Stock Compensation

3 Months Ended

Mar. 31, 2018

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Stock Compensation

Stock compensation

The Company uses various equity-based compensation programs to provide long-term performance incentives for its global workforce. Currently, these incentives consist principally of stock options, restricted stock units, and to a lesser extent, executive performance shares and restricted stock grants. The Company also sponsors a discounted stock purchase plan in the United States and matching-grant programs in several international locations. Additionally, the Company awards restricted stock to its outside directors. The interim information below should be read in conjunction with the disclosures included within the stock compensation footnote of the Company’s 2017 Annual Report on Form 10-K.

The Company classifies pre-tax stock compensation expense in COGS and SG&A expense principally within its Corporate segment. For the periods presented, compensation expense for all types of equity-based programs and the related income tax benefit recognized was as follows:

	Quarter ended
(millions)	March 31, 2018		April 1, 2017
Pre-tax compensation expense	$	17	$	18
Related income tax benefit	$	4	$	6

As of March 31, 2018, total stock-based compensation cost related to non-vested awards not yet recognized was $130 million and the weighted-average period over which this amount is expected to be recognized was 2 years.

Stock options

During the quarters ended March 31, 2018 and April 1, 2017, the Company granted non-qualified stock options to eligible employees as presented in the following activity tables. Terms of these grants and the Company’s methods for determining grant-date fair value of the awards were consistent with that described within the stock compensation footnote in the Company’s 2017 Annual Report on Form 10-K.

Quarter ended March 31, 2018:

Employee and director stock options	Shares (millions)		Weighted- average exercise price		Weighted- average remaining contractual term (yrs.)	Aggregate intrinsic value (millions)
Outstanding, beginning of period	14		$	64
Granted	3		70
Exercised	(1	)	57
Forfeitures and expirations	—		—
Outstanding, end of period	16		$	65	6.9	$	52
Exercisable, end of period	11		$	63	5.9	$	52

Quarter ended April 1, 2017:

Employee and director stock options	Shares (millions)		Weighted- average exercise price		Weighted- average remaining contractual term (yrs.)	Aggregate intrinsic value (millions)
Outstanding, beginning of period	15		$	62
Granted	2		73
Exercised	(1	)	56
Forfeitures and expirations	—		—
Outstanding, end of period	16		$	64	7.2	$	147
Exercisable, end of period	11		$	60	6.3	$	140

The weighted-average grant date fair value of options granted was $10.00 per share and $10.14 per share for the quarters ended March 31, 2018 and April 1, 2017, respectively. The fair value was estimated using the following assumptions:

	Weighted- average expected volatility		Weighted- average expected term (years)	Weighted- average risk-free interest rate		Dividend yield
Grants within the quarter ended March 31, 2018:	18	%	6.6	2.82	%	3.00	%
Grants within the quarter ended April 1, 2017:	18	%	6.6	2.26	%	2.80	%

The total intrinsic value of options exercised was $10 million and $12 million for the quarters ended March 31, 2018 and April 1, 2017, respectively.

Performance shares

In the first quarter of 2018, the Company granted performance shares to a limited number of senior executive-level employees, which entitle these employees to receive a specified number of shares of the Company’s common stock upon vesting. The number of shares earned could range between 0% and 200% of the target amount depending upon performance achieved over the three year vesting period. The performance conditions of the award include adjusted net sales growth and total shareholder return (TSR) of the Company’s common stock relative to a select group of peer companies.

A Monte Carlo valuation model was used to determine the fair value of the awards. The TSR performance metric is a market condition. Therefore, compensation cost of the TSR condition is fixed at the measurement date and is not revised based on actual performance. The TSR metric was valued as a multiplier of possible levels of adjusted net sales growth achievement. Compensation cost related to adjusted net sales growth performance is revised for changes in the expected outcome. The 2018 target grant currently corresponds to approximately 188,000 shares, with a grant-date fair value of $72 per share.

Based on the market price of the Company’s common stock at March 31, 2018, the maximum future value that could be awarded to employees on the vesting date for all outstanding performance share awards was as follows:

(millions)	March 31, 2018
2016 Award	$	17
2017 Award	$	15
2018 Award	$	24

The 2015 performance share award, payable in stock, was settled at 75% of target in February 2018 for a total dollar equivalent of $8 million.

Other stock-based awards

During the quarter ended March 31, 2018, the Company granted restricted stock units and a nominal number of restricted stock awards to eligible employees as presented in the following table. Terms of these grants and the Company’s method of determining grant-date fair value were consistent with that described within the stock compensation footnote in the Company’s 2017 Annual Report on Form 10-K.

Quarter ended March 31, 2018:

Employee restricted stock units	Shares (thousands)		Weighted-average grant-date fair value
Non-vested, beginning of year	1,673		$	65
Granted	635		64
Vested	(399	)	59
Forfeited	(44	)	67
Non-vested, end of period	1,865		$	66

Quarter ended April 1, 2017:

Employee restricted stock and restricted stock units	Shares (thousands)		Weighted-average grant-date fair value
Non-vested, beginning of year	1,166		$	63
Granted	629		67
Vested	(25	)	55
Forfeited	(22	)	64
Non-vested, end of period	1,748		$	65