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Long-Term Incentive Employee Compensation | 12 Months Ended
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Dec. 31, 2011
Long-Term Incentive Employee Compensation [Abstract] |
Long-Term Incentive Employee Compensation | NOTE 18 Long-Term Incentive Employee Compensation NOTE 18 Long-Term Incentive Employee Compensation Our long-term incentive awards program historically has comprised three components: non-qualified stock options (NQOs), restricted shares and units (RS) and a target cash award (TSR). We account for NQOs and RS as equity-based compensation awards. TSR awards are cash settled and accounted for as liability-based compensation. The 2011 Omnibus Incentive Plan (2011 Incentive Plan) was approved by shareholders and established in May of 2011 to provide for the awarding of options on common shares and full value restricted common shares or units to employees and non-employee directors. The number of shares initially available for issuance to participants under the 2011 Incentive Plan was 4.6. The 2011 Incentive Plan replaced the 2003 Incentive Plan on a prospective basis and no future grants will be made under the ITT Amended and Restated 2003 Equity Incentive Plan (2003 Incentive Plan). However, any shares remaining available for issuance under the 2003 Incentive Plan as of the date of 2011 Incentive Plan shareholder approval became available for grant under the 2011 Incentive Plan. In connection with the Distribution, and per the terms of the 2011 Incentive Plan, an equitable adjustment which preserved the intrinsic value of the awards after giving effect to the distribution of Exelis and Xylem was made (referred to as the Equitable Adjustment). As of December 31, 2011, 41.1 shares were available for future grants under the 2011 Incentive Plan. ITT makes shares available for the exercise of stock options or vesting of restricted shares or units by purchasing shares in the open market or by issuing shares from treasury stock. Long-term incentive employee compensation costs are primarily recorded within general and administrative expenses, and are reduced by an estimated forfeiture rate. These costs impacted our consolidated results of operations as follows:
|  | 2011(a) |  | 2010 |  | 2009
Share-based compensation expense, equity-based awards |  |  | $ | 23 |  |  |  | $ | 14 |  |  |  | $ | 16 |
Share-based compensation expense, liability-based awards |  |  |  | 2 |  |  |  |  | (4 | ) |  |  |  | 2 |
Total share-based compensation expense in operating income (loss) |  |  |  | 25 |  |  |  |  | 10 |  |  |  |  | 18 |
Tax benefit |  |  |  | 8 |  |  |  |  | 3 |  |  |  |  | 6 |
Share-based compensation expense, net of tax |  |  | $ | 17 |  |  |  | $ | 7 |  |  |  | $ | 12 |
(a) | Share-based compensation expense incurred during 2011 includes $13 classified as a Transformation cost in the Consolidated Income Statement related to the modification of equity awards.
At December 31, 2011, there was $22 of total unrecognized compensation cost related to non-vested awards. This cost is expected to be recognized ratably over a weighted-average period of 2.44 years. Conversion and Cancellation of Outstanding Equity at Spin Date In connection with the Distribution, ITT modified its outstanding equity awards on October 31, 2011 (the modification date). For equity awards issued through employee compensation arrangements, the awards were generally modified such that, following the Distribution, the employee only held equity in their future employer and the intrinsic value of the awards was preserved through the Equitable Adjustment. Awards held by members of the Board of Directors were modified so that the awardee continued to hold an award in each of the three companies following the Distribution. As a result of the Equitable Adjustment, an option modification expense of $9 was recorded for awards that were fully vested on the modification date, and an addition $1 of incremental fair value will be recorded in future periods as unvested awards vest. A portion of the option modification charge was allocated to discontinued operations for employees who transferred to Exelis or Xylem. Further, subsequent to the Distribution, ITT will only recognize compensation cost for awards that were unvested on the modification date for employees who remained with ITT. Pursuant to the completion of the Distribution on October 31, 2011, 1.2 stock options and 0.5 restricted equity awards held by the employees of Exelis and Xylem were converted to equity awards in the underlying common stock of their respective employer and were cancelled as ITT equity awards. Non-Qualified Stock Options Options generally vest over or at the conclusion of a three-year period and are exercisable in seven or ten-year periods, except in certain instances of death, retirement or disability. Options granted between 2004 and 2009 were awarded with a contractual term of seven years. Options granted prior to 2004 and during 2010 and 2011 were awarded with a contractual term of ten years. The exercise price per share is the fair market value of the underlying common stock on the date each option is granted. A summary of the status of our NQOs as of December 31, 2011, 2010 and 2009 and changes during the years then ended is presented below.
|  | 2011 |  | 2010 |  | 2009
STOCK OPTIONS |  | SHARES |  | WEIGHTED- AVERAGE EXERCISE PRICE |  | SHARES |  | WEIGHTED- AVERAGE EXERCISE PRICE |  | SHARES |  | WEIGHTED- AVERAGE EXERCISE PRICE
Outstanding – January 1 |  |  |  | 3.7 |  |  |  | $ | 85.08 |  |  |  |  | 4.0 |  |  |  | $ | 80.58 |  |  |  |  | 4.1 |  |  |  | $ | 79.66 |
Granted |  |  |  | 0.3 |  |  |  |  | 115.36 |  |  |  |  | 0.4 |  |  |  |  | 106.60 |  |  |  |  | 0.4 |  |  |  |  | 67.18 |
Exercised |  |  |  | (0.7 | ) |  |  |  | 76.27 |  |  |  |  | (0.6 | ) |  |  |  | 62.90 |  |  |  |  | (0.4 | ) |  |  |  | 52.64 |
Cancelled or expired(a) |  |  |  | (1.3 | ) |  |  |  | 92.76 |  |  |  |  | (0.1 | ) |  |  |  | 97.56 |  |  |  |  | (0.1 | ) |  |  |  | 91.88 |
Outstanding on Distribution Date before Equitable Adjustment |  |  |  | 2.0 |  |  |  |  | 88.52 |  |  |  |  | – |  |  |  |  | – |  |  |  |  | – |  |  |  |  | – |
Outstanding on Distribution Date after Equitable Adjustment |  |  |  | 8.0 |  |  |  |  | 16.18 |  |  |  |  | – |  |  |  |  | – |  |  |  |  | – |  |  |  |  | – |
November/December 2011 Activity: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Granted |  |  |  | 0.7 |  |  |  |  | 20.28 |  |  |  |  | – |  |  |  |  | – |  |  |  |  | – |  |  |  |  | – |
Exercised |  |  |  | (0.7 | ) |  |  |  | 13.87 |  |  |  |  | – |  |  |  |  | – |  |  |  |  | – |  |  |  |  | – |
Outstanding – December 31 |  |  |  | 8.0 |  |  |  | $ | 16.70 |  |  |  |  | 3.7 |  |  |  | $ | 85.08 |  |  |  |  | 4.0 |  |  |  | $ | 80.58 |
Options exercisable – December 31 |  |  |  | 6.3 |  |  |  | $ | 16.03 |  |  |  |  | 3.0 |  |  |  | $ | 83.72 |  |  |  |  | 3.2 |  |  |  | $ | 78.98 |
(a) | Includes 1.2 shares cancelled in connection with the Distribution of Exelis and Xylem, with a corresponding weighted average exercise price of $92.20.
The intrinsic value of options exercised (which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise) during 2011, 2010 and 2009 was $30, $22 and $18, respectively. The amount of cash received from the exercise of stock options was $62, $35 and $20 for 2011, 2010 and 2009, respectively. The income tax benefit realized during 2011, 2010 and 2009 associated with stock option exercises and lapses of restricted stock was $17, $14 and $11, respectively. We classify the cash flows attributable to excess tax benefits arising from stock option exercises and restricted stock lapses as a financing activity. Excess tax benefits arising from stock option exercises and restricted stock lapses were $7, $6 and $3 for 2011, 2010 and 2009, respectively. The following table summarizes information about ITT’s stock options at December 31, 2011:
|  | OPTIONS OUTSTANDING |  | OPTIONS EXERCISABLE
RANGE OF EXERCISE PRICES |  | NUMBER |  | WEIGHTED- AVERAGE REMAINING CONTRACTUAL LIFE (IN YEARS) |  | WEIGHTED- AVERAGE EXERCISE PRICE |  | AGGREGATE INTRINSIC VALUE |  | NUMBER |  | WEIGHTED- AVERAGE REMAINING CONTRACTUAL LIFE (IN YEARS) |  | WEIGHTED- AVERAGE EXERCISE PRICE |  | AGGREGATE INTRINSIC VALUE
$5-$10 |  | 0.2 |  | (b) |  | $ 9.46 |  | $ 2 |  | 0.2 |  | (b) |  | $ 9.46 |  | $ 2
$10-$15 |  | 2.9 |  | 2.2 |  | 12.98 |  | 18 |  | 2.6 |  | 1.9 |  | 13.04 |  | 16
$15-$20 |  | 3.3 |  | 1.9 |  | 18.21 |  | 5 |  | 3.0 |  | 1.2 |  | 18.02 |  | 5
$20-$26 |  | 1.6 |  | 7.2 |  | 21.19 |  | – |  | 0.5 |  | 2.2 |  | 22.04 |  | –
|  | 8.0 |  | 3.0 |  | $16.70 |  | $25 |  | 6.3 |  | 1.6 |  | $16.03 |  | $23
(b) | The contractual life of the 0.2 options ended on January 2, 2012.
The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on ITT’s closing stock price of $19.33 as of December 31, 2011, which would have been received by the option holders had all option holders exercised their options as of that date. The number of options “out-of-the-money” as of December 31, 2011, included as exercisable in the preceding table was 1.7. As of December 31, 2011, the total number of stock options expected to vest (including those that have already vested) was 7.9. These stock options have a weighted-average exercise price of $16.65, an aggregate intrinsic value of $25 and a weighted-average remaining contractual life of 2.9 years. The fair value of each option grant was estimated on the date of grant using the binomial lattice pricing model which incorporates multiple and variable assumptions over time, including assumptions such as employee exercise patterns, stock price volatility and changes in dividends. The following are weighted-average assumptions for 2011, 2010 and 2009:
|  | November 7, 2011 Grants |  | 2011 Grants Before Distribution |  | 2010 |  | 2009
Dividend yield |  |  |  | 1.79 | % |  |  |  | 1.73 | % |  |  |  | 1.88 | % |  |  |  | 2.54 | %
Expected volatility |  |  |  | 39.30 | % |  |  |  | 24.74 | % |  |  |  | 27.06 | % |  |  |  | 38.77 | %
Expected life (in years) |  |  |  | 7.0 |  |  |  |  | 7.0 |  |  |  |  | 7.0 |  |  |  |  | 4.7 |
Risk-free rates |  |  |  | 1.51 | % |  |  |  | 3.05 | % |  |  |  | 3.06 | % |  |  |  | 2.20 | %
Weighted-average grant date fair value |  |  | $ | 6.97 |  |  |  | $ | 29.70 |  |  |  | $ | 29.00 |  |  |  | $ | 19.20 |
Expected volatilities for option grants prior to the Distribution were based on ITT’s stock price history, including implied volatilities from traded options on our stock. Expected volatilities for option grants subsequent to the Distribution were based on a peer average of historical and implied volatility. ITT uses historical data to estimate option exercise and employee termination behavior within the valuation model. Employee groups and option characteristics are considered separately for valuation purposes. The expected life represents an estimate of the period of time options are expected to remain outstanding. The expected life provided above represents the weighted average of expected behavior for certain groups of employees who have historically exhibited different behavior. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of option grant. Restricted Stock RS typically vests three years from the date of grant. Holders of restricted shares have the right to receive dividends and vote on the shares. Holders of restricted units have the right to receive cumulative dividends, which are subject to forfeiture, at the vesting date. If an employee leaves the Company prior to vesting, whether through resignation or termination for cause, the RS is forfeited. If an employee retires or is terminated other than for cause, a pro rata portion of the RS may vest. Included within restricted stock outstanding are 0.1 vested shares that have been deferred until termination of service per individual award agreements. As of December 31, 2011, the total number of RS expected to vest was 1.3. The table below provides a rollforward of outstanding RS for each of the previous three years ended.
|  | 2011 |  | 2010 |  | 2009
RESTRICTED STOCK |  | SHARES |  | WEIGHTED- AVERAGE GRANT DATE FAIR VALUE |  | SHARES |  | WEIGHTED- AVERAGE GRANT DATE FAIR VALUE |  | SHARES |  | WEIGHTED- AVERAGE GRANT DATE FAIR VALUE
Outstanding – January 1 |  |  |  | 0.9 |  |  |  | $ | 89.70 |  |  |  |  | 0.8 |  |  |  | $ | 88.72 |  |  |  |  | 0.7 |  |  |  | $ | 103.92 |
Granted |  |  |  | 0.3 |  |  |  |  | 115.18 |  |  |  |  | 0.3 |  |  |  |  | 106.50 |  |  |  |  | 0.3 |  |  |  |  | 67.76 |
Lapsed |  |  |  | (0.3 | ) |  |  |  | 99.53 |  |  |  |  | (0.2 | ) |  |  |  | 108.88 |  |  |  |  | (0.2 | ) |  |  |  | 105.66 |
Cancelled(c) |  |  |  | (0.6 | ) |  |  |  | 95.30 |  |  |  |  | – |  |  |  |  | 89.50 |  |  |  |  | – |  |  |  |  | 109.88 |
Outstanding on Distribution Date before equitable adjustment |  |  |  | 0.3 |  |  |  |  | 93.42 |  |  |  |  | – |  |  |  |  | – |  |  |  |  | – |  |  |  |  | – |
Outstanding on Distribution Date after equitable adjustment |  |  |  | 1.0 |  |  |  |  | 17.94 |  |  |  |  | – |  |  |  |  | – |  |  |  |  | – |  |  |  |  | – |
November/December 2011 Activity: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Granted |  |  |  | 0.4 |  |  |  |  | 20.27 |  |  |  |  | – |  |  |  |  | – |  |  |  |  | – |  |  |  |  | – |
Outstanding – December 31 |  |  |  | 1.4 |  |  |  | $ | 18.55 |  |  |  |  | 0.9 |  |  |  | $ | 89.62 |  |  |  |  | 0.8 |  |  |  | $ | 88.72 |
(c) | Includes 0.5 RS cancelled in connection with the Distribution of Exelis and Xylem, with a corresponding weighted average grant date fair value of $95.14.
Restricted units represented approximately 63%, 21% and 19% of total RS outstanding at December 31, 2011, 2010 and 2009, respectively. Total Shareholder Return Awards The TSR award plan is a performance-based cash award incentive program provided to key employees of ITT. TSR awards are accounted for under stock-compensation principles of accounting as liability-based awards. The fair value of outstanding awards is determined at the conclusion of the three-year performance period by measuring ITT’s total shareholder return percentage against the total shareholder return performance of other stocks generally comprising the S&P Industrials Index. We reassess the fair value of our TSR awards on a quarterly basis at the end of each reporting period using actual total shareholder return data over the elapsed performance period as well as a Monte Carlo simulation. Payment, if any, typically occurs during the first quarter of each year and is based on the TSR performance comparison measured against targets established at the time of the award. However, no payments were made during 2011 as the TSR performance metric for the 2008 to 2010 performance period was less than the minimum stipulated in the TSR Award Agreement. During 2010 and 2009, payments totaling $18 and $21 were made to settle the vested 2007 and 2006 TSR awards, respectively. In connection with the Distribution, a proportionate number of outstanding TSR awards vested corresponding to the percentage of time passed between original grant date and October 31, 2011 (the vested portion). The fair value of the vested portion on October 31, 2011 was nil, as the performance factor for each TSR grant was below the floor threshold. The unvested portion of TSR awards (the percent of time remaining between October 31, 2011 and the awards originally stated vest end date) were modified depending on the year of grant. The 2009 TSR awards were modified to settle via a cash payment in December 2011 of less than $1, equal to the unvested portion at target payout of 100%. The unvested portion of the 2010 and 2011 TSR awards were modified through the granting of RSU awards with a grant date fair value equal to the unvested portion at target. The replacement RSU awards maintain the vesting date established in the original TSR award agreement. No compensation expense was recognized in connection with these modifications as the incremental fair value resulting from the modification pertains to the unvested portion of the original TSR award. The deferred compensation cost of $2 will be recognized straight-line over the remaining vesting periods.

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