted
	Equivalent			Average Grant
	Units			Date Fair Value
	(In thousands)			(Per unit)
Non-vested at beginning of period		376		$	11.88
Granted		146			17.49
Vested		(64	)		16.02
Forfeited		—			—

Non-vested at end of period		458		$	13.10

The following table summarizes the activity of cash-settled stock appreciation rights in first six months 2011:


						Weighted		Aggregate
						Average		Intrinsic Value
				Weighted		Remaining		(Current
	Rights			Average		Contractual		Value Less
	Outstanding			Exercise Price		Term		Exercise Price)
	(In thousands)			(Per share)		(In years)		(In thousands)
Balance at beginning of period		909		$	11.28		8	$	7,289
Granted		—			—
Exercised		(12	)		9.29
Forfeited		—			—

Balance at end of period		897		$	11.30		8	$	4,888

Exercisable at end of period		380		$	10.48		8	$	2,333

The fair value of awards settled in cash was $184,000 in first six months 2011 and $731,000 in first six months 2010. At second quarter-end 2011, the fair value of vested cash-settled awards is $14,296,000 and is included in other liabilities. The aggregate current value of non-vested cash-settled awards is $10,082,000 at second quarter-end 2011 based on a quarter-end stock price of $16.43.

Equity-settled awards

Equity-settled awards granted to our employees include restricted stock units (RSU), which vest ratably over three years from the date of grant, and beginning first quarter 2011, market-leveraged stock units (MSU), which vest after three years. The following table summarizes the activity of equity-settled awards in first six months 2011:


			Weighted
	Equivalent		Average Grant
	Units		Date Fair Value
	(In thousands)		(Per share)
Non-vested at beginning of period		—	$	—
Granted		160		20.73
Vested		—		—
Forfeited		—		—

Non-vested at end of period		160	$	20.73

In first quarter 2011, we granted 124,700 MSU awards. These awards will be settled in common stock based upon our stock price performance over three years from the date of grant. The number of shares to be issued could range from a high of 187,050 shares if our stock price increases by 50 percent or more, to a low of 62,350 shares if our stock price decreases by 50 percent, or could be zero if our stock price decreases by more than 50 percent, the minimum threshold performance. MSU awards are valued using a Monte Carlo simulation pricing model, which includes expected stock price volatility and risk-free interest rate assumptions. Compensation expense is recognized regardless of achievement of performance conditions, provided the requisite service period is satisfied.

Unrecognized share-based compensation expense related to non-vested equity-settled awards is $2,745,000 at second quarter-end 2011. The weighted average period over which this amount will be recognized is estimated to be three years.

Restricted stock

Restricted stock awards vest either ratably over or after three years, generally if we achieve a minimum one percent annualized return on assets over such three-year period. The following table summarizes the activity of restricted stock awards in first six months 2011:


				Weighted
	Restricted			Average Grant
	Shares			Date Fair Value
	(In thousands)			(Per share)
Non-vested at beginning of period		636		$	17.56
Granted		—			—
Vested		(199	)		24.77
Forfeited		—			—

Non-vested at end of period		437		$	14.27

Unrecognized share-based compensation expense related to non-vested restricted stock awards is $3,204,000 at second quarter-end 2011. The weighted average period over which this amount will be recognized is estimated to be two years.

Stock options

Stock options have a ten-year term, generally become exercisable ratably over three to four years and provide for accelerated or continued vesting upon retirement, death, disability or if there is a change in control. Options were granted with an exercise price equal to the market value of our stock on the date of grant. The following table summarizes the activity of stock option awards in first six months 2011:


					Weighted		Aggregate
					Average		Intrinsic Value
			Weighted		Remaining		(Current
	Options		Average		Contractual		Value Less
	Outstanding		Exercise Price		Term		Exercise Price)
	(In thousands)		(Per share)		(In years)		(In thousands)
Balance at beginning of period		957	$	23.45		8	$	1,890
Granted		327		18.59
Exercised		—		—
Forfeited		—		—

Balance at end of period		1,284	$	22.22		8	$	1,154

Exercisable at end of period		642	$	25.61		7	$	577

We estimate the fair value of stock options using the Black-Scholes option pricing model and the following assumptions:


	First Six Months
	2011			2010
Expected dividend yield		0.0	%		0.0	%
Expected stock price volatility		56.2	%		51.0	%
Risk-free interest rate		2.4	%		2.3	%
Expected life of options (years)		6			6
Weighted average estimated fair value of options granted	$	10.11		$	8.98

We have limited historical experience as a stand-alone company so we utilized alternative methods in determining our valuation assumptions. The expected life was based on the simplified method utilizing the midpoint between the vesting period and the contractual life of the awards. In 2011, the expected stock price volatility was based on a blended rate utilizing our historical volatility and historical prices of our peers’ common stock for a period corresponding to the expected life of the options. In 2010, the expected stock price volatility was based on historical prices of our peers’ common stock for a period corresponding to the expected life of the options. Pre-vesting forfeitures are estimated based upon the pool of participants and their expected activity and historical trends.

Unrecognized share-based compensation expense related to non-vested stock options is $3,570,000 at second quarter-end 2011. The weighted average period over which this amount will be recognized is estimated to be three years.

Pre-Spin Awards

Certain of our employees participated in Temple-Inland’s share-based compensation plans. In conjunction with the 2007 spin-off, these awards were equitably adjusted into separate awards of the common stock of Temple-Inland and the spin-off entities.

Stock options have a ten-year term, generally become exercisable ratably over four years and provide for accelerated or continued vesting upon retirement, death, disability or if there is a change in control. A summary of stock option awards outstanding at second quarter-end 2011 follows:

Weighted

Aggregate

Average

Intrinsic Value

Weighted

Remaining

(Current

Options

Average

Contractual

Value Less

Outstanding

Exercise Price

Term

Exercise Price)

(In thousands)

(Per share)

(In years)

(In thousands)

Outstanding and exercisable on Forestar stock

22.08

114

Outstanding and exercisable on Temple-Inland stock

145

21.30

1,224

1,338

The intrinsic value of options exercised was $337,000 in first six months 2011 and $553,000 in first six months 2010.