Stock Compensation

6 Months Ended

Jul. 04, 2015

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Stock Compensation

Stock compensation

The Company uses various equity-based compensation programs to provide long-term performance incentives for its global workforce. Currently, these incentives consist principally of stock options, restricted stock units, and to a lesser extent, executive performance shares and restricted stock grants. During 2015, the Company changed the mix of equity compensation, awarding an increasing number of restricted stock units and fewer stock option awards. The Company also sponsors a discounted stock purchase plan in the United States and matching-grant programs in several international locations. Additionally, the Company awards restricted stock to its outside directors. The interim information below should be read in conjunction with the disclosures included within the stock compensation footnote of the Company’s 2014 Annual Report on Form 10-K.

The Company classifies pre-tax stock compensation expense in SGA expense principally within its corporate operations. For the periods presented, compensation expense for all types of equity-based programs and the related income tax benefit recognized were as follows:

	Quarter ended				Year-to-date period ended
(millions)	July 4, 2015		June 28, 2014		July 4, 2015		June 28, 2014
Pre-tax compensation expense	$	13	$	14	$	25	$	28
Related income tax benefit	$	5	$	5	$	9	$	10

As of July 4, 2015, total stock-based compensation cost related to non-vested awards not yet recognized was $77 million and the weighted-average period over which this amount is expected to be recognized was 2 years.

Stock options

During the year-to-date periods ended July 4, 2015 and June 28, 2014, the Company granted non-qualified stock options to eligible employees as presented in the following activity tables. Terms of these grants and the Company’s methods for determining grant-date fair value of the awards were consistent with that described within the stock compensation footnote in the Company’s 2014 Annual Report on Form 10-K.

Year-to-date period ended July 4, 2015:

Employee and director stock options	Shares (millions)		Weighted- average exercise price		Weighted- average remaining contractual term (yrs.)	Aggregate intrinsic value (millions)
Outstanding, beginning of period	21		$	56
Granted	3		64
Exercised	(2	)	53
Forfeitures and expirations	—		—
Outstanding, end of period	22		$	57	7.1	$	131
Exercisable, end of period	13		$	55	6.1	$	114

Year-to-date period ended June 28, 2014:

Employee and director stock options	Shares (millions)		Weighted- average exercise price		Weighted- average remaining contractual term (yrs.)	Aggregate intrinsic value (millions)
Outstanding, beginning of period	20		$	54
Granted	6		60
Exercised	(2	)	50
Forfeitures and expirations	(1	)	57
Outstanding, end of period	23		$	55	7.5	$	209
Exercisable, end of period	11		$	52	6.0	$	145

The weighted-average fair value of options granted was $7.20 per share and $6.70 per share for the year-to-date periods ended July 4, 2015 and June 28, 2014, respectively. The fair value was estimated using the following assumptions:

	Weighted- average expected volatility		Weighted- average expected term (years)	Weighted- average risk-free interest rate		Dividend yield
Grants within the year-to-date period ended July 4, 2015:	16	%	6.9	1.98	%	3.00	%
Grants within the year-to-date period ended June 28, 2014:	15	%	7.3	2.35	%	3.00	%

The total intrinsic value of options exercised was $23 million and $33 million for the year-to-date periods ended July 4, 2015 and June 28, 2014, respectively.

Performance shares

In the first quarter of 2015, the Company granted performance shares to a limited number of senior executive-level employees, which entitle these employees to receive a specified number of shares of the Company’s common stock upon vesting. The number of shares earned could range between 0 and 200% of the target amount depending upon performance achieved over the three year vesting period. The performance conditions of the award include three-year cumulative operating cash flow (CCF) and total shareholder return (TSR) of the Company’s common stock relative to a select group of peer companies.

A Monte Carlo valuation model was used to determine the fair value of the awards. The TSR performance metric is a market condition. Therefore, compensation cost of the TSR condition is fixed at the measurement date and is not revised based on actual performance. The TSR metric was valued as a multiplier of possible levels of CCF achievement. Compensation cost related to CCF performance is revised for changes in the expected outcome. The 2015 target grant currently corresponds to approximately 177,000 shares, with a grant-date fair value of $58 per share.

Based on the market price of the Company’s common stock at July 4, 2015, the maximum future value that could be awarded to employees on the vesting date for all outstanding performance share awards was as follows:

(millions)	July 4, 2015
2013 Award	$	24
2014 Award	$	27
2015 Award	$	22

The 2012 performance share award, payable in stock, was settled at 35% of target in February 2015 for a total dollar equivalent of $3 million.

Other stock-based awards

During the year-to-date period ended July 4, 2015, the Company granted restricted stock units and a nominal number of restricted stock awards to eligible employees as presented in the following table. Terms of these grants and the Company’s method of determining grant-date fair value were consistent with that described within the stock compensation footnote in the Company’s 2014 Annual Report on Form 10-K.

Year-to-date period ended July 4, 2015:

Employee restricted stock and restricted stock units	Shares(thousands)		Weighted-average grant-date fair value
Non-vested, beginning of year	346		$	54
Granted	563		58
Vested	(79	)	51
Forfeited	(17	)	56
Non-vested, end of period	813		$	57

Grants of restricted stock and restricted stock units for the comparable period ended June 28, 2014 were 56,000.