Employee Stock-Based Compensation

9 Months Ended

Sep. 28, 2012

Employee Stock-Based Compensation

18.    Employee Stock-Based Compensation

During the year-to-date period ended September 28, 2012, the Company granted stock-based compensation under the Amended and Restated 2008 Long Term Performance Plan (2008 LTPP) in the form of stock options, restricted stock units and performance units.

Engility Spin-off Adjustments. As a result of the spin-off of Engility, effective July 17, 2012, all outstanding stock-based compensation awards related to current and former Engility employees were assumed by and transferred to Engility. The share amounts for outstanding stock options, restricted stock units and performance units that remained with L-3, and the strike price for such stock options were adjusted to maintain their aggregate intrinsic value at the date of the spin-off pursuant to the terms of the Company’s 2008 LTPP and resulted in no charge to the statement of operations. The conversion ratio for stock options, restricted stock units and performance units that remained with L-3 was 1.04.

Stock Options. The Company granted 811,193 stock options with an exercise price equal to the closing price of L-3 Holdings common stock on the date of grant. The options expire after 10 years from the date of grant and vest ratably over a three-year period on the annual anniversary of the date of grant. The options granted to our Chairman, President and Chief Executive Officer are also subject to performance-based vesting conditions. The weighted average grant date fair value for the options awarded was $11.12 per option and was estimated using the Black-Scholes option-pricing model. The weighted average assumptions used in the valuation model for this grant are presented in the table below.

Expected holding period (in years)	5.3
Expected volatility	26.5	%
Expected dividend yield	3.5	%
Risk-free interest rate	1.0	%

Restricted Stock Units. The Company granted 715,866 restricted stock units with a weighted average grant date fair value of $67.48 per share. Restricted stock units automatically convert into shares of L-3 Holdings common stock upon vesting, and are subject to forfeiture until certain restrictions have lapsed, including a three year cliff vesting period for employees and a one year cliff vesting period for non-employee directors, in each case starting on the date of grant.

Performance Units. The Company granted 66,756 performance units with a weighted average grant date fair value per unit of $67.49. The final payout for these units is based on the achievement of pre-determined EPS goals established by the compensation committee of the Company’s Board of Directors for the three-year period ending December 31, 2014. The payout can range from zero to 200% of the original number of units awarded, which are converted into shares of L-3 Holdings common stock based on the then existing closing price at the end of the performance period.