STOCK OPTION AND RESTRICTED STOCK UNIT AWARDS

12 Months Ended

Oct. 30, 2022

STOCK OPTION AND RESTRICTED STOCK UNIT AWARDS

STOCK OPTION AND RESTRICTED STOCK UNIT AWARDS

22. STOCK OPTION AND RESTRICTED STOCK UNIT AWARDS

The company issues stock options and restricted stock unit awards to key employees under plans approved by stockholders. Restricted stock unit awards consist of service-based and performance /service-based awards. Restricted stock units are also issued to nonemployee directors for their services as directors under a plan approved by stockholders. At October 30, 2022, the company is authorized to grant an additional 17.2 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.

Service-based restricted stock units cliff vest after a three-year service period and include dividend equivalent payments. Performance/service-based awards 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 three-year 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. Stock options ratably vest over a three-year service period and expire ten years from the grant date.

The fair value of stock options and service-based restricted stock units, which is based on the closing price of the company’s common stock on the grant date, are expensed over the shorter of the award vesting period or the employee’s retirement eligibility period. Performance/service-based units expense, which are based on the fair value at the grant date excluding dividends, are recognized over the employees’ requisite service period and adjusted quarterly for the probable number of shares to be awarded. The fair value of each stock option award was estimated on the date of grant using a binomial lattice option valuation model. The company recognizes the effect of award forfeitures as an adjustment to compensation expense in the period the forfeiture occurs.

The total share-based compensation expense, recognized income tax benefits, and total grant-date fair values of stock options and

restricted stock units vested consisted of the following in millions of dollars:

	2022		2021		2020
Share-based compensation expense	$	85	$	82	$	81
Income tax benefits		17		16		19
Stock options and restricted stock units vested		74		93		79

At October 30, 2022, there was $66 million of total unrecognized compensation cost from share-based compensation arrangements granted under the plans. This compensation is expected to be recognized over a weighted-average period of approximately 1.5 years.

Stock Options

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:

	2022	2021	2020
Risk-free interest rate*	1.27%	.47%	1.67%
Expected dividends	1.2%	1.2%	1.8%
Volatility*	32.0%	31.0%	26.0%
Expected term (in years)*	5.1	5.5	5.7

*    Weighted-averages

The activity for outstanding stock options at October 30, 2022, and changes during 2022 in millions of dollars and shares follow:

				Remaining
				Contractual	Aggregate
		Exercise		Term	Intrinsic
	Shares	Price*		(Years)	Value
Outstanding at beginning of year	2.5	$	127.82
Granted	.2		343.94
Exercised	(.6)		105.85
Forfeited	(.1)		290.65
Outstanding at end of year	2.0		153.11	4.81	$	497.2
Exercisable at end of year	1.6		119.16	3.79		436.9

*    Weighted-averages

The amounts related to stock options were as follows in millions of dollars unless otherwise noted:

	2022		2021		2020
Weighted-average grant date fair values (per share)	$	89.20	$	62.73	$	35.83
Intrinsic value of options exercised	$	169	$	318	$	398
Cash received from exercises		63		148		331
Tax benefit from exercises		39		71		93

Restricted Stock Units

The weighted-average grant date fair values were as follows:

	2022		2021		2020
Service-based	$	347.59	$	258.86	$	168.94
Performance/service-based		331.47		245.73		160.81

The company’s restricted stock units at October 30, 2022 and changes during 2022 in thousands of shares follow:

		Grant-Date
	Shares	Fair Value*
Service-based
Nonvested at beginning of year	486	$	190.87
Granted	139		347.59
Vested	(208)		173.62
Forfeited	(13)		259.72
Nonvested at end of year	404		251.42
Performance/service based
Nonvested at beginning of year	197	$	171.82
Granted	37		331.47
Vested	(168)		139.37
Performance change	84		139.37
Forfeited	(7)		267.13
Nonvested at end of year	143		227.70

* Weighted-averages