Stock-Based Compensation

The Company records compensation expense for all stock-based awards based on the estimated fair value of the award at the grant date, which is recognized over the vesting period. The Company recorded stock-based compensation expense of $5 million and $4 million ($3 million and $2 million, net of tax) during the three months ended June 30, 2013 and 2012, respectively, and $9 million and $8 million ($6 million and $5 million, net of tax), during the six months ended June 30, 2013 and 2012, respectively, related to stock-based awards that were granted by the Company.

The Company applies the direct method and tax law ordering approach to calculate the tax effects of stock-based compensation. In jurisdictions with net operating loss carryforwards, tax deductions for exercises of stock options and vesting of restricted stock units in 2013 and 2012 did not generate a cash benefit. Approximately $12 million of incremental tax benefits will be recorded in additional paid-in capital when realized in these jurisdictions.

During the six months ended June 30, 2013, the Company granted the following stock-based awards under the Amended and Restated 2007 Equity and Incentive Plan:


•	25,000 time-based restricted cash units (“RCUs”) and 87,000 market-vesting restricted cash units (“MCUs”); and


•	635,000 time-based restricted stock units (“RSUs”), 395,000 performance-based restricted stock units (“PSUs”), and 87,000 market-vesting restricted stock units (“MSUs”).

Restricted Cash Unit Awards

The terms of the RCUs generally provide for vesting on the second anniversary of the grant date, subject to continued employment, and for settlement on the third anniversary of the grant date. The fair value of the RCUs was based on the Company’s stock price of $21.20 on the grant date.

The terms of the MCUs generally provide for vesting of all or a portion of such units on the third anniversary of the grant date, subject to the attainment of performance goals based on total shareholder return over the vesting period in comparison to a specified market index (“TSR”). On the grant date, these units had a fair market value of $17.14, which was calculated using a Monte Carlo simulation model, based on the expected cash payout.

The amount payable in respect of the RCUs and MCUs will be based on the Company’s average closing stock price over a specified number of trading days at the time of settlement. At June 30, 2013, the Company had 268,000 time-based and market-vesting restricted cash units outstanding with a weighted average contractual life of 1.9 years.

Restricted Stock Unit Awards

The terms of substantially all of the RSUs provide for vesting ratably on the first three anniversaries of the grant date, subject to continued employment. The weighted-average fair value of the RSUs of $21.73 was based on the Company’s closing stock price on the date of grant.

The terms of the PSUs generally provide for vesting of a substantial majority of such units (or a portion thereof) on the third anniversary of the grant date, subject to attainment of certain performance goals based on Adjusted EBITDA, subject to certain further adjustments, with full vesting permitted on such anniversary if goals based on TSR are also achieved.

The terms of the MSUs generally provide for vesting of all or a portion of such units on the third anniversary of the grant date, subject to the attainment of performance goals based on TSR.

The Company determined the weighted-average fair value of performance-based and market-vesting restricted stock units granted in the six months ended June 30, 2013 and 2012 using a Monte Carlo simulation model. The weighted-average fair value of the PSUs and MSUs granted in the six months ended June 30, 2013, was estimated to be $20.64 and $17.14, respectively. The weighted-average fair value of the Company’s market-vesting restricted stock units issued in the six months ended June 30, 2012 was estimated to be $10.59. The assumptions used to estimate the weighted-average fair value of the performance-based and market-vesting awards issued during the six months ended June 30, 2013 and the market-vesting awards issued in the six months ended June 30, 2012 were as follows:



	Six Months Ended June 30,
	2013	2012
Expected volatility of stock price	43%	49%
Risk-free interest rate	0.39%	0.38% - 0.42%
Expected term of awards	3 years	3 years
Dividend yield	0.0%	0.0%

The activity related to the Company’s time-based, performance-based and market-vesting restricted stock units (collectively, solely for purposes of the table below, “RSUs”), and stock options consisted of:



		RSUs				Options
		Number of RSUs (in 000s)		Weighted Average Fair Value		Number of Options (in 000s)		Weighted Average Exercise Price
Balance at January 1, 2013		3,497		$	13.64	1,901		$	2.89
	Granted at fair market value	1,117		20.99		—		—
	Vested/exercised ^(a)	(1,104	)	12.72		(717	)	3.45
	Canceled	(47	)	14.12		(3	)	27.40
Balance at June 30, 2013 ^(b) (c)		3,463		$	16.30	1,181		$	2.49

__________


^(a)	During the six months ended June 30, 2013, 436,000 market-vesting restricted stock units vested. Stock options exercised during the six months ended June 30, 2013 had an intrinsic value of $17 million.

^(b)

As of June 30, 2013, the Company’s outstanding RSUs had an aggregate intrinsic value of $100 million; aggregate unrecognized compensation expense related to RSUs amounted to $37 million; and the balance of RSUs at June 30, 2013, consists of 1,374,000 related to time-based awards and 2,089,000 related to market-vesting and performance-based awards. Approximately 9,000 time-based restricted stock units and 3,000 market-vesting restricted stock units are eligible to vest in 2013, if applicable service criteria are satisfied.


^(c)	As of June 30, 2013, the Company’s outstanding stock options had aggregate intrinsic value of $31 million; there were 1,172,000 “in-the-money” stock options; and aggregate unrecognized compensation expense related to unvested stock options was immaterial. 1,117,000 stock options are exercisable as of June 30, 2013.

The table below summarizes information regarding the Company’s outstanding stock options as of June 30, 2013 (in thousands of shares):



Range of Exercise Prices	Weighted Average Contractual Life (years)	Number of Options
Less than $5.00	5.6	1,012
$5.01 to $10.00	0	—
$10.01 to $15.00	6.6	160
$15.01 to $20.00	0	—
$20.01 and above	1.3	9
Total	5.7	1,181

As of June 30, 2013, all of the stock appreciation rights outstanding at December 31, 2012 had been exercised.