STOCK OPTIONS AND OTHER SHARE-BASED COMPENSATION

As of June 30, 2017, we had options or other share-based compensation outstanding under two shareholder-approved employee stock incentive plans (“SIPs”), the Harris Corporation 2005 Equity Incentive Plan (As Amended and Restated Effective August 27, 2010) and the Harris Corporation 2015 Equity Incentive Plan (the “2015 EIP”) (prior to July 3, 2015, we had an additional shareholder approved SIP under which options or other share-based compensations was outstanding). Grants of share-based awards after October 23, 2015 were made under our 2015 EIP. We believe that share-based awards more closely align the interests of participants with those of shareholders. Certain share-based awards provide for accelerated vesting if there is a change in control (as defined under our SIPs).

Summary of Share-Based Compensation Expense

The following table summarizes the amounts and classification of share-based compensation expense:



	2017			2016			2015

	(In millions)
Total expense	$	42		$	36		$	33
Included in:
Cost of product sales and services	$	3		$	4		$	3
Engineering, selling and administrative expenses	39			32			30
Income from continuing operations	42			36			33
Tax effect on share-based compensation expense	(16		)	(14		)	(13		)
Total share-based compensation expense after-tax	$	26		$	22		$	20

Compensation cost related to share-based compensation arrangements that was capitalized as part of inventory or fixed assets in fiscal 2017, 2016 and 2015 was not material.

As of the end of fiscal 2017, a total of 29,302,222 shares of common stock remained available under our 2015 EIP for future issuance (excluding shares to be issued in respect of outstanding options and other share-based awards, and with each full-value award (e.g., restricted stock and restricted stock unit awards and performance share and performances share unit awards) counting as 4.6 shares against the total remaining for future issuance). In fiscal 2017, we issued an aggregate of 1,325,754 shares of common stock under the terms of our SIPs, which is net of shares withheld for tax purposes.

Stock Options

The following information relates to stock options, including performance stock options, that have been granted under shareholder-approved SIPs. Option exercise prices are equal to or greater than the fair market value of our common stock on the date the options are granted, using the closing stock price of our common stock. Options may be exercised for a period set at the time of grant, which generally ranges from seven to ten years after the date of grant, and options, other than performance stock options, generally become exercisable in installments, which are typically 33.3 percent one year from the grant date, 33.3 percent two years from the grant date and 33.3 percent three years from the grant date. In certain instances, vesting and exercisability are also subject to performance criteria.

The fair value as of the grant date of each option award was determined using the Black-Scholes-Merton option-pricing model which uses assumptions noted in the following table. Expected volatility over the expected term of the options is based on implied volatility from traded options on our common stock and the historical volatility of our stock price. The expected term of the options is based on historical observations of our common stock, considering average years to exercise for all options exercised and average years to cancellation for all options canceled, as well as average years remaining for vested outstanding options, which is calculated based on the weighted-average of these three inputs. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

A summary of the significant assumptions used in determining the fair value of stock option grants under our SIPs is as follows:



	2017		2016		2015

Expected dividends	2.4	%	2.5	%	2.7	%
Expected volatility	21.8	%	23.0	%	24.3	%
Risk-free interest rates	1.2	%	1.5	%	1.7	%
Expected term (years)	5.03		5.05		5.02

A summary of stock option activity under our SIPs as of June 30, 2017 and changes during fiscal 2017 is as follows:



	Shares		Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
					(In years)	(In millions)
Stock options outstanding July 1, 2016	4,935,845		$	62.28
Stock options forfeited or expired	(272,129	)	$	81.23
Stock options granted	1,230,480		$	90.88
Stock options exercised	(984,054	)	$	54.81
Stock options outstanding June 30, 2017	4,910,142		$	69.89	7.23	$	192.41
Stock options exercisable June 30, 2017	2,313,860		$	55.09	5.83	$	124.92

The weighted-average grant-date fair value was $13.82 per share, $12.68 per share and $12.51 per share for options granted during fiscal 2017, 2016 and 2015, respectively. The total intrinsic value of options exercised during fiscal 2017, 2016 and 2015 was $47 million, $20 million and $20 million, respectively, at the time of exercise.

A summary of the status of our nonvested stock options at June 30, 2017 and changes during fiscal 2017 is as follows:



	Shares		Weighted- Average Grant-Date Fair Value Per Share
Nonvested stock options July 1, 2016	2,683,709		$	12.64
Stock options granted	1,230,480		$	13.82
Stock options vested	(1,317,907	)	$	12.59
Nonvested stock options June 30, 2017	2,596,282		$	13.23

As of June 30, 2017, there was $34 million of total unrecognized compensation expense related to nonvested stock options granted under our SIPs. This expense is expected to be recognized over a weighted-average period of 1.47 years. The total fair value of stock options that vested during fiscal 2017, 2016 and 2015 was approximately $17 million, $15 million and $16 million, respectively.

Restricted Stock and Restricted Stock Unit Awards

The following information relates to awards of restricted stock and restricted stock units that have been granted to employees under our SIPs. These awards are not transferable until vested and the restrictions generally lapse upon the achievement of continued employment over a specified time period.

The fair value as of the grant date of these awards was based on the closing price of our common stock on the grant date and is amortized to compensation expense over the vesting period. At June 30, 2017, there were 154,215 shares of restricted stock and 106,749 restricted stock units outstanding, substantially all of which were payable in shares.

A summary of the status of these awards at June 30, 2017 and changes during fiscal 2017 is as follows:



	Shares		Weighted- Average Grant Price Per Share
Restricted stock and restricted stock units outstanding at July 1, 2016	411,875		$	71.07
Restricted stock and restricted stock units granted	99,155		$	94.60
Restricted stock and restricted stock units vested	(222,667	)	$	63.90
Restricted stock and restricted stock units forfeited	(27,399	)	$	82.52
Restricted stock and restricted stock units outstanding at June 30, 2017	260,964		$	84.92

As of June 30, 2017, there was $12 million of total unrecognized compensation expense related to these awards under our SIPs. This expense is expected to be recognized over a weighted-average period of 1.44 years. The weighted-average grant date price per share or per unit of these awards granted during fiscal 2017, 2016 and 2015 was $94.60, $81.53 and $78.05, respectively. The total fair value of these awards that vested during fiscal 2017, 2016 and 2015 was approximately $14 million, $7 million and $14 million, respectively.

Performance Share Unit Awards

The following information relates to awards of performance share units that have been granted to employees under our SIPs. Generally, these awards are subject to performance criteria, such as meeting predetermined operating income or earnings per share and return on invested capital targets (and market conditions, such as total shareholder return) for a 3-year performance period. These awards also generally vest at the expiration of the same 3-year period. The final determination of the number of shares to be issued in respect of an award is made by our Board of Directors or a committee of our Board of Directors.

The fair value as of the grant date of these awards was determined based on a fair value from a multifactor Monte Carlo valuation model that simulates our stock price and total shareholder return (“TSR”) relative to other companies in our TSR peer group, less a discount to reflect the delay in payments of cash dividend-equivalents that are made only upon vesting. The fair value of these awards is amortized to compensation expense over the vesting period if achievement of the performance measures is considered probable. At June 30, 2017, there were 633,735 performance share units outstanding, all of which were payable in shares.

A summary of the status of these awards at June 30, 2017 and changes during fiscal 2017 is as follows:



	Shares		Weighted- Average Grant Price Per Share
Performance share units outstanding at July 1, 2016	681,731		$	68.67
Performance share units granted	374,907		$	84.40
Performance share units vested	(352,366	)	$	59.32
Performance share units forfeited	(70,537	)	$	80.99
Performance share units outstanding at June 30, 2017	633,735		$	81.81

As of June 30, 2017, there was $23 million of total unrecognized compensation expense related to these awards under our SIPs. This expense is expected to be recognized over a weighted-average period of 1.28 years. The weighted-average grant date price per share or per unit of these awards granted during fiscal 2017, 2016 and 2015 was $84.40, $73.32 and $64.23, respectively. The total fair value of these awards that vested during fiscal 2017, 2016 and 2015 was approximately $21 million, $18 million and $7 million, respectively.