13. Common Stock

National Oilwell Varco has authorized 1 billion shares of $.01 par value common stock. The Company also has authorized 10 million shares of $.01 par value preferred stock, none of which is issued or outstanding.

Cash dividends aggregated $703 million and $389 million for the years ended December 31, 2014 and 2013, respectively. The declaration and payment of future dividends is at the discretion of the Company’s Board of Directors and will be dependent upon the Company’s results of operations, financial condition, capital requirements and other factors deemed relevant by the Company’s Board of Directors.

On September 30, 2014, the Company announced that its Board of Directors authorized a share repurchase program to purchase up to $3 billion of the Company’s outstanding common stock. The Company may repurchase its shares on the open market at prevailing market prices. The timing and actual number of shares repurchased will depend on a variety of factors including market conditions and regulatory considerations. The duration of the share repurchase program is 36 months, although it may be increased, extended, suspended or discontinued without prior notice. The Company intends to fund the repurchases using its available U.S. cash balances, which may involve the repatriation of foreign earnings not indefinitely reinvested. However, depending on U.S. cash balances, the Company may choose to borrow against its revolving credit facility, its commercial paper program or new debt issuances to finance the repurchases. As shares are repurchased, they are constructively retired and returned to an unissued state. At December 31, 2014, the Company repurchased 11.6 million shares under the program for an aggregate amount of $779 million.

Stock Options

Under the terms of National Oilwell Varco’s Long-Term Incentive Plan, as amended, 39.5 million shares of common stock are authorized for the grant of options to officers, key employees, non-employee directors and other persons. Options granted under our stock option plan generally vest over a three-year period starting one year from the date of grant and expire ten years from the date of grant. The purchase price of options granted may not be less than the closing market price of National Oilwell Varco common stock on the date of grant. At December 31, 2014, approximately 11.9 million shares were available for future grants.

We also have inactive stock option plans that were acquired in connection with the acquisitions of Varco International, Inc. in 2005 and Grant Prideco in 2008. We converted the outstanding stock options under these plans to options to acquire our common stock and no further options are being issued under these plans. Stock option information summarized below includes amounts for the National Oilwell Varco Long-Term Incentive Plan and stock plans of acquired companies. Options outstanding at December 31, 2014 under the stock option plans have exercise prices between $8.43 and $77.99 per share, and expire at various dates from January 26, 2015 to December 4, 2024.

On June 2, 2014, as a result of the spin-off and pursuant to the terms of the Employee Matters Agreement and the Plan, outstanding NOV stock-based awards held by continuing NOV employees were adjusted to generally preserve the intrinsic value of the original award. Outstanding NOV stock-based awards held by employees of NOW were converted into similar NOW stock-based awards, each appropriately adjusted to generally preserve the intrinsic value of the original award. Adjustments to the awards are reflected in the following tables and did not have a material impact to compensation expense.

Total compensation cost that has been charged against income for all share-based compensation arrangements was $101 million, $92 million and $80 million for 2014, 2013 and 2012, respectively. The total income tax benefit recognized in the income statement for all share-based compensation arrangements was $35 million, $28 million and $24 million for 2014, 2013 and 2012, respectively.

Stock Options

The following summarizes options activity:


	Years Ended December 31,
	2014					2013					2012
	Number of Shares			Average Exercise Price		Number of Shares			Average Exercise Price		Number of Shares			Average Exercise Price
Shares under option at beginning of year		11,535,566		$	58.36		10,274,477		$	54.11		11,367,995		$	43.52
Granted		3,389,547			69.00		3,072,086			63.96		2,428,406			77.99
Spin-off		(1,567,348	)				—			—		—			—
Cancelled		(498,967	)		70.32		(329,002	)		66.78		(247,426	)		55.58
Exercised		(1,977,665	)		53.56		(1,481,995	)		38.75		(3,274,498	)		34.59

Shares under option at end of year		10,881,133		$	61.22		11,535,566		$	58.36		10,274,477		$	54.11

Exercisable at end of year		5,903,712		$	55.06		6,324,117		$	49.29		5,231,150		$	40.56

The following summarizes information about stock options outstanding at December 31, 2014:


	Weighted-Avg		Options Outstanding				Options Exercisable
Range of Exercise Price	Remaining Contractual		Shares		Weighted- Exercise		Shares		Weighted- Exercise
$8.43 - $45.00		3.49		2,428,973	$	32.39		2,428,973	$	32.39
$45.01 - $70.00		8.19		5,458,369		65.94		1,102,784		61.06
$70.01 - $77.99		6.68		2,993,791		75.99		2,371,955		75.49

Total		6.72		10,881,133	$	61.22		5,903,712	$	55.06

The weighted-average fair value of options granted during 2014, 2013 and 2012, was approximately $25.60, $24.11 and $30.01 per share, respectively, as determined using the Black-Scholes option-pricing model. The total intrinsic value of options exercised during 2014 and 2013, was $111 million and $64 million, respectively.

The determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise activity. The use of the Black Scholes model requires the use of extensive actual employee exercise activity data and the use of a number of complex assumptions including expected volatility, risk-free interest rate, expected dividends and expected term.


	Years Ended December 31,
	2014			2013			2012
Valuation Assumptions:
Expected volatility		49.4	%		50.1	%		51.7	%
Risk-free interest rate		1.5	%		0.9	%		0.9	%
Expected dividends	$	1.39		$	0.75		$	0.57
Expected term (in years)		3.7			3.4			3.2

The Company used the actual volatility for traded options for the past 10 years prior to option date as the expected volatility assumption required in the Black Scholes model.

The risk-free interest rate assumption is based upon observed interest rates appropriate for the term of our employee stock options. The dividend yield assumption is based on the history and expectation of dividend payouts. The estimated expected term is based on actual employee exercise activity for the past ten years.

As stock-based compensation expense recognized in the Consolidated Statement of Income in 2014 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. ASC Topic 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience.

The following summary presents information regarding outstanding options at December 31, 2014 and changes during 2014 with regard to options under all stock option plans:


	Shares			Weighted- Average Exercise Price		Weighted Remaining Contractual Term (years)		Aggregate Intrinsic Value
Outstanding at December 31, 2013		11,535,566		$	58.36		5.37	$	155,892,094
Granted		3,389,547		$	69.00
Spin-off		(1,567,348	)	$	—
Canceled		(498,967	)	$	70.32
Exercised		(1,977,665	)	$	53.56

Outstanding at December 31, 2014		10,881,133		$	61.22		6.72	$	87,998,114

Vested or expected to vest		10,739,679		$	61.22		6.72	$	86,854,138

Exercisable at December 31, 2014		5,903,712		$	55.06		5.15	$	85,503,217

At December 31, 2014, total unrecognized compensation cost related to nonvested stock options was $69 million. This cost is expected to be recognized over a weighted-average period of two years. The total fair value of stock options vested in 2014, 2013 and 2012 was approximately $67 million, $64 million and $55 million, respectively. Cash received from option exercises for 2014, 2013 and 2012 was $108 million, $58 million and $113 million, respectively. The actual tax benefit realized for the tax deductions from option exercises totaled $44 million, $39 million and $42 million for 2014, 2013 and 2012, respectively. Cash used to settle equity instruments granted under all share-based payment arrangements for 2014, 2013 and 2012 was not material for any period.

Restricted Shares

The Company issues restricted stock awards and restricted stock units to officers and key employees in addition to stock options. On February 25, 2014, the Company granted 426,272 shares of restricted stock and restricted stock units with a fair value of $69.00 per share; and performance share awards to senior management employees with potential payouts varying from zero to 436,390 shares. The stock options vest over a three-year period from the grant date while the restricted stock and restricted stock units vest on the third anniversary of the date of grant. The performance share awards can be earned based on performance against established goals over a three-year performance period. The performance share awards are divided into two equal, independent parts that are subject to two separate performance metrics: 50% with a TSR (total shareholder return) goal (the “TSR Award”) and 50% with an internal ROC (return on capital) goal (the “ROC Award”).

Performance against the TSR goal is determined by comparing the performance of the Company’s TSR with the TSR performance of the members of the OSX index for the three year performance period. Performance against the ROC goal is determined by comparing the performance of the Company’s actual ROC performance average for each of the three years of the performance period against the ROC goal set by the Company’s Compensation Committee.

On May 14, 2014, the Company granted 18,736 restricted stock awards with a fair value of $68.89 per share. The awards were granted to non-employee members of the board of directors and vest on the first anniversary of the grant date.

The following summary presents information regarding outstanding restricted shares:


	Years Ended December 31,
	2014					2013					2012
	Number of Units			Weighted- Average Grant Date Fair Value		Number of Units			Weighted- Average Grant Date Fair Value		Number of Units			Weighted- Average Grant Date Fair Value
Nonvested at beginning of year		1,643,193		$	67.98		1,449,683		$	62.29		1,741,840		$	40.76
Granted		708,821			70.14		822,281			63.69		523,218			77.26
Spin-off		(319,949	)		70.56		—			—		—			—
Vested		(348,981	)		74.97		(368,984	)		63.89		(441,243	)		76.85
Cancelled		(113,943	)		70.32		(259,787	)		37.78		(374,132	)		28.02

Nonvested at end of year		1,569,141		$	73.73		1,643,193		$	67.98		1,449,683		$	62.29

The weighted-average grant day fair value of restricted stock awards and restricted stock units granted during the years ended 2014, 2013 and 2012 was $70.14, $63.69 and $77.26 per share, respectively. There were 348,981; 368,984 and 441,243 restricted stock awards that vested during 2014, 2013 and 2012, respectively. At December 31, 2014, there was approximately $44 million of unrecognized compensation cost related to nonvested restricted stock awards and restricted stock units, which is expected to be recognized over a weighted-average period of two years.