Share-Based Compensation

On May 17, 2018, shareholders approved the Zebra Technologies 2018 Long-Term Incentive Plan (“2018 Plan”). The 2018 Plan superseded and replaced the 2015 Plan on the approval date, except that the 2015 Plan shall remain in effect with respect to outstanding awards under the 2015 Plan until such awards have been exercised, forfeited, canceled, expired or otherwise terminated in accordance with their terms.

The 2018 plan provides for incentive compensation to the Company’s non-employee directors, officers and employees. The awards available under the 2018 Plan include Incentive Stock Options, Nonqualified Stock Options, 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”). A total of 3,800,000 shares are authorized for delivery under the 2018 Plan.

A summary of the equity awards authorized and available for future grants under the 2018 Plan is as follows:



Available for future grants at December 31, 2017	—
Newly authorized shares	3,800,000
Granted	(925	)
Cancellation and forfeitures	—
Plan termination	—
Available for future grants at June 30, 2018	3,799,075

The Zebra Technologies Corporation Long-Term Incentive Plan (“2015 Plan”), provided for incentive compensation to the Company’s non-employee directors, officers and employees. The awards available under the 2015 Plan included SARs, RSAs, PSAs, Cash-settled Stock Appreciation Rights, RSUs, and PSUs. A total of 4 million shares were authorized for delivery under the 2015 Plan. Upon approval of the 2018 plan, there are no shares available for grant 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, 2017	1,437,435
Newly authorized shares	—
Granted	(360,999	)
Cancellation and forfeitures	—
Plan termination	(1,076,436	)
Available for future grants at June 30, 2018	—

Pre-tax share-based compensation expense recognized in the Consolidated Statements of Operations was $28 million and $16 million for the six-month period ended June 30, 2018 and July 1, 2017, respectively. Tax related benefits of $5 million were also recognized for the each of the six-month periods ended June 30, 2018 and July 1, 2017, respectively. As of June 30, 2018, total unearned compensation costs related to the Company’s share-based compensation plans was $75 million, which will be amortized over the weighted average remaining service period of 2.13 years.

Stock Appreciation Rights (“SARs”)

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



	Six Months Ended
	June 30, 2018
SARs	Shares		Weighted- Average Exercise Price
Outstanding at beginning of year	1,817,991		$	65.73
Granted	87,310		149.57
Exercised	(384,528	)	58.18
Forfeited	(35,417	)	79.69
Expired	(438	)	108.20
Outstanding at end of period	1,484,918		$	72.28
Exercisable at end of period	797,045		$	58.20

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 below 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:



	June 30, 2018	July 1, 2017
Expected dividend yield	0%	0%
Forfeiture rate	8.40%	9.37%
Volatility	35.93%	35.49%
Risk free interest rate	2.96%	1.77%
Range of interest rates	1.68% - 3.00%	0.71% - 2.41%
Expected weighted-average life (in years)	4.11	4.13
Fair value of SARs granted (in millions)	$13	$12
Weighted-average grant date fair value of SARs granted (per underlying share)	$47.59	$29.84

The following table summarizes information about SARs outstanding at June 30, 2018:



	Outstanding		Exercisable
Aggregate intrinsic value (in millions)	$	106	$	68
Weighted-average remaining contractual term (in years)	5.86		5.01

The intrinsic value for SARs exercised during the six-months ended June 30, 2018 and July 1, 2017 was $34 million and $8 million, respectively. The total fair value of SARs vested during the period of June 30, 2018 and July 1, 2017 was $7 million and $6 million, respectively.

The Company’s SARs are expensed straight-line 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 hold voting rights and therefore are considered participating securities. The outstanding RSAs and PSAs are included as part of the Company’s Class A Common Stock outstanding. 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 straight-line over the vesting period of the related award, which is typically 3 years. The RSAs granted beginning in 2018 will grade vest over the 3-year vesting period. Some awards, including those granted annually to non-employee directors as an equity retainer fee, were vested upon grant. PSAs targets are set based on certain Company-wide financial metrics. 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 non-employee 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 2018, there were 7,980 shares granted to non-employee directors compared to 12,488 shares in the first six months of prior year. The shares vest immediately upon the grant date.

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



	Six Months Ended
	June 30, 2018
Restricted Stock Awards	Shares		Weighted-Average Grant Date Fair Value
Outstanding at beginning of year	628,642		$	77.70
Granted	199,025		149.41
Released	(144,957	)	109.21
Forfeited	(16,494	)	83.89
Outstanding at end of period	666,216		$	92.26

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
	June 30, 2018
Performance Share Awards	Shares		Weighted-Average Grant Date Fair Value
Outstanding at beginning of year	265,747		$	77.04
Granted	59,383		146.64
Released	(57,074	)	107.31
Forfeited	(6,518	)	80.17
Outstanding at end of period	261,538		$	86.24

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. The RSUs granted beginning in 2018 will grade vest over the 3-year vesting period. Compensation cost is calculated as the market date fair value on grant date multiplied by the number of share-equivalents granted. The fair value is remeasured at the end of each reporting period. Cash settlement payments for these awards of $2.0 million and $1.0 million were made during the six-months ended June 30, 2018 and July 1, 2017, respectively. Share-equivalents issued under these programs totaled 17,253 and 45,781 during the six-months ended June 30, 2018 and July 1, 2017, respectively.

Non-qualified Stock Options

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



	Six Months Ended
	June 30, 2018
Non-qualified Options	Shares		Weighted- Average Exercise Price
Outstanding at beginning of year	15,705		$	26.34
Exercised	(9,083	)	31.26
Expired	—		—
Outstanding at end of period	6,622		$	19.59
Exercisable at end of period	6,622		$	19.59

The following table summarizes information about non-qualified stock options outstanding at June 30, 2018:



	Outstanding		Exercisable
Aggregate intrinsic value (in millions)	$	1	$	1
Weighted-average remaining contractual term (in years)	0.42		0.42

The intrinsic value for non-qualified options exercised during the six-months ended June 30, 2018 and July 1, 2017 was $1 million and $5 million, respectively.

Cash received from the exercise of non-qualified options during the six-months ended June 30, 2018 was less than $1 million compared to $3 million in the prior year period. The related tax benefit realized was $1 million during both the six-months ended June 30, 2018 and July 1, 2017.

Employee Stock Purchase Plan

The Zebra Technologies Corporation 2011 Employee Stock Purchase Plan (“2011 Plan”), which became effective in fiscal 2011, 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 1,500,000 shares. At June 30, 2018, 869,514 shares were available for future purchase.