NOTE 14: Stock-Based Incentive Compensation Plans

The Company's stock-based incentive programs are intended to attract, retain and motivate highly qualified employees. On April 29, 2004, the Company's stockholders approved the 2004 Equity Incentive Plan (the 2004 Plan). The Company also has stock options outstanding under previous equity compensation plans that were in effect before April 29, 2004, as well as equity compensation plans that the Company assumed as part of its acquisition of ATI. Shares reserved for future grants under the Company's prior equity compensation plans were consolidated into the 2004 Plan; none of the reserved shares under the ATI plans were consolidated into the 2004 Plan. As of December 31, 2011 the Company had approximately 10.4 million shares of common stock that were available for future grants and 58 million shares reserved for issuance upon the exercise of outstanding stock options or the vesting of unvested restricted stock awards.

Under the 2004 Plan, stock options generally vest and become exercisable over a three- to four-year period from the date of grant and expire within ten years after the grant date. Unvested shares that are reacquired by the Company from outstanding equity awards become available for grant and may be reissued as new awards.

Under the 2004 Plan, the Company can grant fair market value awards or full value awards. Fair market value awards are awards granted at or above the fair market value of the Company's common stock on the date of grant. Full value awards are awards granted at less than the fair market value of the Company's common stock on the date of grant. Awards can consist of (i) stock options and stock appreciation rights granted at the fair market value of the Company's common stock on the date of grant and (ii) restricted stock or restricted stock units, as full value awards. Following is a description of the material terms of the awards that may be granted under the 2004 Plan:

Stock Options. A stock option is the right to purchase shares of the Company's common stock at a fixed exercise price for a fixed period of time. Under the 2004 Plan, nonstatutory and incentive stock options may be granted. The exercise price of the shares subject to each nonstatutory stock option and incentive stock option cannot be less than 100% of the fair market value of the Company's common stock on the date of the grant. The exercise price of each option granted under the 2004 Plan must be paid in full at the time of the exercise.

 

Stock Appreciation Rights. Awards of stock appreciation rights may be granted pursuant to the 2004 Plan. Stock appreciation rights may be granted to employees and consultants. No stock appreciation right may be granted at less than fair market value of the Company's common stock on the date of grant or have a term of over ten years from the date of grant. Upon exercising a stock appreciation right, the holder of such right is entitled to receive payment from the Company in an amount determined by multiplying (i) the difference between the closing price of a share of the Company's common stock on the date of exercise and the exercise price by (ii) the number of shares with respect to which the stock appreciation right is exercised. The Company's obligation arising upon the exercise of a stock appreciation right may be paid in shares or in cash, or any combination thereof.

Restricted Stock. Restricted stock awards can be granted to any employee, director or consultant. The purchase price for an award of restricted stock is $0.00 per share. Restricted stock based on continued service may fully vest with no minimum time requirements. Restricted stock that is performance based generally may not fully vest for at least one year from the date of grant.

Restricted Stock Units. Restricted stock units are awards that can be granted to any employee, director or consultant and that obligate the Company to issue a specific number of shares of the Company's common stock in the future if the vesting terms and conditions are satisfied. The purchase price for the shares is $0.00 per share. Prior to May 7, 2009, restricted stock units based on continued service may not fully vest for three years from the date of grant. Effective May 7, 2009, restricted stock units based on continued service may fully vest with no minimum time requirements. Restricted stock units that are performance based generally do not vest for at least one year from the date of grant.

Option Exchange. In June 2009, the Company launched a tender offer to exchange certain outstanding stock options with an exercise price greater than $6.34 per share, a grant date on or before June 28, 2008 and an expiration date after July 27, 2010, held by eligible employees for replacement options to be granted under the 2004 Plan (the Option Exchange). The Option Exchange expired on July 27, 2009. As a result, employees tendered options to purchase 14.6 million shares of common stock with a weighted-average exercise price of $14.70 per share, and the Company cancelled and replaced those options on July 27, 2009 with options to purchase 4 million shares of common stock with an exercise price of $3.80 per share, which was the closing price of the Company common stock on the New York Stock Exchange on July 27, 2009. The Option Exchange resulted in an incremental stock-based compensation charge of approximately $1 million. This incremental charge along with unamortized expenses associated with the cancelled options are being recognized over the new vesting periods of the replacement options which range from one to two years.

Market-based restricted stock units and stock options. During 2011, the Company granted restricted stock units and stock options with both a market condition and a service condition (market-based restricted stock units and stock options) to the Company's new President and Chief Executive Officer, whom the Company hired in August 2011. The market-based condition for these awards requires that AMD common stock maintains a weighted average closing price during the three-year vesting period of equal to or greater than $11.00 per share over any 30-day period. Provided the market-based condition is satisfied and our President and CEO remains an employee of the Company, the grants will vest in three equal annual installments on the applicable vesting date. The Company estimated the fair value of market-based restricted stock units and stock options using a Monte Carlo simulation model on the date of grant. As of December 31, 2011, there were 287,000 market-based restricted stock units and 739,000 market-based stock options outstanding with a grant date fair value of $1.3 million and $2.0 million respectively.

Valuation and Expense Information

Stock-based compensation expense related to employee stock options, restricted stock and restricted stock units was allocated in the consolidated statements of operations as follows:

 

		2011				2010				2009
		(In millions)
Cost of sales		$	6			$	4			$	3
Research and development			46				46				40
Marketing, general, and administrative			38				37				32
Total stock-based compensation expense, net of tax of $0		$	90			$	87			$	75

During 2011, 2010, and 2009, the Company did not realize any excess tax benefits related to stock-based compensation and therefore the Company did not record any related financing cash flows. The Company did not capitalize stock-based compensation cost as part of the cost of an asset because the cost was immaterial.

The Company uses the lattice-binomial model in determining the fair value of the employee stock options.

 

The weighted-average estimated fair value of employee stock options granted for the year ended December 31, 2011, December 25, 2010 and December 26, 2009 was $2.85, $3.20 and $2.59 per share respectively, using the following weighted-average assumptions:

 

		2011				2010				2009
Expected volatility			54.82	%			55.97	%			70.51	%
Risk-free interest rate			1.60	%			1.34	%			1.56	%
Expected dividends			0	%			0	%			0	%
Expected life (in years)			3.75				3.71				3.67

The Company used a combination of the historical volatility of its common stock and the implied volatility for publicly traded options on the Company's common stock as the expected volatility assumption required by the lattice-binomial model. The risk-free interest rate assumption is based upon observed interest rates commensurate with the term of the Company's employee stock options. The expected dividend yield is zero as the Company does not expect to pay dividends in the future. The expected term of employee stock options represents the weighted-average period the stock options are expected to remain outstanding and is a derived output of the lattice-binomial model.

The following table summarizes stock option activity, including market-based stock options, and related information:

 

		2011								2010								2009
		Number of Shares				Weighted- Average Exercise Price				Number of Shares				Weighted- Average Exercise Price				Number of Shares				Weighted- Average Exercise Price
		(In millions, except share price)
Options:
Outstanding at beginning of year			37			$	7.77				42			$	8.65				58			$	11.97
Granted			8			$	7.16				5			$	7.77				10			$	4.24
Cancelled			(6	)		$	12.54				(6	)		$	16.92				(25	)		$	14.20
Exercised			(5	)		$	3.82				(4	)		$	3.35				(1	)		$	3.09
Outstanding at end of year			34			$	7.36				37			$	7.77				42			$	8.65
Exercisable at end of year			25			$	7.48				28			$	8.24				24			$	12.04

 

As of December 31, 2011, the weighted average remaining contractual life of outstanding stock options was 3.73 years and their aggregate intrinsic value was $27 million. As of December 31, 2011, the weighted average remaining contractual life of exercisable stock options was 2.84 years and their aggregate intrinsic value was $27 million. The total intrinsic value of stock options exercised for 2011, 2010 and 2009 was $21 million, $22 million and $5 million.

Restricted Stock Units and Awards. Restricted stock and restricted stock units vest in accordance with the terms and conditions established by the Compensation Committee of the Board of Directors, and are based either on continued service or continued service and performance. The cost of restricted stock units and restricted stock awards is determined using the fair value of the Company's common stock on the date of the grant, and the compensation expense is recognized over the service period.

The summary of the changes in restricted stock units and awards outstanding, including the market-based restricted stock units, during 2011, 2010 and 2009 is presented below:

 

		2011								2010								2009
		Number of Shares				Weighted- Average Grant Date Fair Value				Number of Shares				Weighted- Average Grant Date Fair Value				Number of Shares				Weighted- Average Grant Date Fair Value
		(In millions except share price)
Non-vested balance at beginning of period			24			$	6.50				22			$	5.32				11			$	11.09
Granted			14			$	7.34				12			$	8.54				17			$	4.12
Forfeited			(4	)		$	6.66				(2	)		$	6.13				(2	)		$	9.70
Vested			(10	)		$	6.25				(8	)		$	6.41				(4	)		$	13.68
Non-vested balance at end of period			24			$	7.07				24			$	6.50				22			$	5.32

 

The total fair value of restricted stock and restricted stock units vested during 2011, 2010 and 2009 was $74 million, $61 million and $16 million, respectively. Compensation expense recognized for the restricted stock units for 2011, 2010 and 2009 was approximately $73 million, $61 million and $49 million. Compensation expense recognized for the restricted stock awards is not significant.

As of December 31, 2011, the Company had $21 million of total unrecognized compensation expense, net of estimated forfeitures, related to stock options that will be recognized over the weighted average period of 2.08 years.

As of December 31, 2011, the Company had $103 million of total unrecognized compensation expense, net of estimated forfeitures, related to restricted stock awards and restricted stock units that will be recognized over the weighted average period of 1.79 years.