9. Stock-Based Compensation

Stock-based Compensation Expense

During the three months ended October 3, 2014, the Company recognized in expense $19 million for stock-based compensation related to the vesting of options issued under the Company’s stock plans and the ESPP, as compared to $21 million in the prior-year period. The tax benefit realized as a result of the aforementioned stock-based compensation expense was $5 million in both the three months ended October 3, 2014 and September 27, 2013. As of October 3, 2014, total compensation cost related to unvested stock options and ESPP rights issued to employees but not yet recognized was $145 million and will be amortized on a straight-line basis over a weighted average service period of approximately 2.3 years.

During the three months ended October 3, 2014, the Company recognized in expense $20 million for stock-based compensation related to the vesting of awards of RSUs issued under the Company's stock plans, as compared to $21 million in the prior-year period. The tax benefit realized as a result of the aforementioned stock-based compensation expense was $5 million in the three months ended October 3, 2014, as compared to $4 million in the prior-year period. As of October 3, 2014, the aggregate unamortized fair value of all unvested RSUs was $179 million, which will be recognized on a straight-line basis over a weighted average vesting period of approximately 1.9 years. RSUs include performance stock unit awards (“PSUs”). The effect of PSUs was immaterial to the condensed consolidated financial statements during the three months ended October 3, 2014 and September 27, 2013.

During both the three months ended October 3, 2014 and September 27, 2013, the Company recognized in expense $4 million related to adjustments to market value as well as the vesting of stock appreciation rights (“SARs”). The tax benefit realized as a result of the aforementioned SARs expense was $1 million in both the three months ended October 3, 2014 and September 27, 2013. The SARs will be settled in cash upon exercise. As a result, the Company had a total liability of $58 million and $61 million related to SARs included in accrued expenses in the condensed consolidated balance sheets, as of October 3, 2014 and June 27, 2014, respectively. As of October 3, 2014, total compensation cost related to unvested SARs issued to employees but not yet recognized was not material to the Company's consolidated statement of income.

Stock Option Activity

The following table summarizes stock option 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 27, 2014	10.1		$	37.03
Granted	1.2		100.06
Exercised	(1.3	)	31.04
Options outstanding at October 3, 2014	10.0		$	45.16	4.7	$	514
Exercisable at October 3, 2014	4.5		$	32.19	3.3	$	290
Vested and expected to vest after October 3, 2014	9.8		$	44.56	4.7	$	509

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 October 3, 2014, the Company had options outstanding to purchase an aggregate of 8.7 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 $514 million at that date. During the three months ended October 3, 2014, the aggregate intrinsic value of options exercised under the Company’s stock option plans was $86 million, determined as of the date of exercise, as compared to $27 million in the prior-year period.

RSU Activity

The following table summarizes RSU activity under the Company's stock plans (in millions, except weighted average grant date fair value):



	Number of Shares		Weighted Average Grant-Date Fair Value
RSUs outstanding at June 27, 2014	3.7		$	49.77
Granted	1.1		100.07
Vested	(1.5	)	40.57
RSUs outstanding at October 3, 2014	3.3		70.88
Expected to vest after October 3, 2014	3.1		$	70.38

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 $113 million in the three months ended October 3, 2014. These amounts are being recognized to expense over the corresponding vesting periods. The Company has assumed a forfeiture rate of 4.4% for the three months ended October 3, 2014, based on a historical analysis indicating forfeitures for these types of awards.

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 October 3, 2014, 0.7 million SARs were outstanding with a weighted average exercise price of $8.06. There were no SARs granted and all other SARs activity was immaterial to the condensed consolidated financial statements for the three months ended October 3, 2014 and September 27, 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
	October 3, 2014	September 27, 2013
Suboptimal exercise factor	2.51	2.06
Range of risk-free interest rates	0.11% to 2.16%	0.10% to 2.02%
Range of expected stock price volatility	0.24 to 0.47	0.31 to 0.50
Weighted average expected volatility	0.36	0.43
Post-vesting termination rate	1.25%	3.09%
Dividend yield	1.68%	1.58%
Fair value	$32.29	$24.00

The weighted average expected term of the Company’s stock options granted during the three months ended October 3, 2014 was 5.8 years, as compared to 5.0 years in the 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 are granted on either June 1st or December 1st of each year. ESPP activity was immaterial to the condensed consolidated financial statements for the three months ended October 3, 2014 and September 27, 2013.

Stock Repurchase Program

Since May 18, 2012, the Company's Board of Directors has authorized $3.0 billion for the repurchase of its common stock and approved the extension of its stock repurchase program to September 13, 2017. The Company repurchased 2.2 million shares for a total cost of $223 million during the three months ended October 3, 2014. The remaining amount available to be purchased under the Company’s stock repurchase program as of October 3, 2014 was $931 million. The Company may continue to repurchase its stock as it deems appropriate and market conditions allow. Repurchases under the stock repurchase program may be made in the open market or in privately negotiated transactions and may be made under a Rule 10b5-1 plan. The Company expects stock repurchases to be funded principally by operating cash flows and borrowings under the Company's Credit Agreement.

Dividends to Shareholders

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 receive dividends when and as declared by the Company’s Board of Directors. In the three months ended October 3, 2014, the Company declared a cash dividend of $0.40 per share of the Company’s common stock to shareholders of record as of October 3, 2014, totaling $94 million, which was paid on October 15, 2014. The Company may modify, suspend or cancel its cash dividend policy in any manner and at any time.