Share-Based and Long-Term Incentive Compensation

9 Months Ended

Oct. 01, 2011

Share-Based and Long-Term Incentive Compensation [Abstract]

Share-Based and Long-Term Incentive Compensation

Note 5 - Share-Based and Long-Term Incentive Compensation

We have shareholder approved share-based compensation plans that permit awards to key employees and non-employee directors in the form of cash-settled restricted or performance stock units, stock-settled restricted stock units, or options to purchase shares of our common stock.  We also have long-term incentives for key employees in the form of fixed value awards that vest over multiple years.  We generally grant awards annually in February, and we use treasury stock to fulfill awards settled in common stock and stock option exercises.

Share-based and long-term incentive compensation expense consists of:

		Third Quarter				First Nine Months
		2011		2010		2011		2010
		(In millions)
Cash-settled restricted or performance stock units	$	9	$	3	$	40	$	10
Stock-settled restricted stock units		1		0		3		1
Stock options		1		1		5		5
Total share-based compensation expense		11		4		48		16
Fixed value cash awards		1		2		3		4
Total share-based and long-term incentive compensation expense	$	12	$	6	$	51	$	20

Share-based and long-term incentive compensation expense is included in:

		Third Quarter				First Nine Months
		2011		2010		2011		2010
		(In millions)
Cost of sales	$	2	$	0	$	5	$	2
Selling expense		0		0		1		1
General and administrative expense		10		6		45		17
Total share-based and long-term incentive compensation expense	$	12	$	6	$	51	$	20

The fair value of awards granted to retirement-eligible employees and expensed at the date of grant was $4 million in first nine months 2011 and $3 million in first nine months 2010.

Unrecognized share-based and long-term incentive compensation for all awards not vested was $37 million at third quarter-end 2011.  We expect to recognize this cost over a weighted average period of two years or upon completion of the merger.

The fair value of all share-based and long-term incentive awards vested and to be settled in cash, including accrued dividends of $2 million, was $90 million at third quarter-end 2011, of which $52 million is included in other current liabilities and $38 million in long-term liabilities, and $64 million at year-end 2010, of which $14 million is included in other current liabilities and $50 million in long-term liabilities.

Cash-settled restricted or performance stock units

Cash-settled restricted or performance stock units generally have a three-year term and vest after three years from the date of grant or the attainment of stated ROI-based performance goals, generally measured over a three-year period, or if there is a change of control, such as the merger.  Changes in our estimate of the attainment of stated performance goals could have a significant impact on our share-based compensation expense in any one accounting period.

A summary of activity for first nine months 2011 follows:

	Cash-Settled Units			Weighted Average Grant Date Fair Value Per Share		Aggregate Current Value
	(In thousands)					(In millions)
Not vested beginning of year	2,627		$	12
Granted	447			24
Vested and settled	(651	)		19
Forfeited	(6	)		17
Not vested at third quarter-end 2011	2,417			12	$	76
Not vested units at third quarter-end 2011 subject  to:
Time vesting requirements	439				$	14
Performance requirements	1,978					62
	2,417				$	76

Unrecognized share-based compensation expense related to non-vested cash-settled restricted or performance stock units was $18 million at third quarter-end 2011 share price of $31 per share.  We expect to recognize this cost over a weighted average period of two years or upon completion of the merger.  The fair value of awards settled in cash was $17 million in first nine months 2011 and $17 million in first nine months 2010.  The fair value of units vested and to be settled in cash, including accrued dividends of $2 million in 2011 and $1 million in 2010, was $57 million at third quarter-end 2011, of which $41 million is included in other current liabilities and $16 million in long-term liabilities; and $40 million at year-end 2010, of which $14 million was included in other current liabilities and $26 million in long-term liabilities.  In addition, approximately one-half of our annual director compensation is paid in the form of cash-settled restricted stock units that are deferred until retirement.  The fair value of these units vested and to be settled in cash included in long-term liabilities was $20 million at third quarter-end 2011 and $14 million at year-end 2010.

Stock-settled restricted stock units

Stock-settled restricted stock units vest after three years from the date of grant upon attainment of stated ROI-based performance goals or if there is a change of control, such as the merger.  There is no accelerated vesting upon retirement for these awards.

A summary of activity for first nine months 2011 follows:

	Stock-Settled Units		Weighted Average Grant Date Fair Value Per Share		Aggregate Current Value
	(In thousands)				(In millions)
Not vested beginning of year	369	$	20	$
Granted	241		24
Vested and settled	0		0
Forfeited	0		0
Not vested at third quarter-end 2011	610	$	21	$	19

Unrecognized share-based compensation expense related to non-vested stock-settled restricted stock units was $8 million at third quarter-end 2011.  We expect to recognize this cost over a weighted average period of two years or upon completion of the merger.

Stock options

Stock options have a ten-year term, generally become exercisable ratably over four years and provide for accelerated vesting upon retirement, death, disability, or if there is a change in control, such as the merger.  Options are granted with an option price equal to the market value of common stock on the date of grant.

A summary of activity for first nine months 2011 follows:

	Shares			Weighted Average Exercise Price Per Share	Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value (Current value less exercise price)
	(In thousands)				(In years)		(In millions)
Outstanding beginning of year	7,416		$	15
Granted	431			24
Exercised	(1,840	)		16
Forfeited	(37	)		16
Outstanding at third quarter-end 2011	5,970			16	6	$	92
Exercisable at third quarter-end 2011	4,024			17	5	$	60

We estimated the fair value of our options using the Black-Scholes-Merton option-pricing model and the following assumptions:

		First Nine Months
		2011			2010
Expected dividend yield		2.2	%		3.2	%
Expected stock price volatility		65.0	%		66.6	%
Risk-free interest rate		3.3	%		3.2	%
Expected life of options (in years)		8			8
Weighted average estimated fair value of options at grant date	$	13.40		$	10.23

Unrecognized share-based compensation expense related to non-vested stock options awards was $6 million at third quarter-end 2011.  We expect to recognize this cost over a weighted average period of three years or upon completion of the merger.

Fixed Value Cash Awards

Long-term incentive compensation expense is related to $18 million of fixed value cash awards that were granted to employees in February and August 2009.  These awards are not tied to our stock price.  The fixed value cash awards generally vest over periods from three to six years and provide for accelerated or continued vesting upon retirement, death, disability, or if there is a change of control, such as the merger.

Unrecognized long-term incentive compensation expense related to fixed value cash awards was $5 million at third quarter-end 2011.  We expect to recognize this cost over a weighted average period of three years or upon completion of the merger.  Accrued long-term incentive compensation at third quarter-end 2011 was $13 million, of which $11 million is included in other current liabilities and $2 million in long-term liabilities.  At year-end 2010, accrued long-term incentive compensation included in long-term liabilities was $10 million.