3M 2007 Annual Report Download - page 88

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82
portion of the annual grant away from traditional stock options primarily to restricted stock units. These changes will
reduce the annual dilution impact from 1.5% of total outstanding common stock to about 1%. However, associated with
the reduction in the number of eligible employees, the Company provided a one-time “buyout” grant to the impacted
employees, which resulted in increased stock-based compensation expense in 2007. The following table summarizes
MSOP restricted stock and restricted stock unit activity during the twelve months ended December 31, 2007:
Restricted Stock and
Restricted Stock Units
Number of
Awards
Grant Date
Fair Value*
Nonvested balance –
As of January 1, 2007 411,562 $78.11
Granted
Annual 1,695,592 77.88
Other 22,465 50.88
Vested (90,913) 77.38
Forfeited (37,125) 79.04
As of December 31, 2007 2,001,581 $77.63
*Weighted average
As of December 31, 2007, there was $97 million of compensation expense that has yet to be recognized related to
non-vested restricted stock and restricted stock units. This expense is expected to be recognized over the remaining
vesting period with a weighted-average life of 39 months. The total fair value of restricted stock and restricted stock
units that vested during the twelve-month periods ended December 31, 2007 and 2006 was $6 million and $5 million,
respectively.
In addition, the Company issues cash settled Restricted Stock Units and Stock Appreciation Rights in certain
countries. These grants do not result in the issuance of Common Stock and are considered immaterial by the
Company.
The remaining total MSOP shares available for grant under the 2005 MSOP Program are 4,408,083, 13,074,202 and
24,937,892, respectively, as of December 31, 2007, 2006 and 2005. Restricted stock and restricted stock units, per the
2005 MSOP Program, shall be counted against the total shares available as 2.45 shares for every one share issued in
connection with that award.
Effective with the May 2005 grant, the Company no longer issues options eligible for additional progressive (reload)
options; however, when a progressive option is issued upon the exercise of a pre-May 2005 non-qualified stock
option, the option is revalued and additional stock compensation expense is incurred.
For annual and progressive (reload) options, the weighted average fair value at the date of grant was calculated using the
Black-Scholes option-pricing model and the assumptions that follow.
MSOP Assumptions Annual Progressive (Reload)
2007 2006 2005 2007 2006 2005
Exercise price $84.79 $87.23 $76.87 $87.12 $80.44 $81.19
Risk-free interest rate 4.6% 5.0% 4.0% 4.6% 4.5% 3.7%
Dividend yield 2.1% 2.0% 2.0% 2.1% 2.0% 2.0%
Volatility 20.0% 20.0% 23.5% 18.4% 20.1% 20.9%
Expected life (months) 69 69 69 25 39 40
Black-Scholes fair value $18.12 $19.81 $18.28 $13.26 $12.53 $13.18
In connection with the adoption of SFAS No. 123R, in 2005 the Company reviewed and updated, among other things,
its volatility and expected term assumptions. Expected volatility is a statistical measure of the amount by which a stock
price is expected to fluctuate during a period. For the 2007, 2006 and 2005 annual grant date, the Company estimated
the expected volatility based upon the average of the most recent one year volatility, the median of the term of the
expected life rolling volatility, the median of the most recent term of the expected life volatility of 3M stock, and the
implied volatility on the grant date. The expected term assumption is based on the weighted average of historical
grants and assuming that options outstanding are exercised at the midpoint of the future remaining term.