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Stock-Based Compensation
6 Months Ended
Apr. 30, 2011
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 performance-based restricted units ("PRU"), special incremental performance-based restricted units ("IPRU"), stock options and restricted stock awards.

        Total stock-based compensation expense before income taxes for the three and six months ended April 30, 2011 was $147 million and $327 million, respectively. The resulting income tax benefit for the three and six months ended April 30, 2011 was $61 million and $104 million, respectively. Total stock-based compensation expense before income taxes for the three and six months ended April 30, 2010 was $200 million and $381 million, respectively. The resulting income tax benefit for the three and six months ended April 30, 2010 was $64 million and $122 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 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 were used to determine the weighted-average fair values of the PRU awards:

 
  Six months ended
April 30
 
 
  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 six months ended April 30, 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 six months ended April 30, 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 six months ended April 30, 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 April 30, 2011 and changes during the six months ended April 30, 2011 were as follows:

 
  Shares
(in thousands)
 

Outstanding Target Shares at October 31, 2010

    18,508  

Granted

    5,798  

Vested

     

Change in units due to performance and market conditions achievement for PRUs vested in the period

     

Forfeited

    (786 )
       

Outstanding Target Shares at April 30, 2011

    23,520  
       

Outstanding Target Shares assigned a fair value at April 30, 2011

    17,608 (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 six months ended April 30, 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 April 30, 2011, there was $286 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 1.3 years.

  • Special Incremental Performance-Based Restricted Units

        HP granted IPRUs representing hypothetical shares of HP common stock to certain executive officers. IPRU awards contain performance and market conditions and vest over three years.

        The amount of non-vested IPRUs granted and outstanding as of April 30, 2011 was 0.3 million units. At April 30, 2011, there was $3 million of unrecognized pre-tax stock-based compensation expense related to IPRUs, which HP expects to recognize over the remaining weighted-average vesting period of 2.5 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
April 30
  Six months ended
April 30
 
 
  2011   2010   2011   2010  

Weighted-average fair value of grants per share

  $ 10.73   $ 14.12   $ 11.06   $ 14.19  

Implied volatility

    27 %   27 %   28 %   28 %

Risk-free interest rate

    2.16 %   2.45 %   1.97 %   2.42 %

Dividend yield

    0.77 %   0.61 %   0.76 %   0.61 %

Expected life in months

    60     61     60     61  

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

        Option activity as of April 30, 2011 and changes during the six months ended April 30, 2011 were as follows:

 
  Shares
(in thousands)
  Weighted-
Average
Exercise
Price
Per Share
  Weighted-
Average
Remaining
Contractual
Term
(in years)
  Aggregate
Intrinsic
Value
(in millions)
 

Outstanding at October 31, 2010

    142,916   $ 28              

Granted and assumed through acquisition

    1,026   $ 22              

Exercised

    (30,828 ) $ 24              

Forfeited/cancelled/expired

    (2,398 ) $ 41              
                         

Outstanding at April 30, 2011

    110,716   $ 29     2.8   $ 1,444  
                         

Vested and expected to vest at April 30, 2011

    109,586   $ 29     2.7   $ 1,428  
                         

Exercisable at April 30, 2011

    102,792   $ 29     2.3   $ 1,327  
                         

        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 April 30, 2011. The aggregate intrinsic value is the difference between HP's closing stock price on the last trading day of the second 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 six months ended April 30, 2011 was $348 million and $606 million, respectively.

        At April 30, 2011, there was $218 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 1.9 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 April 30, 2011 and changes during the six months ended April 30, 2011 were as follows:

 
  Shares
(in thousands)
  Weighted-
Average
Grant
Date Fair
Value
Per Share
 

Outstanding at October 31, 2010

    5,848   $ 45  

Granted

    7,717   $ 43  

Vested

    (2,412 ) $ 46  

Forfeited

    (310 ) $ 44  
             

Outstanding at April 30, 2011

    10,843   $ 43  
             

        At April 30, 2011, there was $376 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.