Stock Inventive and Purchase Plans

12 Months Ended

Dec. 31, 2020

Stock Incentive and Purchase Plans [Abstract]

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

NOTE M – STOCK INCENTIVE AND PURCHASE PLANS

Employee and Director Stock Incentive Plans

In 2020, our Board of Directors and stockholders approved amendments to our 2011 Long-Term Incentive Plan effective October 1, 2020 (Amended and Restated 2011 LTIP), authorizing for issuance up to 171 million shares of our common stock. The Amended and Restated 2011 LTIP covers officers, directors, employees and consultants and provides for the grant of restricted or unrestricted common stock, restricted stock units (RSUs), options to acquire our common stock, stock appreciation rights, performance awards (market-based and performance-based RSUs) and other stock and non-stock awards. Shares reserved under our current and former stock incentive plans totaled approximately 187 million as of December 31, 2020. 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 Amended and Restated 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 (RSAs), RSUs and deferred stock units (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)	2020		2019		2018
Cost of products sold	$	9	$	8	$	7
Selling, general and administrative expenses	130		120		109
Research and development expenses	30		28		24
	170		157		140
Income tax (benefit) expense	(28)		(24)		(21)
	$	142	$	133	$	119
Net impact per common share - basic	$	0.10	$	0.10	$	0.09
Net impact per common share - assuming dilution	$	0.10	$	0.09	$	0.08

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,
	2020					2019					2018
Options granted (in thousands)	3,819					2,992					3,491
Weighted-average exercise price	$	41.79				$	40.20				$	27.26
Weighted-average grant-date fair value	$	10.44				$	11.76				$	8.55
Black-Scholes Assumptions
Expected volatility	23				%	24				%	26				%
Expected term (in years, weighted)	5.8					6.1					6.0
Risk-free interest rate	0.27%		-	1.72%		1.38%		-	2.61%		2.61%		-	3.01%

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 on our common stock and currently we do not intend to pay cash dividends on our common stock. 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, 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
Granted	3,819	42
Exercised	(3,096)	13
Cancelled/forfeited	(666)	27
Outstanding as of December 31, 2020	23,122	$	24	5.5	$	312
Exercisable as of December 31, 2020	15,105	17		4.1	290
Expected to vest as of December 31, 2020	7,683	37		8.2	22
Total vested and expected to vest as of December 31, 2020	22,787	$	24	5.4	$	312

The total intrinsic value of stock options exercised was $84 million in 2020, $140 million in 2019 and $90 million in 2018.

Non-Vested Stock

We value RSAs, RSUs 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, 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
Granted	3,609	41
Vested(1)	(4,147)	25
Forfeited	(554)	34
Balance as of December 31, 2020	9,987	$	34

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

The total vesting date fair value of shares that vested was approximately $172 million in 2020, $193 million in 2019 and $170 million in 2018.

Market-based DSU Awards

During 2020, 2019 and 2018, 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, in general, 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 $8 million for 2020, $10 million for 2019 and $7 million for 2018. We determined these fair values based on Monte Carlo simulations as of the date of grant, utilizing the following assumptions:

	2020			2019			2018
	Awards			Awards			Awards
Stock price on date of grant	$	42.16		$	40.12		$	27.09
Measurement period (in years)	2.9			2.9			2.9
Risk-free rate	1.37		%	2.48		%	2.36		%

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 2020, 2019 and 2018, 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, in general, 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, 2020:

	2020 AFCF			2019 AFCF			2018 AFCF
Fair value, net of forfeitures to date (in millions)	$	6		$	8		$	11
Achievement of target payout	89		%	90		%	118		%
Year-end stock price used in determining fair value	$	35.95		$	45.22		$	35.34

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 five percent to all unvested stock-based awards as of December 31, 2020, 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, 2020:

	Unrecognized  Compensation Cost (in millions) (1)		Weighted Average Remaining Vesting Period (in years)
Stock options	$	35
Non-vested stock awards	169
	$	204	1.7

(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, 2020, there were approximately 6 million shares available for future issuance under the employee stock purchase plan. We temporarily suspended our global employee stock purchase plan for the offering period for the second half of 2020 due to cost-savings initiatives in response to the COVID-19 pandemic and have resumed for the offering period for the first half of 2021.

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,
	2020		2019				2018
Shares issued or to be issued (in thousands)	1,387		2,196				2,452
Range of purchase prices	$	29.84	$29.29		-	$36.47	$21.49		-	$27.91
Expense recognized (in millions)	$	10	$	19			$	17

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.