NOTE 7. COMMON STOCK

Share Repurchases

We repurchased 1.5 million, 3.0 million and 1.0 million shares of our common stock during fiscal years 2012, 2011 and 2010 for $42.4 million, $110.0 million and $34.5 million, respectively, in the open market. In May 2011, our Board of Directors approved an expansion of our share repurchase authorization by 3.0 million shares. Share repurchases may be made through the open market or private transactions. As of September 30, 2012 a cumulative total of 28.2 million shares had been repurchased by us at market trading prices, leaving 0.5 million shares remaining for purchase under the Board's authorization. The Board's approval has no expiration date and currently there are no plans to terminate this program in the future.

Stock-Based Compensation

We have stock-based compensation plans under which employees and non-employee directors may be granted options to purchase shares of Company common stock at the fair market value at the time of grant. In addition to stock options, we grant performance-based stock options, performance share units ("PSUs") and RSUs to certain management level employees and vested deferred stock to non-employee directors. We also offer eligible employees the opportunity to buy shares of our common stock at a discount via an Employee Stock Purchase Plan ("ESPP"). The ESPP was approved by our shareholders in fiscal 2009 and did not have a significant impact on our financial statements in any fiscal year.

Our primary stock-based compensation program is the Stock Incentive Plan, which has been approved by our shareholders. Under the Stock Incentive Plan, we have a total of 15.3 million authorized shares. At September 30, 2012, 5.5 million shares were available for future grants under our stock-based compensation plans. We generally settle our stock-based awards with treasury shares. As of September 30, 2012, we had 19.5 million treasury shares available for use to settle stock-based awards.

The following table sets forth a summary of the annual stock-based compensation cost that was charged against income for all types of awards:

	Years Ended September 30
	2012			2011			2010

Total stock-based compensation cost (pre-tax)	$	11.6		$	12.2		$	12.0
Total income tax benefit		(4.2	)		(4.5	)		(4.4	)
Total stock-based compensation cost, net of tax	$	7.4		$	7.7		$	7.6

Stock Options

Stock options granted by our Compensation Committee under the Stock Incentive Plan are non-qualified stock options. These awards are generally granted with exercise prices equal to the average of the high and low prices of our common stock on the date of grant. They vest in equal annual installments over a three or four year period and the maximum contractual term is ten years. We use a Binomial option-pricing model to estimate the fair value of stock options, and compensation cost is recognized on a straight-line basis over the requisite service period.

The following table sets forth the weighted average fair value per share of stock options and the related valuation assumptions used in the determination of those fair values, excluding performance-based stock options:

	Years Ended September 30
	2012		2011		2010
Weighted average fair value per share	$	9.79	$	12.31	$	7.86

Valuation assumptions:
Risk-free interest rate		1.0%		1.2%		2.4%
Expected dividend yield		1.4%		1.1%		1.7%
Expected volatility		41.2%		37.3%		37.2%
Weighted average expected life		4.8 years		5.3 years		5.6 years

The risk-free interest rate is based upon observed U.S. Treasury interest rates appropriate for the term of our employee stock options. Expected dividend yield is based on the history and our expectation of dividend payouts. Expected volatility for options was based on the median volatility of our Peer Group. Expected life represents the weighted average period the stock options are expected to remain outstanding and is a derived output of the Binomial model. The expected life of employee stock options is impacted by the above assumptions as well as the post-vesting forfeiture rate and the exercise factor used in the Binomial model. These two variables are based on the history of exercises and forfeitures for previous stock options granted by us and Hillenbrand Industries, Inc., our predecessor.

The following table summarizes transactions under our stock option plans, excluding performance-based stock options, for fiscal year 2012:

	Weighted					Weighted
	Average			Weighted		Average	Aggregate
	Number of			Average		Remaining	Intrinsic
	Shares			Exercise		Contractual	Value (1)
	(in thousands)			Price		Term	(in millions)

Balance Outstanding at October 1, 2011		1,704		$	30.05
Granted		825			30.65
Exercised		(144	)		24.00
Cancelled/Forfeited		(282	)		32.28
Balance Outstanding at September 30, 2012		2,103		$	30.41	7.4 years	$	3.9
Exercisable at September 30, 2012		731		$	28.60	5.4 years	$	2.1
Options Expected to Vest		1,184		$	31.26	8.4 years	$	1.7

(1)

The aggregate intrinsic value represents the total pre-tax intrinsic value, based on our closing stock price of $29.06, as reported by the New York Stock Exchange on September 30, 2012. This amount, which changes continuously based on the fair value of our common stock, would have been received by the option holders had all option holders exercised their options as of the balance sheet date.

The total intrinsic value of options exercised during fiscal years 2012, 2011 and 2010 was $1.3 million, $23.3 million and $3.9 million.

As of September 30, 2012, there was $9.4 million of unrecognized compensation expense related to stock options granted under the Plan. This unrecognized compensation expense does not reflect a reduction for our estimate of potential forfeitures, and is expected to be recognized over a weighted average period of 2.3 years.

Performance-Based Stock Options

Our Compensation Committee sometimes grants performance-based stock options to a limited number of our executives. These awards are consistent with our compensation program's guiding principles and are designed to align management's interests with those of shareholders. Option prices and the term of such awards are similar to our stock options; however, vesting of the performance grants is contingent upon the achievement of performance targets and corresponding service requirements. Performance targets are set at the date of grant with a threshold, target and maximum level. The number of options that ultimately vests increases at each level of performance attained. Expense recognized to date related to performance-based stock options has not been significant.

The fair values of the performance options are estimated on the date of the grant using the Binomial option-pricing model and related valuation assumptions for stock options, as previously discussed. For certain performance awards with a market condition such as total shareholder return, as described below, a Monte-Carlo simulation method is used to determine fair value. The Monte-Carlo simulation is a generally accepted statistical technique used to generate a defined number of stock price paths in order to develop a reasonable estimate of the range of our and the Peer Group's future expected stock prices and minimizes standard error.

As of September 30, 2012, the total number of performance-based stock options granted and outstanding is approximately 0.2 million shares. There is no unrecognized compensation expense related to performance-based stock options as of September 30, 2012 as the performance period concluded as of September 30, 2011.

The basis for the assumptions listed above is similar to the valuation assumptions used for non-performance-based stock options, as discussed previously.

The following table summarizes our stock option activity related to performance-based stock options for fiscal year 2012.

	Weighted					Weighted
	Average			Weighted		Average	Aggregate
	Number of			Average		Remaining	Intrinsic
	Shares			Exercise		Contractual	Value (1)
	(in thousands)			Price		Term	(in millions)

Balance Outstanding at October 1, 2011		524		$	19.39
Granted		-			-
Exercised		(217	)		19.39
Cancelled/Forfeited		(131	)		19.39
Balance Outstanding at September 30, 2012		176		$	19.39	3.7 years	$	1.7

(1) The aggregate intrinsic value represents the total pre-tax intrinsic value, based on our closing stock price of $29.06 as reported by the New York Stock Exchange on September 30, 2012. This amount, which changes continuously based on the fair value of our common stock, would have been received by the option holders had all option holders exercised their options as of the balance sheet date.

Restricted Stock Units

RSUs are granted to certain employees with fair values equal to the average of the high and low prices of our common stock on the date of grant, multiplied by the number of units granted. RSU grants are contingent upon continued employment and vest over periods ranging from one to five years. Dividends, payable in common stock equivalents, accrue on the grants and are subject to the same specified terms as the original grants, including the risk of forfeiture.

The following table summarizes transactions for our nonvested RSUs for fiscal year 2012:

				Weighted
	Number of			Average
	Share Units			Grant Date
	(in thousands)			Fair Value

Nonvested RSUs at October 1, 2011		406		$	29.03
Granted		108			30.76
Vested		(139	)		26.77
Forfeited		(68	)		30.45
Nonvested RSUs at September 30, 2012		307		$	30.38

As of September 30, 2012, there was $5.3 million of total unrecognized compensation expense related to nonvested RSUs granted under the Stock Incentive Plan. This unrecognized compensation expense does not reflect a reduction for our estimate of potential forfeitures, and is expected to be recognized over a weighted average period of 2 years. The total vest date fair value of shares that vested during fiscal years 2012, 2011 and 2010 was $6.8 million, $15.9 million and $7.3 million.

Performance Share Units

Our Compensation Committee grants PSUs to certain employees and these awards are subject to any stock dividends, stock splits, and other similar rights inuring to common stock, but unlike our RSUs are not entitled to dividend reinvestment. Vesting of the grants is contingent upon achievement of performance targets and corresponding service requirements.

The fair value of the PSUs is equal to the average of the high and low prices of our common stock on the date of grant, multiplied by the number of units granted. For PSUs with a market condition such as total shareholder return, the Monte-Carlo simulation method is used to determine fair value. The following table sets forth the weighted average fair value per share for total shareholder return PSUs and the related valuation assumptions used in the determination of those fair values:

	Years Ended September 30
	2012		2011
Weighted average fair value per share	$	23.26	$	31.13

Valuation assumptions:
Risk-free interest rate		0.4%		0.8%
Expected dividend yield		0.0%		1.1%
Expected volatility		35.6%		39.8 - 41.7%

The basis for the assumptions listed above is similar to the valuation assumptions used for stock options, as discussed previously.

The following table summarizes transactions for our nonvested PSUs for fiscal 2012:

				Weighted
	Number of			Average
	Share Units			Grant Date
	(in thousands)			Fair Value

Nonvested PSUs as of October 1, 2011		242		$	22.52
Granted		265			23.26
Vested		(36	)		13.20
Forfeited		(79	)		21.30
Nonvested PSUs at September 30, 2012		392		$	25.40

As of September 30, 2012, there was $6.1 million of unrecognized compensation expense related to PSUs granted under the Stock Incentive Plan based on the expected achievement of certain performance targets or market conditions. This unrecognized compensation expense does not reflect a reduction for our estimate of potential forfeitures, and is expected to be recognized by the end of fiscal 2014.