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Equity-Based Compensation

6 Months Ended

Jul. 02, 2011

Note 13 – Equity-Based Compensation

Zebra has an equity-based compensation plan and a stock purchase plan available for future grants. Zebra recognizes compensation costs using the straight-line method over the vesting period of up to 5 years.

The compensation expense and the related tax benefit for equity-based payments were included in the Consolidated Statement of Earnings as follows (in thousands):


	Three Months Ended				Six Months Ended
	July 2, 2011		July 3, 2010		July 2, 2011		July 3, 2010
Cost of sales	$	299	$	233	$	537	$	420
Selling and marketing		264		355		774		546
Research and development		347		345		694		661
General and administrative		2,570		1,452		4,945		2,712

Total compensation		3,480		2,385		6,950		4,339

Income tax benefit	$	1,201	$	823	$	2,398	$	1,497

Cash flows resulting from the tax benefits from tax deductions in excess of the compensation cost recognized (excess tax benefits) are classified as financing cash flows in the statement of cash flows. The tax benefits classified as financing cash flows for the six months ended July 2, 2011 was $1,234,000, and for the six months ended July 3, 2010 was $16,000.

The fair value of equity-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 Zebra stock prices over our entire stock history. Stock option grants in the table below include both stock options, all of which were non-qualified, and stock appreciation rights (SAR) that will be settled in Zebra stock. The following table shows the weighted-average assumptions used for grants of stock options and SARs as well as the fair value of the grants based on those assumptions:


	Six Months Ended
	July 2, 2011			July 3, 2010
Expected dividend yield		0	%		0	%
Forfeiture rate		11.50	%		9.78	%
Volatility		35.33	%		39.50	%
Risk free interest rate		2.01	%		2.26	%
– Range of interest rates		0.01% - 3.18	%		0.06% - 3.41	%
Expected weighted-average life		5.42 years			5.36 years
Fair value of options and SARs granted	$	5,347,000		$	6,527,000
Weighted-average grant date fair value of options and SARs granted	$	14.39		$	10.65

SAR activity was as follows:


	Six Months Ended July 2, 2011
SARs	Shares			Weighted-Average Exercise Price
Outstanding at beginning of year		1,234,787		$	23.82
Granted		371,551			41.51
Exercised		(74,117	)		22.01
Forfeited		(210,841	)		24.36
Expired		(273	)		19.56

Outstanding at end of period		1,321,107		$	28.81

Exercisable at end of period		318,637		$	23.19

Intrinsic value of exercised SARs	$	1,411,000

For the six months ended July 2, 2011, equity granted above includes SARs with respect to 371,551 shares of Zebra common stock.

The terms of the SARs are established under the 2006 Zebra Technologies Corporation Incentive Compensation Plan (the 2006 Plan) and the applicable SAR agreement. Once vested, a SAR entitles the holder to receive a payment equal to the difference between the per-share base price of the SAR and the fair market value of a share of Zebra stock on the date the SAR is exercised, multiplied by the number of SARs exercised. Exercised SARs are settled in whole shares of Zebra stock, and any fraction of a share is settled in cash. Except for SARs granted to Zebra's five independent directors, which were vested in full at the May 19, 2011 grant date, the SARs granted above vest annually in four equal amounts on each of the first four anniversaries of the grant date and expire 10 years after the grant date.

The following table summarizes information about SARs outstanding at July 2, 2011:


	Outstanding					Exercisable
Range of Exercise Prices	Number of Shares		Weighted-Average Remaining Contractual Life	Weighted-Average Exercise Price		Number of Shares		Weighted-Average Exercise Price
$ 19.56-$19.56		430,997	7.79 years	$	19.56		191,840	$	19.56
$ 19.57-$27.50		63,389	8.33 years		24.84		37,432		24.42
$ 27.51-$27.82		442,705	8.77 years		27.82		70,409		27.82
$ 27.83-$39.19		24,925	9.06 years		32.16		2,911		28.57
$ 39.20-$42.36		359,091	9.80 years		41.61		16,045		42.36

		1,321,107					318,637


	Outstanding		Exercisable
Aggregate intrinsic value	$	14,761,000	$	5,208,000
Weighted-average remaining contractual term		8.7 years		8.2 years

Stock option activity was as follows:


	Six Months Ended July 2, 2011
Options	Shares			Weighted-Average Exercise Price
Outstanding at beginning of year		2,340,959		$	37.36
Granted		0			0.00
Exercised		(348,332	)		25.87
Forfeited		(53,802	)		32.36
Expired		(45,009	)		39.51

Outstanding at end of period		1,893,816		$	39.55

Exercisable at end of period		1,734,673		$	39.94

Intrinsic value of exercised options	$	5,192,000

The following table summarizes information about stock options outstanding at July 2, 2011:


	Outstanding					Exercisable
Range of Exercise Prices	Number of Shares		Weighted-Average Remaining Contractual Life	Weighted-Average Exercise Price		Number of Shares		Weighted-Average Exercise Price
$ 1.29-$35.75		378,715	2.82 years	$	26.81		338,734	$	26.55
$ 35.76-$37.20		399,652	6.61 years		36.60		300,114		36.60
$ 37.21-$43.35		512,947	5.34 years		41.82		493,323		41.83
$ 43.36-$47.12		444,629	3.50 years		46.21		444,629		46.21
$ 47.13-$53.92		157,873	3.61 years		51.41		157,873		51.41

		1,893,816					1,734,673


	Outstanding		Exercisable
Aggregate intrinsic value	$	5,903,000	$	5,204,000
Weighted-average remaining contractual term		4.5 years		4.3 years

Restricted stock award activity, granted under the 2006 Plan, was as follows:


	Six Months Ended July 2, 2011
Restricted Stock Awards	Shares			Weighted-Average Grant Date Fair Value
Outstanding at beginning of year		844,686		$	25.46
Granted		209,465			41.53
Vested		(195,071	)		30.24
Forfeited		(10,212	)		28.83

Outstanding at end of period		848,868		$	28.29

For the six months ended July 2, 2011, shares of restricted stock awards granted totaled 209,465.


	As of July 2, 2011
Awards granted under Zebra's equity based compensation plans:
Unearned compensation costs related to awards granted	$	23,329,000
Period expected to be recognized over		2.7 years

The fair value of the purchase rights of all Zebra employees issued under the stock purchase plan is estimated using the following weighted-average assumptions for purchase rights granted. Expected lives of three months to one year have been used along with these assumptions.


	Six Months Ended
	July 2, 2011			July 3, 2010
Fair market value	$	38.52		$	26.79
Option price	$	36.60		$	25.45
Expected dividend yield		0	%		0	%
Expected volatility		26	%		26	%
Risk free interest rate		0.11	%		0.11	%

- Definition

Tabular disclosure of components of a stock option or other award plan under which equity-based compensation is awarded to employees, typically comprised of the amount of unearned compensation (deferred compensation cost), compensation expense, and changes in the quantity and fair value of the shares (or other type of equity) granted, exercised, forfeited, and issued and outstanding pertaining to that plan. Disclosure may also include nature and general terms of such arrangements that existed during the period and potential effects of those arrangements on shareholders, effect of compensation cost arising from equity-based payment arrangements on the income statement, method of estimating the fair value of the goods or services received, or the fair value of the equity instruments granted, during the period, cash flow effects resulting from equity-based payment arrangements and, for registrants that accelerate vesting of out of the money share options, reasons for the decision to accelerate.

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