Stock-Based Compensation

HP’s stock-based compensation plans permit the issuance of restricted stock awards, stock options and performance-based awards.

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



	Three months ended July 31						Nine months ended July 31
	2018			2017			2018			2017
	In millions
Stock-based compensation expense	$	55		$	46		$	203		$	169
Income tax benefit	(12		)	(15		)	(45		)	(54		)
Stock-based compensation expense, net of tax	$	43		$	31		$	158		$	115

Restricted Stock Awards

Restricted stock awards are non-vested stock awards that may include grants of restricted stock or restricted stock units. For the three and nine months ended July 31, 2018 and 2017, HP granted only restricted stock units. HP uses the closing stock price on the grant date to estimate the fair value of service-based restricted stock units. HP did not grant any restricted stock units subject to performance-adjusted vesting conditions for the three months ended July 31, 2017. HP estimates the fair value of restricted stock units subject to performance-adjusted vesting conditions using a combination of the closing stock price on the grant date and a Monte Carlo simulation model. The weighted-average fair value and the assumptions used to measure the fair value of restricted stock units subject to performance-adjusted vesting conditions in the Monte Carlo simulation model were as follows:



	Three months ended July 31						Nine months ended July 31
	2018			2017			2018			2017
Weighted-average grant date fair value⁽¹⁾	$	28		$	—		$	24		$	20
Expected volatility⁽²⁾	24.8		%	—		%	29.5		%	30.5		%
Risk-free interest rate⁽³⁾	2.5		%	—		%	1.9		%	1.4		%
Expected performance period in years⁽⁴⁾	2.3			0.0			2.9			2.9


⁽¹⁾	The weighted-average grant date fair value was based on performance-adjusted restricted stock units granted during the period.


⁽²⁾	The expected volatility was estimated using the historical volatility derived from HP’s common stock.


⁽³⁾	The risk-free interest rate was estimated based on the yield on U.S. Treasury zero-coupon issues.


⁽⁴⁾	The expected performance period was estimated based on the length of the remaining performance period from the grant date.

A summary of restricted stock unit activity was as follows:



	Nine months ended July 31, 2018
	Shares		Weighted-Average Grant Date Fair Value Per Share
	In thousands
Outstanding at beginning of period	31,822		$	14
Granted	15,014		$	21
Vested	(14,080	)	$	14
Forfeited	(1,436	)	$	17
Outstanding at end of period	31,320		$	17

As of July 31, 2018, there was $258 million of unrecognized pre-tax stock-based compensation expense related to non-vested restricted stock units, which HP expects to recognize over the remaining weighted-average vesting period of 1.4 years.

Stock Options

HP utilizes the Black-Scholes-Merton option pricing model to estimate the fair value of stock options subject to service-based vesting conditions. HP 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. HP did not grant any stock options for the three months ended July 31, 2018. The weighted-average fair value and the assumptions used to measure the fair value of stock options for the three and nine months ended July 31, 2018 and 2017 were as follows:



	Three months ended July 31						Nine months ended July 31
	2018			2017			2018			2017
Weighted-average grant date fair value ⁽¹⁾	$	—		$	4		$	5		$	4
Expected volatility ⁽²⁾	—		%	28.0		%	29.4		%	28.0		%
Risk-free interest rate ⁽³⁾	—		%	1.9		%	2.5		%	1.9		%
Expected dividend yield ⁽⁴⁾	—		%	2.8		%	2.6		%	2.8		%
Expected term in years ⁽⁵⁾	0.0			5.5			5.0			5.5


⁽¹⁾	The weighted-average grant date fair value was based on stock options granted during the period.


⁽²⁾	The expected volatility was estimated based on a blended volatility (50% historical volatility and 50% implied volatility from traded options on HP's common stock).


⁽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⁾	Due to the lack of historical exercise and post-vesting termination patterns of the post-Separation employee base, the expected term was estimated using the simplified method; and for the performance-contingent awards, the expected term represents an output from the lattice model.

A summary of stock option activity was as follows:



	Nine months ended July 31, 2018
	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
	In thousands				In years	In millions
Outstanding at beginning of period	18,067		$	13
Granted	54		$	21
Exercised	(8,593	)	$	12
Forfeited and expired	(278	)	$	16
Outstanding at end of period	9,250		$	14	4.2	$	86
Vested and expected to vest	9,204		$	14	4.2	$	85
Exercisable	6,555		$	14	3.7	$	61

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 year 2018. The aggregate intrinsic value is the difference between HP’s closing stock price on the last trading day of the third quarter of fiscal year 2018 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, 2018 was $16 million and $86 million, respectively.

As of July 31, 2018, there was $1 million of unrecognized pre-tax, stock-based compensation expense related to unvested stock options, which HP expects to recognize over the remaining weighted-average vesting period of 0.3 years.

In January 2018, the Board approved an amendment and restatement of HP’s 2004 Stock Incentive Plan, which included retiring 80 million shares from the plan’s share reserves.