Stock-Based Compensation

9 Months Ended

Jul. 30, 2011

Note 3 — Stock-Based Compensation

Grant-Date Fair Value — The Company uses the Black-Scholes option pricing model to calculate the grant-date fair value of stock option awards. The grant-date fair value of restricted stock units represents the fair value of the Company’s common stock on the date of grant, reduced by the present value of dividends expected to be paid on the Company’s common stock prior to vesting. Information pertaining to the Company’s stock option awards and the related estimated weighted-average assumptions used to calculate the fair value of stock options granted during the three- and nine-month periods ended July 30, 2011 and July 31, 2010 are as follows:


	Three Months Ended						Nine Months Ended
Stock Options	July 30, 2011			July 31, 2010			July 30, 2011			July 31, 2010

Options granted (in thousands)		20			12			1,980			1,850
Weighted-average exercise price per share	$	38.50		$	29.19		$	37.61		$	31.51
Weighted-average grant-date fair value per share	$	7.91		$	7.00		$	8.62		$	7.78
Assumptions:
Weighted-average expected volatility		28.2	%		33.3	%		29.2	%		31.4	%
Weighted-average expected term (in years)		5.3			5.3			5.3			5.3
Weighted-average risk-free interest rate		1.7	%		2.1	%		2.1	%		2.6	%
Weighted-average expected dividend yield		2.6	%		3.0	%		2.3	%		2.5	%

Expected volatility — The Company is responsible for estimating volatility and has considered a number of factors, including third-party estimates, when estimating volatility. The Company currently believes that the exclusive use of implied volatility results in the best estimate of the grant-date fair value of employee stock options because it reflects the market’s current expectations of future volatility. In evaluating the appropriateness of exclusively relying on implied volatility, the Company concluded that: (1) options in the Company’s common stock are actively traded with sufficient volume on several exchanges; (2) the market prices of both the traded options and the underlying shares are measured at a similar point in time to each other and on a date close to the grant date of the employee share options; (3) the traded options have exercise prices that are both near-the-money and close to the exercise price of the employee share options; and (4) the remaining maturities of the traded options used to estimate volatility are at least one year.

Expected term — The Company uses historical employee exercise and option expiration data to estimate the expected term assumption for the Black-Scholes grant-date valuation. The Company believes that this historical data is currently the best estimate of the expected term of a new option, and that generally its employees exhibit similar exercise behavior.

Risk-free interest rate — The yield on zero-coupon U.S. Treasury securities for a period that is commensurate with the expected term assumption is used as the risk-free interest rate.

Expected dividend yield — Expected dividend yield is calculated by annualizing the cash dividend declared by the Company’s Board of Directors for the current quarter and dividing that result by the closing stock price on the date of grant. Until such time as the Company’s Board of Directors declares a cash dividend for an amount that is different from the current quarter’s cash dividend, the current dividend will be used in deriving this assumption. Cash dividends are not paid on options, restricted stock or restricted stock units.

Stock-Based Compensation Expense

The amount of stock-based compensation expense recognized during a period is based on the value of the awards that are ultimately expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The term “forfeitures” is distinct from “cancellations” or “expirations” and represents only the unvested portion of the surrendered stock-based award. Based on an analysis of its historical forfeitures, the Company has applied an annual forfeiture rate of 4.3% to all unvested stock-based awards as of July 30, 2011. The rate of 4.3% represents the portion that is expected to be forfeited each year over the vesting period. This analysis will be re-evaluated quarterly and the forfeiture rate will be adjusted as necessary. Ultimately, the actual expense recognized over the vesting period will only be for those options that vest.

Stock-Based Compensation Activity

A summary of the activity under the Company’s stock option plans as of July 30, 2011 and changes during the three- and nine-month periods then ended is presented below:


						Weighted-
						Average
	Options			Weighted-		Remaining		Aggregate
	Outstanding			Average Exercise		Contractual		Intrinsic
Activity during the Three Months Ended July 30, 2011	(in thousands)			Price Per Share		Term in Years		Value

Options outstanding at April 30, 2011		37,023		$	30.13
Options granted		20		$	38.50
Options exercised		(1,467	)	$	28.06
Options forfeited		(114	)	$	28.05
Options expired		(179	)	$	41.98

Options outstanding at July 30, 2011		35,283		$	30.17		4.7	$	199,989

Options exercisable at July 30, 2011		18,837		$	31.88		3.6	$	92,054

Options vested or expected to vest at July 30, 2011 (1)		34,532		$	30.20		4.6	$	195,298


(1)		In addition to the vested options, the Company expects a portion of the unvested options to vest at some point in the future. Options expected to vest is calculated by applying an estimated forfeiture rate to the unvested options.


	Options			Weighted-
	Outstanding			Average Exercise
Activity during the Nine Months Ended July 30, 2011	(in thousands)			Price Per Share

Options outstanding at October 30, 2010		43,079		$	29.87
Options granted		1,980		$	37.61
Options exercised		(7,210	)	$	26.27
Options forfeited		(376	)	$	27.72
Options expired		(2,190	)	$	44.23

Options outstanding at July 30, 2011		35,283		$	30.17

During the three and nine months ended July 30, 2011, the total intrinsic value of options exercised (i.e. the difference between the market price at exercise and the price paid by the employee to exercise the options) was $18.9 million and $88.6 million, respectively, and the total amount of proceeds received by the Company from exercise of these options was $41.2 million and $189.4 million, respectively. Proceeds from stock option exercises pursuant to employee stock plans in the Company’s statement of cash flows during the nine months ended July 30, 2011 of $189.2 million are net of the value of shares surrendered by employees in certain limited circumstances to satisfy the exercise price of options, and to satisfy employee tax obligations upon vesting of restricted stock units and in connection with the exercise of stock options granted to the Company’s employees under the Company’s equity compensation plans. The withholding amount is based on the Company’s minimum statutory withholding requirement. The total grant-date fair value of stock options that vested during the three and nine months ended July 30, 2011, was approximately $0.3 million and $26.7 million, respectively.

During the three and nine months ended July 31, 2010, the total intrinsic value of options exercised (i.e. the difference between the market price at exercise and the price paid by the employee to exercise the options) was $2.2 million and $17.9 million, respectively, and the total amount of proceeds received from exercise of these options was $4.9 million and $198.2 million, respectively. Proceeds from stock option exercises pursuant to employee stock plans in the Company’s statement of cash flows during the nine months ended July 31, 2010 of $174.0 million are net of the value of shares surrendered by employees in certain limited circumstances to satisfy the exercise price of options, and to satisfy employee tax obligations upon vesting of restricted stock units and in connection with the exercise of stock options granted to the Company’s employees under the Company’s equity compensation plans. The withholding amount is based on the Company’s minimum statutory withholding requirement. The total grant-date fair value of stock options that vested during the three and nine months ended July 31, 2010 was approximately $0.3 million and $32.3 million, respectively.

A summary of the Company’s restricted stock unit award activity as of July 30, 2011 and changes during the three- and nine- month periods then ended is presented below:


	Restricted			Weighted-
	Stock Units			Average Grant
	Outstanding			Date Fair Value
Activity during the Three Months Ended July 30, 2011	(in thousands)			Per Share

Restricted stock units outstanding at April 30, 2011		2,091		$	31.03
Units granted		20		$	33.96
Restrictions lapsed		(6	)	$	18.51
Forfeited		(10	)	$	31.39

Restricted stock units outstanding at July 30, 2011		2,095		$	31.09


	Restricted			Weighted-
	Stock Units			Average Grant
	Outstanding			Date Fair Value
Activity during the Nine Months Ended July 30, 2011	(in thousands)			Per Share

Restricted stock units outstanding at October 30, 2010		1,265		$	28.21
Units granted		890		$	34.97
Restrictions lapsed		(29	)	$	24.17
Forfeited		(31	)	$	31.47

Restricted stock units outstanding at July 30, 2011		2,095		$	31.09

As of July 30, 2011, there was $102.2 million (before tax consideration) of total unrecognized compensation cost related to unvested share-based awards, including stock options, restricted stock and restricted stock units. That cost is expected to be recognized over a weighted-average period of 1.4 years.

- Definition

Tabular disclosure of components of a stock option or other award plan under which equity-based compensation is awarded to employees, typically comprised of the amount of unearned compensation (deferred compensation cost), compensation expense, and changes in the quantity and fair value of the shares (or other type of equity) granted, exercised, forfeited, and issued and outstanding pertaining to that plan. Disclosure may also include nature and general terms of such arrangements that existed during the period and potential effects of those arrangements on shareholders, effect of compensation cost arising from equity-based payment arrangements on the income statement, method of estimating the fair value of the goods or services received, or the fair value of the equity instruments granted, during the period, cash flow effects resulting from equity-based payment arrangements and, for registrants that accelerate vesting of out of the money share options, reasons for the decision to accelerate.

+ References+ Details