Stock-based Compensation

In 2003, shareholders approved the 2003 Long-Term Incentive Plan, which authorized the issuance of an aggregate of 31.2 million shares to satisfy awards of stock options, stock appreciation rights, unrestricted stock, restricted stock/units (including performance restricted stock) and performance units. In 2005, shareholders approved the 2005 Long-Term Incentive Plan, which authorized the issuance of an additional 6 million shares to satisfy the same types of awards. In 2008, shareholders approved an amendment to the 2005 Long-Term Incentive Plan to increase the number of authorized shares to 10.5 million and in 2010, shareholders approved another amendment to the 2005 Long-Term Incentive Plan to increase the number of authorized shares to 17.5 million. In 2015, shareholders approved the 2015 Long-Term Incentive Plan, which authorized the issuance of 13 million shares. Approximately 6 million of these shares were shares that were currently available under the 2005 plan and were incorporated into the 2015 Plan upon approval by shareholders.

Awards under Long-Term Incentive Plans may be granted to employees and directors. Pursuant to the Long-Term Incentive Plan, we adopted a long-term incentive compensation program which provides for grants of total shareholder return (TSR) performance restricted stock/units, EPS performance restricted stock/units, strategic performance restricted stock/units, time-lapse restricted stock/units, special performance restricted stock/units and unrestricted stock. Under the program, awards of TSR performance restricted stock/units will be earned by comparing our total shareholder return during a three-year period to the respective total shareholder returns of companies in a performance peer group. Based upon our ranking in the performance peer group, a recipient of TSR performance restricted stock/units may earn a total award ranging from 0% to 200% of the initial grant. Awards of EPS performance restricted stock/units will be earned based upon our achievement of annual earnings per share goals. During the three-year vesting period, a recipient of EPS performance restricted stock/units may earn a total award of either 0% or 100% of the initial grant. Awards of the strategic performance restricted stock units were earned based upon the achievement of two key metrics, net sales and EPS growth, compared to strategic plan objectives during a three-year period. A recipient of strategic performance restricted stock units earned a total award ranging from 0% to 200% of the initial grant. Awards of time-lapse restricted stock/units will vest ratably over the three-year period. In addition, we may issue special grants of restricted stock/units to attract and retain executives which vest over various periods. Awards are generally granted annually in October.

Annual stock option grants were granted in 2018, 2017, and 2016, and were not part of the long-term incentive compensation program for 2015. Stock options are granted on a selective basis under the Long-Term Incentive Plans. The term of a stock option granted under these plans may not exceed ten years from the date of grant. Options granted in 2018, 2017, and 2016 under these plans vest ratably over a three-year period. The option price may not be less than the fair market value of a share of common stock on the date of the grant.

In 2018, we issued stock options, time-lapse restricted stock units, unrestricted stock, EPS performance restricted stock units and TSR performance restricted stock units. We did not issue strategic performance restricted stock units or special performance restricted units in 2018.

Total pre-tax stock-based compensation expense and tax-related benefits recognized in the Consolidated Statements of Earnings were as follows:



	2018		2017		2016
Total pre-tax stock-based compensation expense	$	61	$	60	$	64
Tax-related benefits	$	11	$	22	$	24

The following table summarizes stock option activity as of July 29, 2018:



	Options		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life	Aggregate Intrinsic Value
	(Options in thousands)				(In years)
Outstanding at July 30, 2017	1,042		$	52.08
Granted	575		$	47.19
Exercised	—		$	—
Terminated	(80	)	$	50.05
Outstanding at July 29, 2018	1,537		$	50.36	8.2	$	—
Exercisable at July 29, 2018	519		$	51.40	7.5	$	—

The total intrinsic value of options exercised during 2017 was not material. During 2016, the total intrinsic value of options exercised was $2. We measure the fair value of stock options using the Black-Scholes option pricing model. The expected term of options granted was based on the weighted average time of vesting and the end of the contractual term. We utilized this simplified method as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term.

The assumptions and grant-date fair values for grants in 2018 and 2017 were as follows:



	2018	2017	2016
Risk-free interest rate	2.06%	1.28%	1.68%
Expected dividend yield	2.95%	2.26%	2.46%
Expected volatility	19.60%	18.64%	18.35%
Expected term	6 years	6 years	6 years
Grant-date fair value	$6.67	$7.51	$6.86

We expense stock options on a straight-line basis over the vesting period, except for awards issued to retirement eligible participants, which we expense on an accelerated basis. As of July 29, 2018, total remaining unearned compensation related to nonvested stock options was $1, which will be amortized over the weighted-average remaining service period of 1.3 years.

The following table summarizes time-lapse restricted stock units and EPS performance restricted stock units as of July 29, 2018:



	Units		Weighted- Average Grant-Date Fair Value
	(Restricted stock units in thousands)
Nonvested at July 30, 2017	1,221		$	50.86
Granted	1,220		$	44.18
Vested	(643	)	$	48.67
Forfeited	(146	)	$	48.27
Nonvested at July 29, 2018	1,652		$	47.01

We determine the fair value of time-lapse restricted stock units, EPS performance restricted stock units, strategic performance restricted stock units and special performance restricted stock units based on the quoted price of our stock at the date of grant. We expense time-lapse restricted stock units on a straight-line basis over the vesting period, except for awards issued to retirement-eligible participants, which we expense on an accelerated basis. We expense EPS performance restricted stock units on a graded-vesting basis, except for awards issued to retirement-eligible participants, which we expense on an accelerated basis. There were 142 thousand EPS performance target grants outstanding at July 29, 2018, with a weighted-average grant-date fair value of $49.60. The actual number of EPS performance restricted stock units and strategic performance restricted stock units that vest will depend on actual performance achieved. We estimate expense based on the number of awards expected to vest. In the first quarter of 2017, recipients of strategic performance restricted stock units earned 35% of the initial grants based on actual performance achieved during a three-year period ended July 31, 2016. There were no strategic performance restricted stock units outstanding at July 29, 2018.

In 2015, we issued special performance restricted stock units for which vesting was contingent upon meeting various financial goals and performance milestones to support innovation and growth initiatives. These awards vested in the first quarter of 2017. Recipients of special performance restricted stock units earned 0% of the initial grants based upon financial goals and 100% of the initial grants based upon performance milestones to support innovation and growth initiatives.

As of July 29, 2018, total remaining unearned compensation related to nonvested time-lapse restricted stock units and EPS performance restricted stock units was $37, which will be amortized over the weighted-average remaining service period of 1.7 years. The fair value of restricted stock units vested during 2018, 2017 and 2016 was $30, $55 and $44, respectively. The weighted-average grant-date fair value of the restricted stock units granted during 2017 and 2016 was $54.79 and $50.44, respectively.

The following table summarizes TSR performance restricted stock units as of July 29, 2018:



	Units		Weighted- Average Grant-Date Fair Value
	(Restricted stock units in thousands)
Nonvested at July 30, 2017	1,774		$	48.24
Granted	943		$	39.39
Vested	(815	)	$	43.39
Forfeited	(238	)	$	43.53
Nonvested at July 29, 2018	1,664		$	46.66

We estimated the fair value of TSR performance restricted stock units at the grant date using a Monte Carlo simulation. Assumptions used in the Monte Carlo simulation were as follows:



	2018	2017	2016
Risk-free interest rate	1.58%	0.85%	0.92%
Expected dividend yield	2.95%	2.26%	2.46%
Expected volatility	19.07%	17.78%	17.25%
Expected term	3 years	3 years	3 years

We recognize compensation expense on a straight-line basis over the service period. As of July 29, 2018, total remaining unearned compensation related to TSR performance restricted stock units was $23, which will be amortized over the weighted-average remaining service period of 1.8 years. In the first quarter of 2018, recipients of TSR performance restricted stock units earned 125% of the initial grants based upon our TSR ranking in a performance peer group during a three-year period ended July 28, 2017. As a result, approximately 160 thousand additional shares were awarded. In the first quarter of 2017, recipients of TSR performance restricted stock units earned 75% of the initial grants based upon our TSR ranking in a performance peer group during a three-year period ended July 29, 2016. In the first quarter of 2016, recipients of TSR performance restricted stock units earned 100% of the initial grants based upon our TSR ranking in a performance peer group during a three-year period ended July 31, 2015. The fair value of TSR performance restricted stock units vested during 2018, 2017, and 2016 was $38, $14, and $22, respectively. The grant-date fair value of the TSR performance restricted stock units granted during 2017 and 2016 was $39.53 and $62.44, respectively. In the first quarter of 2019, recipients of TSR performance restricted stock units will receive a 0% payout based upon our TSR ranking in a performance peer group during a three-year period ended July 27, 2018.

The excess tax deficiencies of $3 in 2018, and the excess tax benefits of $6 in 2017 and $7 in 2016, on the exercise of stock options and vested restricted stock were presented as cash flows from operating activities. Cash received from the exercise of stock options was $2 for 2017 and 2016, and are reflected in cash flows from financing activities in the Consolidated Statements of Cash Flows.