Note 8. Shareholders’ Equity

Stock Incentive Plans

In addition to awards assumed in connection with acquisitions, the Company maintains two stock-based incentive plans (collectively, including the assumed awards, referred to as the “Stock Plans”): the amended and restated 2004 Performance Incentive Plan and the Employee Stock Option Plan. No new awards may be granted under the Employee Stock Option Plan. As of June 27, 2014, options to purchase 77,033 shares of the Company’s common stock remained outstanding and exercisable under the Employee Stock Option Plan. Other than for such options, no restricted stock or other awards were outstanding under the Employee Stock Option Plan as of June 27, 2014. Options granted under the Employee Stock Option Plan expire ten years from the date of grant.

The types of awards that may be granted under the 2004 Performance Incentive Plan include stock options, SARs, RSUs, stock bonuses and other forms of awards granted or denominated in the Company’s common stock or units of the Company’s common stock, as well as cash bonus awards. Persons eligible to receive awards under the 2004 Performance Incentive Plan include officers and employees of the Company or any of its subsidiaries, directors of the Company and certain consultants and advisors to the Company or any of its subsidiaries. The vesting of awards under the 2004 Performance Incentive Plan is determined at the date of grant. Each award expires on a date determined at the date of grant; however, the maximum term of options and SARs under the 2004 Performance Incentive Plan is ten years after the grant date of the award. RSUs granted under the 2004 Performance Incentive Plan typically vest over periods ranging from one to four years from the date of grant. To the extent available, the Company issues shares out of treasury stock upon the vesting of awards or the exercise of employee stock options and ESPP.

As of June 27, 2014, the maximum number of shares of the Company’s common stock that was authorized for award grants under the 2004 Performance Incentive Plan was 48.8 million shares. Any shares subject to awards under the Employee Stock Option Plan that are canceled, forfeited or otherwise terminate without having vested or been exercised, as applicable, will become available for other award grants under the 2004 Performance Incentive Plan. Shares issued in respect of stock options and SARs granted under the 2004 Performance Incentive Plan count against the plan’s share limit on a one-for-one basis, whereas shares issued in respect of any other type of award granted through November 7, 2012 under the plan count against the plan’s share limit as 1.35 shares for every one share actually issued in connection with such award. Shares issued in respect of awards granted on or after November 8, 2012 count against the plan’s share limit as 1.72 shares for every one share actually issued in connection with such award. The 2004 Performance Incentive Plan was extended in 2013 and will terminate on August 6, 2022 unless terminated earlier by the Company’s Board of Directors.

Employee Stock Purchase Plan

The Company maintains an ESPP. Under the ESPP, eligible employees may authorize payroll deductions of up to 10% of their eligible compensation during prescribed offering periods to purchase shares of the Company’s common stock at 95% of the fair market value of common stock on either the first day of that offering period or on the applicable exercise date, whichever is less. A participant may participate in only one offering period at a time, and a new offering period generally begins each June 1st and December 1st. Each offering period is generally 24 months and consists of four exercise dates (each, generally six months following the start of the offering period or the preceding exercise date, as the case may be). If the fair market value of the Company’s common stock is less on a given exercise date than on the date of grant, employee participation in that offering period ends and participants are automatically re-enrolled in the next new offering period.

Stock-based Compensation Expense

The Company recognized in expense $85 million, $88 million and $57 million for stock-based compensation related to the vesting of options issued by the Company under the Stock Plans and the ESPP in 2014, 2013 and 2012, respectively. The tax benefit realized as a result of the aforementioned stock-based compensation expense was $22 million, $25 million and $12 million in 2014, 2013 and 2012, respectively. As of June 27, 2014, total compensation cost related to unvested stock options granted under the Stock Plans and ESPP rights issued to employees but not yet recognized was $128 million and will be amortized on a straight-line basis over a weighted average service period of approximately 2.2 years.

For purposes of this footnote, references to RSUs include performance stock unit awards (“PSUs”). The effect of the PSU activity was immaterial to the consolidated financial statements in 2014, 2013 and 2012. The Company granted approximately 1.4 million RSUs during 2014, which are generally payable in an equal number of shares of the Company’s common stock at the time of vesting of the units. The aggregate market value of the shares underlying the RSUs granted in 2014 was $95 million at the date of grant. The compensation expense for granted and assumed RSUs is being recognized as expense over the corresponding vesting or measurement periods of the awards. For purposes of recognizing awards granted, the Company has assumed a weighted average forfeiture rate of 3.3% based on a historical analysis indicating forfeitures for these types of awards. The Company recognized in expense $71 million, $52 million and $35 million related to RSUs granted under the Stock Plans that vested during 2014, 2013 and 2012, respectively. The tax benefit realized as a result of the aforementioned expense was $18 million, $14 million and $10 million in 2014, 2013 and 2012, respectively. As of June 27, 2014, the aggregate unamortized fair value of all unvested RSUs granted under the Stock Plans was $91 million, which will be recognized on a straight-line basis over a weighted average vesting period of approximately 1.4 years. In 2013, stock-based compensation expense included $5 million of accelerated expense associated with the employee termination benefits as discussed in Note 17.

The Company recognized in expense $36 million and $46 million related to adjustments to market value as well as the vesting of SARs in 2014 and 2013, respectively, and a benefit of $7 million related to SARs in 2012. The tax benefit realized as a result of the aforementioned SARs expense was $7 million and $4 million in 2014 and 2013, respectively. There was no tax effect in 2012. The SARs will be settled in cash upon exercise. As a result, the Company had a total liability of $61 million related to SARs included in accrued liabilities as of June 27, 2014 in the consolidated balance sheet. As of June 27, 2014, total compensation cost related to unvested SARs issued to employees but not yet recognized was $1 million and will be recognized on a straight-line basis over a weighted average service period of approximately 0.5 years.

Stock Option Activity

The following table summarizes stock option activity under the Stock Plans over the last three fiscal years (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 July 1, 2011	10.2		$	22.49
Granted	3.7		31.78
Assumed	4.2		8.47
Exercised	(2.1	)	15.14
Forfeited or expired	(0.2	)	28.76
Options outstanding at June 29, 2012	15.8		$	21.89
Granted	3.4		43.51
Exercised	(6.8	)	18.53
Forfeited or expired	(0.5	)	32.72
Options outstanding at June 28, 2013	11.9		$	29.47
Granted	1.6		68.96
Assumed	1.7		38.18
Exercised	(4.5	)	25.22
Forfeited or expired	(0.6	)	67.23
Options outstanding at June 27, 2014	10.1		$	37.03	4.6	$	572
Exercisable at June 27, 2014	4.8		$	30.03	3.2	$	310
Vested and expected to vest after June 27, 2014	9.9		$	36.82	4.5	$	565

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 June 27, 2014, the Company had options outstanding to purchase an aggregate of 10.0 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 $572 million at that date. During 2014, 2013 and 2012, the aggregate intrinsic value of options exercised under the Stock Plans was $247 million, $211 million and $53 million, respectively, determined as of the date of exercise.

The following table summarizes information about options outstanding and exercisable under the Stock Plans as of June 27, 2014 (in millions, except exercise price):



	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number of Shares	Weighted Average Remaining Contractual Life (in years)	Weighted Average Exercise Price		Number of Shares	Weighted Average Exercise Price
$3.08 – $23.78	2.5	4.7	$	13.41	1.6	$	13.79
$25.79 – $29.60	2.3	3.5	28.03		1.5	27.63
$30.06 – $41.75	1.3	3.2	35.82		0.9	34.54
$43.11 – $43.11	2.1	5.2	43.11		0.6	43.11
$48.01 – $91.64	1.8	6.1	67.31		0.1	67.50
$91.88 – $388.77	0.1	3.6	156.90		0.1	156.93
	10.1	4.6	$	37.03	4.8	$	30.03

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 July 1, 2011	3.1		$	28.85
Granted	1.6		32.87
Assumed	0.4		38.98
Vested	(1.3	)	24.58
Forfeited or expired	(0.1	)	32.01
RSUs outstanding at June 29, 2012	3.7		$	33.19
Granted	1.7		43.14
Vested	(1.4	)	37.89
Forfeited or expired	(0.4	)	35.46
RSUs outstanding at June 28, 2013	3.6		$	35.82
Granted	1.4		69.08
Assumed	0.2		62.73
Vested	(1.3	)	33.61
Forfeited or expired	(0.2	)	47.62
RSUs outstanding at June 27, 2014	3.7		$	49.77
Expected to vest after June 27, 2014	3.5		$	49.48

The fair value of each RSU is the market price of the Company’s stock on the date of grant. RSUs are generally payable in an equal number of shares of the Company’s common stock at the time of the vesting of the units. The aggregate value of RSUs that became fully-vested during 2014, 2013 and 2012 was $89 million, $71 million and $41 million, respectively, determined as of the vest date. The grant-date fair value of the shares underlying the RSU awards at the date of grant or assumption was $95 million, $74 million and $71 million in 2014, 2013 and 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 3.3%, 2.0% and 2.4% during 2014, 2013 and 2012, 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. The share-based liability is remeasured at each reporting date, using a binomial option-pricing model, through the requisite service period. As of June 27, 2014, 0.7 million SARs were outstanding with a weighted average exercise price of $7.96. There were no SARs granted and all other SARs activity was immaterial to the consolidated financial statements for the year ended June 27, 2014.

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 during the three years ended June 27, 2014 was estimated using the following weighted average assumptions:



	2014	2013	2012
Suboptimal exercise factor	2.07	1.90	1.81
Range of risk-free interest rates	0.10% to 2.44%	0.14% to 1.96%	0.12% to 1.61%
Range of expected stock price volatility	0.27 to 0.50	0.36 to 0.53	0.41 to 0.55
Weighted average expected volatility	0.43	0.49	0.49
Post-vesting termination rate	3.10%	2.16%	2.61%
Dividend yield	1.58%	2.53%	—
Fair value	$24.14	$15.75	$12.91

The weighted average expected term of the Company’s stock options granted during 2014, 2013 and 2012 was 5.0 years, 4.0 years and 4.9 years, respectively.

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 ESPP are granted on either June 1st or December 1st of each year.

The fair values of all ESPP purchase rights granted on or prior to June 27, 2014 have been estimated at the date of grant using a Black-Scholes-Merton option-pricing model with the following weighted average assumptions:



	ESPP
	2014	2013	2012
Option life (in years)	1.24	1.24	1.24
Risk-free interest rate	0.26%	0.23%	0.22%
Stock price volatility	0.31	0.42	0.46
Dividend yield	1.64%	1.61%	—
Fair value	$14.62	$10.36	$7.29

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 until September 13, 2017. The Company repurchased 10.3 million shares for a total cost of $816 million during 2014. The remaining amount available to be purchased under the Company’s stock repurchase program as of June 27, 2014 was $1.2 billion. 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 Credit Agreement.

Stock Reserved for Issuance

The following table summarizes all shares of common stock reserved for issuance at June 27, 2014 (in millions):



	Number of Shares
Maximum shares issuable in connection with:
Outstanding awards and shares available for award grants	23.6
ESPP	5.9
Total	29.5

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 2014, the Company declared aggregate cash dividends of $1.25 per share of the Company’s common stock, totaling $295 million, of which $201 million was paid during 2014. On August 5, 2014, the Company declared a cash dividend of $0.40 per share of its common stock to shareholders of record as of October 3, 2014, which will be paid on October 15, 2014. The Company may modify, suspend or cancel its cash dividend policy in any manner and at any time.