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Equity-Based Compensation
12 Months Ended
Sep. 27, 2014
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Equity-Based Compensation
Equity-Based Compensation

Under various plans, the Company may grant stock options and other equity-based awards to executive, management and creative personnel. The Company’s approach to long-term incentive compensation contemplates awards of stock options and restricted stock units (RSUs). Certain RSUs awarded to senior executives vest based upon the achievement of market and/or performance conditions (Performance RSUs).
Stock options are generally granted at exercise prices equal to or exceeding the market price at the date of grant and become exercisable ratably over a four-year period from the grant date. The following table summarizes contractual terms for our stock option grants: 
Grant dates
  
Contractual Term
Prior to January 2005
  
10 years
January 2005 through December 2010
  
7 years
After December 2010
  
10 years

At the discretion of the Compensation Committee of the Company’s Board of Directors, options can occasionally extend up to 15 years after date of grant.
RSUs generally vest ratably over four years and Performance RSUs fully vest after three years, subject to achieving market and/or performance conditions.
Equity-based award grants generally provide continued vesting, in the event of termination, for employees that reach age 60 or greater, have at least ten years of service and have held the award for at least one year.
Each share granted subject to a stock option award reduces the number of shares available under the Company’s stock incentive plans by one share while each share granted subject to a RSU award reduces the number of shares available by two shares. As of September 27, 2014, the maximum number of shares available for issuance under the Company’s stock incentive plans (assuming all the awards are in the form of stock options) was approximately 99 million shares and the number available for issuance assuming all awards are in the form of RSUs was approximately 50 million shares. The Company satisfies stock option exercises and vesting of RSUs with newly issued shares. Stock options and RSUs are generally forfeited by employees who terminate prior to vesting.
Each year, during the first half of the year, the Company awards stock options and restricted stock units to a broad-based group of management and creative personnel. The fair value of options is estimated based on the binomial valuation model. The binomial valuation model takes into account variables such as volatility, dividend yield and the risk-free interest rate. The binomial valuation model also considers the expected exercise multiple (the multiple of exercise price to grant price at which exercises are expected to occur on average) and the termination rate (the probability of a vested option being cancelled due to the termination of the option holder) in computing the value of the option.
In fiscal years 2014, 2013 and 2012, the weighted average assumptions used in the option-valuation model were as follows:
 
 
2014
 
2013
 
2012
Risk-free interest rate
3.0
%
 
1.8
%
 
2.0
%
Expected volatility
25
%
 
26
%
 
31
%
Dividend yield
1.37
%
 
1.60
%
 
1.56
%
Termination rate
3.2
%
 
2.7
%
 
2.7
%
Exercise multiple
1.48

 
1.41

 
1.41


Although the initial fair value of stock options is not adjusted after the grant date, changes in the Company’s assumptions may change the value of, and therefore the expense related to, future stock option grants. The assumptions that cause the greatest variation in fair value in the binomial valuation model are the expected volatility and expected exercise multiple. Increases or decreases in either the expected volatility or expected exercise multiple will cause the binomial option value to increase or decrease, respectively.
The volatility assumption considers both historical and implied volatility and may be impacted by the Company’s performance as well as changes in economic and market conditions.
Compensation expense for RSUs and stock options is recognized ratably over the service period of the award. Compensation expense for RSUs is based on the market price of the shares underlying the awards on the grant date. Compensation expense for Performance RSUs reflects the estimated probability that the market and/or performance conditions will be met.
The impact of stock options/rights and RSUs on income and cash flows for fiscal years 2014, 2013 and 2012, was as follows: 
 
2014
 
2013
 
2012
Stock option/rights compensation expense (1)
$
102

 
$
101

 
$
115

RSU compensation expense
312

 
311

 
310

Total equity-based compensation expense (2)
414

 
412

 
425

Tax impact
(139
)
 
(139
)
 
(145
)
Reduction in net income
$
275

 
$
273

 
$
280

Equity-based compensation expense capitalized during the period
$
49

 
$
58

 
$
56

Tax benefit reported in cash flow from financing activities
$
255

 
$
204

 
$
122

 
(1) 
Includes stock appreciation rights.
(2) 
Equity-based compensation expense is net of capitalized equity-based compensation and excludes amortization of previously capitalized equity-based compensation costs. Amortization of previously capitalized equity-based compensation totaled $68 million, $65 million and $59 million in fiscal years 2014, 2013 and 2012, respectively.
The following table summarizes information about stock option transactions (shares in millions): 
 
2014
 
Shares  
 
Weighted  
Average
Exercise Price
Outstanding at beginning of year
41

 
$
37.06

Awards forfeited
(1
)
 
45.61

Awards granted
6

 
69.74

Awards exercised
(12
)
 
32.64

Awards expired/cancelled

 

Outstanding at end of year
34

 
44.23

Exercisable at end of year
15

 
$
33.87


The following tables summarize information about stock options vested and expected to vest at September 27, 2014 (shares in millions): 
 
 
Vested
Range of Exercise Prices
 
Number of
Options
 
Weighted
Average
Exercise Price
 
Weighted 
Average
Remaining
Years of 
Contractual 
Life
$ 0   — $ 20
 
1

 
$
18.62

 
1.2
$ 21 — $ 30
 
4

 
26.88

 
0.9
$ 31 — $ 40
 
8

 
36.09

 
6.0
$ 41 — $ 75
 
2

 
50.76

 
8.2
 
 
15

 
 
 
 
 
 
 
Expected to Vest
Range of
Exercise
Prices
 
Number of
Options (1)
 
Weighted
Average
Exercise Price
 
Weighted 
Average
Remaining
Years of 
Contractual 
Life
$ 0   — $ 30
 
1

 
$
24.06

 
2.9
$ 31 — $ 40
 
6

 
38.98

 
7.0
$ 41 — $ 55
 
6

 
51.06

 
8.3
$ 56 — $ 85
 
5

 
72.75

 
9.2
 
 
18

 
 
 
 
 
(1) 
Number of options expected to vest is total unvested options less estimated forfeitures.
The following table summarizes information about RSU transactions (shares in millions): 
 
2014
 
Units      
 
Weighted
Average
Grant-Date    
Fair Value
Unvested at beginning of year
21

 
$
42.28

Granted (1)
5

 
72.63

Vested
(9
)
 
39.23

Forfeited
(1
)
 
47.60

Unvested at end of year (2)
16

 
$
53.17

(1) RSU grants include 0.3 million shares of Performance RSUs.
(2) 1.2 million of the unvested RSUs are Performance RSUs.
The weighted average grant-date fair values of options granted during 2014, 2013 and 2012 were $19.21, $12.38 and $10.65, respectively. The total intrinsic value (market value on date of exercise less exercise price) of options exercised and RSUs vested during 2014, 2013 and 2012 totaled $1,257 million, $1,162 million and $1,033 million, respectively. The aggregate intrinsic values of stock options vested and expected to vest at September 27, 2014 were $807 million and $653 million, respectively.
As of September 27, 2014, there was $154 million of unrecognized compensation cost related to unvested stock options and $486 million related to unvested RSUs. That cost is expected to be recognized over a weighted-average period of 1.6 years for stock options and 1.6 years for RSUs.
Cash received from option exercises for 2014, 2013 and 2012 was $404 million, $587 million and $1,008 million, respectively. Tax benefits realized from tax deductions associated with option exercises and RSU vesting for 2014, 2013 and 2012 totaled $431 million, $398 million and $360 million, respectively.