STOCK-BASED COMPENSATION

We have two primary stock-based compensation programs under which we annually grant stock option, restricted stock unit (RSU) and performance stock unit (PSU) awards to key managers and directors.

In our main long-term incentive program, key managers can elect to receive options or RSUs. All options granted vest after three years. Exercise prices on options granted have been, and continue to be, set equal to the market price of the underlying shares on the date of the grant. The stock options granted from July 1998 through August 2002 had a 15-year life and expired during fiscal year 2017. The options granted since September 2002 have a 10-year life.

RSUs granted in February 2017 vest and settle in shares of common stock three years from the grant date. RSUs granted prior to February 2017 vest and settle in shares of common stock five years from the grant date.

Senior-level executives participate in an additional long-term incentive program that awards PSUs, which are paid in shares after the end of a three-year performance period. Under this program, the number of PSUs that will vest is based on the Company's performance relative to pre-established performance goals during that three year period.

In addition to these long-term incentive programs, we award RSUs to the Company's directors and make other minor stock option and RSU grants to employees for which the terms are not substantially different than our long-term incentive awards.

A total of 185 million shares of common stock were authorized for issuance under the stock-based compensation plan approved by shareholders in 2014. A total of 95 million shares remain available for grant under the 2014 plan.

The Company recognizes stock-based compensation expense based on the fair value of the awards at the date of grant. The fair value is amortized on a straight-line basis over the requisite service period. Awards to employees eligible for retirement prior to the award becoming fully vested are recognized as compensation expense from the grant date through the date the employee first becomes eligible to retire and is no longer required to provide services to earn the award. Stock-based compensation expense, which is included as part of Cost of products sold and SG&A in the Consolidated Statement of Earnings, and the related tax benefit were as follows:



Years ended June 30	2017		2016		2015
Stock options	$	216	$	199	$	223
RSUs and PSUs	150		143		114
Total stock-based expense ⁽¹⁾	$	366	$	342	$	337

Income tax benefit ⁽¹⁾	$	111	$	85	$	109


⁽¹⁾	Includes amounts related to discontinued operations, which are not material in any period presented.

We utilize an industry standard lattice-based valuation model to calculate the fair value for stock options granted. Assumptions utilized in the model, which are evaluated and revised to reflect market conditions and experience, were as follows:



Years ended June 30	2017				2016				2015
Interest rate	0.8	-	2.6	%	0.7	-	1.9	%	0.1	-	2.1	%
Weighted average interest rate	2.6			%	1.8			%	2.0			%
Dividend yield	3.2			%	3.2			%	3.1			%
Expected volatility	12	-	16	%	15	-	17	%	11	-	15	%
Weighted average volatility	15			%	16			%	15			%
Expected life in years	9.6				8.3				8.3

Lattice-based option valuation models incorporate ranges of assumptions for inputs and those ranges are disclosed in the preceding table. Expected volatilities are based on a combination of historical volatility of our stock and implied volatilities of call options on our stock. We use historical data to estimate option exercise and employee termination patterns within the valuation model. The expected life of options granted is derived from the output of the option valuation model and represents the average period of time that options granted are expected to be outstanding. The interest rate for periods within the contractual life of the options is based on the U.S. Treasury yield curve in effect at the time of grant.

A summary of options, RSUs and PSUs outstanding under the plans as of June 30, 2017 and activity during the year then ended is presented below:



Options	Options (in thousands)		Weighted Average Exercise Price		Weighted Average Contract-ual Life in Years	Aggregate Intrinsic Value
Outstanding, beginning of year	230,397		$	68.02
Granted	21,425		90.70
Exercised	(44,070	)	59.11
Canceled	(1,267	)	69.76
OUTSTANDING, END OF YEAR	206,485		$	72.46	5.4	$	3,109
EXERCISABLE	140,803		$	66.71	3.9	$	2,878

The weighted average grant-date fair value of options granted was $10.45, $8.48 and $9.38 per share in 2017, 2016 and 2015, respectively. The total intrinsic value of options exercised was $1,334, $1,388 and $1,814 in 2017, 2016 and 2015, respectively. The total grant-date fair value of options that vested during 2017, 2016 and 2015 was $246, $200 and $241, respectively. At June 30, 2017, there was $208 of compensation cost that has not yet been recognized related to stock option grants. That cost is expected to be recognized over a remaining weighted average period of 2.0 years. Cash received from options exercised was $2,630, $2,332 and $2,631 in 2017, 2016 and 2015, respectively. The actual tax benefit for the tax deductions from option exercises totaled $421, $433 and $519 in 2017, 2016 and 2015, respectively.



	RSUs				PSUs
Other stock-based awards	Units (in thousands)		Weighted Average Grant Date Fair Value		Units (in thousands)		Weighted Average Grant Date Fair Value
Non-vested at July 1, 2016	5,274		$	65.53	1,146		$	75.25
Granted	1,730		89.74		623		91.03
Vested	(1,586	)	66.70		(575	)	77.55
Forfeited	(59	)	69.21		—		—
Non-vested at June 30, 2017	5,359		$	74.98	1,194		$	82.40

At June 30, 2017, there was $255 of compensation cost that has not yet been recognized related to restricted stock, RSUs and PSUs. That cost is expected to be recognized over a remaining weighted average period of 2.5 years. The total grant date fair value of shares vested was $163, $97 and $79 in 2017, 2016 and 2015, respectively.

The Company settles equity issuances with treasury shares. We have no specific policy to repurchase common shares to mitigate the dilutive impact of options, RSUs and PSUs. However, we have historically made adequate discretionary purchases, based on cash availability, market trends and other factors, to offset the impacts of such activity.