STOCK OPTION AND RESTRICTED STOCK AWARDS

12 Months Ended

Oct. 31, 2021

STOCK OPTION AND RESTRICTED STOCK AWARDS

STOCK OPTION AND RESTRICTED STOCK AWARDS

23. STOCK OPTION AND RESTRICTED STOCK AWARDS

The company issues stock options and restricted stock unit awards to key employees under plans approved by stockholders. Restricted stock units are also issued to nonemployee directors for their services as directors under a plan approved by stockholders. Options are awarded with the exercise price equal to the market

price and become exercisable in one to three years after grant. Options expire ten years after the date of grant. Restricted stock awards generally vest after three years. The compensation cost for stock options and service-based restricted stock units, which is based on the fair value at the grant date, is recognized on a straight-line basis over the requisite period the employee is required to render service. The compensation cost for performance/service-based units, which is based on the fair value at the grant date excluding dividends, is recognized over the employees’ requisite service period and periodically adjusted for the probable number of shares to be awarded. The company recognizes the effect of award forfeitures as an adjustment to compensation expense in the period the forfeiture occurs. According to these plans, at October 31, 2021, the company is authorized to grant an additional 17.7 million shares related to stock options or restricted stock units. The company currently uses shares that have been repurchased through its stock repurchase programs to satisfy share option exercises.

The fair value of each option award was estimated on the date of grant using a binomial lattice option valuation model. Expected volatilities are based on implied volatilities from traded call options on the company’s stock. The expected volatilities are constructed from the following three components: the starting implied volatility of short-term call options traded within a few days of the valuation date; the predicted implied volatility of long-term call options; and the trend in implied volatilities over the span of the call options’ time to maturity. The company uses historical data to estimate option exercise behavior. The expected term of options granted is derived from the output of the option valuation model based on the underlying distribution of historical exercise behavior and represents the weighted-average period of time that options granted are expected to be outstanding. The risk-free rates utilized for periods throughout the contractual life of the options are based on U.S. Treasury security yields at the time of grant.

The assumptions used for the binomial lattice model to determine the fair value of options follow:

	2021	2020	2019
Risk-free interest rate*	.47%	1.67%	2.85%
Expected dividends	1.2%	1.8%	2.0%
Volatility*	31.0%	26.0%	30.0%
Expected term (in years)*	5.5	5.7	8.2

*    Weighted-averages

Stock option activity at October 31, 2021, and changes during 2021 in millions of dollars and shares follow:

				Remaining
				Contractual	Aggregate
		Exercise		Term	Intrinsic
	Shares	Price*		(Years)	Value
Outstanding at beginning of year	3.7	$	107.30
Granted	.3		254.83
Exercised	(1.5)		99.38
Outstanding at end of year	2.5		127.82	5.07	$	527.3
Exercisable at end of year	1.9		103.25	4.00		445.0

*    Weighted-averages

The weighted-average grant-date fair values of options granted during 2021, 2020, and 2019 were $62.73, $35.83, and $46.96, respectively. The total intrinsic values of options exercised during 2021, 2020, and 2019 were $318 million, $398 million, and $186 million, respectively. During 2021, 2020, and 2019, cash received from stock option exercises was $148 million, $331 million, and $178 million, respectively, with tax benefits of $71 million, $93 million, and $44 million, respectively.

The service-only based units award one share of common stock for each unit at the end of the vesting period and include dividend equivalent payments. The performance/service based units are subject to a performance metric based on the company’s compound annual revenue growth rate, compared to a benchmark group of companies over the vesting period. The performance/service based units award common stock in a range of zero to 200 percent for each unit granted based on the level of the metric achieved and do not include dividend equivalent payments over the vesting period. The weighted-average fair values of the service-only based units at the grant dates during 2021, 2020, and 2019 were $258.86, $168.94, and $149.54 per unit, respectively, based on the market price of a share of underlying common stock. The fair value of the performance/service based units at the grant date during 2021, 2020, and 2019 were $245.73, $160.81, and $140.49 per unit, respectively, based on the market price of a share of underlying common stock excluding dividends.

The company’s restricted stock units at October 31, 2021 and changes during 2021 in millions of shares follow:

		Grant-Date
	Shares	Fair Value*
Service-only based
Nonvested at beginning of year	.9	$	155.47
Granted	.2		258.86
Vested	(.5)		190.87
Forfeited	(.1)		163.16
Nonvested at end of year	.5		190.87
Performance/service based
Nonvested at beginning of year	.2	$	147.55
Granted	.1		245.73
Vested	(.2)		145.16
Performance change	.1		144.98
Nonvested at end of year	.2		171.82

* Weighted-averages

During 2021, 2020, and 2019, the total share-based compensation expense was $82 million, $81 million, and $82 million, respectively, with recognized income tax benefits of $16 million, $19 million, and $20 million, respectively. At October 31, 2021, there was $63 million of total unrecognized compensation cost from share-based compensation arrangements granted under the plans, which is related to restricted shares and options. This compensation is expected to be recognized over a weighted-average period of approximately two years. The total grant-date fair values of stock options and restricted shares vested during 2021, 2020, and 2019 were $93 million, $79 million, and $66 million, respectively.