Note 14 – Share-Based Compensation

Zebra has a share-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 share-based payments were included in the Consolidated Statement of Earnings as follows (in thousands):


	Three Months Ended				Six Months Ended
	June 28, 2014		June 29, 2013		June 28, 2014		June 29, 2013
Cost of sales	$	241	$	276	$	483	$	460
Selling and marketing		516		541		1,069		1,006
Research and development		374		459		740		784
General and administrative		3,013		3,082		4,818		4,254

Total compensation	$	4,144	$	4,358	$	7,110	$	6,504

Income tax benefit	$	1,442	$	1,523	$	2,435	$	2,253

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 June 28, 2014 was $3,947,000 and for the six months ended June 29, 2013 was $3,727,000.

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 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. Restricted stock grants are valued at the market closing price on the date of the grant. 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:


	Six Months Ended
	June 28, 2014		June 29, 2013
Expected dividend yield		0%		0%
Forfeiture rate		10.32%		10.31%
Volatility		34.92%		32.00%
Risk free interest rate		1.73%		.82%
Range of interest rates		0.02% - 2.61%		0.02% - 1.78%
Expected weighted-average life		5.36 years		5.42 years
Fair value of stock appreciation rights (SARs) granted	$	4,211,000	$	4,443,000
Weighted-average grant date fair value of SARs granted	$	25.02	$	13.83

Stock option activity was as follows:


	Six Months Ended June 28, 2014
Options	Shares			Weighted-Average Exercise Price
Outstanding at beginning of year		955,777		$	42.78
Exercised		(263,659	)		45.38

Outstanding at end of period		692,118		$	41.79

Exercisable at end of period		692,118		$	41.79

Intrinsic value of exercised options	$	6,308,000

The following table summarizes information about stock options outstanding at June 28, 2014:


	Outstanding		Exercisable
Aggregate intrinsic value	$	17,480,000	$	17,480,000
Weighted-average remaining contractual term		2.2 years		2.2 years

SAR activity was as follows:


	Six Months Ended June 28, 2014
SARs	Shares			Weighted-Average Exercise Price
Outstanding at beginning of year		1,402,784		$	36.36
Granted		168,314			74.72
Exercised		(145,077	)		35.21
Forfeited		(14,936	)		48.62

Outstanding at end of period		1,411,085		$	40.92

Exercisable at end of period		705,246		$	32.96

Intrinsic value of exercised SARs	$	5,510,000

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 grant 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. All SARs expire 10 years after the grant date.

The following table summarizes information about SARs outstanding at June 28, 2014:


	Outstanding		Exercisable
Aggregate intrinsic value	$	38,132,000	$	24,039,000
Weighted-average remaining contractual term		7.4 years		6.5 years

Restricted stock award activity granted under the Plans, are as follows:


	Six Months Ended June 28, 2014
Restricted Stock Awards	Shares			Weighted-Average Grant Date Fair Value
Outstanding at beginning of year		435,377		$	40.92
Granted		110,097			74.26
Released		(144,602	)		43.50
Forfeited		(6,669	)		51.18

Outstanding at end of period		394,203		$	49.12

The terms of Zebra’s restricted stock grants are defined in the Plans and the applicable award agreements. Restricted grants consist of time vested restricted stock awards (RSA’s), restricted stock units (RSU’s) and performance share awards (PSA’s). Zebra’s restricted stock awards and units 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. Restricted stock units of 8,992 were granted in the second quarter of 2014.

Performance share award activity granted under the Plans, are as follows:


	Six Months Ended June 28, 2014
Performance Share Awards	Shares			Weighted-Average Grant Date Fair Value
Outstanding at beginning of year		195,159		$	42.25
Granted		4,323			69.41
Released		(33,535	)		41.45
Forfeited		(20,555	)		41.45

Outstanding at end of period		145,392		$	43.36


	As of
	June 28, 2014
Awards granted under Zebra’s equity-based compensation plans:
Unearned compensation costs related to awards granted	$	20,875,000
Period expected to be recognized over		2.5 years

The fair value of the purchase rights 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
	June 28, 2014			June 29, 2013
Fair market value	$	60.06		$	40.94
Option price	$	57.06		$	38.89
Expected dividend yield		0	%		0	%
Expected volatility		34	%		18	%
Risk free interest rate		0.06	%		0.06	%