Stock Inventive and Ownership Plans

12 Months Ended

Dec. 31, 2019

Stock Incentive and Ownership Plans [Abstract]

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

NOTE L – STOCK INCENTIVE AND OWNERSHIP PLANS

Employee and Director Stock Incentive Plans

In 2011, our Board of Directors and stockholders approved our 2011 Long-Term Incentive Plan (the 2011 LTIP), authorizing for issuance up to 146 million shares of our common stock. The 2011 LTIP covers officers, directors, employees and consultants and provides for the grant of restricted or unrestricted common stock, deferred stock units (DSU), options to acquire our common stock, stock appreciation rights, performance awards (market-based and performance-based DSUs) and other stock and non-stock awards. Shares reserved under our current and former stock incentive plans totaled approximately 124 million as of December 31, 2019. The Executive Compensation and Human Resources Committee (the Committee) of the Board of Directors, consisting of independent, non-employee directors may authorize the issuance of common stock and cash awards under the 2011 LTIP in recognition of the achievement of long-term performance objectives established by the Committee.

Non-qualified options issued to employees are generally granted with an exercise price equal to the market price of our stock on the grant date, vest over a four-year service period and have a ten-year contractual life. In the case of qualified options, if the recipient owns more than ten percent of the voting power of all classes of stock, the option granted will be at an exercise price of 110 percent of the fair market value of our common stock on the date of grant and will expire over a period not to exceed five years. Non-vested stock awards, including restricted stock awards and DSUs, issued to employees are generally granted with an exercise price of zero and typically vest in four or five equal annual installments. These awards represent our commitment to issue shares to recipients after the vesting period. Upon each vesting date, such awards are no longer subject to risk of forfeiture and we issue shares of our common stock to the recipient.

The following presents the impact of stock-based compensation on our consolidated statements of operations:

	Year Ended December 31,
(in millions, except per share data)	2019			2018			2017
Cost of products sold	$	8		$	7		$	7
Selling, general and administrative expenses	120			109			98
Research and development expenses	28			24			23
	157			140			127
Income tax (benefit) expense	(24		)	(21		)	(32		)
	$	133		$	119		$	96
Net impact per common share - basic	$	0.10		$	0.09		$	0.07
Net impact per common share - assuming dilution	$	0.09		$	0.08		$	0.07

Stock Options

We use the Black-Scholes option-pricing model to calculate the grant-date fair value of stock options granted to employees under our stock incentive plans. We calculated the fair value for options granted using the following estimated weighted-average assumptions:

	Year Ended December 31,
	2019						2018						2017
Options granted (in thousands)	2,992						3,491						4,439
Weighted-average exercise price	$	40.20					$	27.26					$	24.70
Weighted-average grant-date fair value	$	11.76					$	8.55					$	7.16
Black-Scholes Assumptions
Expected volatility	24					%	26					%	25					%
Expected term (in years, weighted)	6.1						6.0						6.1
Risk-free interest rate	1.38		%	-	2.61%		2.61		%	-	3.01%		2.03		%	-	2.21%

Expected Volatility

We use our historical volatility and implied volatility as a basis to estimate expected volatility in our valuation of stock options.

Expected Term

We estimate the expected term of options using historical exercise and forfeiture data. We believe that this historical data provides the best estimate of the expected term of new option grants.

Risk-Free Interest Rate

We use yield rates on U.S. Treasury securities for a period approximating the expected term of the award to estimate the risk-free interest rate in our grant-date fair value assessment.

Expected Dividend Yield

We have not historically paid cash dividends to our stockholders and currently do not intend to pay cash dividends. Therefore, we have assumed an expected dividend yield of zero in our grant-date fair value assessment.

Information related to stock options under stock incentive plans are as follows:

	Stock Options (in thousands)		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life  (in years)	Aggregate Intrinsic Value (in millions)
Outstanding as of December 31, 2016	26,644		$	11
Granted	4,439		25
Exercised	(3,922	)	10
Cancelled/forfeited	(445	)	17
Outstanding as of December 31, 2017	26,716		$	13
Granted	3,491		27
Exercised	(4,385	)	11
Cancelled/forfeited	(519	)	22
Outstanding as of December 31, 2018	25,304		$	16
Granted	2,992		40
Exercised	(4,872	)	12
Cancelled/forfeited	(359	)	24
Outstanding as of December 31, 2019	23,065		$	19	5.5	$	594
Exercisable as of December 31, 2019	15,091		$	14	4.1	$	476
Expected to vest as of December 31, 2019	7,617		30		8.0	114
Total vested and expected to vest as of December 31, 2019	22,707		$	19	5.3	$	590

The total intrinsic value of stock options exercised was $140 million in 2019, $90 million in 2018 and $64 million in 2017.

Non-Vested Stock

We value restricted stock awards and DSUs based on the closing trading value of our shares on the date of grant. Information related to non-vested stock awards is as follows:

	Non-Vested Stock Award Units (in thousands)		Weighted Average Grant-Date Fair Value
Balance as of December 31, 2016	18,797		$	14
Granted	4,798		24
Vested (1)	(7,663	)	11
Forfeited	(683	)	17
Balance as of December 31, 2017	15,250		$	18
Granted	4,375		28
Vested (1)	(6,194	)	16
Forfeited	(748	)	22
Balance as of December 31, 2018	12,683		$	22
Granted	3,656		39
Vested (1)	(4,811	)	20
Forfeited	(449	)	27
Balance as of December 31, 2019	11,079		$	29

(1) The number of restricted stock units vested includes shares withheld on behalf of employees to satisfy statutory tax withholding requirements.

The total vesting date fair value of stock award units that vested was approximately $193 million in 2019, $170 million in 2018 and $190 million in 2017.

Market-based DSU Awards

During 2019, 2018 and 2017, we granted market-based DSU awards to certain members of our senior management team. The number of shares ultimately issued to the recipient is based on the total stockholder return (TSR) of our common stock as compared to the TSR of the common stock of the other companies in the S&P 500 Healthcare Index over a three-year performance period. The number of DSUs ultimately granted under this program range from 0 percent to 200 percent of the target number of performance-based DSUs awarded to the participant as determined by achievement of the performance criteria of the program. In addition, award recipients must remain employed by us throughout the three-year performance period to attain the full amount of the market-based DSUs that satisfied the market performance criteria.

We determined the fair value of the market-based DSU awards to be approximately $10 million for 2019, $7 million for 2018 and $8 million for 2017. We determined these fair values based on Monte Carlo simulations as of the date of grant, utilizing the following assumptions:

	2019			2018			2017
	Awards			Awards			Awards
Stock price on date of grant	$	40.12		$	27.09		$	24.55
Measurement period (in years)	2.9			2.9			2.8
Risk-free rate	2.48		%	2.36		%	1.45		%

We recognize the expense on these awards in our consolidated statements of operations on a straight-line basis over the three-year measurement period.

Free Cash Flow Performance-based DSU Awards

During 2019, 2018 and 2017, we granted free cash flow performance-based DSU awards to certain members of our senior management team. The attainment of these performance-based DSUs is based on our adjusted free cash flow (AFCF) measured against our internal annual financial plan performance for AFCF. AFCF is measured over a one-year performance period beginning January 1st of each year and ending December 31st. The number of DSUs ultimately granted under this program range from 0 percent to 150 percent of the target number of performance-based DSUs awarded to the participant as determined by achievement of the performance criteria of the program. In addition, award recipients must remain employed by us throughout a three-year service period (inclusive of the one-year performance period) to attain the full amount of the performance-based DSUs that satisfied the performance criteria.

The following table presents our assumptions used in determining the fair value of our AFCF awards currently expected to vest as of December 31, 2019:

	2019 AFCF			2018 AFCF			2017 AFCF
Fair value, net of forfeitures to date (in millions)	$	8		$	11		$	6
Achievement of target payout	90		%	118		%	98		%
Year-end stock price used in determining fair value	$	45.22		$	35.34		$	24.79

We recognize the expense on these awards in our consolidated statements of operations over the vesting period which is three years after the date of grant.

Expense Attribution

We recognize compensation expense for our stock incentive plan using a straight-line method over the substantive vesting period. Most of our stock awards provide for immediate vesting upon death or disability of the participant. In addition, our stock grants to employees provide for accelerated vesting of our stock-based awards, other than performance-based and market-based awards, upon retirement, if the stock award has been held for at least one year by the recipient. In accordance with the terms of our stock grants, for employees who will become retirement eligible prior to the vest date we expense stock-based awards, other than performance-based and market-based awards, over the greater of one year or the period between grant date and retirement-eligibility. The performance-based and market-based awards discussed above do not contain provisions that would accelerate the full vesting of the awards upon retirement-eligibility.

We recognize stock-based compensation expense for the value of the portion of awards that are ultimately expected to vest. FASB ASC Topic 718, Compensation – Stock Compensation allows forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The term “forfeitures” is distinct from “cancellations” or “expirations” and represents only the unvested portion of the surrendered stock-based award. We have applied, based on an analysis of our historical forfeitures, a weighted-average annual forfeiture rate of approximately six percent to all unvested stock-based awards as of December 31, 2019, which represents the portion that we expect will be forfeited each year over the vesting period. We re-evaluate this analysis annually or more frequently if there are significant changes in circumstances and adjust the forfeiture rate as necessary. Ultimately, we will only recognize expense for those shares that vest.

Unrecognized Compensation Cost

We expect to recognize the following future expense for awards outstanding as of December 31, 2019:

	Unrecognized  Compensation Cost (in millions) (1)		Weighted Average Remaining Vesting Period (in years)
Stock options	$	35
Non-vested stock awards	169
	$	204	1.2

(1) Amounts presented represent compensation cost, net of estimated forfeitures.

Employee Stock Purchase Plans

Our global employee stock purchase plan provides for the granting of options to purchase up to 50 million shares of our common stock to all eligible employees. Under the global employee stock purchase plan, we grant each eligible employee, at the beginning of each six-month offering period, an option to purchase shares of our common stock equal to not more than ten percent of the employee’s eligible compensation or the statutory limit under the U.S. Internal Revenue Code. Such options may be exercised only to the extent of accumulated payroll deductions at the end of the offering period, at a purchase price equal to 85 percent of the fair market value of our common stock at the beginning or end of each offering period, whichever is less. As of December 31, 2019, there were approximately 8 million shares available for future issuance under the employee stock purchase plan.

Information related to shares issued or to be issued in connection with the employee stock purchase plan based on employee contributions and the range of purchase prices is as follows:

	Year Ended December 31,
	2019				2018				2017
Shares issued or to be issued (in thousands)	2,196				2,452				2,491
Range of purchase prices	$	29.29	-	$36.47	$	21.49	-	$27.91	$	18.60	-	$21.07
Expense recognized (in millions)	$	19			$	17			$	13

We use the Black-Scholes option-pricing model to calculate the grant-date fair value of shares issued under the employee stock purchase plan. We recognize expense related to shares purchased through the employee stock purchase plan ratably over the offering period.