Note 9 – Benefit Plans
Stock Plans
2003 Employee Stock Plan
The 2003 Employee Stock Plan (the “2003 Plan”) is a shareholder approved plan that provides for broad-based equity grants to employees, including executive officers. The 2003 Plan permits the granting of incentive stock options, nonstatutory stock options, RSUs, stock appreciation rights, stock purchase rights and performance-based awards. Options granted under the 2003 Plan generally expire seven to ten years after the grant date and generally become exercisable over a period of four years, based on continued employment, with either annual, semi-annual or quarterly vesting. RSUs granted under the 2003 Plan generally vest over two to four years, based on continued employment and are settled upon vesting in shares of the Company’s common stock on a one-for-one basis. Each share issued with respect to an award granted under the 2003 Plan (other than a stock option or stock appreciation right) reduces the number of shares available for grant under the plan by two shares, whereas shares issued in respect of an option or stock appreciation right count against the number of shares available for grant on a one-for-one basis. All RSUs, other than RSUs held by the Chief Executive Officer, granted under the 2003 Plan have dividend equivalent rights (“DER”), which entitle holders of RSUs to the same dividend value per share as holders of common stock. DER are subject to the same vesting and other terms and conditions as the corresponding unvested RSUs. DER are accumulated and paid when the underlying shares vest. As of September 28, 2013, approximately 28.3 million shares were reserved for future issuance under the 2003 Plan.
1997 Director Stock Plan
The 1997 Director Stock Plan (the “Director Plan”) is a shareholder approved plan that (i) permits the Company to grant awards of RSUs or stock options to the Company’s non-employee directors, (ii) provides for automatic initial grants of RSUs upon a non-employee director joining the Board of Directors and automatic annual grants of RSUs at each annual meeting of shareholders, and (iii) permits the Board of Directors to prospectively change the relative mixture of stock options and RSUs for the initial and annual award grants and the methodology for determining the number of shares of the Company’s common stock subject to these grants without shareholder approval. Each share issued with respect to RSUs granted under the Director Plan reduces the number of shares available for grant under the plan by two shares. The Director Plan expires November 9, 2019. All RSUs granted under the Director Plan are entitled to DER. As of September 28, 2013, approximately 176,000 shares were reserved for future issuance under the Director Plan.
Rule 10b5-1 Trading Plans
During the fourth quarter of 2013, executive officers Timothy D. Cook, Peter Oppenheimer, D. Bruce Sewell, Philip W. Schiller, Daniel Riccio and Jeffrey E. Williams and director William V. Campbell had equity trading plans in place in accordance with Rule 10b5-1(c)(1) under the Exchange Act. An equity trading plan is a written document that pre-establishes the amounts, prices and dates (or formula for determining the amounts, prices and dates) of future purchases or sales of the Company’s stock, including shares acquired pursuant to the Company’s employee and director equity plans.
Employee Stock Purchase Plan
The Employee Stock Purchase Plan (the “Purchase Plan”) is a shareholder approved plan under which substantially all employees may purchase the Company’s common stock through payroll deductions at a price equal to 85% of the lower of the fair market values of the stock as of the beginning or the end of six-month offering periods. An employee’s payroll deductions under the Purchase Plan are limited to 10% of the employee’s compensation and employees may not purchase more than $25,000 of stock during any calendar year. As of September 28, 2013, approximately 1.8 million shares were reserved for future issuance under the Purchase Plan.
401(k) Plan
The Company’s 401(k) Plan (the “401(k) Plan”) is a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the 401(k) Plan, participating U.S. employees may defer a portion of their pre-tax earnings, up to the IRS annual contribution limit ($17,500 for calendar year 2013). The Company matches 50% to 100% of each employee’s contributions, depending on length of service, up to a maximum 6% of the employee’s eligible earnings. The Company’s matching contributions to the 401(k) Plan were $135 million, $114 million and $90 million in 2013, 2012 and 2011, respectively.
Restricted Stock Units
A summary of the Company’s RSU activity and related information for 2013, 2012 and 2011, is as follows:
| Number of RSUs (in thousands) |
Weighted- Average Grant Date Fair Value |
Aggregate Intrinsic Value (in millions) |
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Balance at September 25, 2010 |
13,034 | $ | 165.63 | |||||||||
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RSUs granted |
6,667 | $ | 312.63 | |||||||||
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RSUs vested |
(4,513 | ) | $ | 168.08 | ||||||||
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RSUs cancelled |
(742 | ) | $ | 189.08 | ||||||||
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Balance at September 24, 2011 |
14,446 | $ | 231.49 | |||||||||
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RSUs granted |
7,799 | $ | 431.35 | |||||||||
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RSUs vested |
(6,305 | ) | $ | 205.27 | ||||||||
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RSUs cancelled |
(935 | ) | $ | 256.01 | ||||||||
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Balance at September 29, 2012 |
15,005 | $ | 344.87 | |||||||||
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RSUs granted |
5,631 | $ | 547.62 | |||||||||
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RSUs vested |
(6,042 | ) | $ | 321.73 | ||||||||
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RSUs cancelled |
(1,268 | ) | $ | 401.17 | ||||||||
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Balance at September 28, 2013 |
13,326 | $ | 435.70 | $ | 6,433 | |||||||
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The fair value as of the respective vesting dates of RSUs was $3.1 billion, $3.3 billion and $1.5 billion for 2013, 2012 and 2011, respectively. The majority of RSUs that vested in 2013, 2012 and 2011 were net-share settled such that the Company withheld shares with value equivalent to the employees’ minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. The total shares withheld were approximately 2.2 million, 2.3 million and 1.6 million for 2013, 2012 and 2011, respectively, and were based on the value of the RSUs on their respective vesting dates as determined by the Company’s closing stock price. Total payments for the employees’ tax obligations to taxing authorities were $1.1 billion, $1.2 billion and $520 million in 2013, 2012 and 2011, respectively, and are reflected as a financing activity within the Consolidated Statements of Cash Flows. These net-share settlements had the effect of share repurchases by the Company as they reduced and retired the number of shares that would have otherwise been issued as a result of the vesting and did not represent an expense to the Company.
Stock Options
A summary of the Company’s stock option activity and related information for 2013, 2012 and 2011, is as follows:
| Outstanding Options | ||||||||||||||||
| Number of Options (in thousands) |
Weighted- Average Exercise Price |
Weighted- Average Remaining Contractual Term (in years) |
Aggregate Intrinsic Value (in millions) |
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Balance at September 25, 2010 |
21,725 | $ | 90.46 | |||||||||||||
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Options granted |
1 | $ | 342.62 | |||||||||||||
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Options cancelled |
(163 | ) | $ | 128.42 | ||||||||||||
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Options exercised |
(9,697 | ) | $ | 67.63 | ||||||||||||
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Balance at September 24, 2011 |
11,866 | $ | 108.64 | |||||||||||||
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Options assumed |
41 | $ | 30.86 | |||||||||||||
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Options cancelled |
(25 | ) | $ | 103.22 | ||||||||||||
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Options exercised |
(5,337 | ) | $ | 84.85 | ||||||||||||
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Balance at September 29, 2012 |
6,545 | $ | 127.56 | |||||||||||||
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Options granted |
8 | $ | 30.36 | |||||||||||||
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Options assumed |
29 | $ | 210.08 | |||||||||||||
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Options cancelled |
(8 | ) | $ | 108.87 | ||||||||||||
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Options exercised |
(2,480 | ) | $ | 108.33 | ||||||||||||
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Balance at September 28, 2013 |
4,094 | $ | 139.65 | 1.1 | $ | 1,405 | ||||||||||
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Exercisable at September 28, 2013 |
4,072 | $ | 140.07 | 1.0 | $ | 1,396 | ||||||||||
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Expected to vest after September 28, 2013 |
22 | $ | 61.93 | 7.8 | $ | 9 | ||||||||||
Aggregate intrinsic value represents the value of the Company’s closing stock price on the last trading day of the period in excess of the weighted-average exercise price multiplied by the number of options outstanding or exercisable. Total intrinsic value of options at time of exercise was $1.0 billion, $2.3 billion and $2.6 billion for 2013, 2012 and 2011, respectively.
Share-based Compensation
The Company granted 8,000 and 1,370 stock options during 2013 and 2011, respectively. The weighted-average grant date fair value per share of stock options granted during 2013 and 2011 was $294.84 and $181.13, respectively. The Company did not grant any stock options during 2012.
During 2013 and 2012, in conjunction with certain business combinations, the Company assumed 29,000 and 41,000 stock options, respectively, which had a weighted-average fair value per share of $407.80 and $405.39, respectively. The Company did not assume any stock options during 2011.
The weighted-average fair value of stock purchase rights per share was $115.19, $108.44 and $71.47 during 2013, 2012 and 2011, respectively.
The following table shows a summary of the share-based compensation expense included in the Consolidated Statements of Operations for 2013, 2012 and 2011 (in millions):
| 2013 | 2012 | 2011 | ||||||||||
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Cost of sales |
$ | 350 | $ | 265 | $ | 200 | ||||||
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Research and development |
917 | 668 | 450 | |||||||||
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Selling, general and administrative |
986 | 807 | 518 | |||||||||
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Total share-based compensation expense |
$ | 2,253 | $ | 1,740 | $ | 1,168 | ||||||
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The income tax benefit related to share-based compensation expense was $816 million, $567 million and $467 million for 2013, 2012 and 2011, respectively. As of September 28, 2013, the total unrecognized compensation cost related to outstanding stock options and RSUs was $4.7 billion, which the Company expects to recognize over a weighted-average period of 3.0 years.