Stock-Based Compensation

Stock compensation expense consisted of the following:



	Years Ended December 31,
	2011		2010		2009
	(In millions)
Stock-based compensation	$	7.5	$	6.9	$	7.5

We have stock-based compensation awards outstanding under five plans (collectively, the Stock Plans). We have stock options outstanding under our 1996 Directors Stock Compensation Program (Directors Plan). We have stock options and restricted stock outstanding under our 2000 Stock Incentive Plan (2000 Incentive Plan), our 2005 Stock Incentive Plan (2005 Incentive Plan), our 2008 Stock Incentive Plan (2008 Incentive Plan) and our 2011 Stock Incentive Plan (2011 Incentive Plan). We also have restricted stock units outstanding under our 2005 Incentive Plan, our 2008 Incentive Plan and our 2011 Incentive Plan. No further shares are available for grant under the Directors Plan, 2000 Incentive Plan, the 2005 Incentive Plan or the 2008 Incentive Plan. Restricted stock granted and stock option awards exercised are issued from our treasury stock. The purchase of treasury stock is discretionary and will be subject to determination by our Board of Directors each quarter following its review of our financial performance and other factors.

The Directors Plan was approved and adopted by 3M Company, as our sole shareholder, and became effective on July 1, 1996. The outstanding options are non-qualified, normally have a term of ten years and generally became exercisable one year after grant date. Exercise prices are equal to the fair market value of our common stock on the date of grant. As a result of the approval and adoption of the 2005 Incentive Plan in May 2005, no further shares are available for grant under the Directors Plan.

The 2000 Incentive Plan was approved and adopted by our shareholders on May 16, 2000, and became effective immediately. The outstanding options are non-qualified, normally have a term of seven to ten years and generally became exercisable 25 percent per year beginning on the first anniversary of the grant date. Exercise prices are equal to the fair market value of our common stock on the date of grant.

The 2005 Incentive Plan was approved and adopted by our shareholders on May 4, 2005, and became effective immediately. The 2005 Incentive Plan permitted the granting of incentive and non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalents, performance awards and other stock and stock-based awards. The total number of shares of common stock that could have been issued or awarded under the 2005 Incentive Plan was not to exceed 2.5 million, of which the maximum number of shares that could have been awarded pursuant to grants of restricted stock, restricted stock units and stock awards was 1.5 million. The outstanding options are non-qualified and normally have a term of ten years. For employees, the options generally become exercisable 25 percent per year beginning on the first anniversary of the grant date. For directors, the options generally became exercisable in full on the first anniversary of the grant date. Exercise prices for stock options are equal to the fair market value of our common stock on the date of grant. As a result of the approval and adoption of the 2008 Incentive Plan in May 2008, no further shares are available for grant under the 2005 Incentive Plan.

The 2008 Incentive Plan was approved and adopted by our shareholders on May 7, 2008 and became effective immediately. The 2008 Incentive Plan permits grants of stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalents, performance awards, stock awards and other stock-based awards (collectively, Awards). The Board of Directors and Compensation Committee have the authority to determine the type of Awards as well as the amount, terms and conditions of each Award under the 2008 Incentive Plan, subject to the limitations and other provisions of the 2008 Incentive Plan. The total number of shares of common stock that may be issued or granted under the 2008 Incentive Plan may not exceed 4.0 million, of which the maximum number of shares that may be provided pursuant to grants of Awards other than options and stock appreciation rights is 2.0 million. The number of shares available for Awards, as well as the terms of outstanding Awards, is subject to adjustments as provided in the 2008 Incentive Plan for stock splits, stock dividends, recapitalization and other similar events. The outstanding options are non-qualified and normally have a term of ten years. For employees, the options generally become exercisable and restricted stock vests 25 percent per year beginning on the first anniversary of the grant date, subject to the employees continuing service to the Company. For directors, the options generally become exercisable and restricted stock vests in full on the first anniversary of the grant date. Exercise prices for stock options are equal to the fair market value of our common stock on the date of grant. As a result of the approval and adoption of the 2011 Incentive Plan in May 2011, no further shares are available for grant under the 2008 Incentive Plan.

The 2011 Incentive Plan was approved and adopted by our shareholders on May 4, 2011 and became effective immediately. The 2011 Stock Incentive Plan permits the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalents, performance awards, stock awards and other stock-based awards. The aggregate number of shares of our common stock that may be issued under all stock-based awards made under the 2011 Stock Incentive Plan is 4.5 million and the maximum number of shares that may be awarded pursuant to grants of awards other than options and stock appreciation rights is 1.1 million. The number of shares available for awards, as well as the terms of outstanding awards, is subject to adjustments as provided in the 2011 Stock Incentive Plan for stock splits, stock dividends, recapitalization and other similar events. Awards may be granted under the 2011 Stock Incentive Plan until the earlier to occur of May 3, 2021 or the date on which all shares available for awards under the 2011 Stock Incentive Plan have been purchased or acquired; provided, however, that incentive stock options may not be granted after February 10, 2021. As of December 31, 2011, we had stock-based compensation awards consisting of stock options and restricted stock. As of December 31, 2011, there were 3,799,009 shares available for grant under our 2011 Incentive Plan. No further shares were available for grant under any other Stock Plan.

Stock Options

The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. The assumptions used in the valuation model are supported primarily by historical indicators and current market conditions. Volatility was calculated using the historical weekly close rate for a period of time equal to the expected term. The risk-free rate of return was determined by using the U.S. Treasury yield curve in effect at the time of grant. The expected term was calculated on an aggregated basis and estimated based on an analysis of options already exercised and any foreseeable trends or changes in recipients’ behavior. In determining the expected term, we considered the vesting period of the awards, the contractual term of the awards, historical average holding periods, stock price history, impacts from recent restructuring initiatives and the relative weight for each of these factors. The dividend yield was based on the latest dividend payments made on or announced by the date of the grant.

The following table summarizes our weighted average assumptions used in the valuation of options for the years ended December 31:



	2011		2010		2009
Volatility	44	%	43	%	41	%
Risk-free interest rate	2.13	%	2.49	%	2.13	%
Expected life (months)	70		66		65
Dividend yield	—	%	—	%	—	%

The following table summarizes stock option activity:



	Stock Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value
						(millions)
Outstanding December 31, 2008	4,103,756		$	32.09	6.2	$	—
Granted	1,054,599		9.71
Exercised	—		—
Cancelled	(341,850	)	31.25
Forfeited	(221,667	)	28.32
Outstanding December 31, 2009	4,594,838		$	27.19	6.2	$	0.1
Granted	889,089		10.46
Exercised	(1,000	)	8.11
Cancelled	(421,146	)	31.19
Forfeited	(145,693	)	17.97
Outstanding December 31, 2010	4,916,088		$	24.10	5.6	$	0.7
Granted	1,401,163		9.41
Exercised	(45,429	)	10.13
Cancelled	(475,703	)	35.11
Forfeited	(116,540	)	14.34
Outstanding December 31, 2011	5,679,579		$	19.87	6.0	$	—

No performance-based options were granted during the year ended December 31, 2011. Of the options granted during the year ended December 31, 2010, there were 105,397 performance-based options granted based on the Company’s performance against operating income targets for 2010. Operating income (as defined under the 2010 Annual Bonus Plan) exceeded specified levels; therefore, the full grant will vest 25 percent per year over four years from the date of grant.

There was no aggregate intrinsic value at December 31, 2011 as our stock price of $5.73 on December 30, 2011 was below the exercise price of all of the outstanding stock options. Our stock price of $10.31 and $8.72 on December 31, 2010 and December 31, 2009, respectively, resulted in an aggregate intrinsic value of $0.7 million and $0.1 million, respectively. The intrinsic value of options exercised during 2011 and 2010 was less than $0.1 million each year. As no options were exercised during 2009, there was no intrinsic value for exercised options during 2009. The weighted average grant date fair value of options granted during the years 2011, 2010 and 2009 was $4.15, $4.46 and $3.94, respectively.

The following table summarizes outstanding, exercisable options and options expected to vest as of December 31, 2011:



	Exercisable Options				Options Expected to Vest
		Weighted Average Remaining	Weighted Average			Weighted Average Remaining	Weighted Average
Range of Exercise	Stock	Contractual	Exercise		Stock	Contractual	Exercise
Prices	Options	Life (Years)	Price		Options	Life (Years)	Price
$6.17 to $14.15	909,873	6.2	$	9.95	1,910,343	8.8	$	9.67
$14.16 to $19.20	—	—	—		—	—	—
$19.21 to $23.95	104,468	0.7	22.83		3,035	6.6	20.64
$23.96 to $28.70	731,717	4.9	24.37		135,077	6.3	24.62
$28.71 to $39.38	1,180,329	2.8	34.93		—	—	—
$39.39 to $41.75	388,145	3.1	41.34		—	—	—
$41.76 to $46.97	38,000	1.9	44.45		—	—	—
$6.17 to $46.97	3,352,532	4.1	$	26.32	2,048,455	8.7	$	10.67

The outstanding options are non-qualified and generally have a term of ten years. For employees, the options granted prior to May 2011 generally become exercisable and vest 25 percent per year beginning on the first anniversary of the grant date, subject to the employee's continuing service to the Company. Grants during and after May 2011 become exercisable and vest 33 percent per year beginning on the first anniversary of the grant date, subject to the employee's continuing service to the Company. For directors, the options generally become exercisable in full on the first anniversary of the grant date.

Total related stock-based compensation expense recognized in the Consolidated Statements of Operations for the years ended December 31, 2011, 2010 and 2009 was $4.1 million, $3.8 million and $4.9 million, respectively. This expense would result in related tax benefits of $1.3 million, $1.2 million and $1.6 million for the years ended December 31, 2011, 2010 and 2009, respectively. However, these tax benefits are included in the U.S. deferred tax assets which are subject to a full valuation allowance, and due to the valuation allowance, we did not recognize the related tax benefit in 2011 and 2010.

On March 18, 2010, we announced the retirement of our former Vice Chairman and Chief Executive Officer, effective May 5, 2010. In connection with his retirement from the Company, the Board of Directors also determined to accelerate the vesting of his outstanding unvested options and restricted stock. As a result, additional compensation expense of $0.8 million was recognized during the first quarter of 2010. The related tax benefit was $0.3 million for the year ended December 31, 2010. This tax benefit was included in the U.S. deferred tax assets that were subject to the valuation allowance established during 2010.

No related stock-based compensation was capitalized as part of an asset for the years ended December 31, 2011, 2010 or 2009. As of December 31, 2011, there was $7.2 million of total unrecognized compensation expense related to non-vested stock options granted under our Stock Plans. That expense is expected to be recognized over a weighted average period of 2.21 years.

Restricted Stock

The following table summarizes our restricted stock activity:



	Restricted Stock		Weighted Average Grant Date Fair Value Per Share
Nonvested as of December 31, 2008	304,511		$	28.98
Granted	327,654		9.38
Vested	(119,074	)	29.44
Forfeited	(51,389	)	30.04
Nonvested as of December 31, 2009	461,702		$	14.84
Granted	524,655		10.45
Vested	(209,302	)	15.17
Forfeited	(37,859	)	11.15
Nonvested as of December 31, 2010	739,196		$	11.34
Granted	385,049		9.28
Vested	(274,934	)	12.15
Forfeited	(54,265	)	12.05
Nonvested as of December 31, 2011	795,046		$	10.02

There were no performance-based restricted shares granted during the year ended December 31, 2011. Of the restricted shares granted during the year ended December 31, 2010, there were 265,837 performance-based restricted shares granted based on the Company’s performance against operating income targets for 2010. Operating income (as defined under the 2010 Annual Bonus Plan) exceeded specified levels; therefore, the full grant will vest 25 percent per year over four years from the date of grant.

The total fair value of shares vested during the years 2011, 2010 and 2009 was $3.3 million, $3.2 million and $3.5 million, respectively.

Total related stock-based compensation expense recognized in the Consolidated Statements of Operations for the years ended December 31, 2011, 2010 and 2009 was $3.4 million, $3.1 million and $2.6 million, respectively. This expense would result in related tax benefits of $1.3 million, $1.2 and $1.0 million for the years ended December 31, 2011, 2010 and 2009, respectively. However, these tax benefits are included in the U.S. deferred tax assets which are subject to a full valuation allowance and due to the valuation allowance, we did not recognize the related tax benefit in 2011 and 2010.

No related stock-based compensation was capitalized as part of an asset for the years ended December 31, 2011, 2010 or 2009. As of December 31, 2011, there was $5.7 million of total unrecognized compensation expense related to restricted stock granted under our Stock Plans. That expense is expected to be recognized over a weighted average period of 2.2 years.