Stock-based compensation

The Company provides benefits to its employees in the form of stock-based payments, such as grants of stock options and restricted stock units, whereby employees render service in exchange for shares or rights to shares. The maximum number of shares available for issuance under the currently effective plan is 9.1 million, subject to certain limitations. At December 31, 2011, 4.4 million shares were available for issuance. The Compensation Committee of ACI’s Board of Directors (the “Compensation Committee”) administers the Company’s stock incentive plans and has broad discretion to establish the terms of stock awards, including, without limitation, the power to set the term (up to 10 years), vesting schedule and exercise price of stock options.

For the years ended December 31, 2011, 2010 and 2009, total stock-based compensation expense was $24.3 million, $14.3 million and $12.9 million, respectively. As of December 31, 2011, there was approximately $27.1 million of total unrecognized compensation cost related to unvested stock-based compensation arrangements granted under the Company’s stock incentive plans. This unrecognized compensation cost is expected to be recognized over a weighted-average period of 2.8 years.

In October 2011, the Compensation Committee approved certain modifications to awards outstanding under the stock incentive plans. The approved modifications included extending the lives of certain previously-granted stock option awards and providing for post-retirement vesting of certain stock options and restricted stock units to qualifying individuals. The Company recognized $7.3 million in non-cash stock-based compensation expense relating to these modifications in the fourth quarter of 2011.

In November 2011, the Compensation Committee granted certain members of senior management a total of 1.2 million market performance-based stock options that consist of three tranches. Provided that certain service requirements are satisfied, these tranches vest and become exercisable, if at all, on the earlier of (i) the date on which ACI’s common stock reaches certain market prices (as specified in the performance-based stock option award agreements) or (ii) the date on which a secondary vesting condition is met. The secondary vesting condition will be satisfied if the Company’s Total Shareholder Return (as defined in the award agreements) for the period from the date of grant through December 31, 2018 is greater than zero and is higher than the Total Shareholder Return of each of the specified peer companies.

The fair value of the performance-based stock option grants was approximately $5.2 million, with a weighted-average value of $4.55 per share. The annual amortization expense related to these options is estimated to be approximately $1.3 million, with approximately $0.1 million recognized in the fourth quarter of 2011.

Stock options

Stock options are valued at the date of award, which does not precede the approval date, and compensation cost is recognized on a straight-line basis, net of estimated forfeitures, over the requisite service period. The outstanding time-vested stock options generally vest over four years and have 10-year contractual terms.

Summary information for all stock option activity under the Company’s plans is as follows:



	Years Ended December 31,
	2011				2010				2009
	Options		Weighted- Average Exercise Price		Options		Weighted- Average Exercise Price		Options		Weighted- Average Exercise Price
	(Amounts in thousands)				(Amounts in thousands)				(Amounts in thousands)
Outstanding at beginning of year	4,850		$	20.46	5,090		$	20.40	5,271		$	20.37
Granted	1,761		19.12		664		15.70		690		18.02
Exercised	(523	)	13.88		(265	)	8.43		(274	)	7.80
Forfeited or expired	(196	)	23.33		(639	)	20.32		(597	)	23.13
Outstanding at end of year	5,892		$	20.55	4,850		$	20.46	5,090		$	20.40
Options exercisable at end of year	3,328		$	22.34	3,286		$	21.59	3,309		$	20.31

The aggregate intrinsic value of options exercised during the years ended December 31, 2011, 2010 and 2009 was $3.7 million, $2.5 million and $2.4 million, respectively. The aggregate intrinsic value of options outstanding was $5.5 million, $4.4 million and $6.1 million at December 31, 2011, 2010 and 2009, respectively. The aggregate intrinsic value of options exercisable at December 31, 2011, 2010 and 2009 was $4.1 million, $3.4 million and $4.6 million, respectively. The aggregate intrinsic value represents the total pre-tax intrinsic value that would have been realized by the option holders had all option holders exercised their options on the applicable date. The intrinsic value of a stock option is the excess of the Company’s closing stock price on that date over the exercise price, multiplied by the number of in-the-money options.

At December 31, 2011, the weighted-average remaining contractual life for stock options outstanding and stock options exercisable was 6.3 years and 4.2 years, respectively.

During the years ended December 31, 2011, 2010 and 2009, the amount of cash received by the Company from the exercise of stock options was $7.3 million, $2.2 million and $2.1 million, respectively.

The fair value of each time-vested option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model, while the fair value of market performance-based stock options is calculated using the Monte Carlo simulation model. Expected volatility is based on historical volatility trends as well as implied future volatility observations as determined by independent third parties. In determining the expected life of the option grants, the Company uses historical data to estimate option exercise and employee termination behavior. The expected life represents an estimate of the time options are expected to remain outstanding. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. treasury yield in effect at the time of grant. The following table sets forth fair value per share information, including related assumptions, used to determine compensation cost for the Company’s non-qualified stock options consistent with the requirements of ASC Topic 718.



	Years Ended December 31,
	2011			2010			2009
Weighted-average fair value per share of options granted during the year	$	5.57		$	5.73		$	7.28
Weighted-average assumptions:
Expected stock price volatility	51.6		%	51.5		%	57.8		%
Risk-free interest rate	1.4		%	1.5		%	2.3		%
Expected option life (years)	6.2			4.6			4.5
Expected annual dividend yield	2.2		%	2.4		%	2.6		%

The following table summarizes the Company’s unvested stock option activity for the year ended December 31, 2011:



	Shares		Weighted- Average Exercise Price (per Share)
	(Amounts in thousands)
Unvested at January 1, 2011	1,564		$	18.08
Granted	1,761		19.12
Vested	(720	)	20.67
Forfeited	(40	)	18.84
Unvested at December 31, 2011	2,565		$	18.23

Restricted stock units

For each of the three years ended December 31, 2011, 2010 and 2009, the Company granted restricted stock units in addition to stock options. The value of the restricted stock units at the date of grant is amortized through expense over the requisite service period using the straight-line method. The requisite service period for the restricted stock units that were granted is generally four years. The Company uses historical data to estimate employee forfeitures, which are compared to actual forfeitures on a quarterly basis and adjusted if necessary.

The following table summarizes the Company’s unvested restricted stock unit activity for the year ended December 31, 2011:



	Units		Weighted- Average Grant Date Fair Value (per Unit)
	(Amounts in thousands)
Unvested at January 1, 2011	1,698		$	16.61
Granted	624		22.00
Vested	(601	)	16.56
Forfeited	(43	)	17.84
Unvested at December 31, 2011	1,678		$	18.60