SHARE-BASED COMPENSATION

6 Months Ended

Apr. 30, 2013

Share-based Compensation [Abstract]

SHARE-BASED COMPENSATION

4.     SHARE-BASED COMPENSATION

Agilent accounts for share-based awards in accordance with the provisions of the authoritative accounting guidance which requires the measurement and recognition of compensation expense for all share-based payment awards made to our employees and directors including employee stock option awards, restricted stock units, employee stock purchases made under our employee stock purchase plan (“ESPP”) and performance share awards granted to selected members of our senior management under the long-term performance plan (“LTPP”) based on estimated fair values.

The impact on our results for share-based compensation was as follows:

	Three Months Ended				Six Months Ended
	April 30,				April 30,
	2013		2012		2013		2012
	(in millions)
Cost of products and services	$	3	$	4	$	11	$	10
Research and development	3		2		7		6
Selling, general and administrative	13		12		32		29
Total share-based compensation expense	$	19	$	18	$	50	$	45

At April 30, 2013 there was no share-based compensation capitalized within inventory. For the three and six months ended April 30, 2013, the windfall tax benefit realized from exercised stock options and similar awards was zero and $2 million, respectively. For the three and six months ended April 30, 2012, the windfall tax benefits from exercised stock options and similar awards was zero.

The following assumptions were used to estimate the fair value of the options and LTPP grants.

	Three Months Ended				Six Months Ended
	April 30,				April 30,
	2013		2012		2013		2012
Stock Option Plans:
Weighted average risk-free interest rate	—		1.2	%	0.9	%	0.9	%
Dividend yield	—		1	%	1	%	0	%
Weighted average volatility	—		38	%	39	%	38	%
Expected life	—		5.8yrs		5.8yrs		5.8yrs
LTPP:
Volatility of Agilent shares	37	%	41	%	37	%	41	%
Volatility of selected peer-company shares	6%-64%		17%-75%		6%-64%		17%-75%
Price-wise correlation with selected peers	49	%	62	%	49	%	62	%

The fair value of share-based awards for employee stock option awards was estimated using the Black-Scholes option pricing model. Shares granted under the LTPP were valued using a Monte Carlo simulation model. Both the Black-Scholes and Monte Carlo simulation fair value models require the use of highly subjective and complex assumptions, including the option’s expected life and the price volatility of the underlying stock. The estimated fair value of restricted stock unit awards is determined based on the market price of Agilent’s common stock on the date of grant adjusted for expected dividend yield.  On January 17, 2012, the company’s Board of Directors approved the initiation of quarterly cash dividends to the company’s shareholders. The fair value of all the awards granted prior to the declaration of quarterly cash dividend was measured based on an expected dividend yield of 0%. The ESPP allows eligible employees to purchase shares of our common stock at 85 percent of the purchase price and uses the purchase date to establish the fair market value.

We use historical volatility to estimate the expected stock price volatility assumption for employee stock option awards. In reaching the conclusion, we have considered many factors including the extent to which our options are currently traded and our ability to find traded options in the current market with similar terms and prices to the options we are valuing. In estimating the expected life of our options granted we considered the historical option exercise behavior of our executives, which we believe is representative of future behavior.