NOTE 8. STOCK-BASED COMPENSATION

In connection with the Separation, the Company adopted the 2016 Stock Incentive Plan (the “Stock Plan”). Outstanding equity awards of Danaher held by our employees at the Separation date were converted into or replaced with Fortive equity awards under the Stock Plan. The Stock Plan provides for the grant of stock appreciation rights, performance stock units (“PSUs”), restricted stock units (“RSUs”), restricted stock awards and performance stock awards (collectively, “Stock Awards”), stock options or any other stock-based award. As of September 29, 2017, approximately 7 million shares of our common stock were reserved for issuance under the Stock Plan. For a full description of our stock-based compensation program refer to Note 16 of our 2016 Annual Report on Form 10-K.

When stock options are exercised by the employee or Stock Awards vest, we derive a tax deduction measured by the excess of the market value on such date over the grant date price. During the three and nine months ended September 29, 2017, we realized a tax benefit of $9.7 million and $26.2 million, respectively, related to employee stock options that were exercised and Stock Awards that vested. As of January 1, 2017, we prospectively adopted ASU No. 2016-09, Compensation—Stock Compensation (Topic 718). Accordingly, we recorded the excess of the tax benefit related to the exercise of stock options and vesting of Stock Awards over the expense recorded for financial statement reporting purposes (the “Excess Tax Benefit”) as a component of income tax expense and as an operating cash inflow in the accompanying consolidated and combined condensed financial statements. Such Excess Tax Benefit was $5.9 million and $16.1 million during the three and nine months ended September 29, 2017, respectively.

We had no stock-based compensation plans prior to the Separation; however certain of our employees had participated in Danaher’s stock-based compensation plans (“Danaher Plans”), which provided for the grants of stock options, PSUs and RSUs among other types of awards.

Stock-based Compensation Expense

Stock-based compensation has been recognized as a component of selling, general & administrative expenses in the accompanying Consolidated and Combined Condensed Statements of Earnings. Under ASU 2016-09, we will continue to recognize stock-based compensation expense based on the portion of the awards that are ultimately expected to vest. Prior to the Separation, Danaher allocated stock-based compensation expense to the Company based on Fortive employees participating in the Danaher Plans. These allocations are reflected in the accompanying Combined Condensed Statement of Earnings for the nine months ended September 30, 2016.

The following summarizes the components of our stock-based compensation expense under the Stock Plan and the Danaher Plans ($ in millions):



	Three Months Ended						Nine Months Ended
	September 29, 2017			September 30, 2016			September 29, 2017			September 30, 2016
Stock Awards:
Pretax compensation expense	$	7.2		$	7.3		$	22.6		$	21.5
Income tax benefit	(2.4		)	(2.3		)	(8.0		)	(7.1		)
Stock Award expense, net of income taxes	4.8			5.0			14.6			14.4
Stock options:
Pretax compensation expense	4.7			4.7			14.6			12.9
Income tax benefit	(1.6		)	(1.6		)	(5.0		)	(4.4		)
Stock option expense, net of income taxes	3.1			3.1			9.6			8.5
Total stock-based compensation:
Pretax compensation expense	11.9			12.0			37.2			34.4
Income tax benefit	(4.0		)	(3.9		)	(13.0		)	(11.5		)
Total stock-based compensation expense, net of income taxes	$	7.9		$	8.1		$	24.2		$	22.9

The following summarizes the unrecognized compensation cost for the Stock Plan awards as of September 29, 2017. This compensation cost is expected to be recognized over a weighted average period of approximately two years, representing the remaining service period related to the awards. Future compensation amounts will be adjusted for any changes in estimated forfeitures ($ in millions):



Stock Awards	$	45.2
Stock options	44.8
Total unrecognized compensation cost	$	90.0

In connection with the exercise of certain stock options and the vesting of Stock Awards issued under the Stock Plan, a number of shares of Fortive common stock sufficient to fund statutory minimum tax withholding requirements has been withheld from the total shares issued or released to the award holder (though under the terms of the Stock Plan, the shares are considered to have been issued and are not added back to the pool of shares available for grant). During the nine months ended September 29, 2017, approximately 223 thousand shares of Fortive common stock with an aggregate value of $13.5 million were withheld to satisfy this requirement. This withholding is treated as a reduction in additional paid-in capital in the accompanying Consolidated Condensed Statement of Changes in Equity.

Stock Options

The following summarizes the assumptions used in the Black-Scholes Merton option pricing model to value stock options granted under the Stock Plan during the nine months ended September 29, 2017:



Risk-free interest rate	1.90% - 2.26%
Weighted average volatility^(a)	21.0	%
Dividend yield	0.5	%
Expected years until exercise	5.5 - 8.0

^(a) Weighted average volatility was estimated based on an average historical stock price volatility of a group of peer companies, given our limited trading history.

The following summarizes option activity under the Stock Plan for the nine months ended September 29, 2017 (in millions, except price per share and numbers of years):



	Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding as of December 31, 2016	10.7		$	33.23
Granted	1.8		57.55
Exercised	(1.0	)	25.09
Canceled/forfeited	(0.3	)	44.87
Outstanding as of September 29, 2017	11.2		$	37.65	6.5	$	370.9
Vested and expected to vest as of September 29, 2017 ^(a)	10.8		$	37.23	6.5	$	362.6
Vested as of September 29, 2017	5.4		$	28.23	4.7	$	229.3

^(a) The “expected to vest” options are the net unvested options that remain after applying the forfeiture rate assumption to total unvested options.

The aggregate intrinsic values in the table above represent the total pretax intrinsic value (the difference between the closing stock price of Fortive common stock on the last trading day of the third quarter of 2017 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on September 29, 2017. The amount of aggregate intrinsic value will change based on the price of Fortive’s common stock. The aggregate intrinsic value of options exercised during the nine months ended September 29, 2017 was $38 million. Exercise of options during the first nine months of 2017 resulted in cash receipts of $25 million.

Stock Awards

The following summarizes information related to unvested Stock Award activity under the Stock Plan for the nine months ended September 29, 2017 (in millions; except price per share):



	Number of Stock Awards		Weighted Average Grant-Date Fair Value
Unvested as of December 31, 2016	2.2		$	39.20
Granted	0.6		57.04
Vested	(0.6	)	35.70
Forfeited	(0.1	)	43.65
Unvested as of September 29, 2017	2.1		$	45.32