Share-Based Compensation and Savings Plans

Share-Based Compensation Plans

We maintain stock incentive plans (collectively, the “Plans”) for the benefit of certain of our officers, directors and employees. At June 30, 2012, 42 million shares remain available for future issuances under the Plans. This amount includes 33 million shares available under the Cardinal Health, Inc. 2011 Long-Term Incentive Plan (“2011 LTIP”), 1 million shares available under the Cardinal Health, Inc. 2007 Nonemployee Directors Equity Incentive Plan and 8 million shares available under our employee stock purchase plans which were indefinitely suspended in May 2009. The number of shares authorized for issuance under the 2011 LTIP will increase by shares that are not issued under outstanding equity awards. The 2011 LTIP contains fungible share counting provisions. Under these provisions, stock options are counted against the plan as one share for every share issued; awards other than stock options are counted against the plan as two and one-half shares for every share issued. This means that only 13 million shares could be issued under awards other than stock options while 33 million shares could be issued under stock options.

The following table provides total share-based compensation expense from continuing operations by type of award for fiscal 2012, 2011 and 2010:



(in millions)	2012			2011		2010 (1)
Restricted share and share unit expense	$	55		$	52	$	57
Employee stock option expense	25			26		41
Performance share unit expense	6			—		—
Employee stock purchase plan expense	—			—		1
Stock appreciation right (income)/expense	(1		)	2		1
Total share-based compensation expense from continuing operations	$	85		$	80	$	100


(1)	Excludes share-based compensation expense charged to discontinued operations, which was approximately $2 million, net of tax, during fiscal 2010. Share-based compensation expense charged to restructuring and employee severance related to the Spin-Off was approximately $10 million, net of tax, during fiscal 2010.

The total tax benefit from continuing operations related to share-based compensation was $31 million, $29 million and $36 million for fiscal 2012, 2011 and 2010, respectively.

Stock Options

Employee stock options granted under the Plans generally vest in equal annual installments over three years and are exercisable for periods ranging from seven to ten years from the date of grant. All employee stock options are exercisable at a price equal to the market value of the Common Shares underlying the option at the date of grant.

The following summarizes all stock option transactions under the Plans from June 30, 2010 through June 30, 2012:



(in millions, except per share amounts)	Stock Options Outstanding		Weighted Average Exercise Price per Common Share
Balance at June 30, 2010	24		$	37.88
Granted	4		31.07
Exercised	(3	)	30.16
Canceled and forfeited	(2	)	43.34
Balance at June 30, 2011	23		$	37.02
Granted	2		41.58
Exercised	(2	)	30.26
Canceled and forfeited	(2	)	47.19
Balance at June 30, 2012	21		$	37.29
Exercisable at June 30, 2012	15		$	38.80

The following table provides data related to all stock option activity for fiscal 2012, 2011 and 2010:



(in millions, except per share amounts)	2012			2011			2010
Weighted-average grant date fair value per stock option	$	9.26		$	6.40		$	6.44
Aggregate intrinsic value of exercised options	27			26			7
Aggregate intrinsic value of outstanding options at period end	137			217			57
Cash received upon exercise	42			63			40
Cash tax disbursements realized related to exercise	(4		)	(14		)	(16		)
Total compensation cost, net of estimated forfeitures, related to unvested stock options not yet recognized, pre-tax	25			29			32
Weighted-average period over which stock option compensation cost is expected to be recognized in years	2			2			2
Weighted-average remaining contractual life in years	3			4			4

The fair values of the stock options granted to our employees and directors during fiscal 2012, 2011 and 2010 were estimated on the date of grant using a lattice valuation model. We believe the lattice model provides reasonable estimates because it has the ability to take into account individual exercise patterns based on changes in our stock price and other variables and it provides for a range of input assumptions, which are disclosed in the table below. The risk-free rate is based on the United States Treasury yield curve at the time of the grant. We analyzed historical data to estimate option exercise behaviors and employee terminations to be used within the lattice model. The expected life of the options granted was calculated from the option valuation model and represents the length of time in years that the options granted are expected to be outstanding. Expected volatilities are based on implied volatility from traded options on our Common Shares and historical volatility over a period of time commensurate with the contractual term of the option grant (up to ten years). The following table provides the range of assumptions used for options valued during fiscal 2012, 2011 and 2010:



	2012			2011			2010
Risk-free interest rate	1.2%	-	1.3%	1.2%	-	1.7%	1.9%	-	2.5%
Expected volatility	29%			27%	-	32%	32%
Dividend yield	2.0%	-	2.1%	2.2%	-	2.5%	2.0%	-	2.8%
Expected life in years	6			5			4	-	5

Restricted Shares and Restricted Share Units

Restricted shares and restricted share units granted under the Plans generally vest in equal installments over three years. The fair value is determined by the grant date market price of our Common Shares. Restricted shares and restricted share units accrue dividends or cash dividend equivalents that are payable upon vesting of the awards.

The following table summarizes all transactions related to restricted shares and restricted share units under the Plans from June 30, 2010 through June 30, 2012:



(in millions, except per share amounts)	Shares		Weighted Average Grant Date Fair Value per Share
Nonvested at June 30, 2010	3		$	33.33
Granted	2		31.42
Vested	(1	)	36.11
Canceled and forfeited	—		—
Nonvested at June 30, 2011	4		$	31.31
Granted	2		41.67
Vested	(2	)	32.50
Canceled and forfeited	—		—
Nonvested at June 30, 2012	4		$	35.46

The following table provides data related to all restricted share and restricted share unit activity for fiscal 2012, 2011 and 2010:



(in millions)	2012		2011		2010
Total compensation cost, net of estimated forfeitures, related to nonvested restricted share and share unit awards not yet recognized, pre-tax	$	67	$	56	$	58
Weighted-average period in years over which restricted share and share unit cost is expected to be recognized	2		2		2

Performance Share Units

Beginning in fiscal 2012, performance share units were granted under the Plans, which represent Common Shares potentially issuable in the future. Performance share units generally vest over two-year and three-year performance periods based on achievement of specific performance goals. Based on the extent to which the targets are achieved, vested shares may range from 0 percent to 200 percent of the target award amount. The fair value of performance share units is determined by the grant date market price of our Common Shares and the compensation expense associated with nonvested performance share units is dependent on our periodic assessment of the probability of the targets being achieved and our estimate of the number of shares that will ultimately be issued. Performance share units accrue cash dividend equivalents that are payable upon vesting of the awards.

The following table summarizes information related to performance share units under the Plans (based on target award amounts) from June 30, 2011 through June 30, 2012:



(in millions, except per share amounts)	Performance Share Units	Weighted Average Grant Date Fair Value per Share
Nonvested at June 30, 2011	—	$	—
Granted	1	42.60
Vested	—	—
Canceled and forfeited	—	—
Nonvested at June 30, 2012 (1)	1	$	42.60

The following table provides data related to all performance share unit activity for fiscal 2012, 2011 and 2010:



(in millions)	2012
Total compensation cost, net of estimated forfeitures, related to nonvested performance share units not yet recognized, pre-tax	$	12
Weighted-average period in years over which performance share unit cost is expected to be recognized	2

Adjustments to Stock Incentive Plans

In connection with the Spin-Off, on August 31, 2009, we adjusted share-based compensation awards granted under the Plans into awards based on our Common Shares and/or CareFusion common stock, as applicable. For purposes of the vesting of these equity awards, continued employment or service with us or with CareFusion is treated as continued employment for purposes of both our and CareFusion’s equity awards.

The adjustments to stock incentive plans were treated as a modification in accordance with share-based compensation accounting guidance and resulted in a total incremental compensation cost of $1 million.

The following table summarizes the stock options outstanding as of June 30, 2012:



(in millions)	Our Awards	CareFusion Awards
Held by our employees and former employees	20	5
Held by CareFusion employees	1
Total	21

Employee Savings Plans

Substantially all of our domestic non-union employees are eligible to be enrolled in our company-sponsored contributory retirement savings plans, which include features under Section 401(k) of the Internal Revenue Code of 1986, as amended, and provide for matching and profit sharing contributions by us. Our contributions to the plans are determined by the Board of Directors subject to certain minimum requirements as specified in the plans. The total expense for our employee retirement savings plans was $53 million, $70 million and $84 million for fiscal 2012, 2011 and 2010, respectively.