Stock Purchase and Award Plans

The Company measures stock-based compensation expense at the grant date based on the fair value of the award and recognizes the compensation expense over the requisite service period, which is generally the vesting period.

In January 2015, the Company's Board of Directors approved an amendment to and assumption of the existing Medtronic, Inc. 2013 Stock Award and Incentive Plan. In fiscal year 2015, the Company granted stock awards under the Medtronic plc 2013 Stock Award and Incentive Plan (2013 Plan). The 2013 Plan was approved by the Company's shareholders in August 2013 and amended in January 2015. The 2013 Plan provides for the grant of non-qualified and incentive stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, and other stock and cash-based awards. As of April 24, 2015, there were approximately 41 million shares available for future grants under the 2013 Plan.

Share Options Options are granted at the exercise price equal to the closing price of the Company’s ordinary share on the grant date. The majority of the Company’s options are non-qualified options with a 10-year life and a 4-year ratable vesting term. In fiscal year 2015, the Company granted share options under the 2013 Plan.

Restricted Stock Awards Restricted stock and restricted stock units (collectively referred to as restricted stock awards) are granted to officers and key employees. Restricted stock awards are subject to forfeiture if employment terminates prior to the lapse of the restrictions. The Company grants restricted stock awards that typically cliff vest after four years. Restricted stock awards are expensed over the vesting period. The Company also grants shares of performance-based restricted stock awards that typically cliff vest after three years only if the Company has also achieved certain performance objectives. Performance awards are expensed over the performance period based on the probability of achieving the performance objectives. Shares of restricted stock are considered issued and outstanding shares of the Company at the grant date and have the same dividend and voting rights as other ordinary shares. Restricted stock units are not considered issued or outstanding ordinary shares of the Company. Dividend equivalent units are accumulated on restricted stock units during the vesting period. In fiscal year 2015, the Company granted restricted stock units under the 2013 Plan. As of April 24, 2015, all restricted stock awards outstanding were restricted stock units.

Employees Stock Purchase Plan The Medtronic plc Amended and Restated 2014 Employees Stock Purchase Plan (ESPP) allows participating employees to purchase the Company's ordinary shares at a discount through payroll deductions. Employees can contribute up to the lesser of 10 percent of their wages or the statutory limit under the U.S. Internal Revenue Code toward the purchase the Company’s ordinary shares at 85 percent of its market value at the end of the calendar quarter purchase period. Employees purchased 1 million shares at an average price of $57.66 per share in the fiscal year ended April 24, 2015. As of April 24, 2015, plan participants have had approximately $11 million withheld to purchase the Company's ordinary shares at 85 percent of its market value on June 30, 2015, the last trading day before the end of the calendar quarter purchase period. At April 24, 2015, approximately 22 million ordinary shares were available for future purchase under the ESPP.

Valuation Assumptions The Company uses the Black-Scholes option pricing model (Black-Scholes model) to determine the fair value of stock options as of the grant date. The fair value of stock options under the Black-Scholes model requires management to make assumptions regarding projected employee stock option exercise behaviors, risk-free interest rates, volatility of the Company’s stock price, and expected dividends.

The expense recognized for shares purchased under the Company’s ESPP is equal to the 15 percent discount the employee receives at the end of the calendar quarter purchase period. The expense recognized for restricted stock awards is equal to the grant date fair value, which is equal to the closing stock price on the date of grant.

The following table provides the weighted average fair value of options granted to employees and the related assumptions used in the Black-Scholes model:



	Fiscal Year
	2015			2014			2013
Weighted average fair value of options granted	$	25.39		$	12.00		$	7.42
Assumptions used:
Expected life (years)^(a)	4.24			6.40			6.50
Risk-free interest rate^(b)	0.99		%	1.88		%	0.94		%
Volatility^(c)	21.29		%	25.20		%	26.22		%
Dividend yield^(d)	1.66		%	2.02		%	2.64		%

(a)

Expected life: The Company analyzes historical employee stock option exercise and termination data to estimate the expected life assumption. The Company calculates the expected life assumption using the midpoint scenario, which combines historical exercise data with hypothetical exercise data, as the Company believes this data currently represents the best estimate of the expected life of a new employee option. The Company also stratifies its employee population into two groups based upon distinctive exercise behavior patterns.


(b)	Risk-free interest rate: The rate is based on the grant date yield of a zero-coupon U.S. Treasury bond whose maturity period equals the expected term of the option.


(c)	Volatility: Expected volatility is based on a blend of historical volatility and an implied volatility of the Company’s ordinary shares. Implied volatility is based on market traded options of the Company’s ordinary shares.


(d)	Dividend yield: The dividend yield rate is calculated by dividing the Company’s annual dividend, based on the most recent quarterly dividend rate, by the closing stock price on the grant date.

Stock-Based Compensation Expense Under the fair value recognition provisions of U.S. GAAP for accounting for stock-based compensation, the Company measures stock-based compensation expense at the grant date based on the fair value of the award and recognizes the compensation expense over the requisite service period, which is generally the vesting period.

The amount of stock-based compensation expense recognized during a period is based on the portion of the awards that are ultimately expected to vest. The Company estimates pre-vesting forfeitures at the time of grant by analyzing historical data and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. Ultimately, the total expense recognized over the vesting period will equal the fair value of awards that actually vest.

Pursuant to the Transaction Agreement, unvested restricted stock units held by Covidien employees that were granted prior to June 15, 2014 accelerated and became vested upon the close of the Covidien acquisition, whereby each share was converted in a manner consistent with the Arrangement Consideration discussed in Note 2. The accelerated vesting and share conversion constituted a modification under the authoritative guidance for accounting for stock compensation and resulted in $91 million of incremental costs on the date of acquisition and is included in acquisition-related items.

Also pursuant to the Transaction Agreement, unvested performance share units held by Covidien employees accelerated and vested upon the close of the Covidien acquisition based on performance achieved through January 15, 2015. The modification made to the market-based condition of unvested performance share units as a result of the Covidien acquisition also constituted a modification similar to the modification described above. As a result, the modification resulted in incremental compensation cost of $72 million on the date of the acquisition and is included in acquisition-related items.

Additionally, pursuant to the Transaction Agreement, outstanding stock option awards held by Covidien employees upon transaction close were converted into options to acquire the Company's ordinary shares in a manner designed to preserve the intrinsic value of such awards. In addition, pursuant to the Transaction Agreement, unvested restricted stock units granted on or after June 15, 2014 which were held by Covidien employees upon close of the Covidien acquisition were converted into restricted stock units of the Company in a manner designed to preserve the intrinsic value of such awards. The modifications made to the restricted stock units granted on or after June 15, 2014 and all outstanding share options pursuant to the Transaction Agreement that converted such awards constituted modifications under the authoritative guidance for accounting for stock compensation. This guidance requires the Company to revalue the award upon the transaction close and allocate the revised fair value between consideration paid and continuing expense based on the ratio of service performed through the transaction date over the total service period of the award. The revised fair value allocated to post-combination services resulted in incremental expense which is recognized over the remaining service period of the award. The Company recognized $26 million of incremental expense related to these modifications from the date of the acquisition through the end of fiscal year 2015 and is included in acquisition-related items. Except for the conversion of share options and restricted stock units discussed herein, the material terms of these awards remained unchanged.

The following table presents the components and classification of stock-based compensation expense, including the modification expense related to the Transaction Agreement, for stock options, restricted stock awards, and ESPP shares recognized for fiscal years 2015, 2014, and 2013:



	Fiscal Year
(in millions)	2015			2014			2013
Stock options	$	140		$	34		$	44
Restricted stock awards	284			98			96
Employees stock purchase plan	15			13			12
Total stock-based compensation expense	$	439		$	145		$	152

Cost of products sold	$	23		$	14		$	12
Research and development expense	29			27			31
Selling, general, and administrative expense	128			104			109
Restructuring charges	70			—			—
Acquisition-related items	189			—			—
Total stock-based compensation expense	439			145			152
Income tax benefits	(138		)	(40		)	(43		)
Total stock-based compensation expense, net of tax	$	301		$	105		$	109

Stock Options The following table summarizes all stock option activity, including activity from options assumed or issued as a result of acquisitions, during fiscal year 2015:



	Options (in thousands)		Wtd. Avg. Exercise Price		Wtd. Avg. Remaining Contractual Term (in years)	Aggregate Intrinsic Value (dollars in millions)
Outstanding at April 25, 2014	35,577		$	44.78
Granted	40,952		57.96
Exercised	(13,503	)	45.32
Expired/Forfeited	(1,005	)	50.43
Outstanding at April 24, 2015	62,021		53.27		7.03	$	1,351
Vested and expected to vest at April 24, 2015	55,649		51.27		6.75	1,314
Exercisable at April 24, 2015	28,272		39.91		4.53	981

The following table summarizes the total cash received from the issuance of new shares upon stock option award exercises, the total intrinsic value of options exercised and the related tax benefit during fiscal years 2015, 2014, and 2013:



(in millions)	2015		2014		2013
Cash proceeds from options exercised	$	609	$	1,273	$	230
Intrinsic value of options exercised	329		249		39
Tax benefit related to options exercised	106		78		12

Unrecognized compensation expense related to outstanding stock options as of April 24, 2015 was $403 million and is expected to be recognized over a weighted average period of 2.0 years.

Restricted Stock Awards The following table summarizes restricted stock award activity, including activity from restricted stock awards assumed or issued as a result of acquisitions, during fiscal year 2015:



	Awards (in thousands)		Wtd. Avg. Grant Price
Nonvested at April 25, 2014	9,558		$	44.06
Granted	3,515		69.30
Vested	(2,442	)	39.53
Forfeited	(609	)	46.22
Nonvested at April 24, 2015	10,022		$	53.88

The following table summarizes the weighted-average grant date fair value of restricted stock awards granted, total fair value of restricted stock awards vested and related tax benefit during fiscal years 2015, 2014, and 2013:



(in millions, except per share data)	2015		2014		2013
Weighted-average grant-date fair value per restricted stock award	$	69.30	$	55.62	$	39.53
Fair value of restricted stock awards vested	174		142		116
Tax benefit related to restricted stock awards vested	50		40		34

Unrecognized compensation expense related to restricted stock awards as of April 24, 2015 was $252 million and is expected to be recognized over a weighted average period of 2.2 years.