Stock Purchase and Award Plans

The Medtronic, Inc. 2013 Stock Award and Incentive Plan was originally approved by the Company's shareholders in August 2013. In January 2015, the Company's Board of Directors approved an amendment to and assumption of the existing Medtronic, Inc. 2013 Stock Award and Incentive Plan, which created the new Medtronic plc 2013 Stock Award and Incentive Plan (2013 Plan). In fiscal year 2017, the Company granted stock awards under the 2013 Plan. The 2013 Plan provides for the grant of non-qualified and incentive stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, and other stock and cash-based awards. At April 28, 2017, there were approximately 21 million shares available for future grants under the 2013 Plan.

Share Options Options are granted at the exercise price, which is equal to the closing price of the Company’s ordinary share on the grant date. The majority of the Company’s options are non-qualified options with a 10-year life and a 4-year ratable vesting term. In fiscal year 2017, the Company granted share options under the 2013 Plan. The Company also grants shares of performance-based share options that typically cliff vest after three years only if the Company has also achieved certain performance objectives. Performance awards are expensed over the performance period based on the probability of achieving the performance objectives.

Restricted Stock Restricted stock awards and restricted stock units (collectively referred to as restricted stock) are granted to officers and key employees. At April 28, 2017, the Company does not have any outstanding restricted stock awards. The Company grants restricted stock units that typically cliff vest after four years. The expense recognized for restricted stock units is equal to the grant date fair value, which is equal to the closing stock price on the date of grant. Restricted stock units are expensed over the vesting period and are subject to forfeiture if employment terminates prior to the lapse of the restrictions. The Company also grants shares of performance-based restricted stock units that typically cliff vest after three years only if the Company has also achieved certain performance objectives. Performance awards are expensed over the performance period based on the probability of achieving the performance objectives.

Restricted stock units are not considered issued or outstanding ordinary shares of the Company. Dividend equivalent units are accumulated on restricted stock units during the vesting period. In fiscal year 2017, the Company granted restricted stock units under the 2013 Plan. At April 28, 2017, all restricted stock outstanding were restricted stock units.

Employees Stock Purchase Plan The Medtronic plc Amended and Restated 2014 Employees Stock Purchase Plan (ESPP) allows participating employees to purchase the Company's ordinary shares at a discount through payroll deductions. The expense recognized for shares purchased under the Company’s ESPP is equal to the 15 percent discount the employee receives at the end of the calendar quarter purchase period.

Employees may contribute between 2 percent and 10 percent of their wages or the statutory limit under the U.S. Internal Revenue Code toward the purchase of newly issued ordinary shares of the Company at 85 percent of its market value at the end of the calendar quarter purchase period. Employees purchased 2 million shares at an average price of $68.68 per share in fiscal year 2017. At April 28, 2017, plan participants had approximately $11 million withheld to purchase the Company's ordinary shares at 85 percent of its market value on June 30, 2017, the last trading day before the end of the calendar quarter purchase period. At April 28, 2017, approximately 18 million ordinary shares were available for future purchase under the ESPP.

Stock Option Valuation Assumptions The Company uses the Black-Scholes option pricing model (Black-Scholes model) to determine the fair value of stock options at the grant date. The fair value of stock options under the Black-Scholes model requires management to make assumptions regarding projected employee stock option exercise behaviors, risk-free interest rates, volatility of the Company’s stock price, and expected dividends.

The following table provides the weighted average fair value of options granted to employees and the related assumptions used in the Black-Scholes model:



	Fiscal Year
	2017			2016			2015
Weighted average fair value of options granted	$	14.70		$	13.72		$	25.39
Assumptions used:
Expected life (years)⁽¹⁾	6.18			5.94			4.24
Risk-free interest rate⁽²⁾	1.26		%	1.79		%	0.99		%
Volatility⁽³⁾	21.07		%	21.00		%	21.29		%
Dividend yield⁽⁴⁾	1.97		%	1.96		%	1.66		%

(1)

Expected life: The Company analyzes historical employee stock option exercise and termination data to estimate the expected life assumption. The Company calculates the expected life assumption using the midpoint scenario, which combines historical exercise data with hypothetical exercise data, as the Company believes this data currently represents the best estimate of the expected life of a new employee option.


(2)	Risk-free interest rate: The rate is based on the grant date yield of a zero-coupon U.S. Treasury bond whose maturity period equals the expected term of the option.


(3)	Volatility: Expected volatility is based on a blend of historical volatility and an implied volatility of the Company’s ordinary shares. Implied volatility is based on market traded options of the Company’s ordinary shares.


(4)	Dividend yield: The dividend yield rate is calculated by dividing the Company’s annual dividend, based on the most recent quarterly dividend rate, by the closing stock price on the grant date.

Stock-Based Compensation Expense Pursuant to the transaction agreement associated with the Covidien acquisition dated June 15, 2014, outstanding stock option awards held by Covidien employees upon transaction close were converted into options to acquire the Company's ordinary shares in a manner designed to preserve the intrinsic value of such awards. In addition, unvested restricted stock units granted on or after June 15, 2014 which were held by Covidien employees upon close of the Covidien acquisition were converted into restricted stock units of the Company in a manner designed to preserve the intrinsic value of such awards. The modifications made to the restricted stock units granted on or after June 15, 2014 and all outstanding share options pursuant to the transaction agreement that converted such awards constituted modifications under the authoritative guidance for accounting for stock compensation. This guidance requires the Company to revalue the award upon the transaction close and allocate the revised fair value between consideration paid and continuing expense based on the ratio of service performed through the transaction date over the total service period of the award. The revised fair value allocated to post-combination services resulted in incremental expense which is recognized over the remaining service period of the award. The Company recognized $23 million and $58 million of incremental expense related to these modifications during fiscal year 2017 and 2016, respectively, within acquisition-related items in the consolidated statements of income. Except for the conversion of share options and restricted stock units discussed herein, the material terms of these awards remained unchanged.

The following table presents the components and classification of stock-based compensation expense for stock options, restricted stock, and ESPP shares recognized for fiscal years 2017, 2016, and 2015:



	Fiscal Year
(in millions)	2017			2016			2015
Stock options	$	157		$	206		$	140
Restricted stock	169			148			284
Employees stock purchase plan	22			21			15
Total stock-based compensation expense	$	348		$	375		$	439

Cost of products sold	$	49		$	50		$	23
Research and development expense	41			37			29
Selling, general, and administrative expense	233			212			128
Restructuring charges	2			18			70
Acquisition-related items	23			58			189
Total stock-based compensation expense	348			375			439
Income tax benefits	(98		)	(108		)	(138		)
Total stock-based compensation expense, net of tax	$	250		$	267		$	301

Stock Options The following table summarizes all stock option activity, including activity from options assumed or issued as a result of acquisitions, during fiscal year 2017:



	Options (in thousands)		Wtd. Avg. Exercise Price		Wtd. Avg. Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in millions)
Outstanding at April 29, 2016	52,970		$	57.09
Granted	4,061		87.35
Exercised	(9,488	)	40.56
Expired/Forfeited	(2,349	)	73.90
Outstanding at April 28, 2017	45,194		62.41		6.30	$	952
Vested and expected to vest at April 28, 2017	22,929		75.32		7.89	194
Exercisable at April 28, 2017	19,138		44.71		4.14	735

The following table summarizes the total cash received from the issuance of new shares upon stock option award exercises, the total intrinsic value of options exercised and the related tax benefit during fiscal years 2017, 2016, and 2015:



	Fiscal Year
(in millions)	2017		2016		2015
Cash proceeds from options exercised	$	367	$	452	$	609
Intrinsic value of options exercised	403		374		329
Tax benefit related to options exercised	140		131		106

Unrecognized compensation expense related to outstanding stock options at April 28, 2017 was $178 million and is expected to be recognized over a weighted average period of 1.6 years.

Restricted Stock The following table summarizes restricted stock activity, including activity from restricted stock assumed or issued as a result of acquisitions, during fiscal year 2017:



	Awards (in thousands)		Wtd. Avg. Grant Price
Nonvested at April 29, 2016	8,820		$	64.33
Granted	3,198		85.07
Vested	(2,727	)	48.17
Forfeited	(503	)	71.32
Nonvested at April 28, 2017	8,788		$	76.49

The following table summarizes the weighted-average grant date fair value of restricted stock granted, total fair value of restricted stock vested and related tax benefit during fiscal years 2017, 2016, and 2015:



	Fiscal Year
(in millions, except per share data)	2017		2016		2015
Weighted-average grant-date fair value per restricted stock	$	85.07	$	77.68	$	69.30
Fair value of restricted stock vested	131		276		174
Tax benefit related to restricted stock vested	76		76		50

Unrecognized compensation expense related to restricted stock as of April 28, 2017 was $334 million and is expected to be recognized over a weighted average period of 2.5 years.