Stock Based Compensation

12 Months Ended

Dec. 31, 2019

Share-based Payment Arrangement [Abstract]

Stock Based Compensation

NOTE 17. STOCK BASED COMPENSATION

The 2016 Stock Incentive Plan (the “Stock Plan”) provides for the grant of stock appreciation rights, restricted stock units (“RSUs”), performance stock units (“PSUs”), performance-based restricted stock awards (“RSAs”), and performance stock awards (“PSAs”) (collectively, “Stock Awards”), stock options, or any other stock-based award. A total of 40 million shares of

our common stock have been authorized for issuance under the Stock Plan. As of December 31, 2019, approximately 20 million shares of our common stock remain available for issuance under the Stock Plan. Stock options under the Stock Plan generally vest pro rata over a five-year period and terminate 10 years from the grant date, though the specific terms of each grant are determined by the Compensation Committee of our Board of Directors. Our executive officers and certain other employees may be awarded stock options with different vesting criteria and stock options granted to non-employee directors are fully vested as of the grant date. Exercise prices for stock options granted under the Stock Plan were equal to the closing price of Fortive’s common stock on the NYSE on the date of grant, while stock options issued as conversion awards in connection with the Separation from Danaher were priced to maintain the economic value before and after the Separation.

RSUs and RSAs issued under the Stock Plan provide for the issuance of common stock at no cost to the holder. RSUs granted to employees under the Stock Plan generally provide for time-based vesting over five years, although certain employees may be awarded RSUs with different time-based vesting criteria, and RSAs granted to members of our senior management are also subject to performance-based vesting criteria. RSUs granted to non-employee directors under the Stock Plan vest on the earlier of the first anniversary of the grant date or the date of, and immediately prior to, the next annual meeting of our shareholders following the grant date. However, the underlying shares are not issued until the earlier of the director’s death or the first day of the seventh month following the director’s retirement from the Board of Directors (the “Board”). Prior to vesting, RSUs granted under the Stock Plan do not have dividend equivalent rights, do not have voting rights, and the shares underlying the RSUs are not considered issued or outstanding. RSAs granted under the Stock Plan have all of the same dividend, voting, and other rights corresponding to all other common stock, provided, however, that the dividends payable on the RSAs will accrue and be delivered at the time of delivery of the shares upon vesting of the RSA.

During 2019, 2018, and 2017 PSAs and PSUs were granted under the Stock Plan. These awards vest based on our total shareholder return ranking relative to the S&P 500 Index.

Stock awards generally vest only if the employee is employed by us (or in the case of directors, the director continues to serve on the Board) on the vesting date. To cover the exercise of stock options, vesting of RSUs and PSUs, and issuances of RSAs and PSAs, we generally issue shares authorized but previously unissued, although we may instead issue treasury shares; provided, however, that, either type of issuance would equally reduce the number of shares available under our Stock Plan.

We account for stock-based compensation by measuring the cost of employee services received in exchange for all equity awards granted based on the fair value of the award as of the grant date. We recognize the compensation expense over the requisite service period (which is generally the vesting period but may be shorter than the vesting period, for example, if the employee becomes retirement eligible before the end of the vesting period).

The fair value of RSUs is calculated using the closing price of Fortive common stock on the date of grant, adjusted for the impact of RSUs not having dividend rights prior to vesting. The fair value of RSAs is calculated using the closing price of Fortive common stock on the date of grant. The fair value of the PSUs and PSAs is calculated using a Monte Carlo pricing model. The fair value of the stock options granted is calculated using a Black-Scholes Merton (“Black-Scholes”) option pricing model.

In connection with the exercise of certain stock options and the vesting of Stock Awards issued under the Stock Plan, a number of our shares sufficient to fund statutory minimum tax withholding requirements have 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 year ended December 31, 2019, approximately 193 thousand shares of Fortive common stock with an aggregate value of approximately $15 million, were withheld to satisfy this requirement. The tax withholding is treated as a reduction in Additional paid-in capital in the accompanying Consolidated Statement of Changes in Equity.

Stock-based Compensation Expense

Stock-based compensation has been recognized as a component of Selling, general, and administrative expenses in the accompanying Consolidated Statements of Earnings. The amount of stock-based compensation expense recognized during a period is based on the portion of the awards that are ultimately expected to vest. We estimate pre-vesting forfeitures at the time of grant by analyzing historical data and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. Ultimately, the total expense recognized over the vesting period will equal the fair value of awards that actually vest.

The following summarizes the components of our stock-based compensation expense under the Stock Plan for the years ended December 31 ($ in millions):

	2019			2018			2017
Stock Awards:
Pretax compensation expense	$	39.5		$	30.5		$	26.9
Income tax benefit	(7.5		)	(6.3		)	(8.7		)
Stock Award expense, net of income taxes	32.0			24.2			18.2
Stock options:
Pretax compensation expense	21.9			20.3			17.3
Income tax benefit	(3.3		)	(4.2		)	(5.7		)
Stock option expense, net of income taxes	18.6			16.1			11.6
Total stock-based compensation:
Pretax compensation expense	61.4			50.8			44.2
Income tax benefit	(10.8		)	(10.5		)	(14.4		)
Total stock-based compensation expense, net of income taxes	$	50.6		$	40.3		$	29.8

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. Accordingly, we record 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 financial statements. During the years ended December 31, 2019, 2018, and 2017 we realized an Excess Tax Benefit of $13 million, $17 million, and $17 million, respectively, related to stock options that were exercised and Stock Awards that vested.

The following summarizes the unrecognized compensation cost for the Stock Plan awards as of December 31, 2019. This compensation cost is expected to be recognized over a weighted average period of approximately three 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	$	61.2
Stock options	55.4
Total unrecognized compensation cost	$	116.6

Stock Options

The following summarizes the assumptions used in the Black-Scholes model to value stock options granted under the Stock Plan during the years ended December 31:

	2019			2018			2017
Risk-free interest rate	1.43% - 2.6%			2.71% - 2.96%			1.9% - 2.26%
Volatility (a)	19.9		%	18.8		%	20.9		%
Dividend yield (b)	0.4		%	0.4		%	0.5		%
Expected years until exercise	5.5 - 8.0			5.5 - 8.0			5.5 - 8.0
Weighted average fair value at date of grant	$	19.38		$	18.67		$	13.43
(a) Beginning August 2018, expected volatility was based on a weighted average blend of the company’s historical stock price volatility from July 2, 2016 (the date of Separation) through the stock option grant date and the average historical stock price volatility of a group of peer companies for the expected term of the options. The weighted average volatility from July 2, 2016 to July 2018 was estimated based on an average historical stock price volatility of a group of peer companies given our limited trading history.
(b) The dividend yield is calculated by dividing our annual dividend, based on the most recent quarterly dividend rate, by Fortive’s closing stock price on the grant date.

The following summarizes option activity under the Stock Plan for the years ended December 31, 2019, 2018, and 2017 (in millions, except price per share and numbers of years):

	Options		Weighted Average Exercise Price		Weighted  Average Remaining Contractual Term (years)	Aggregate Intrinsic Value
Outstanding as of January 1, 2017	9.4		$	33.23
Granted	1.7		58.07
Exercised	(1.0	)	24.77
Canceled/forfeited	(0.4	)	45.12
Outstanding as of December 31, 2017	9.7		38.09
Granted	1.7		76.67
Exercised	(1.4	)	28.99
Canceled/forfeited	(0.3	)	54.13
Outstanding as of December 31, 2018	9.7		46.25
Granted	2.2		79.61
Exercised	(1.2	)	33.84
Canceled/forfeited	(0.5	)	66.16
Outstanding as of December 31, 2019	10.2		$	53.64	6.2	$	242.0
Vested and expected to vest as of December 31, 2019 (a)	10.0		$	53.12	6.1	$	240.5
Vested as of December 31, 2019	4.8		$	38.14	4.2	$	184.5
(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 2019 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 December 31, 2019. The amount of aggregate intrinsic value will change based on the price of Fortive’s common stock.

Options outstanding as of December 31, 2019 are summarized below (in millions; except price per share and number of years):

	Outstanding				Vested
Exercise Price	Shares	Average Exercise Price		Average Remaining Life (in years)	Shares	Average Exercise Price
$18.21 - $26.10	1.3	$	23.27	1	1.3	$	23.27
$26.11 - $40.12	1.5	34.45		4	1.5	34.45
$40.13 - $45.64	2.1	42.69		6	1.2	42.74
$45.65 - $54.12	0.4	49.83		7	0.2	50.06
$54.13 - $76.05	2.0	63.23		8	0.4	61.74
$76.06 - $86.03	2.9	79.47		9	0.2	76.97
Total shares	10.2				4.8

The following summarizes aggregate intrinsic value and cash receipts related to stock option exercise activity under the Stock Plans for the years ended December 31 ($ in millions):

	2019		2018		2017
Aggregate intrinsic value of stock options exercised	$	52.5	$	68.7	$	42.3
Cash receipts from stock options exercised	$	40.0	$	39.3	$	26.0

Stock Awards

The following summarizes information related to Stock Award activity under the Stock Plan for the years ended December 31, 2019, 2018, and 2017 (in millions; except price per share):

	Number of Stock Awards (a)		Weighted Average Grant-Date Fair Value
Unvested as of January 1, 2017	2.1		$	39.20
Granted	0.5		57.79
Vested	(0.6	)	35.96
Forfeited	(0.1	)	43.94
Unvested as of December 31, 2017	1.9		45.92
Granted	0.6		77.78
Vested	(0.6	)	41.28
Forfeited	(0.1	)	53.23
Unvested as of December 31, 2018	1.8		57.63
Granted	0.9		80.44
Vested	(0.5	)	48.90
Forfeited	(0.2	)	66.64
Unvested as of December 31, 2019	2.0		69.37
(a) For the year ended December 31, 2017, the table excludes the stock award activity for employees of the A&S Business that was divested on October 1, 2018.