9. Stock-Based Compensation

Stock-Based Compensation Expense

During the three and six months ended January 2, 2015, the Company recognized in expense $18 million and $37 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 $45 million in the respective prior-year periods. The tax benefit realized as a result of the aforementioned stock-based compensation expense was $7 million and $12 million in the three and six months ended January 2, 2015, respectively, as compared to $6 million and $11 million in the three and six months ended December 27, 2013, respectively. As of January 2, 2015, total compensation cost related to unvested stock options and ESPP rights issued to employees but not yet recognized was $129 million and will be amortized on a straight-line basis over a weighted average service period of approximately 2.2 years.

During the three and six months ended January 2, 2015, the Company recognized in expense $23 million and $43 million, respectively, for stock-based compensation related to the vesting of awards of RSUs issued under the Company's stock plans, as compared to $18 million and $39 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 $11 million in the three and six months ended January 2, 2015, respectively, as compared to $5 million and $9 million in the three and six months ended December 27, 2013, respectively. As of January 2, 2015, the aggregate unamortized fair value of all unvested RSUs was $157 million, which will be recognized on a straight-line basis over a weighted average vesting period of approximately 1.7 years. RSUs include performance stock unit awards (“PSUs”). The effect of PSUs was immaterial to the condensed consolidated financial statements in the three and six months ended January 2, 2015 and December 27, 2013.

During the three and six months ended January 2, 2015, the Company recognized in expense $8 million and $12 million, respectively, related to adjustments to market value as well as the vesting of stock appreciation rights (“SARs”), as compared to $20 million and $24 million in the respective prior-year periods. The tax benefit realized as a result of the aforementioned SARs expense was $2 million and $3 million in the three and six months ended January 2, 2015, respectively, as compared to $4 million and $5 million in the three and six months ended December 27, 2013, respectively. The SARs will be settled in cash upon exercise. As a result, the Company had a total liability of $63 million related to SARs included in accrued expenses in the condensed consolidated balance sheet as of January 2, 2015. As of January 2, 2015, 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
Exercised	(1.1	)	32.14
Canceled or expired	(0.1	)	32.53
Options outstanding at January 2, 2015	8.8		$	47.01	4.4	$	564
Exercisable at January 2, 2015	4.0		$	32.98	3.1	$	314
Vested and expected to vest after January 2, 2015	8.6		$	46.41	4.4	$	558

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 January 2, 2015, the Company had options outstanding to purchase an aggregate of 8.8 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 $564 million at that date. During the three and six months ended January 2, 2015, the aggregate intrinsic value of options exercised under the Company’s stock option plans was $76 million and $163 million, respectively, determined as of the date of exercise, as compared to $80 million and $107 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
RSUs outstanding at January 2, 2015	3.2		72.15
Expected to vest after January 2, 2015	3.0		$	71.69



*	Shares granted 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 $3 million and $116 million in the three and six months ended January 2, 2015, respectively. These amounts are being recognized to expense over the corresponding vesting periods. The Company has assumed a forfeiture rate of 4.3% and 4.4% for the three and six months ended January 2, 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. The share-based liability is remeasured at each reporting date, using a binomial option-pricing model, through the requisite service period. As of January 2, 2015, 0.6 million SARs were outstanding with a weighted average exercise price of $8.11. 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 January 2, 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		Six Months Ended
	January 2, 2015	December 27, 2013	January 2, 2015	December 27, 2013
Suboptimal exercise factor	2.59	2.20	2.51	2.06
Range of risk-free interest rates	0.25% to 1.92%	0.12% to 2.44%	0.11% to 2.16%	0.10% to 2.44%
Range of expected stock price volatility	0.23 to 0.46	0.29 to 0.49	0.23 to 0.47	0.29 to 0.50
Weighted average expected volatility	0.35	0.41	0.36	0.43
Post-vesting termination rate	1.69%	3.18%	1.25%	3.09%
Dividend yield	1.45%	1.45%	1.68%	1.58%
Fair value	$31.96	$25.29	$32.29	$24.03

The weighted average expected term of the Company’s stock options granted during the three and six months ended January 2, 2015 was 6.0 years and 5.8 years, respectively, compared to 5.4 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 six months ended January 2, 2015 and December 27, 2013.

Stock Repurchase Program

Since May 21, 2012, the Company's Board of Directors has authorized $3.0 billion for the repurchase of its common stock. The Company repurchased 3.2 million and 5.4 million shares for a total cost of $309 million and $532 million during the three and six months ended January 2, 2015. The remaining amount available to be purchased under the Company’s stock repurchase program as of January 2, 2015 was $622 million. 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, resulting in a cumulative authorized repurchase amount of $5.0 billion since the inception of the repurchase program. 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 January 2, 2015, the Company declared a cash dividend of $0.40 per share of the Company’s common stock to shareholders of record as of January 2, 2015, totaling $93 million, which was paid on January 15, 2015. In addition, 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. On February 3, 2015, the Company declared a cash dividend of $0.50 per share of the Company's common stock to shareholders of record as of April 3, 2015, which will be paid on April 16, 2015. The Company may modify, suspend or cancel its cash dividend policy in any manner and at any time.