Stock-Based Compensation

9 Months Ended

Jul. 31, 2011

Note 2: Stock-Based Compensation

HP's stock-based compensation plans include HP's principal equity plans as well as various equity plans assumed through acquisitions. HP's principal equity plans include performance-based restricted units ("PRU"), stock options and restricted stock awards.

Total stock-based compensation expense before income taxes for the three and nine months ended July 31, 2011 was $148 million and $475 million, respectively. The resulting income tax benefit for the three and nine months ended July 31, 2011 was $46 million and $150 million, respectively. Total stock-based compensation expense before income taxes for the three and nine months ended July 31, 2010 was $166 million and $547 million, respectively. The resulting income tax benefit for the three and nine months ended July 31, 2010 was $54 million and $176 million, respectively.

Performance-based Restricted Units

HP's PRU program provides for the issuance of PRUs representing hypothetical shares of HP common stock. Each PRU award reflects a target number of shares ("Target Shares") that may be issued to the award recipient before adjusting for performance and market conditions. The actual number of shares the recipient receives is determined at the end of a three-year performance period based on results achieved versus company performance goals and may range from 0% to 200% of the Target Shares granted. The performance goals are based on HP's annual cash flow from operations as a percentage of revenue and a market condition based on total shareholder return ("TSR") relative to the S&P 500 over the three-year performance period.

Recipients of PRU awards generally must remain employed by HP on a continuous basis through the end of the applicable three-year performance period in order to receive any portion of the shares subject to that award. Target Shares do not have dividend equivalent rights and do not have the voting rights of common stock until earned and issued following the end of the applicable performance period. The expense for these awards, net of estimated forfeitures, is recorded over the requisite service period based on the number of Target Shares that are expected to be earned and the achievement of the cash flow goals during the performance period.

HP estimates the fair value of a Target Share using a Monte Carlo simulation model, as the TSR modifier contains a market condition. The following weighted-average assumptions, in addition to projections of market conditions, were used to determine the weighted-average fair values of the PRU awards:

	Nine months ended July 31

	2011			2010
Weighted-average fair value of grants per share	$	27.59	⁽¹⁾	$	57.13	⁽²⁾
Expected volatility⁽³⁾		30	%		38	%
Risk-free interest rate		0.38	%		0.73	%
Dividend yield		0.75	%		0.64	%
Expected life in months		19			22

⁽¹⁾: Reflects the weighted-average fair value for the third year of the three-year performance period applicable to PRUs granted in fiscal 2009, for the second year of the three-year performance period applicable to PRUs granted in fiscal 2010 and for the first year of the three-year performance period applicable to PRUs granted in the nine months ended July 31, 2011. The estimated fair value of a Target Share for the third year for PRUs granted in fiscal 2010 and for the second and third years for PRUs granted in the nine months ended July 31, 2011 will be determined on the measurement date applicable to those PRUs, which will be the date that the annual cash flow goals are approved for those PRUs, and the expense will be amortized over the remainder of the applicable three-year performance period.
⁽²⁾: Reflects the weighted-average fair value for the third year of the three-year performance period applicable to PRUs granted in fiscal 2008, for the second year of the three-year performance period applicable to PRUs granted in fiscal 2009 and for the first year of the three-year performance period applicable to PRUs granted in the nine months ended July 31, 2010.
⁽³⁾: HP uses historic volatility for PRU awards as implied volatility cannot be used when simulating multivariate prices for companies in the S&P 500.

Non-vested PRUs as of July 31, 2011 and changes during the nine months ended July 31, 2011 were as follows:



Outstanding Target Shares at October 31, 2010	18,508
Granted	5,950
Vested	—
Change in units due to performance and market conditions achievement for PRUs vested in the period	—
Forfeited	(1,637	)

Outstanding Target Shares at July 31, 2011	22,821

Outstanding Target Shares assigned a fair value at July 31, 2011	17,098	⁽¹⁾

⁽¹⁾: Excludes Target Shares for the third year for PRUs granted in fiscal 2010 and for the second and third years for PRUs granted in the nine months ended July 31, 2011 as the measurement date has not yet been established. The measurement date and related fair value for the excluded PRUs will be established when the annual cash flow goals are approved.

At July 31, 2011, there was $177 million of unrecognized pre-tax stock-based compensation expense related to PRUs with an assigned fair value, which HP expects to recognize over the remaining weighted-average vesting period of 1.2 years.

Stock Options

HP estimated the weighted-average fair value of stock options using the Black-Scholes option pricing model with the following weighted-average assumptions:

	Three months ended July 31						Nine months ended July 31

	2011			2010			2011			2010
Weighted-average fair value of grants per share⁽¹⁾	$	8.44		$	13.66		$	10.24		$	14.04
Implied volatility		28	%		32	%		28	%		29	%
Risk-free interest rate		1.64	%		1.96	%		1.87	%		2.29	%
Dividend yield		1.34	%		0.69	%		0.94	%		0.64	%
Expected life in months		61			60			60			61

⁽¹⁾: The fair value calculation was based on stock options granted during the period.

Option activity as of July 31, 2011 and changes during the nine months ended July 31, 2011 were as follows:

			Weighted- Average Exercise Price Per Share			Aggregate Intrinsic Value (in millions)

Outstanding at October 31, 2010	142,916		$	28
Granted and assumed through acquisition	1,243		$	24
Exercised	(33,736	)	$	24
Forfeited/cancelled/expired	(3,311	)	$	41

Outstanding at July 31, 2011	107,112		$	29	2.5	$	961

Vested and expected to vest at July 31, 2011	106,145		$	29	2.5	$	951

Exercisable at July 31, 2011	100,333		$	29	2.1	$	890

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value that option holders would have received had all option holders exercised their options on July 31, 2011. The aggregate intrinsic value is the difference between HP's closing stock price on the last trading day of the third quarter of fiscal 2011 and the exercise price, multiplied by the number of in-the-money options. Total intrinsic value of options exercised for the three and nine months ended July 31, 2011 was $42 million and $648 million, respectively.

At July 31, 2011, there was $188 million of unrecognized pre-tax stock-based compensation expense related to stock options, which HP expects to recognize over the remaining weighted-average vesting period of 1.8 years.

Restricted Stock Awards

Restricted stock awards are non-vested stock awards that include grants of restricted stock and grants of restricted stock units.

Non-vested restricted stock awards as of July 31, 2011 and changes during the nine months ended July 31, 2011 were as follows:

			Weighted- Average Grant Date Fair Value Per Share

Outstanding at October 31, 2010	5,848		$	45
Granted	9,156		$	41
Vested	(2,870	)	$	45
Forfeited	(651	)	$	44

Outstanding at July 31, 2011	11,483		$	42

At July 31, 2011, there was $367 million of unrecognized pre-tax stock-based compensation expense related to non-vested restricted stock awards, which HP expects to recognize over the remaining weighted-average vesting period of 1.6 years.