Share-Based Compensation

The Zebra Technologies Corporation 2015 Long-Term Incentive Plan (“2015 Plan”) which became effective in fiscal 2015, provides for incentive compensation to the Company’s non-employee directors, officers and employees. The awards available under the 2015 Plan include stock-settled Stock Appreciation Rights (“SARs”), Restricted Stock Awards (“RSAs”), Performance Share Awards (“PSAs”), cash-settled Stock Appreciation Rights (“CSRs”), Restricted Stock Units (“RSUs”), and Performance Stock Units (“PSUs”). Non-qualified stock options were available under the 2006 Long-Term Incentive Plan (“2006 Plan”). Non-qualified stock options are no longer granted under the 2015 Plan. A total of 4 million shares became available for delivery under the 2015 Plan.

A summary of the equity awards authorized and available for future grants under the 2015 Plan is as follows:



Available for future grants at December 31, 2016	2,164,297
Newly authorized options	—
Granted	(722,763	)
Cancellation and forfeitures	—
Plan termination	—
Available for future grants at July 1, 2017	1,441,534

Pre-tax share-based compensation expense recognized in the statements of operations was $16 million and $12 million for the six month period ended July 1, 2017 and July 2, 2016, respectively. Tax related benefits of $5 million and $4 million were recognized for the six month period ended July 1, 2017 and July 2, 2016, respectively. As of July 1, 2017, total unearned compensation costs related to the Company’s share-based compensation plans was $65 million, which will be amortized over the weighted average remaining service period of 2.7 years.

Stock Appreciation Rights (“SARs”)

A summary of the Company’s SARs outstanding under the 2015 Plan is as follows:



	Six Months Ended
	July 1, 2017
SARs	Shares		Weighted-Average Exercise Price
Outstanding at beginning of period	1,740,786		$	56.15
Granted	400,682		98.85
Exercised	(147,350	)	48.88
Forfeited	(30,134	)	69.81
Expired	(4,065	)	108.20
Outstanding at end of period	1,959,919		$	65.12
Exercisable at end of period	972,304		$	50.57

The fair value of share-based compensation is estimated on the date of grant using a binomial model. Volatility is based on an average of the implied volatility in the open market and the annualized volatility of the Company’s stock price over its entire stock history. Grants in the table above include SARs that will be settled in the Class A common stock or cash.

The following table shows the weighted-average assumptions used for grants of SARs, as well as the fair value of the grants based on those assumptions:



	July 1, 2017	July 2, 2016
Expected dividend yield	0%	0%
Forfeiture rate	9.37%	9.01%
Volatility	35.49%	43.14%
Risk free interest rate	1.77%	1.29%
Range of interest rates	0.71% - 2.41%	0.25% - 1.75%
Expected weighted-average life	4.13	5.33
Fair value of SARs granted (in millions)	$12	$12
Weighted-average grant date fair value of SARs granted (per underlying share)	$29.84	$19.95

The following table summarizes information about SARs outstanding at July 1, 2017:



	Outstanding		Exercisable
Aggregate intrinsic value - (in millions)	$	61	$	43
Weighted-average remaining contractual term	6.6		5.3

The intrinsic value for SARs exercised during the six months ended July 1, 2017 and July 2, 2016 was $8 million and $1 million, respectively. The total fair value of SARs vested during the period of July 1, 2017 and July 2, 2016 was $6 million and $2 million, respectively.

Cash received from the exercise of SARs during the first two quarters of 2017 was $7 million compared to $2 million in the prior year. The related tax benefit realized was $2 million during the first two quarters of 2017 compared to less than $1 million in the prior year.

The Company’s SARs are expensed over the vesting period of the related award, which is typically 4 years.

Restricted Stock Awards (“RSAs”) and Performance Share Awards (“PSAs”)

The Company’s restricted stock grants consist of time-vested restricted stock awards (“RSAs”) and performance vested restricted stock awards (“PSAs”). The RSAs and PSAs vest at each vesting date subject to restrictions such as continuous employment except in certain cases as set forth in each stock agreement. The Company’s restricted stock awards are expensed over the vesting period of the related award, which is typically 3 years. Some awards, including those granted annually to non-employee directors as an equity retainer fee, were vested upon grant. Compensation cost is calculated as the market date fair value on grant date multiplied by the number of shares granted.

The Company also issues stock awards to nonemployee directors. Each director receives an equity grant of shares every year during the month of May. The number of shares granted to each director is determined by dividing the value of the annual grant by the price of a share of common stock. During the first six months of 2017, there were 12,488 shares granted to nonemployee directors compared to 25,088 shares in the first six months of prior year. New directors in any fiscal year earned a prorated amount. The shares vest immediately upon the grant date.

A summary of information relative to the Company’s restricted stock awards, inclusive of nonemployee director stock awards, is as follows:



	Six Months Ended
	July 1, 2017
Restricted Stock Awards	Shares		Weighted-Average Grant Date Fair Value
Outstanding at beginning of year	622,814		$	70.19
Granted	196,877		98.80
Released	(147,654	)	75.91
Forfeited	(15,567	)	69.56
Outstanding at end of year	656,470		$	77.49

The fair value of each performance award granted includes assumptions around the Company’s performance goals. A summary of information relative to the Company’s performance awards is as follows:



	Six Months Ended
	July 1, 2017
Performance Share Awards	Shares		Weighted-Average Grant Date Fair Value
Outstanding at beginning of year	379,226		$	70.14
Granted	79,423		98.87
Released	(2,029	)	62.70
Forfeited	(183,961	)	73.07
Outstanding at end of year	272,659		$	76.72

Other Award Types

The Company also has cash-settled compensation awards including Cash-settled Stock Appreciation Rights (“CSRs”), Restricted Stock Units (“RSUs”), and Performance Stock Units (“PSUs”) (the “Awards”) that are expensed over the vesting period of the related award, which is not more than 4 years. Compensation cost is calculated at the market date fair value on grant date multiplied by the number of share-equivalents granted and the fair value is remeasured at the end of each reporting period. Share-based liabilities paid for these awards was $1 million during the six months ended July 1, 2017 compared to less than $1 million during the same period of prior year. Share-equivalents issued under these programs totaled 45,781 and 77,809 during the six months ended July 1, 2017 and July 2, 2016, respectively.

Non-qualified Stock Options

A summary of the Company’s options outstanding under the 2006 Plan is as follows:



	Six Months Ended
	July 1, 2017
Non-qualified Options	Shares		Weighted- Average Exercise Price
Outstanding at beginning of year	154,551		$	35.96
Granted	—		—
Exercised	(81,705	)	36.94
Forfeited	—		—
Expired	(5,941	)	41.25
Outstanding at end of year	66,905		$	34.30
Exercisable at end of year	66,905		$	34.30

The following table summarizes information about non-qualified stock options outstanding at July 1, 2017:



	Outstanding		Exercisable
Aggregate intrinsic value - (in millions)	$	4	$	4
Weighted-average remaining contractual term	0.9		0.9

There were no non-qualified stock options issued during the six months ended July 1, 2017.

The intrinsic value for non-qualified options exercised during the six months ended July 1, 2017 and July 2, 2016 was $5 million and less than $1 million , respectively.

Cash received from the exercise of non-qualified options during the six months ended July 1, 2017 was $3 million compared to less than $1 million in the prior year. The related tax benefit realized was $1 million during the six months ended July 1, 2017 compared to less than $1 million in the prior year.

Employee Stock Purchase Plan

The Zebra Technologies Corporation 2011 Employee Stock Purchase Plan (“2011 Plan”) which became effective in fiscal 2011, and the 2011 Plan permits eligible employees to purchase common stock at 95% of the fair market value at the date of purchase. Employees may make purchases by cash or payroll deductions up to certain limits. The aggregate number of shares that may be purchased under this plan is 1.5 million. At July 1, 2017, 1 million shares were available for future purchase.