Stock-Based Compensation

Prior to the separation, certain of the Company's employees participated in stock-based compensation plans sponsored by former Parent. Former Parent's stock-based compensation plans included incentive compensation plans and an employee stock purchase plan. All awards granted under the plans were based on former Parent's common shares and as such the award activity is not reflected in the Company's Condensed Consolidated and Combined Financial Statements.

In conjunction with the separation, the Company adopted the Hewlett Packard Enterprise Company 2015 Stock Incentive Plan (the "Plan"). The Plan became effective on November 1, 2015. The total number of shares of the Company's common stock authorized under the Plan was 260 million. The Plan provides for the grant of various types of awards including restricted stock awards, stock options and performance-based awards.

In connection with the separation, and in accordance with the Employee Matters Agreement between HP Inc. and the Company, the Company's employees with outstanding former Parent stock-based awards received replacement stock-based awards under the Plan at separation. The value of the replacement stock-based awards was designed to generally preserve the intrinsic value of the replaced awards immediately prior to separation. The incremental expense incurred by the Company was not material. Also in conjunction with the separation, the Company granted one-time retention stock awards, with a total grant date fair value of approximately $137 million to certain executives. These awards vest over 3 years from the grant date.

Stock-Based Compensation Expense

Stock-based compensation expense and the resulting tax benefits were as follows:



	Three Months Ended July 31,						Nine Months Ended July 31,
	2016			2015			2016			2015
	In millions
Stock-based compensation expense	$	149		$	117		$	452		$	353
Income tax benefit	(45		)	(38		)	(134		)	(116		)
Stock-based compensation expense, net of tax	$	104		$	79		$	318		$	237

In May 2016, in connection with the announcement of the Everett Transaction, the Company modified its stock-based compensation program such that certain unvested equity awards outstanding on May 24, 2016 will vest upon the earlier of: (i) the termination of an employee’s employment with HPE as a direct result of an announced sale, divestiture or spin-off of a subsidiary, division or other business; (ii) the termination of an employee’s employment with HPE without cause; or (iii) June 1, 2018. This modification also includes changes to the performance and market conditions of certain performance-based awards. As a result, for the three and nine months ended July 31, 2016, stock-based compensation expense in the table above includes pre-tax expense of $15 million, which has been recorded within Separation costs in the Condensed Consolidated and Combined Statements of Earnings. Additionally, for the three and nine months ended July 31, 2016, stock-based compensation expense in the table above includes pre-tax expense of $5 million related to workforce reductions, which has been recorded within Restructuring charges in the Condensed Consolidated and Combined Statements of Earnings.

For the three and nine months ended July 31, 2015, stock-based compensation expense includes expense attributable to the Company based on the awards and terms previously granted under former Parent's incentive compensation plan to the Company's employees prior to the separation and an allocation of former Parent's corporate and shared functional employee expenses. Accordingly, the amounts presented for the three and nine months ended July 31, 2015 are not necessarily indicative of future awards and do not necessarily reflect the results that the Company would have experienced as an independent, publicly-traded company.

Restricted Stock Awards

Restricted stock awards are non-vested stock awards that may include grants of restricted stock or restricted stock units. Restricted stock awards and cash-settled awards are generally subject to forfeiture if employment terminates prior to the lapse of the restrictions. Such awards generally vest one to three years from the date of grant. During the vesting period, ownership of the restricted stock cannot be transferred. Restricted stock has the same dividend and voting rights as common stock and is considered to be issued and outstanding upon grant. The dividends paid on restricted stock are non-forfeitable. Restricted stock units have forfeitable dividend equivalent rights equal to the dividend paid on common stock. Restricted stock units do not have the voting rights of common stock, and the shares underlying restricted stock units are not considered issued and outstanding upon grant. The fair value of the restricted stock awards is the close price of the Company's common stock on the grant date of the award. The Company expenses the fair value of restricted stock awards ratably over the period during which the restrictions lapse.

A summary of restricted stock award activity is as follows:



	Nine Months Ended July 31, 2016
	Shares		Weighted-Average Grant Date Fair Value Per Share
	In thousands
Outstanding at beginning of period	—		$	—
Converted from former Parent's plan	42,012		$	15
Granted⁽¹⁾	31,956		$	15
Vested	(9,637	)	$	15
Forfeited	(3,560	)	$	15
Outstanding at end of period	60,771		$	15

______________________________________________________________________________


(1)	Includes a one-time restricted stock unit retention grant of approximately 5 million shares.

At July 31, 2016, there was $580 million of unrecognized pre-tax, stock-based compensation expense related to unvested restricted stock awards, which the Company expects to recognize over the remaining weighted-average vesting period of 1.2 years.

Stock Options

Stock options granted under the Company's principal equity plans are generally non-qualified stock options, but the principal equity plans permitted some options granted to qualify as incentive stock options under the U.S. Internal Revenue Code. Stock options generally vest over three to four years from the date of grant. The exercise price of a stock option is equal to the closing price of the Company's common stock on the option grant date. The majority of the stock options issued by the Company contain only service vesting conditions. The Company also issued, to a lesser extent, performance-contingent stock options that vest only on the satisfaction of both service and market conditions.

The Company utilizes the Black-Scholes-Merton option pricing formula to estimate the fair value of stock options subject to service-based vesting conditions. The Company estimates the fair value of stock options subject to performance-contingent vesting conditions using a combination of a Monte Carlo simulation model and a lattice model, as these awards contain market conditions. The weighted-average fair value and the assumptions used to measure fair value were as follows:



	Three Months Ended July 31, 2016			Nine Months Ended July 31, 2016
Weighted-average fair value⁽¹⁾	$	5		$	4
Expected volatility⁽²⁾	28.4		%	31.1		%
Risk-free interest rate⁽³⁾	1.2		%	1.7		%
Expected dividend yield⁽⁴⁾	1.2		%	1.5		%
Expected term in years⁽⁵⁾	5.3			5.4

______________________________________________________________________________


(1)	The weighted-average fair value was based on the fair value of stock options granted during the period.


(2)	The expected volatility was estimated using the average historical volatility of selected peer companies.


(3)	The risk-free interest rate was estimated based on the yield on U.S. Treasury zero-coupon issues.


(4)	The expected dividend yield represents a constant dividend yield applied for the duration of the expected term of the award.


(5)	For awards subject to service-based vesting, the expected term was estimated using the simplified method detailed in SEC Staff Accounting Bulletin No. 107 and for performance-contingent awards, the expected term represents an output from the lattice model.

A summary of stock option activity is as follows:



	Nine months ended July 31, 2016
	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
	In thousands				In years	In millions
Outstanding at beginning of period	—		$	—
Converted from former Parent's plan	42,579		$	15
Granted⁽¹⁾	25,369		$	15
Exercised	(4,861	)	$	10
Forfeited/canceled/expired	(1,780	)	$	20
Outstanding at end of period	61,307		$	15	5.7	$	381
Vested and expected to vest at end of period	59,118		$	15	5.7	$	369
Exercisable at end of period	25,373		$	14	4.1	$	194

______________________________________________________________________________


(1)	Includes one-time stock option retention grant of approximately 16 million shares.

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value that option holders would have realized had all option holders exercised their options on the last trading day of the third quarter of fiscal 2016. The aggregate intrinsic value is the difference between the Company's closing common stock price on the last trading day of the third quarter of fiscal 2016 and the exercise price, multiplied by the number of in-the-money options. The total intrinsic value of options exercised for the three and nine months ended July 31, 2016 was $22 million and $35 million, respectively.

At July 31, 2016, there was $76 million of unrecognized pre-tax, stock-based compensation expense related to stock options, which the Company expects to recognize over the remaining weighted-average vesting period of 1.9 years.

Employee Stock Purchase Plan

Effective November 1, 2015, the Company adopted the Hewlett Packard Enterprise Company 2015 Employee Stock Purchase Plan ("ESPP"). The total number of shares of Company's common stock authorized under the ESPP was 80 million. The ESPP allows eligible employees to contribute up to 10% of their eligible compensation to purchase Hewlett Packard Enterprise's common stock. The ESPP provides for a discount not to exceed 15% and an offering period up to 24 months. The Company currently offers 6 month offering periods during which employees have the ability to purchase shares at 95% of the closing market price on the purchase date. No stock-based compensation expense was recorded in connection with those purchases, as the criteria of a non-compensatory plan were met.