16. Stock-based Compensation and Outstanding Awards

Prior to the Spin-Off, the Company participated in NOV’s stock-based compensation plan known as the National Oilwell Varco, Inc. Long-Term Incentive Plan (the “NOV Plan”) and the Company’s employees were issued NOV equity awards. Under the NOV Plan, the Company’s employees were granted stock options, restricted stock units (RSUs), performance share awards (PSAs) and/or restricted stock awards (RSAs).

In connection with the Spin-Off, the Company established the NOW Inc. Long-Term Incentive Plan (the “Plan”). The Plan was adopted by the Company’s board of directors and approved by NOV, as the Company’s sole stockholder, on May 1, 2014. Under the terms of the Plan, 16 million shares of Company common stock were authorized for grant under the Plan. In connection with the Spin-Off, stock-based compensation awards granted under the NOV Plan and held by Company employees as of May 30, 2014, were adjusted or substituted as follows. These adjustments were intended to preserve the intrinsic value of the awards on May 30, 2014.

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Stock option awards held by Company employees were replaced with substitute awards to purchase NOW common stock.

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Unvested RSAs and RSUs under the NOV plan were replaced with adjusted, substitute awards for NOW RSAs or RSUs, as applicable.

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PSAs received were replaced entirely with substitute NOW RSAs.

Stock based compensation expense recognized in the years ended December 31, 2014, 2013 and 2012 totaled $18 million, $6 million and $6 million, respectively. Adjustment and substitution of the awards did not result in additional compensation expense.

A summary of stock option activity under the Plan as of December 31, 2014, and changes from May 30, 2014 through December 31, 2014 are presented below:


Options	Shares			Weighted-Average Exercise Price		Aggregate Intrinsic Value (in millions)
Outstanding as of May 30, 2014		3,599,654		$	30.85
Granted		—			—
Forfeited		(39,855	)		31.36
Exercised or settled		(14,280	)		27.49
Expired or canceled

Outstanding as of December 31, 2014		3,545,519		$	30.86	$	2

Exercisable at December 31, 2014		1,589,126		$	30.61	$	2

All stock option awards presented in this table are for NOW stock only.

The weighted-average remaining contractual terms of outstanding options and exercisable options at December 31, 2014, were 7.6 years and 6.4 years, respectively. The total intrinsic value of options exercised for the period from May 30, 2014 through December 31, 2014 was less than $1 million.

A summary of the status of the Company’s nonvested shares as of December 31, 2014, and changes for the period from May 30, 2014 through December 31, 2014 are presented below:


RSAs / RSUs	Shares			Weighted-Average Grant-Date Fair Value
Nonvested as of May 30, 2014		1,034,055		$	31.94
Granted		1,422,708			29.02
Vested		—			—
Forfeited		(9,825	)		31.59
Expired or canceled		—			—

Nonvested as of December 31, 2014		2,446,938		$	30.24

All RSUs and RSAs presented in this table are for NOW stock only.

Awards granted in connection with the adjustment and substitution of awards originally issued under the NOV Plan were deducted from the number of NOW shares of common stock available for grant under the Plan. As of December 31, 2014, unrecognized compensation cost related to stock option awards was $12 million, which is expected to be recognized over a weighted average period of 1.8 years. Unrecognized compensation cost related to RSU and RSA awards was $57 million, which is expected to be recognized over a weighted average period of 4.6 years.

The determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s 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 options-pricing model requires the use of extensive 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.

Though NOW Inc. did not grant any new options in 2014 after the Spin-Off, the following table provides the significant assumptions used to calculate the grant date fair market values of options granted prior to the Spin-Off over the years shown below, as calculated using the Black-Scholes options-pricing model.


	Year Ended December 31,
	2014			2013			2012
Valuation Assumptions:
Expected volatility		50.0	%		50.1	%		51.7	%
Risk-free interest rate		0.9	%		0.9	%		0.9	%
Expected dividends	$	0.75		$	0.75		$	0.57
Expected term (in years)		3.4			3.4			3.2

Expected volatility was based on NOV’s actual volatility for traded options for the past 10 years prior to grant date. The risk-free interest rate assumption was based on observed interest rates appropriate for the term of the employee stock options. The expected dividend assumption was based on NOV’s history and expectation of dividend payouts. The estimated expected term was based on NOV’s actual employee exercise activity for the past ten years. As stock-based compensation expense recognized in the consolidated statements of income for 2014 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.