9. Stock-Based Compensation

Stock-Based Compensation Expense

During the three and nine months ended April 3, 2015, the Company recognized in expense $17 million and $53 million, respectively, for stock-based compensation related to the vesting of options issued under the Company’s stock plans and the ESPP, as compared to $24 million and $69 million in the respective prior-year periods. The tax benefit realized as a result of the aforementioned stock-based compensation expense was $8 million and $20 million in the three and nine months ended April 3, 2015, respectively, as compared to $6 million and $17 million in the three and nine months ended March 28, 2014, respectively. As of April 3, 2015, total compensation cost related to unvested stock options and ESPP rights issued to employees but not yet recognized was $111 million and will be amortized on a straight-line basis over a weighted average service period of approximately 2.1 years.

During the three and nine months ended April 3, 2015, the Company recognized in expense $21 million and $64 million, respectively, for stock-based compensation related to the vesting of awards of RSUs and performance stock unit awards, issued under the Company's stock plans, as compared to $17 million and $56 million in the respective prior-year periods. The tax benefit realized as a result of the aforementioned stock-based compensation expense was $6 million and $17 million in the three and nine months ended April 3, 2015, respectively, as compared to $5 million and $14 million in the three and nine months ended March 28, 2014, respectively. As of April 3, 2015, the aggregate unamortized fair value of all unvested RSUs was $141 million, which will be recognized on a straight-line basis over a weighted average vesting period of approximately 1.5 years.

During the three and nine months ended April 3, 2015, the Company recognized a $9 million benefit and $3 million expense, respectively, related to adjustments to market value as well as the vesting of stock appreciation rights (“SARs”), as compared to $11 million expense and $35 million expense in the respective prior-year periods. The tax expense and tax benefit realized as a result of the aforementioned SARs expense was $2 million and $1 million in the three and nine months ended April 3, 2015, respectively, as compared to a $2 million benefit and $7 million benefit in the three and nine months ended March 28, 2014, respectively. The SARs will be settled in cash upon exercise. As a result, the Company had a total liability of $50 million related to SARs included in accrued expenses in the condensed consolidated balance sheet as of April 3, 2015. As of April 3, 2015, all SARs issued to employees were fully vested and are now solely subject to market price fluctuations.

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
Exercised	(1.1	)	32.14
Canceled or expired	(0.1	)	32.53
Options outstanding at January 2, 2015	8.8		47.01
Assumed in acquisition	0.1		3.49
Exercised	(1.0	)	32.26
Canceled or expired	(0.2	)	58.23
Options outstanding at April 3, 2015	7.7		$	48.48	4.5	$	358
Exercisable at April 3, 2015	3.5		$	34.15	3.2	$	215
Vested and expected to vest after April 3, 2015	7.6		$	47.91	4.5	$	355

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 April 3, 2015, the Company had options outstanding to purchase an aggregate of 6.4 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 $358 million at that date. During the three and nine months ended April 3, 2015, the aggregate intrinsic value of options exercised under the Company’s stock option plans was $73 million and $236 million, respectively, determined as of the date of exercise, as compared to $60 million and $164 million in the respective prior-year periods.

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
Granted*	—		101.27
Vested	(0.1	)	48.25
Forfeited*	—		64.09
RSUs outstanding at January 2, 2015	3.2		72.15
Granted	0.1		101.84
Vested	(0.1	)	51.75
Forfeited	(0.1	)	64.65
RSUs outstanding at April 3, 2015	3.1		$	73.54
Expected to vest after April 3, 2015	3.0		$	73.07



*	Shares were immaterial for rounding purposes.

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 $8 million and $124 million in the three and nine months ended April 3, 2015, respectively. These amounts are being recognized to expense over the corresponding vesting periods. The Company has assumed a forfeiture rate of 4.6% and 4.4% for the three and nine months ended April 3, 2015, respectively, 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. As of April 3, 2015, 0.6 million SARs were outstanding with a weighted average exercise price of $8.02. 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 April 3, 2015.

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
	April 3, 2015	March 28, 2014	April 3, 2015	March 28, 2014
Suboptimal exercise factor	2.65	2.29	2.52	2.06
Range of risk-free interest rates	0.21% to 1.60%	0.13% to 2.31%	0.11% to 2.16%	0.10% to 2.44%
Range of expected stock price volatility	0.25 to 0.45	0.27 to 0.48	0.23 to 0.47	0.27 to 0.50
Weighted average expected volatility	0.34	0.39	0.36	0.43
Post-vesting termination rate	1.04%	3.29%	1.25%	3.09%
Dividend yield	2.15%	1.34%	1.69%	1.57%
Fair value	$28.87	$28.78	$32.22	$24.06

The weighted average expected term of the Company’s stock options granted during the three and nine months ended April 3, 2015 was 5.3 years and 5.8 years, respectively, compared to 5.6 years and 5.0 years in 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 are granted on either June 1 or December 1 of each year. ESPP activity was immaterial to the condensed consolidated financial statements for the three and nine months ended April 3, 2015 and March 28, 2014.

Stock Repurchase Program

The Company's Board of Directors previously authorized $3.0 billion for the repurchase of the Company's common stock. On February 3, 2015, the Company's Board of Directors authorized an additional $2.0 billion for the repurchase of its common stock and approved the extension of its stock repurchase program to February 3, 2020. The Company repurchased 2.2 million and 7.6 million shares, respectively, for a total cost of $240 million and $772 million during the three and nine months ended April 3, 2015, respectively. The remaining amount available to be purchased under the Company’s stock repurchase program as of April 3, 2015 was $2.4 billion. The Company may continue to repurchase its stock as it deems appropriate. 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 April 3, 2015, the Company declared a cash dividend of $0.50 per share as of April 3, 2015, totaling $116 million, which was paid on April 16, 2015. In the nine months ended April 3, 2015, the Company declared cash dividends of $1.30 per share for a total of $280 million. On May 5, 2015, the Company declared a cash dividend of $0.50 per share as of July 3, 2015, which will be paid on July 15, 2015. The Company may modify, suspend or cancel its cash dividend policy in any manner and at any time.