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 Plans"). 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. In connection with the Everett and Seattle Transactions, the number of shares of the Company's common stock authorized for issuance under the Plan increased by 67 million. 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 three years from the grant date. The Company's stock-based incentive compensation program also includes various equity plans assumed through acquisitions under which stock-based awards are outstanding.

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 three years from the grant date.

Stock-Based Compensation Expense

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



	Fiscal years ended October 31,
	2018			2017			2016
	In millions
Stock-based compensation expense from continuing operations	$	309		$	454		$	408
Income tax benefit	(56		)	(159		)	(131		)
Stock-based compensation expense from continuing operations, net of tax	$	253		$	295		$	277
Stock-based compensation expense from discontinued operations	$	—		$	166		$	189

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 $126 million during fiscal 2017, of which $92 million was recorded in Net loss from discontinued operations in the Consolidated Statement of Earnings for the fiscal year ended October 31, 2017. The remaining $34 million arising from the acceleration for fiscal 2017 was recorded within Separation costs in the Consolidated Statement of Earnings. The stock-based compensation expense arising from the acceleration for fiscal 2018 was not material.

Additionally, as permitted by the Plan, in connection with the Everett and Seattle Transactions and in accordance with the respective Employee Matters Agreements, 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 outstanding awards prior to the close of the transactions. The incremental expense incurred by the Company related to the Everett and Seattle Transactions was not material.

For the fiscal year ended October 31, 2018, stock-based compensation expense from continuing operations in the table above includes pre-tax expense of $10 million, which was recorded within Separation costs, $3 million related to workforce reductions, which was recorded within Restructuring charges and $10 million related to the acquisition of Nimble Storage, Inc. ("Nimble Storage"), which was recorded within Acquisition and other related charges in the Consolidated Statement of Earnings.

For the fiscal year ended October 31, 2017, stock-based compensation expense from continuing operations in the table above includes pre-tax expense of $41 million, which was recorded within Separation costs, $33 million, related to workforce reductions, which was recorded within Restructuring charges, and $23 million related to the acquisitions of Silicon Graphics International Corp. ("SGI") and Nimble Storage, which was recorded within Acquisition and other related charges, in the Consolidated Statement of Earnings.

For the fiscal year ended October 31, 2016, stock-based compensation expense from continuing operations in the table above includes pre-tax expense of $33 million, which was recorded within Separation costs, and $8 million related to workforce reductions, which was recorded within Restructuring charges, in the Consolidated Statement of Earnings.

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.

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. The Company also issues performance-adjusted restricted stock units ("PARSU") that vest only on the satisfaction of service, performance and market conditions. The Company estimates the fair value of PARSUs subject to performance-contingent vesting conditions using the Monte Carlo simulation model.

The following table summarizes restricted stock unit activity:



	Fiscal years ended October 31,
	2018				2017				2016
	Shares		Weighted- Average Grant Date Fair Value Per Share		Shares		Weighted- Average Grant Date Fair Value Per Share		Shares		Weighted- Average Grant Date Fair Value Per Share
	In thousands				In thousands				In thousands
Outstanding at beginning of year	48,517		$	14	57,321		$	15	—		$	—
Converted from former Parent's Plans	—		$	—	—		$	—	42,012		$	15
Granted and assumed through acquisition⁽¹⁾	22,131		$	15	23,980		$	21	32,752		$	15
Additional shares granted due to post-spin adjustments⁽²⁾	—		$	—	25,543		$	9	—		$	—
Vested⁽³⁾	(32,659	)	$	14	(51,976	)	$	16	(12,747	)	$	15
Forfeited/canceled⁽⁴⁾	(5,572	)	$	14	(6,351	)	$	16	(4,696	)	$	15
Outstanding at end of year	32,417		$	14	48,517		$	14	57,321		$	15


(1)	Fiscal 2017 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. Fiscal 2016 includes a one-time restricted stock unit retention grant of approximately 5 million shares.


(2)	Additional shares granted as a result of the post-spin exercise price adjustments made related to the Everett and Seattle Transactions, as permitted by the Plan, in order to preserve the intrinsic value of outstanding awards prior to the close of the transactions.

(3)

Fiscal 2018 includes approximately 6 million restricted stock units, with a weighted-average grant date fair value of $14 per share, which were accelerated to vest on June 1, 2018 as part of the Everett Transaction. Fiscal 2017 includes approximately 14 million restricted stock units, with a weighted-average grant date fair value of $17 per share, which were accelerated as part of the Everett and Seattle Transactions.


(4)	Fiscal 2017 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 and Software segments, which were canceled by HPE and assumed by DXC and Micro Focus in connection with the Everett and Seattle Transactions, and in accordance with the respective Employee Matters Agreements.

The total grant date fair value of restricted stock awards vested for Company employees in fiscal 2018, 2017 and 2016 was $270 million, $472 million and $130 million, respectively, net of taxes. As of October 31, 2018, there was $259 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 1.4 years.

Stock Options

Stock options granted under the Plan are generally non-qualified stock options, but the Plan permits 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 has also issued performance-contingent stock options that vest only on the satisfaction of both service and market conditions. In fiscal 2018, the Company did not issue stock options.

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:



	Fiscal years ended October 31,
	2017			2016
Weighted-average fair value⁽¹⁾	$	6		$	4
Expected volatility⁽²⁾	25.7		%	31.1		%
Risk-free interest rate⁽³⁾	2.0		%	1.7		%
Expected dividend yield⁽⁴⁾	1.0		%	1.5		%
Expected term in years⁽⁵⁾	6.1			5.4


(1)	The weighted-average fair value was based on the fair value of stock options granted under the Plan during the respective periods.


(2)	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 option.


(5)	For options granted subject to service-based vesting, the expected term was estimated using the simplified method detailed in SEC Staff Accounting Bulletin No. 110.

The following table summarizes stock option activity:



	Fiscal years ended October 31,
	2018							2017							2016
	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value		Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value		Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
	In thousands				In years	In millions		In thousands				In years	In millions		In thousands				In years	In millions
Outstanding at beginning of year	49,274		$	10				57,498		$	15				—		$	—
Converted from former Parent's Plans	—		$	—				—		$	—				42,579		$	15
Granted and assumed through acquisition⁽¹⁾	316		$	10				6,074		$	23				25,390		$	15
Additional shares granted due to post-spin adjustments⁽²⁾	—		$	—				24,523		$	11				—		$	—
Exercised	(26,476	)	$	9				(29,492	)	$	12				(7,845	)	$	11
Forfeited/canceled/expired⁽³⁾	(4,851	)	$	13				(9,329	)	$	16				(2,626	)	$	20
Outstanding at end of year⁽⁴⁾	18,263		$	10	4.2	$	92	49,274		$	10	4.6	$	207	57,498		$	15	5.4	$	437
Vested and expected to vest at end of year⁽⁴⁾	18,038		$	10	4.2	$	91	48,566		$	10	4.6	$	205	55,716		$	15	5.3	$	425
Exercisable at end of year⁽⁴⁾	14,896		$	10	3.7	$	85	24,736		$	9	3.0	$	123	26,204		$	13	3.8	$	241


(1)	Fiscal 2016 includes one-time stock option retention grant of approximately 16 million shares.


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


(3)	Fiscal 2017 includes approximately 8 million stock options, with a weighted-average exercise price of $16 per share, related to the former ES and Software segments, which were canceled by HPE in connection with the Everett and Seattle Transactions, and in accordance with the respective Employee Matters Agreements.


(4)	The weighted average exercise price reflects the impact of the post-spin adjustments to the exercise price related to the Everett and Seattle Transactions.

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 fiscal 2018, 2017 and 2016, respectively. The aggregate intrinsic value is the difference between the Company's closing common stock price on the last trading day of the respective fiscal year and the exercise price, multiplied by the number of in-the-money options. The total intrinsic value of options exercised in fiscal 2018, 2017 and 2016 was $200 million, $218 million and $62 million, respectively.

The following table summarizes significant ranges of outstanding and exercisable stock options:



	As of October 31, 2018
	Options Outstanding				Options Exercisable
Range of Exercise Prices	Shares Outstanding	Weighted- Average Remaining Contractual Term	Weighted- Average Exercise Price		Shares Exercisable	Weighted- Average Exercise Price
	In thousands	In years			In thousands
$0-$9.99	10,862	3.8	$	8	10,368	$	8
$10-$19.99	7,358	4.8	$	14	4,485	$	13
$20-$29.99	43	2.8	$	25	43	$	25
	18,263	4.2	$	10	14,896	$	10

As of October 31, 2018, there was $7 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 1.3 years.

Cash received from option exercises and purchases under the Company's ESPP was $279 million, $411 million and $119 million in fiscal 2018, 2017 and 2016, respectively. The benefit realized for the tax deduction from option exercises in fiscal 2018, 2017 and 2016 was $61 million, $69 million and $21 million, respectively.