Stock-Based Compensation

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. On January 25, 2017, the Company amended the Plan and reduced the authorized shares of common stock to 210 million shares. The Plan provides for the grant of various types of awards including restricted stock awards, stock options and performance-based awards. These awards generally vest over 3 years from the grant date.

In connection 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 in the first quarter of fiscal 2016. These awards generally 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,
	2017			2016			2017			2016
	In millions
Stock-based compensation expense from continuing operations	$	128		$	117		$	406		$	347
Income tax benefit	(41		)	(34		)	(130		)	(101		)
Stock-based compensation expense from continuing operations, net of tax	$	87		$	83		$	276		$	246
Stock-based compensation expense from discontinued operations	$	—		$	32		$	100		$	105

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 would 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 included changes to the performance and market conditions of certain performance-based awards. The incremental expense arising from this modification was not material. Additionally, as a result of the accelerated vesting related to this modification, the Company incurred stock-based compensation expense of $5 million and $100 million during the three and nine months ended July 31, 2017, respectively, of which $69 million was recorded in Net loss from discontinued operations in the Condensed Consolidated Statement of Earnings for the nine months ended July 31, 2017. There was no stock-based compensation expense recorded in Net loss from discontinued operations in the Condensed Consolidated Statement of Earnings for the three months ended July 31, 2017. The remaining $5 million and $31 million arising from the modification for the three and nine months ended July 31, 2017, respectively, has been recorded within Separation costs in the Condensed Consolidated Statements of Earnings.

In addition, in connection with the Everett Transaction and in accordance with the Employee Matters Agreement, HPE made certain post-spin adjustments to the exercise price and number of stock-based compensation awards with the intention of preserving the intrinsic value of the awards prior to the close of the transaction. The incremental expense incurred by the Company was not material.

For the three and nine months ended July 31, 2017, stock-based compensation expense in the table above includes pre-tax expense of $7 million and $40 million, respectively, which has been recorded within Separation costs, $10 million and $29 million, respectively, related to workforce reductions, which has been recorded within Restructuring charges, and $14 million and $21 million, respectively, related to the acquisitions of Silicon Graphics International Corp. ("SGI") and Nimble Storage, Inc. ("Nimble Storage"), which has been recorded within Acquisition and other related charges in the Condensed Consolidated Statements of Earnings.

For the three and nine months ended July 31, 2016, stock-based compensation expense in the table above includes pre-tax expense of $12 million, which has been recorded within Separation costs, and $5 million, related to workforce reductions, which has been recorded within Restructuring charges, in the Condensed Consolidated Statements of Earnings.

Restricted Stock Units

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 units is the closing price of the Company's common stock on the grant date of the award. The Company expenses the fair value of restricted stock units ratably over the period during which the restrictions lapse.

A summary of restricted stock unit activity is as follows:



	Nine Months Ended July 31, 2017
	Shares		Weighted-Average Grant Date Fair Value Per Share
	In thousands
Outstanding at beginning of period	57,321		$	15
Granted and assumed through acquisition⁽¹⁾	22,958		$	21
Additional shares granted due to conversion⁽²⁾	12,902		$	18
Vested⁽³⁾	(43,161	)	$	16
Forfeited/canceled⁽⁴⁾	(3,204	)	$	17
Outstanding at end of period	46,816		$	18


(1)	Includes approximately 11 million restricted stock units assumed by the Company through acquisition with a weighted-average grant date fair value of $18 per share.


(2)	Additional shares granted as a result of the post-spin exercise price adjustments made related to the Everett Transaction, in order to preserve the intrinsic value of the awards prior to the close of the transaction.


(3)	Includes approximately 9 million restricted stock units, with a weighted-average grant date fair value of $18 per share, which were accelerated as part of the Everett Transaction.


(4)	Includes approximately 0.3 million restricted stock units, with a weighted-average grant date fair value of $18 per share, related to the former ES segment, which were canceled by HPE and assumed by DXC in connection with the Everett Transaction and in accordance with the Everett Employee Matters Agreement.

At July 31, 2017, there was $417 million of unrecognized pre-tax stock-based compensation expense related to unvested restricted stock units, which the Company expects to recognize over the remaining weighted-average vesting period of 1.3 years.

Stock Options

Stock options granted under the Company's principal equity plans are generally non-qualified stock options, but the principal equity plans permit some options granted to qualify as incentive stock options under the U.S. Internal Revenue Code. 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 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:



	Nine Months Ended July 31, 2017
Weighted-average fair value⁽¹⁾	$	6
Expected volatility⁽²⁾	25.7		%
Risk-free interest rate⁽³⁾	2.0		%
Expected dividend yield⁽⁴⁾	1.0		%
Expected term in years⁽⁵⁾	6.1


(1)	The weighted-average fair value was based on the fair value of stock options granted during the period. There were no stock options granted during the three months ended July 31, 2017.


(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. 110, 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, 2017
	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
	In thousands				In years	In millions
Outstanding at beginning of period	57,498		$	15
Granted and assumed through acquisition	5,267		$	24
Additional shares granted due to conversion⁽¹⁾	12,574		$	12
Exercised	(22,861	)	$	13
Forfeited/canceled/expired⁽²⁾	(8,475	)	$	16
Outstanding at end of period⁽³⁾	44,003		$	12	5.0	$	237
Vested and expected to vest at end of period⁽³⁾	43,013		$	12	4.9	$	233
Exercisable at end of period⁽³⁾	21,965		$	11	3.5	$	148


(1)	Additional shares granted as a result of the post-spin exercise price adjustments made related to the Everett Transaction, in order to preserve the intrinsic value of the awards prior to the close of the transaction.


(2)	Includes approximately 8 million stock options, with a weighted-average exercise price of $16 per share, related to the former ES segment, which were canceled by HPE and assumed by DXC in connection with the Everett Transaction and in accordance with the Everett Employee Matters Agreement.


(3)	The weighted average exercise price reflects the impact of the post-spin adjustment to the exercise price related to the Everett Transaction.

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 2017. 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 2017 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, 2017 was $47 million and $167 million, respectively.

At July 31, 2017, there was $39 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 1.4 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 of 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.