9. Stock-Based Compensation

Stock-based Compensation Expense

During the three months ended March 29, 2013, the Company recognized in expense $21 million for stock-based compensation related to the vesting of options issued under the Company’s stock option plans and the ESPP, as compared to $11 million in the prior-year period. During the nine months ended March 29, 2013, the Company recognized in expense $70 million for stock-based compensation related to the vesting of options issued under the Company’s stock option plans and the ESPP, as compared to $35 million in the prior-year period. As of March 29, 2013, total compensation cost related to unvested stock options and ESPP rights issued to employees but not yet recognized was $122 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 months ended March 29, 2013, the Company recognized in expense $15 million related to the vesting of awards of RSUs, as compared to $9 million in the prior-year period. During the nine months ended March 29, 2013, the Company recognized in expense $40 million, related to the vesting of awards of RSUs, as compared to $25 million in the prior-year period. As of March 29, 2013, the aggregate unamortized fair value of all unvested RSUs was $80 million, which will be recognized on a straight-line basis over a weighted average vesting period of approximately 1.4 years. In the three and nine months ended March 29, 2013, stock-based compensation expense and expense related to RSUs included $1 million and $3 million, respectively, of accelerated expense associated with the employee termination benefits and other charges disclosed in Note 12.

During the three months ended March 29, 2013, the Company recognized in expense $12 million related to adjustments to market value as well as the vesting of cash-settled stock appreciation rights (“SARs”), as compared to $1 million in the prior-year period. During the nine months ended March 29, 2013, the Company recognized in expense $28 million related to adjustments to market value as well as the vesting of cash-settled SARs, as compared to $1 million in the prior-year period. As of March 29, 2013, the Company had a total liability of $42 million related to SARs included in accrued liabilities in the condensed consolidated balance sheet. As of March 29, 2013, total compensation cost related to unvested SARs issued to employees but not yet recognized was $14 million and will be accrued on a straight-line basis over a weighted average service period of approximately 1.1 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
Granted		0.2			48.51
Exercised		(1.6	)		22.22
Canceled or expired		(0.2	)		35.69

Options outstanding at March 29, 2013		13.7		$	27.95		4.5	$	306

Exercisable at March 29, 2013		6.1		$	21.63		3.2	$	175

Vested and expected to vest after March 29, 2013		13.5		$	27.76		4.5	$	303

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 March 29, 2013, the Company had options outstanding to purchase an aggregate of 13.7 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 $306 million at that date. During the three months ended March 29, 2013, the aggregate intrinsic value of options exercised under the Company’s stock option plans was $41 million, determined as of the date of exercise, as compared to $15 million in the prior-year period. During the nine months ended March 29, 2013, the aggregate intrinsic value of options exercised under the Company’s stock option plans was $120 million, determined as of the date of exercise, as compared to $23 million in the prior-year period.

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
Granted		0.1			48.56
Vested		(0.2	)		38.53
Forfeited		(0.2	)		35.73

RSUs outstanding at March 29, 2013		4.4		$	36.34

Expected to vest after March 29, 2013		4.2		$	36.26

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 $5 million and $73 million for the three and nine months ended March 29, 2013, 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 nine months ended March 29, 2013.

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 March 29, 2013, 1.2 million SARs were outstanding with a weighted average exercise price of $7.83. There were no SARs granted and all other SARs activity was immaterial to the condensed consolidated financial statements for the three and nine months ended March 29, 2013.

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		Nine Months Ended
	Mar. 29, 2013	Mar. 30, 2012	Mar. 29, 2013	Mar. 30, 2012
Suboptimal exercise factor	1.99	1.80	1.90	1.81
Range of risk-free interest rates	0.14% to 1.24%	0.19% to 1.61%	0.14% to 1.24%	0.12% to 1.61%
Range of expected stock price volatility	0.41 to 0.51	0.43 to 0.53	0.41 to 0.53	0.41 to 0.55
Weighted average expected volatility	0.46	0.48	0.49	0.48
Post-vesting termination rate	2.92%	2.51%	2.14%	2.62%
Dividend yield	1.99%	—	2.41%	—
Fair value	$17.31	$15.46	$15.67	$12.09

The weighted average expected term of the Company’s stock options granted during the three months ended March 29, 2013 was 4.5 years, compared to 5.0 years in the comparative prior-year period. The weighted average expected term of the Company’s stock options granted during the nine months ended March 29, 2013 was 4.0 years, compared to 4.9 years in the comparative prior-year period.

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 nine months ended March 29, 2013 and March 30, 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. In the three months ended March 29, 2013, the Company declared a cash dividend of $0.25 per share of the Company’s common stock to shareholders of record as of March 29, 2013, totaling $60 million, which was paid on April 15, 2013. In the nine months ended March 29, 2013, the Company declared overall cash dividends of $0.75 per share of the Company’s common stock, totaling $181 million, of which $121 million was paid during the nine months ended March 29, 2013. The Company may modify, suspend or cancel its cash dividend policy in any manner and at any time.