STOCK TRANSACTIONS AND STOCK-BASED COMPENSATION

Neither the Company nor any “affiliated purchaser” repurchased any shares of Company common stock during the three and nine month periods ended September 30, 2016. On July 16, 2013, the Company’s Board of Directors approved a repurchase program (the “Repurchase Program”) authorizing the repurchase of up to 20 million shares of the Company’s common stock from time to time on the open market or in privately negotiated transactions. As of September 30, 2016, 20 million shares remained available for repurchase pursuant to the Repurchase Program.

For a full description of the Company’s stock-based compensation programs, reference is made to Note 17 of the Company’s financial statements as of and for the year ended December 31, 2015 included in the Company’s 2015 Annual Report on Form 10-K. As of September 30, 2016, approximately 28 million shares of the Company’s common stock were reserved for issuance under the 2007 Stock Incentive Plan, as adjusted pursuant to the anti-dilution provisions of the plan to account for the Separation.

In connection with the Separation and pursuant to the anti-dilution provisions of the 2007 Stock Incentive Plan, the Company also made certain adjustments to the exercise price and the number of shares underlying stock-based compensation awards with the intention of preserving the intrinsic value of the awards prior to the Separation. Accordingly, the number of shares underlying each stock-based award outstanding as of the date of the Separation was multiplied by a factor of 1.32 and the related exercise price for stock options was divided by a factor of 1.32 which resulted in no increase in the intrinsic value of awards outstanding. The stock-based compensation awards continue to vest over their original vesting period. These adjustments to the Company’s stock-based compensation awards did not result in additional compensation expense.

The following summarizes the assumptions used in the Black-Scholes Merton option pricing model (“Black-Scholes”) to value options granted during the nine month period ended September 30, 2016:



Risk-free interest rate	1.2% - 1.6%
Weighted average volatility	24.6	%
Dividend yield	0.6	%
Expected years until exercise	5.5 - 8.0

The following summarizes the components of the Company’s stock-based compensation expense ($ in millions):



	Three Month Period Ended						Nine Month Period Ended
	September 30, 2016			October 2, 2015			September 30, 2016			October 2, 2015
Restricted stock units (“RSUs”)/performance stock units (“PSUs”):
Pretax compensation expense	$	21.1		$	23.4		$	65.0		$	49.8
Income tax benefit	(6.2		)	(8.6		)	(19.1		)	(17.1		)
RSU/PSU expense, net of income taxes	14.9			14.8			45.9			32.7
Stock options:
Pretax compensation expense	10.3			9.9			31.3			27.1
Income tax benefit	(3.2		)	(3.1		)	(9.7		)	(8.5		)
Stock option expense, net of income taxes	7.1			6.8			21.6			18.6
Total stock-based compensation:
Pretax compensation expense	31.4			33.3			96.3			76.9
Income tax benefit	(9.4		)	(11.7		)	(28.8		)	(25.6		)
Total stock-based compensation expense, net of income taxes	$	22.0		$	21.6		$	67.5		$	51.3

Stock-based compensation has been recognized as a component of selling, general and administrative expenses in the accompanying Consolidated Condensed Statements of Earnings. As of September 30, 2016, $133 million of total unrecognized compensation cost related to RSUs/PSUs is expected to be recognized over a weighted average period of approximately two years. As of September 30, 2016, $112 million of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted average period of approximately three years. Future compensation amounts will be adjusted for any changes in estimated forfeitures.

The following summarizes option activity under the Company’s stock plans (in millions, except weighted exercise price and number of years):



	Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding as of December 31, 2015 ^(a)	24.9		$	43.75
Granted	5.2		66.55
Exercised	(4.9	)	32.54
Cancelled/forfeited	(1.4	)	68.60
Adjustment due to Fortive Separation ^(b)	(5.2	)	50.44
Outstanding as of September 30, 2016	18.6		$	49.31	6	$	542.4
Vested and expected to vest as of September 30, 2016^(c)	18.0		$	48.81	6	$	533.7
Vested as of September 30, 2016	9.0		$	36.69	4	$	376.9


^(a)	The outstanding options (except those options canceled as part of the Separation as noted below) as of December 31, 2015 have been adjusted by a factor of 1.32, as noted above, due to the Separation.


^(b)	The “Adjustment due to Fortive Separation” reflects the cancellation of options which were outstanding as of July 2, 2016 and held by Fortive employees, which have been converted to Fortive options as part of the Separation.


^(c)	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 value in the table above represents the total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the third quarter of 2016 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 30, 2016. The amount of aggregate intrinsic value will change based on the price of the Company’s common stock.

The aggregate intrinsic value of options exercised during the nine month periods ended September 30, 2016 and October 2, 2015 was $181 million and $245 million, respectively. Exercise of options during the first nine months of 2016 and 2015 resulted in cash receipts of $146 million and $169 million, respectively. The Company realized a tax benefit of $7 million and $57 million in the three and nine month periods ended September 30, 2016, respectively, related to the exercise of employee stock options. The net income tax benefit in excess of the expense recorded for financial reporting purposes (the “excess tax benefit”) has been recorded as an increase to additional paid-in capital and is reflected as a financing cash inflow in the accompanying Consolidated Condensed Statements of Cash Flows.

The following summarizes information on unvested RSU and PSU activity (in millions, except weighted average grant-date fair value):



	Number of RSUs/PSUs		Weighted Average Grant-Date Fair Value
Unvested as of December 31, 2015 ^(a)	6.1		$	53.93
Granted	1.8		65.33
Vested	(1.7	)	49.29
Forfeited	(0.7	)	46.31
Adjustment due to Fortive Separation ^(b)	(1.2	)	58.24
Unvested as of September 30, 2016	4.3		60.69


^(a)	The unvested RSUs and PSUs (except those RSUs and PSUs canceled as part of the Separation as noted below) as of December 31, 2015 have been adjusted by a factor of 1.32, as noted above, due to the Separation.


^(b)	The “Adjustment due to Fortive Separation” reflects the cancellation of RSUs and PSUs which were outstanding as of July 2, 2016 and held by Fortive employees which have been converted to Fortive RSUs and PSUs as part of the Separation.

The Company realized a tax benefit of $10 million and $34 million in the three and nine month periods ended September 30, 2016, related to the vesting of RSUs. The excess tax benefit attributable to RSUs has been recorded as an increase to additional paid-in capital and is reflected as a financing cash inflow in the accompanying Consolidated Condensed Statement of Cash Flows.

In connection with the exercise of certain stock options and the vesting of RSUs previously issued by the Company, a number of shares 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 applicable plan, the shares are considered to have been issued and are not added back to the pool of shares available for grant). During the first nine months of 2016, 600 thousand shares with an aggregate value of $44 million were withheld to satisfy the requirement. The withholding is treated as a reduction in additional paid-in capital in the accompanying Consolidated Condensed Statement of Stockholders’ Equity.