Stock-Based Compensation

3 Months Ended

Jan. 31, 2012

Stock-Based Compensation

Stock-Based Compensation

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 restricted stock awards, stock options and performance-based restricted units ("PRUs").

        Total stock-based compensation expense before income taxes for the three months ended January 31, 2012 and 2011 was $175 million and $180 million, respectively. The resulting income tax benefit for the three months ended January 31, 2012 and 2011 was $57 million and $43 million, respectively.

• 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 January 31, 2012 and changes during the three months ended January 31, 2012 were as follows:

	Shares			Weighted- Average Grant Date Fair Value Per Share
	In thousands
Outstanding at October 31, 2011		16,813		$	39
Granted		17,336		$	28
Vested		(2,550	)	$	43
Forfeited		(601	)	$	37
Outstanding at January 31, 2012		30,998		$	33

        At January 31, 2012, there was $891 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.

• Stock Options

        HP utilized the Black-Scholes option pricing model to value the service-based stock options granted under its principal equity plans. HP estimates the fair value of the performance-contingent stock options using a combination of the Monte Carlo simulation model and lattice model, as these awards contain market conditions.

        HP estimated the weighted-average fair value of stock options using the following weighted-average assumptions:

	Three months ended January 31
	2012			2011
Weighted-average fair value of grants per share(1)	$	9.49		$	11.42
Implied volatility		43	%		29	%
Risk-free interest rate		1.20	%		1.75	%
Dividend yield		1.73	%		0.74	%
Expected life in months		67			60

⁽¹⁾

The fair value calculation was based on stock options granted during the period.

        Option activity as of January 31, 2012 and changes during the three months ended January 31, 2012 were as follows:

	Shares			Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
	In thousands					In years		In millions
Outstanding at October 31, 2011		120,243		$	28
Granted		6,705		$	28
Exercised		(14,585	)	$	20
Forfeited/cancelled/expired		(2,504	)	$	38
Outstanding at January 31, 2012		109,859		$	28		3.4	$	434
Vested and expected to vest at January 31, 2012		106,040		$	29		3.2	$	414
Exercisable at January 31, 2012		83,081		$	30		2.1	$	296

        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 January 31, 2012. The aggregate intrinsic value is the difference between HP's closing stock price on the last trading day of the first quarter of fiscal 2012 and the exercise price, multiplied by the number of in-the-money options. Total intrinsic value of options exercised for the three months ended January 31, 2012 was $109 million.

        At January 31, 2012, there was $280 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 2.3 years.

• 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 for PRUs granted in fiscal year 2012 are based on HP's annual cash flow from operations as a percentage of revenue and on HP's annual revenue growth. The performance goals for PRUs granted in previous years are based on HP's annual cash flow from operations as a percentage of revenue and on a market condition based on total shareholder return ("TSR") relative to the S&P 500 over the three-year performance period.

        For PRU awards granted in fiscal year 2012, HP estimates the fair value of the Target Shares using HP's closing stock price on the measurement date. The weighted-average fair value for the first year of the three-year performance period applicable to PRUs granted in the three months ended January 31, 2012 was $27.00. The estimated fair value of the Target Shares for the second and third years for PRUs granted in the three months ended January 31, 2012 will be determined on the measurement date applicable to those PRUs, which will occur during the period that the annual performance goals are approved for those PRUs, and the expense will be amortized over the remainder of the applicable three-year performance period.

        For PRU awards granted prior to fiscal year 2012, HP estimates the fair value of the Target Shares subject to those awards using the Monte Carlo simulation model, as the TSR modifier represents 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 these PRU awards:

	Three months ended January 31
	2012			2011
Weighted-average fair value of grants per share	$	3.35	(1)	$	27.59	(2)
Expected volatility(3)		41	%		30	%
Risk-free interest rate		0.14	%		0.38	%
Dividend yield		1.78	%		0.75	%
Expected life in months		15			19

⁽¹⁾

Reflects the weighted-average fair value for the third year of the three-year performance period applicable to PRUs granted in fiscal 2010 and for the second year of the three-year performance period applicable to PRUs granted in fiscal 2011. The estimated fair value of the Target Shares for the third year for PRUs granted in fiscal 2011 will be determined on the measurement date applicable to those PRUs, which will occur during the period that the annual performance 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 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 three months ended January 31, 2011.

⁽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 January 31, 2012 and changes during the three months ended January 31, 2012 were as follows:

	Shares
	In thousands
Outstanding Target Shares at October 31, 2011		11,382
Granted		1,157
Vested		—
Change in units due to performance and market conditions achievement for PRUs vested in the period		—
Forfeited		(442	)
Outstanding Target Shares at January 31, 2012		12,097
Outstanding Target Shares assigned a fair value at January 31, 2012		9,672	(1)

⁽¹⁾

Excludes Target Shares for the third year for PRUs granted in fiscal 2011 and for the second and third years for PRUs granted in the three months ended January 31, 2012 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 performance goals are approved.

        At January 31, 2012, there was $80 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 1.4 years.