NOTE 8—STOCK-BASED COMPENSATION

Equity instruments are measured at fair value on the grant date. Stock-based compensation expense is generally recognized on a straight-line basis over the requisite service periods of the awards. Compensation expense is based on awards we expect to ultimately vest. Therefore, we have reduced compensation expense for estimated forfeitures based on our historical forfeiture rates. Our estimate of forfeitures is determined at the grant date and is revised if our actual forfeiture rate is materially different from our estimate.

Total compensation expense recognized for the years ended December 31, 2012, 2011 and 2010 was as follows:


	December 31,
	2012		2011		2010
	(In thousands)
Stock options	$	3,984	$	3,845	$	1,724
Restricted stock awards and units		6,880		11,939		11,920
Performance and deferred stock units		4,505		2,041		2,814

Total	$	15,369	$	17,825	$	16,458

As of December 31, 2012, total unrecognized estimated compensation expense related to nonvested awards was $24.5 million. The components of the total gross unrecognized estimated compensation expense and their expected remaining weighted-average periods for expense recognition are as follows (amounts in millions; periods in years):


	Amount		Weighted- Average Period
Stock options	$	5.5		1.8
Restricted stock awards	$	9.4		2.1
Performance shares	$	9.6		1.8

Stock Plans

2009 McDermott International, Inc. Long-Term Incentive Plan

In May 2009, our shareholders approved the 2009 LTIP. Members of the Board of Directors, executive officers and key employees are eligible to participate in the plan. The Compensation Committee of the Board of Directors selects the participants for the plan. The plan provides for a number of forms of stock-based compensation, including incentive and non-qualified stock options, restricted stock, restricted stock units and performance shares and performance units, subject to satisfaction of specific performance goals. Shares approved under the 2001 Directors and Officers Long-Term Incentive Plan (the “2001 LTIP”) that were not awarded as of the date of approval of the 2009 LTIP, or shares that are subject to awards that are cancelled, terminated, forfeited, expired or settled in cash in lieu of shares, are available for issuance under the 2009 LTIP. As part of the approval of the 2009 LTIP, 9,000,000 shares were authorized for issuance. Options to purchase shares are granted at the fair market value (closing trading price) on the date of grant, become exercisable at such time or times as determined when granted and expire not more than seven years after the date of grant.

2001 Directors and Officers Long-Term Incentive Plan

We no longer issue awards under the 2001 LTIP. Members of the Board of Directors, executive officers, key employees and consultants were eligible to participate in the 2001 LTIP. The Compensation Committee of the Board of Directors selected the participants for the plan. The plan provided for a number of forms of stock-based compensation, including incentive and nonqualified stock options, stock appreciation rights, restricted stock, deferred stock units, performance shares and performance units, subject to satisfaction of specific performance goals. Options to purchase shares were granted at not less than 100% of the fair market value (average of the high and low trading price) on the date of grant, became exercisable at such time or times as determined when granted and expire not more than seven years after the date of the grant. Options granted prior to May 2009 expire not more than ten years after the date of the grant. Shares of common stock available to be awarded under the 2001 LTIP are available under the terms of the 2009 LTIP and have been included in the amount available for grant discussed above.

Thrift Plan

On November 12, 1991, 15,000,000 of the authorized and unissued shares of common stock were reserved for issuance for the employer match to the Thrift Plan. On October 11, 2002, an additional 15,000,000 of the authorized and unissued shares of common stock were reserved for issuance for the employer match to the Thrift Plan. Those employer matching contributions equal 50% of the first 6% of compensation, as defined in the Thrift Plan, contributed by participants, and fully vest and are nonforfeitable after three years of service or upon retirement, death, involuntary termination of employment due to reduction in force or approved disability. During the year ended December 31, 2010, we issued 282,022 shares of common stock as employer matching contributions pursuant to the Thrift Plan. Effective June 2010, we began making employer matching contributions in cash, in lieu of shares of common stock. Accordingly, there were no shares issued under the Thrift Plan during the years ended December 31, 2012 and 2011.

B&W Spin-off Changes

In connection with the spin-off of B&W, we made certain adjustments to our stock-based compensation awards. For our employees who held performance shares issued in or prior to May 2009, we cancelled the performance shares and issued restricted stock units in an amount equal to the fair value of the shares held immediately prior to the spin-off. For holders of restricted stock units granted in or prior to May 2010, the holder received additional units of restricted stock to maintain the total fair value of restricted stock held immediately prior to the spin-off. For stock options granted in or prior to May 2010, we adjusted the number of options held by each holder so that the intrinsic value of the stock options held immediately following the spin-off equaled the intrinsic value of the stock options held immediately prior to the spin-off. The adjustments to stock-based compensation awards were treated as a modification and resulted in total incremental compensation cost of $14.5 million, of which approximately $5.2 million and $9.3 million was recognized in the years ended December 31, 2011 and 2010, respectively.

In the event of a change in control of our company, all of these stock-based compensation programs have provisions that may cause restrictions to lapse with respect to restricted stock units and accelerate the exercisability of outstanding options.

Stock Options

The fair value of each option grant was estimated with the following weighted-average assumptions:


	Year Ended December 31,
	2012			2011			2010
Risk-free interest rate		0.77	%		2.26	%		2.12	%
Expected volatility		59	%		41	%		54	%
Expected life of the option in years		4.60			4.60			4.64
Expected dividend yield		0.0	%		0.0	%		0.0	%

The risk-free interest rate is based on the implied yield on a U.S. Treasury zero-coupon issue with a remaining term equal to the expected life of the option. The expected volatility is based on implied volatility from publicly traded options on our common stock, historical volatility of the price of our common stock and other factors. The expected life of the option is based on observed historical patterns. The expected dividend yield is zero based on the projected annual dividend payment. This amount is zero because we have not paid cash dividends historically and do not expect to pay cash dividends for the foreseeable future, although management continues to review and may elect to change this practice.

The following table summarizes activity for our stock options for the year ended December 31, 2012 (share data in thousands):


	Number of Option Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value (in millions)
Outstanding at beginning of period		2,263		$	10.96
Granted		760			14.33
Exercised		(215	)		4.42
Cancelled/expired/forfeited		(80	)		16.90

Outstanding at end of period⁽¹⁾		2,728		$	12.24		4.2 Years	$	5.4

Exercisable at end of period		1,581		$	9.19		1.9 Years	$	5.4

(1)

Of the remaining shares subject to outstanding options, we expect approximately 1.1 million shares to vest at a weighted-average exercise price of $16.45.

The aggregate intrinsic value included in the table above represents the total intrinsic value that would have been received by the option holders had all option holders exercised their options on December 31, 2012. The intrinsic value is calculated as the total number of option shares multiplied by the excess of the closing price of our common stock on the last trading day over the exercise price of the options. This amount changes based on the fair market value of our common stock.

During the years ended December 31, 2012, 2011 and 2010, the total intrinsic value of stock options exercised was $1.9 million, $8.4 million, and $4.0 million, respectively. We recorded cash received in the years ended December 31, 2012, 2011 and 2010 from the exercise of these stock options totaling $1.4 million, $4.8 million and $5.4 million, respectively. The weighted-average fair value of the stock options granted in the years ended December 31, 2012, 2011 and 2010 was $6.93, $9.53 and $25.39, respectively. The total fair value of shares vested during the years ended December 31, 2012, 2011 and 2010 was $3.6 million, $3.2 million and $1.6 million, respectively.

There were no tax benefits realized related to stock options exercised during the years ended December 31, 2012 and 2011. There were $0.8 million of actual tax benefits realized related to the stock options exercised during the year ended December 31, 2010.

Restricted Stock Awards and Units

Nonvested restricted stock awards and changes during the year ended December 31, 2012 were as follows (share data in thousands):


	Number of Shares			Weighted- Average Grant Date Fair Value
Nonvested at beginning of period		1,038		$	13.02
Granted		764			13.16
Vested		(811	)		11.00
Cancelled/forfeited		(73	)		14.99

Nonvested at end of period		918		$	14.80

There were no tax benefits realized related to restricted stock and restricted stock units lapsed during the years ended December 31, 2012 and 2011. The actual tax benefit realized related to the restricted stock and restricted stock units lapsed during the year ended December 31, 2010 was $1.6 million.

Performance Shares

Nonvested performance share awards and changes during the year ended December 31, 2012 were as follows (share data in thousands):


	Number of Shares			Weighted- Average Grant Date Fair Value
Nonvested at beginning of period		188		$	41.96
Granted		371			22.92
Vested		—			—
Cancelled/forfeited		(31	)		32.58

Nonvested at end of period		528		$	29.19