STOCK-BASED COMPENSATION PLANS

In November 2012, the Company’s stockholders voted to approve the amended and restated 2005 Stock Incentive Plan (the Plan). The Plan permits the Company to grant various nonqualified stock-based compensation awards, including stock options, restricted stock, performance units, deferred stock units, stock appreciation rights and other stock-based awards. The primary amendment reflected in the Plan was an increase of approximately 3 million common shares that may be issued for stock-based compensation purposes. As of June 30, 2017, the Company is authorized to grant up to approximately 7 million common shares under the Plan, and, as of June 30, 2017, approximately 7 million common shares were available for grant.

Compensation cost and the related income tax benefit recognized for stock-based compensation plans were classified as indicated below for the fiscal years ended June 30:



	2017		2016		2015
Cost of products sold	$	7	$	6	$	4
Selling and administrative expenses	40		35		25
Research and development costs	4		4		3
Total compensation costs	$	51	$	45	$	32

Related income tax benefit	$	19	$	17	$	12

Cash received during fiscal years 2017, 2016 and 2015 from stock options exercised under all stock-based payment arrangements was $81, $180 and $230, respectively. The Company issues shares for stock-based compensation plans from treasury stock. The Company may repurchase shares under its Evergreen Program to offset the estimated impact of share dilution related to stock-based awards (See Note 13).

Details regarding the valuation and accounting for stock options, restricted stock awards, performance units and deferred stock units for non-employee directors follow.

Stock Options

The fair value of each stock option award granted during fiscal years 2017, 2016 and 2015 was estimated on the date of grant using the Black-Scholes valuation model and assumptions noted in the following table:



	2017	2016	2015
Expected life	5.5 years	5.6 years	5.6 to 5.8 years
Weighted-average expected life	5.5 years	5.6 years	5.7 years
Expected volatility	16.2% to 16.9%	16.4% to 17.3%	16.3% to 18.6%
Weighted-average volatility	16.9%	17.2%	16.6%
Risk-free interest rate	1.3% to 2.2%	1.3% to 1.7%	1.4% to 2.0%
Weighted-average risk-free interest rate	1.3%	1.7%	1.9%
Dividend yield	2.4% to 2.8%	2.5% to 2.8%	2.8% to 3.4%
Weighted-average dividend yield	2.6%	2.8%	3.3%

The expected life of the stock options is based on observed historical exercise patterns. The expected volatility is based on implied volatility from publicly traded options on the Company’s stock at the date of grant, historical implied volatility of the Company’s publicly traded options and other factors. The risk-free interest rate is based on the implied yield on a U.S. Treasury zero-coupon issue with a remaining term equal to the expected term of the option. The dividend yield is based on the projected annual dividend payment per share, divided by the stock price at the date of grant.

Details of the Company’s stock option activities are summarized below:



	Number of Shares (In thousands)		Weighted- Average Exercise Price per Share		Average Remaining Contractual Life	Aggregate Intrinsic Value
Options outstanding as of June 30, 2016	6,827		$	85	7 years	$	366
Granted	1,318		123
Exercised	(1,115	)	75
Canceled	(123	)	112
Options outstanding as of June 30, 2017	6,907		$	93	6 years	$	277
Options vested as of June 30, 2017	3,835		$	80	5 years	$	204

The weighted-average fair value per share of each option granted during fiscal years 2017, 2016 and 2015, estimated at the grant date using the Black-Scholes option pricing model was $13.75, $13.21 and $9.65, respectively. The total intrinsic value of options exercised in fiscal years 2017, 2016 and 2015 was $65, $142 and $140, respectively.

Stock option awards outstanding as of June 30, 2017, have been granted at prices that are equal to the market value of the stock on the date of grant. Stock option grants generally vest over 4 years and expire no later than 10 years after the grant date. The Company recognizes compensation expense on a straight-line basis over the vesting period. As of June 30, 2017, there was $17 of total unrecognized compensation cost related to non-vested options, which is expected to be recognized over a remaining weighted-average vesting period of 1 year, subject to forfeiture changes.

Restricted Stock Awards

The fair value of restricted stock awards is estimated on the date of grant based on the market price of the stock and is amortized to compensation expense on a straight-line basis over the related vesting periods, which are generally 3 to 4 years. The total number of restricted stock awards expected to vest is adjusted by actual and estimated forfeitures. Restricted stock grants receive dividend distributions earned during the vesting period upon vesting.

As of June 30, 2017, there was $1 of total unrecognized compensation cost related to non-vested restricted stock awards, which is expected to be recognized over a remaining weighted-average vesting period of 1 year. The total fair value of the shares that vested in each of the fiscal years 2017, 2016 and 2015 was $1 for all fiscal years. The weighted-average grant-date fair value of awards granted was $131.67, $128.91 and $95.67 per share for fiscal years 2017, 2016 and 2015, respectively.

A summary of the status of the Company’s restricted stock awards is presented below:



	Number of Shares (In thousands)		Weighted-Average Grant Date Fair Value per Share
Restricted stock awards as of June 30, 2016	13		$	108
Granted	10		132
Vested	(4	)	110
Forfeited	(1	)	96
Restricted stock awards as of June 30, 2017	18		$	120

Performance Units

As of June 30, 2017, there was $31 in unrecognized compensation cost related to non-vested performance unit grants that is expected to be recognized over a remaining weighted-average performance period of 1 year. The weighted-average grant-date fair value of awards granted was $122.73, $92.35 and $89.75 per share for fiscal years 2017, 2016 and 2015, respectively.

A summary of the status of the Company’s performance unit awards is presented below:



	Number of Shares (In thousands)		Weighted-Average Grant Date Fair Value per Share
Performance unit awards as of June 30, 2016	952		$	90
Granted	253		123
Distributed	(35	)	59
Forfeited	(308	)	87
Performance unit awards as of June 30, 2017	862		$	102

Performance units vested and deferred as of June 30, 2017	—		$	—

The non-vested performance units outstanding as of June 30, 2017 and 2016 were 738,000 and 794,000, respectively, and the weighted average grant date fair value was $108.00 and $95.18 per share, respectively. There were no shares vested during fiscal year 2017. Deferred shares continue to earn dividends, which are also deferred. The total fair value of shares vested was $0, $26 and $24 during fiscal years 2017, 2016 and 2015, respectively. Upon vesting, the recipients of the grants receive the distribution as shares or, if previously elected by eligible recipients, as deferred stock.

Deferred Stock Units for Nonemployee Directors

Nonemployee directors receive annual grants of deferred stock units under the Company’s director compensation program and can elect to receive all or a portion of their annual retainers and fees in the form of deferred stock units. The deferred stock units receive dividend distributions, which are reinvested as deferred stock units, and are recognized at their fair value on the date of grant. Each deferred stock unit represents the right to receive one share of the Company’s common stock following the completion of a director’s service.

During fiscal year 2017, the Company granted 14,000 deferred stock units, reinvested dividends of 6,000 units and distributed 59,000 shares, which had a weighted-average fair value on the grant date of $121.37, $125.68 and $77.15 per share, respectively. As of June 30, 2017, 205,000 units were outstanding, which had a weighted-average fair value on the grant date of $74.28 per share.