9. Stock-Based Compensation

Stock-based Compensation Expense

During the three and six months ended December 28, 2012, the Company recognized in expense $24 million and $49 million, respectively, for stock-based compensation related to the vesting of options issued under the Company’s stock option plans and the ESPP, which includes $2 million of accelerated expense associated with the employee termination benefits and other charges disclosed in Note 12 below. In the prior-year periods, the Company recognized in expense $15 million and $24 million, respectively, for stock-based compensation related to the vesting of options issued under the Company’s stock option plans and the ESPP. As of December 28, 2012, total compensation cost related to unvested stock options and ESPP rights issued to employees but not yet recognized was $140 million and will be amortized on a straight-line basis over a weighted average service period of approximately 2.4 years.

For purposes of this footnote, references to RSUs include performance stock unit awards (“PSUs”). During the three and six months ended December 28, 2012, the Company recognized in expense $12 million and $25 million, respectively, related to the vesting of awards of RSUs compared to $9 million and $17 million in the respective prior-year periods. As of December 28, 2012, the aggregate unamortized fair value of all unvested RSUs was $95 million, which will be recognized on a straight-line basis over a weighted average vesting period of approximately 1.6 years.

During the three and six months ended December 28, 2012, the Company recognized in expense $4 million and $16 million, respectively, related to adjustments to market value as well as the vesting of cash-settled stock appreciation rights (“SARs”). As of December 28, 2012, the Company had a total liability of $33 million related to SARs included in accrued liabilities in the condensed consolidated balance sheet. As of December 28, 2012, total compensation cost related to unvested SARs issued to employees but not yet recognized was $16 million and will be accrued on a straight-line basis over a weighted average service period of approximately 1.3 years.

Stock Option Activity

The following table summarizes activity under the Company’s stock option plans (in millions, except per share amounts and remaining contractual lives):


	Number of Shares			Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value
Options outstanding at June 29, 2012		15.8		$	21.89
Granted		3.0			43.10
Exercised		(2.2	)		16.18
Canceled or expired		(0.1	)		23.00

Options outstanding at September 28, 2012		16.5		$	26.52
Granted		0.1			37.04
Exercised		(1.2	)		18.56
Canceled or expired		(0.1	)		33.88

Options outstanding at December 28, 2012		15.3		$	27.14		4.6	$	224

Exercisable at December 28, 2012		6.0		$	23.22		3.2	$	110

Vested and expected to vest after December 28, 2012		15.1		$	27.00		4.6	$	223

If an option has an exercise price that is less than the quoted price of the Company’s common stock at the particular time, the aggregate intrinsic value of that option at that time is calculated based on the difference between the exercise price of the underlying options and the quoted price of the Company’s common stock at that time. As of December 28, 2012, the Company had options outstanding to purchase an aggregate of 12.3 million shares with an exercise price below the quoted price of the Company’s stock on that date resulting in an aggregate intrinsic value of $224 million at that date. During the three and six months ended December 28, 2012, the aggregate intrinsic value of options exercised under the Company’s stock option plans was $25 million and $79 million, respectively, determined as of the date of exercise, compared to $3 million and $8 million in the respective prior-year periods.

SARs Activity

The share-based compensation liability for SARs is recognized for the portion of fair value for which service has been rendered at the reporting date. The share-based liability is remeasured at each reporting date, using a binomial option-pricing model, through the requisite service period. As of December 28, 2012, 1.4 million SARs were outstanding with a weighted average exercise price of $7.82. There were no SARs granted and all other SARs activity was immaterial to the condensed consolidated financial statements for the three and six months ended December 28, 2012.

Fair Value Disclosure — Binomial Model

The fair value of stock options granted is estimated using a binomial option-pricing model. The binomial model requires the input of highly subjective assumptions. The Company uses historical data to estimate exercise, employee termination, and expected stock price volatility within the binomial model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The fair value of stock options granted was estimated using the following weighted average assumptions:


	Three Months Ended		Six Months Ended
	Dec. 28, 2012	Dec. 30, 2011	Dec. 28, 2012	Dec. 30, 2011
Suboptimal exercise factor	1.92	1.80	1.90	1.81
Range of risk-free interest rates	0.16% to 1.18%	0.12% to 1.35%	0.16% to 1.18%	0.12% to 1.43%
Range of expected stock price volatility	0.42 to 0.52	0.45 to 0.55	0.42 to 0.53	0.41 to 0.55
Weighted average expected volatility	0.47	0.49	0.49	0.48
Post-vesting termination rate	2.41%	2.48%	2.09%	2.62%
Dividend yield	2.41%	—	2.58%	—
Fair value	$13.08	$10.79	$15.56	$11.90

The weighted average expected term of the Company’s stock options granted during the three and six months ended December 28, 2012 was 4.2 years and 4.0 years, respectively, compared to 4.9 years in both the respective prior-year periods.

Fair Value Disclosure — Black-Scholes-Merton Model

The fair value of ESPP purchase rights issued is estimated at the date of grant of the purchase rights using the Black-Scholes-Merton option-pricing model. The Black-Scholes-Merton option-pricing model requires the input of highly subjective assumptions such as the expected stock price volatility and the expected period until options are exercised. Purchase rights under the current ESPP provisions are granted on either June 1st or December 1st. ESPP activity was immaterial to the condensed consolidated financial statements for the three and six months ended December 28, 2012 and December 30, 2011.

RSU Activity

The following table summarizes RSU activity (in millions, except weighted average grant date fair value):


	Number of Shares			Weighted Average Grant-Date Fair Value
RSUs outstanding at June 29, 2012		3.7		$	33.19
Granted		1.5			43.06
Vested		(0.5	)		35.32

RSUs outstanding at September 28, 2012		4.7		$	36.12
Granted		0.1			35.56
Vested		(0.1	)		30.18

RSUs outstanding at December 28, 2012		4.7		$	35.24

Expected to vest after December 28, 2012		4.5		$	35.24

The fair value of each RSU is the market price of the Company’s stock at the date of grant. RSUs are generally payable in an equal number of shares of the Company’s common stock at the time of vesting of the units. The grant-date fair value of the shares underlying the RSU awards at the date of grant was $3 million and $68 million for the three and six months ended December 28, 2012, respectively. These amounts are being recognized to expense over the corresponding vesting periods. For purposes of valuing these awards, the Company has assumed a forfeiture rate of 3.4%, based on a historical analysis indicating forfeitures for these types of awards. The effect of the PSU activity was immaterial to the Company’s condensed consolidated financial statements for the three and six months ended December 28, 2012.

Dividends

On September 13, 2012, the Company announced that its Board of Directors had authorized the adoption of a quarterly cash dividend policy. Under the cash dividend policy, holders of the Company’s common stock will receive dividends when and as declared by the Company’s Board of Directors. On December 3, 2012 and September 13, 2012, the Board of Directors declared a cash dividend of $0.25 per share of the Company’s common stock, which was paid on December 26, 2012 and October 15, 2012, respectively, to shareholders of record as of the close of business on December 14, 2012 and September 28, 2012, respectively. The Company may modify, suspend or cancel its cash dividend policy in any manner and at any time.