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				Nine Months Ended
	September 29, 2012		October 1, 2011		September 29, 2012		October 1, 2011
Cost of sales	$	287	$	218	$	820	$	755
Selling and marketing		511		333		1,271		1,107
Research and development		374		343		1,196		1,037
General and administrative		2,268		2,204		8,198		7,149

Total compensation	$	3,440	$	3,098	$	11,485	$	10,048

Income tax benefit	$	1,217	$	1,069	$	4,003	$	3,467

Cash flows resulting from the tax benefits of 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 nine months ended September 29, 2012 was $1,492,000 and for the nine months ended October 1, 2011 was $1,265,000.

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. Grants in the tables 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 SARs as well as the fair value of the grants based on those assumptions:


	Nine Months Ended
	September 29, 2012			October 1, 2011
Expected dividend yield		0	%		0	%
Forfeiture rate		10.21	%		11.50	%
Volatility		35.90	%		35.33	%
Risk free interest rate		.94	%		2.01	%
Range of interest rates		0.07% - 1.95	%		0.01% - 3.18	%
Expected weighted-average life		5.48 years			5.42 years
Fair value of stock appreciation rights (SARs) granted	$	5,507,000		$	5,495,000
Weighted-average grant date fair value of SARs granted	$	12.84		$	14.29

SAR activity was as follows:


	Nine Months Ended September 29, 2012
SARs	Shares			Weighted-Average Exercise Price
Outstanding at beginning of year		1,287,724		$	28.91
Granted		428,987			38.51
Exercised		(64,582	)		23.05
Forfeited		(35,725	)		34.30
Expired		(2,011)			41.57
Outstanding at end of period		1,614,393		$	31.56
Exercisable at end of period		553,996		$	26.48
Intrinsic value of exercised SARs	$	953,020

The terms of the SARs are established under either the 2006 Incentive Compensation Plan or the 2011 Long-Term Incentive Plan (the “Plans”) 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. The SARs granted typically vest annually in four equal amounts on each of the first four anniversaries of the grant date, with some SARs vesting over a period of five years and SAR’s granted in 2012 to non-employee directors being fully vested upon grant. Absent an early expiration due to termination of employment, all SARs expire 10 years after the grant date.

The following table summarizes information about SARs outstanding at September 29, 2012:


	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		368,856		6.60 years	$	19.56		256,826	$	19.56
$ 21.83-$27.50		56,764		7.10 years		24.82		46,761		24.64
$ 27.82-$27.82		400,461		7.60 years		27.82		127,518		27.82
$ 28.33-$37.15		61,725		9.02 years		33.37		25,976		34.82
$ 38.79-$42.36		726,587		9.12 years		40.09		96,915		41.69

		1,614,393						553,996

Outstanding

Exercisable

Aggregate intrinsic value

10,972,000

$6,257,000

Weighted-average remaining contractual term

8.1 years

7.4 years

Stock option activity was as follows:


	Nine Months Ended September 29, 2012
Options	Shares			Weighted-Average Exercise Price
Outstanding at beginning of year		1,702,650		$	40.43
Granted		0			0.00
Exercised		(102,230	)		27.26
Forfeited		(1,663	)		36.36
Expired		(20,341	)		43.63

Outstanding at end of period		1,578,416		$	41.24

Exercisable at end of period		1,572,730		$	41.32

Intrinsic value of exercised options	$	1,090,858

The following table summarizes information about stock options outstanding at September 29, 2012:


	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-$36.49		422,223		4.78 years	$	32.84		416,537	$	33.02
$ 36.80-$41.25		378,221		4.56 years		39.78		378,221		39.78
$ 42.28-$45.62		401,316		2.99 years		44.51		401,316		44.51
$ 46.18-$51.62		374,856		2.20 years		48.63		374,856		48.63
$ 53.92-$53.92		1,800		1.66 years		53.92		1,800		53.92

		1,578,416						1,572,730

Outstanding

Exercisable

Aggregate intrinsic value

1,744,000

$1,643,000

Weighted-average remaining contractual term

3.7 years

Restricted stock award activity was as follows:


	Nine Months Ended September 29, 2012
Restricted Stock Awards	Shares			Weighted-Average Grant Date Fair Value
Outstanding at beginning of year		836,141		$	28.34
Granted		235,889			38.53
Released		(226,978	)		20.93
Forfeited		(113,640	)		23.26

Outstanding at end of period		731,412		$	34.72

Zebra’s restricted stock awards are expensed over the vesting period of the related award, typically three to five years. Compensation cost is calculated as the market date fair value on the grant date multiplied by the number of shares granted.


	As of September 29, 2012
Awards granted under Zebra’s equity based compensation plans:
Unearned compensation costs related to awards granted	$	21,978,000
Period expected to be recognized over		2.6 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.


	Nine Months Ended
	September 29, 2012			October 1, 2011
Fair market value	$	34.93		$	35.86
Option price	$	33.18		$	34.07
Expected dividend yield		0	%		0	%
Expected volatility		21	%		32	%
Risk free interest rate		0.06	%		0.09	%