13. Common Stock

National Oilwell Varco has authorized 1 billion shares of $0.01 par value common stock. The Company also has authorized 10 million shares of $0.01 par value preferred stock, none of which is issued or outstanding.

Cash dividends aggregated $230 million and $710 million for the years ended December 31, 2016 and 2015, respectively. The declaration and payment of future dividends is at the discretion of the Company’s Board of Directors and will be dependent upon the Company’s results of operations, financial condition, capital requirements and other factors deemed relevant by the Company’s Board of Directors.

Total compensation cost that has been charged against income for all share-based compensation arrangements was $107 million, $109 million and $101 million for 2016, 2015 and 2014, respectively. The total income tax benefit recognized in the consolidated statements of income for all share-based compensation arrangements was $30 million, $32 million and $29 million for 2016, 2015 and 2014, respectively.

Under the terms of National Oilwell Varco’s Long-Term Incentive Plan, as amended during the second quarter of 2016, 69.4 million shares of common stock are authorized for the grant of options to officers, key employees, non-employee directors and other persons. The Plan provides for the granting of stock options, performance-based share awards, restricted stock, phantom shares, stock payments and stock appreciation rights (“SARs”). The Plan is now subject to a fungible ratio concept, such that the issuance of stock options and SARs reduces the number of available shares under the Plan on a 1-for-1 basis, and the issuance of other awards reduces the number of available shares under the Plan on a 3-for-1 basis. At December 31, 2016, approximately 27.8 million shares were available for future grants.

Stock Options

Options granted under our stock option plan generally vest over a three-year period starting one year from the date of grant and expire ten years from the date of grant. The purchase price of options granted may not be less than the closing market price of National Oilwell Varco common stock on the date of grant.

We also have an inactive stock option plan that was acquired in connection with the acquisition of Grant Prideco in 2008. We converted the outstanding stock options under this plan to options to acquire our common stock and no further options are being issued under this plan. Stock option information summarized below includes amounts for the National Oilwell Varco Long-Term Incentive Plan and stock plans of acquired companies. Options outstanding at December 31, 2016 under the stock option plans have exercise prices between $23.94 and $77.99 per share, and expire at various dates from March 2, 2017 to February 25, 2026.

On June 2, 2014, as a result of the spin-off and pursuant to the terms of the Employee Matters Agreement and the Plan, outstanding NOV stock-based awards held by continuing NOV employees were adjusted to generally preserve the intrinsic value of the original award. Outstanding NOV stock-based awards held by employees of NOW were converted into similar NOW stock-based awards, each appropriately adjusted to generally preserve the intrinsic value of the original award. Adjustments to the awards are reflected in the following tables and did not have a material impact to compensation expense.

The following summarizes options activity:


	Years Ended December 31,
	2016					2015					2014
	Number			Average		Number			Average		Number			Average
	of			Exercise		of			Exercise		of			Exercise
	Shares			Price		Shares			Price		Shares			Price
Shares under option at beginning of year		15,430,307		$	59.50		10,881,133		$	61.22		11,535,566		$	58.36
Granted		3,672,411			28.26		5,746,153			54.74		3,389,547			69.00
Spun-off		—			—		—			—		(1,567,348	)		70.56
Cancelled		(1,517,065	)		49.95		(886,356	)		62.73		(498,967	)		70.32
Exercised		(146,593	)		28.53		(310,623	)		22.56		(1,977,665	)		53.56

Shares under option at end of year		17,439,060		$	54.08		15,430,307		$	59.50		10,881,133		$	61.22

Exercisable at end of year		9,828,897		$	61.56		7,498,414		$	60.30		5,903,712		$	55.06

The following summarizes information about stock options outstanding at December 31, 2016:


	Weighted-Avg		Options Outstanding				Options Exercisable
	Remaining				Weighted-Avg				Weighted-Avg
Range of Exercise Price	Contractual Life		Shares		Exercise Price		Shares		Exercise Price
$12.15 - $55.00		7.56		10,108,458	$	42.77		3,312,182	$	45.43
$55.01 - $70.00		6.21		4,720,781		66.21		3,906,894		65.63
$70.01 - $77.99		4.66		2,609,821		75.95		2,609,821		75.95

Total		6.76		17,439,060	$	54.08		9,828,897	$	61.56

The weighted-average fair value of options granted during 2016, 2015 and 2014, was approximately $6.44, $15.41 and $25.60 per share, respectively, as determined using the Black-Scholes option-pricing model. The total intrinsic value of options exercised during 2016 and 2015, was $4 million and $9 million, respectively.

The determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise activity. The use of the Black Scholes model requires the use of actual employee exercise activity data and the use of a number of complex assumptions including expected volatility, risk-free interest rate, expected dividends and expected term.


	Years Ended December 31,
	2016			2015			2014
Valuation Assumptions:
Expected volatility		48.6	%		49.1	%		49.4	%
Risk-free interest rate		1.2	%		1.5	%		1.5	%
Expected dividends	$	6.52		$	3.36		$	1.39
Expected term (in years)		3.0			3.0			3.7

The Company used the actual volatility for traded options for the past 10 years prior to option date as the expected volatility assumption required in the Black Scholes model.

The risk-free interest rate assumption is based upon observed interest rates appropriate for the term of our employee stock options. The dividend yield assumption is based on the history and expectation of dividend payouts. The estimated expected term is based on actual employee exercise activity for the past ten years.

As stock-based compensation expense recognized in the Consolidated Statement of Income in 2016 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. ASC Topic 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience.

The following summary presents information regarding outstanding options at December 31, 2016 and changes during 2016 with regard to options under all stock option plans:


						Weighted
				Weighted- Average		Remaining Contractual
	Shares			Exercise Price		Term (years)		Aggregate Intrinsic Value
Outstanding at December 31, 2015		15,430,307		$	59.50		5.16	$	5,894,977
Granted		3,672,411		$	28.26
Cancelled		(1,517,065	)	$	49.95
Exercised		(146,593	)	$	28.53

Outstanding at December 31, 2016		17,439,060		$	54.08		6.76	$	37,928,494

Vested or expected to vest		17,212,352		$	54.08		6.76	$	37,408,874

Exercisable at December 31, 2016		9,828,897		$	61.56		5.42	$	6,700,856

At December 31, 2016, total unrecognized compensation cost related to nonvested stock options was $45 million. This cost is expected to be recognized over a weighted-average period of two years. The total fair value of stock options vested in 2016, 2015 and 2014 was approximately $61 million, $72 million and $67 million, respectively. Cash received from option exercises for 2016, 2015 and 2014 was $4 million, $7 million and $108 million, respectively. The actual tax benefit realized for the tax deductions from option exercises totaled nil, $3 million and $16 million for 2016, 2015 and 2014, respectively. Cash used to settle equity instruments granted under all share-based payment arrangements for 2016, 2015 and 2014 was not material for any period.

Stock Appreciation Rights

On February 24, 2016, the Company also granted 4,618,400 SARs with an exercise price of $28.24 and a fair value of $6.44 per SAR. The SARs are cash-settled awards and vest over a three-year period from the grant date. Upon exercise of the SARs, the employee is entitled to receive cash payment for the appreciation in the value of our common stock over the exercise price. We account for the cash-settled SARs as liability awards, which require the awards to be revalued at each reporting period.

The following summary presents information regarding outstanding SARs at December 31, 2016 and changes during 2016 with regard to SARs:


	Year Ended December 31,
	2016
	Number			Average
	of			Exercise
	Shares			Price
Shares under SARs at beginning of year		—		$	—
Granted		4,618,400			28.32
Cancelled		(276,660	)		28.24

Shares under SARs at end of year		4,341,740		$	28.32

Exercisable at end of year		—		$	—

As of December 31, 2016, there was $49 million of unrecognized compensation expense related to nonvested SARs, which is expected to be recognized over a weighted-average period of two years. The expense recognized in 2016 and the liability for cash-settled SARs was $20 million at December 31, 2016.

Restricted Shares

The Company issues restricted stock awards and restricted stock units to officers and key employees in addition to stock options. On February 24, 2016, the Company granted 1,732,095 shares of restricted stock and restricted stock units with a fair value of $28.24 per share; and performance share awards to senior management employees with potential payouts varying from zero to 341,780 shares. The restricted stock and restricted stock units vest on the third anniversary of the date of grant or in three equal annual installments commencing on the first anniversary of the date of grant. The performance share awards can be earned based on performance against established goals over a three-year performance period. The performance share awards are based entirely on a TSR (total shareholder return) goal. Performance against the TSR goal is determined by comparing the performance of the Company’s TSR with the TSR performance of the members of the OSX index for the three-year performance period.

On May 18, 2016, the Company granted 44,520 restricted stock awards with a fair value of $31.45 per share. The awards were granted to non-employee members of the board of directors and vest on the first anniversary of the grant date.

On November 15, 2016, the Company granted 1,435,450 shares of restricted stock and restricted stock units with a fair value of $36.04. The restricted stock and restricted stock units were granted to key employees and vest over a three-year period from the date of grant.

The following summary presents information regarding outstanding restricted shares:


	Years Ended December 31,
	2016					2015					2014
				Weighted-					Weighted-					Weighted-
	Number			Average		Number			Average		Number			Average
	of			Grant Date		of			Grant Date		of			Grant Date
	Units			Fair Value		Units			Fair Value		Units			Fair Value
Nonvested at beginning of year		1,969,250		$	61.53		1,569,141		$	73.73		1,643,193		$	67.98
Granted		3,384,325			31.59		954,075			53.27		708,821			70.14
Spin-off		—			—		—			—		(319,949	)		70.56
Vested		(565,202	)		29.32		(405,327	)		54.30		(348,981	)		74.97
Cancelled		(224,390	)		49.95		(148,639	)		62.73		(113,943	)		70.32

Nonvested at end of year		4,563,983		$	41.10		1,969,250		$	61.53		1,569,141		$	73.73

The weighted-average grant day fair value of restricted stock awards and restricted stock units granted during the years ended 2016, 2015 and 2014 was $31.59, $53.27 and $70.14 per share, respectively. There were 565,202; 405,327 and 348,981 restricted stock awards that vested during 2016, 2015 and 2014, respectively. At December 31, 2016, there was approximately $101 million of unrecognized compensation cost related to nonvested restricted stock awards and restricted stock units, which is expected to be recognized over a weighted-average period of two years.