STRYKER

Stryker 2015 FORM 10-K

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common stock, which is the closing quoted price of our common stock on the day prior to the date of grant. The options are granted for periods of up to 10 years and become exercisable in varying installments. We measure the cost of employee stock options based on the grant- date fair value and recognize that cost using the straight-line method over the period during which a recipient is required to provide services in exchange for the options, typically the vesting period. The weighted-average fair value per share of options is estimated on the date of grant using the Black-Scholes option pricing model. Option Value and Assumptions 2015 2014 2013 Weighted-average fair value per share $ 22.55 $ 15.80 $ 15.24 Assumptions: Risk-free interest rate 1.8% 2.1% 1.3% Expected dividend yield 1.6% 1.8% 1.9% Expected stock price volatility 25.5% 20.2% 27.9% Expected option life 7.3 years 7.1 years 7.1 years The risk-free interest rate for periods within the expected life of options granted is based on the United States Treasury yield curve in effect at the time of grant. Expected stock price volatility is based on the historical volatility of our stock. The expected option life, representing the period of time that options granted are expected to be outstanding, is based on historical option exercise and employee termination data. Summary of 2015 Stock Option Activity Shares (in millions) Weighted Average Exercise Price Weighted- Average Remaining Term (in years) Aggregate Intrinsic Value Outstanding January 1 15.2 $ 59.97 Granted 2.4 93.06 Exercised (2.4) 53.31 Cancelled (0.3) 73.56 Outstanding December 31 14.9 $ 65.85 5.7 $ 402.9 Exercisable December 31 8.3 $ 56.67 3.9 $ 302.2 Options expected to vest 6.0 $ 77.02 7.9 $ 95.9 The aggregate intrinsic value, which represents the cumulative difference between the fair market value of the underlying common stock and the option exercise prices, of options exercised was $98, $113, and $97 during 2015, 2014 and 2013. Exercise prices for options outstanding ranged from $38.71 to $102.27 on December 31, 2015. On December 31, 2015 there was $79 of unrecognized compensation cost related to nonvested stock options granted under the long-term incentive plans; that cost is expected to be recognized over the weighted-average period of approximately 1.6 years. Restricted Stock Units (RSUs) and Performance Stock Units (PSUs) We grant RSUs to key employees and non-employee directors and PSUs to certain key employees under our long-term incentive plans. The fair value of RSUs is determined based on the number of shares granted and the closing quoted price of our common stock on the day prior to the date of grant, adjusted for the fact that RSUs do not include anticipated dividends. RSUs generally vest in one-third increments over a three-year period and are settled in stock. PSUs are earned over a three-year performance cycle and vest in March of the year following the end of that performance cycle. The number of PSUs that will ultimately be earned is based on our performance relative to pre-established goals during that three-year performance cycle. The fair value of PSUs is determined based on the closing quoted price of our common stock on the day prior to the date of grant. Summary of 2015 RSU and PSU Activity Shares (in millions) Weighted Average Grant date Fair value RSUs PSUs RSUs PSUs Nonvested on January 1 1.3 0.3 $ 65.04 $ 66.18 Granted 0.6 0.1 88.47 92.96 Vested (0.7) — 60.54 54.31 Canceled (0.1) (0.1) 74.35 54.03 Nonvested on December 31 1.1 0.3 $ 79.71 $ 79.02 On December 31, 2015 there was $53 of unrecognized compensation cost related to nonvested RSUs. That cost is expected to be recognized as expense over the weighted-average period of approximately 1.0 year. The weighted-average grant date fair value per share of RSUs granted was $88.47 and $76.61 in 2015 and 2014. The fair value of RSUs vested in 2015 was $43. On December 31, 2015 there was $18 of unrecognized compensation cost related to nonvested PSUs; that cost is expected to be recognized as expense over the weighted-average period of approximately 1.3 years. Employee Stock Purchase Plans (ESPP) Full- and part-time employees may participate in our ESPP provided they meet certain eligibility requirements. The purchase price for our common stock under the terms of the ESPP is defined as 95% of the closing stock price on the last trading day of a purchase period. We issued 157,931 and 150,167 shares under the ESPP during 2015 and 2014. NOTE 11 - RETIREMENT PLANS Defined Contribution Plans We provide certain employees with defined contribution plans. A portion of our retirement plan expense under the defined contribution plans is funded with Stryker common stock. The use of Stryker common stock represents a non-cash operating activity that is not reflected in the consolidated statements of cash flows. 2015 2014 2013 Plan expense $148 $132 $132 Expense funded with Stryker common stock 20 18 16 Stryker common stock held by plan Dollar amount 203 198 150 Shares (in millions of shares) 2.2 2.1 2.0 Value as a percentage of total plan assets 11% 11% 9% Defined Benefit Plans Certain of our subsidiaries have both funded and unfunded defined benefit pension plans covering some or all of their employees. Substantially all of the defined benefit pension plans have projected benefit obligations in excess of plan assets. Discount Rate The discount rates were selected using a hypothetical portfolio of high quality bonds on December 31 that would provide the necessary cash flows to match our projected benefit payments. Expected Return on Plan Assets The expected return on plan assets is determined by applying the target allocation in each asset category of plan investments to the anticipated return for each asset category based on historical and projected returns. STRYKER CORPORATION 2015 Form 10-K 29 Dollar amounts in millions except per share amounts or as otherwise specified.

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