Black & Decker 2012 Annual Report Download - page 93

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Stock Option Valuation Assumptions: Stock options are granted at the fair market value of the Company’s stock on the date
of grant and have a 10-year term. Generally, stock option grants vest ratably over 4 years from the date of grant.
The following describes how certain assumptions affecting the estimated fair value of stock options are determined: the
dividend yield is computed as the annualized dividend rate at the date of grant divided by the strike price of the stock option;
expected volatility is based on an average of the market implied volatility and historical volatility for the 5.25 year expected
life; the risk-free interest rate is based on U.S. Treasury securities with maturities equal to the expected life of the option; and a
seven percent forfeiture rate is assumed. The Company uses historical data in order to estimate forfeitures and holding period
behavior for valuation purposes.
The fair value of stock option grants is estimated on the date of grant using the Black-Scholes option pricing model. The
following weighted average assumptions were used to value grants made in 2012, 2011 and 2010. The 2010 weighted average
assumptions include one million options that were granted as part of the Merger.
2012 2011 2010
Average expected volatility…………………………………………… 35.6% 38.4% 31.4%
Dividend yield………………………………………………………… 2.8% 2.5% 2.2%
Risk-free interest rate…………………………………………………. 0.8% 1.1% 2.7%
Expected term………………………………………………………… 5.5 years 5.5 years 6.3 years
Fair value per option…………………………………………………. $
17.47 $
18.29
$
16.68
Weighted average vesting period……………………………………... 2.3 years 2.7 years 3.0 years
As part of the Merger, the Company exchanged the pre-merger stock options of Black & Decker for 5.8 million Stanley
Black & Decker stock options. The following assumptions were used in the valuation of pre-merger Black & Decker stock
options:
2010
Average expected volatility……………………………………………………………………………….. 32.0%
Dividend yield……………………………………………………………………………………………... 0.7%
Risk-free interest rate……………………………………………………………………………………… 1.4%
Expected term……………………………………………………………………………………………... 2.9 years
Fair value per option……………………………………………………………………………………….
$
18.72
All options had fully vested as of the Merger date. The fair value of the 5.8 million options exchanged as part of the merger
was $105.8 million, with $91.7 million recorded as consideration paid and $14.1 million recognized as future compensation
cost. Under ASC 805, the fair value of vested options and the earned portion of unvested options are recognized as
consideration paid. The remaining value relating to the unvested and unearned options are recognized as future stock based
compensation.
Stock Options:
The number of stock options and weighted-average exercise prices are as follows:
2012 2011 2010
Options Price Options Price Options Price
Outstanding, beginning of year………… 10,444,660 $ 52.47 11,641,564 $
48.69
5,839,417 $ 39.75
Granted…………………………………. 1,106,075 70.66 1,150,577 65.05 2,055,942 60.69
Options assumed from merger………….
—
—
—
—
5,843,623 44.41
Exercised……………………………….. (2,258,598) 43.07 (2,166,269) 40.34 (1,720,507) 34.81
Forfeited………………………………... (235,644) 68.48 (181,212) 52.19 (376,911) 54.95
Outstanding, end of year……………….. 9,056,493 $ 56.90 10,444,660 $
52.47
11,641,564 $ 48.69
Exercisable, end of year………………... 5,515,617 $ 52.97 6,853,838 $
49.74
8,100,566 $ 46.70
At December 29, 2012, the range of exercise prices on outstanding stock options was $15.06 to $75.20. Stock option expense
was $26.6 million, $21.5 million, and $17.5 million for the years ended December 29, 2012, December 31, 2011 and January 1,
2011, respectively. At December 29, 2012, the Company had $31.6 million of unrecognized pre-tax compensation expense for
stock options. This expense will be recognized over the remaining vesting periods which are 2.9 years on a weighted average
basis.