Share-Based Compensation

3 Months Ended

Apr. 04, 2020

Share-Based Compensation

Share-Based Compensation

Note 13.  Share-Based Compensation

Under our share-based compensation plans, we have authorization to provide awards to selected employees and non-employee directors in the form of stock options, restricted stock, restricted stock units, stock appreciation rights, performance stock, performance share units and other awards. Compensation expense, or income in periods of share price depreciation, for these plans is  included in net income as follows:

	Three Months Ended
	April 4,		March 30,
(In millions)	2020		2019
Compensation (income) expense	$	(13)	$	44
Income tax expense (benefit)		3		(11)
Total net compensation (income) expense included in net income	$	(10)	$	33

Compensation (income) expense included stock option expense of $10 million in the first quarter 2020 and $11 million in the first quarter of 2019.

Stock Options

Options to purchase our shares have a maximum term of ten years and generally vest ratably over a three-year period. Stock option compensation cost is calculated under the fair value approach using the Black-Scholes option-pricing model to determine the fair value of options granted on the date of grant. The expected volatility used in this model is based on implied volatilities from traded options on our common stock, historical volatilities and other factors. The expected term is based on historical option exercise data, which is adjusted to reflect any anticipated changes in expected behavior.

We grant options annually on the first day of March and the assumptions used in our option-pricing model and the weighted-average fair value  for these options are as follows:

	March 1,			March 1,
	2020			2019
Fair value of options at grant date	$	10.66		$	14.62
Dividend yield		0.2	%		0.2	%
Expected volatility		29.3	%		26.6	%
Risk-free interest rate		1.1	%		2.5	%
Expected term (in years)		4.7			4.7

The stock option activity during the first quarter of 2020 is provided below:

			Weighted-
	Number of		Average Exercise
(Options in thousands)	Options		Price
Outstanding at January 4, 2020		8,744	$	44.00
Granted		1,728		40.60
Exercised		(169)		(31.48)
Forfeited or expired		(66)		(51.93)
Outstanding at April 4, 2020		10,237	$	43.58
Exercisable at April 4, 2020		7,018	$	41.83

At April 4, 2020, the aggregate intrinsic value of our outstanding and exercisable options was de minimis and these options had a weighted-average remaining contractual life of 6.2 and 4.9 years, respectively. The total intrinsic value of options exercised in the first quarter of 2020 and 2019 was $3 million and $16 million,  respectively.

Restricted Stock Units

We issue restricted stock units that include the right to receive dividend equivalents and are settled in both cash and stock. Beginning in 2020, new grants of restricted stock units will vest in full on the third anniversary of the grant date. Restricted stock units granted prior to 2020 vest one-third each in the third, fourth and fifth year following the year of the grant. The activity for restricted stock units payable in both stock and cash during the first quarter of 2020 is provided below:

	Units Payable in Stock					Units Payable in Cash
			Weighted-				Weighted-
	Number of		Average Grant		Number of		Average Grant
(Shares/Units in thousands)	Shares		Date Fair Value		Units		Date Fair Value
Outstanding at January 4, 2020, nonvested		543	$	49.44		1,104	$	49.61
Granted		134		40.60		358		40.60
Vested		(136)		(42.31)		(272)		(42.33)
Forfeited		—		—		(11)		(50.25)
Outstanding at April 4, 2020, nonvested		541	$	49.05		1,179	$	48.54

The fair value of the restricted stock unit awards that vested and/or amounts paid under these awards is as follows:

	Three Months Ended
	April 4,		March 30,
(In millions)	2020		2019
Fair value of awards vested	$	17	$	22
Cash paid		11		16

Performance Share Units

The activity for our performance share units during the first quarter of 2020 is provided below:

			Weighted-
	Number of		Average Grant
(Units in thousands)	Units		Date Fair Value
Outstanding at January 4, 2020, nonvested		411	$	56.03
Granted		276		40.60
Outstanding at April 4, 2020, nonvested		687	$	49.84

Cash paid under these awards totaled $7 million and $10 million in the first quarter of 2020 and 2019, respectively.