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 permit the issuance of restricted stock awards, stock options and performance-based restricted units ("PRUs").

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

	Three months ended July 31						Nine months ended July 31

	2013			2012			2013			2012
	In millions
Stock-based compensation expense	$	107		$	150		$	398		$	494
Income tax benefit		(36	)		(43	)		(125	)		(154	)

Stock-based compensation expense, net of tax	$	71		$	107		$	273		$	340

Restricted Stock Awards

Restricted stock awards are non-vested stock awards that include grants of restricted stock and grants of restricted stock units. For the nine months ended July 31, 2013, HP granted only restricted stock units.

Non-vested restricted stock awards as of July 31, 2013 and changes during the nine months ended July 31, 2013 were as follows:

	Shares			Weighted- Average Grant Date Fair Value Per Share

	In thousands
Outstanding at October 31, 2012		25,532		$	31
Granted		19,677		$	15
Vested		(10,341	)	$	33
Forfeited		(2,328	)	$	25

Outstanding at July 31, 2013		32,540		$	21

At July 31, 2013, there was $392 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 1.3 years.

Stock Options

HP utilizes the Black-Scholes-Merton option pricing formula to estimate the fair value of stock options subject to service-based vesting conditions that are granted under its principal equity plans. 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.

The weighted-average fair value and the assumptions used to measure fair value were as follows:

	Three months ended July 31						Nine months ended July 31

	2013			2012			2013			2012
Weighted-average fair value of grants per option⁽¹⁾	$	6.53		$	6.70		$	4.08		$	9.30
Implied volatility		36	%		36	%		42	%		42	%
Risk-free interest rate		1.14	%		1.20	%		0.98	%		1.20	%
Expected dividend yield		2.36	%		2.40	%		3.72	%		1.77	%
Expected term in months		62			77			70			67

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

Option awards outstanding as of July 31, 2013 and changes during the nine months ended July 31, 2013 were as follows:

	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value

	In thousands					In years		In millions
Outstanding at October 31, 2012		87,296		$	29
Granted		23,967		$	14
Exercised		(9,455	)	$	19
Forfeited/cancelled/expired		(17,224	)	$	25

Outstanding at July 31, 2013		84,584		$	27		4.1	$	363

Vested and expected to vest at July 31, 2013		80,322		$	27		3.9	$	328

Exercisable at July 31, 2013		48,470		$	33		1.9	$	69

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value that option holders would have received had all outstanding options been exercised on July 31, 2013. The aggregate intrinsic value is the difference between HP's closing stock price on the last trading day of the third quarter of fiscal 2013 and the exercise price, multiplied by the number of in-the-money options. Total intrinsic value of options exercised for the three and nine months ended July 31, 2013 was $14 million and $31 million, respectively.

At July 31, 2013, there was $126 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 adjusted annual cash flow from operations as a percentage of revenue and on HP's adjusted annual revenue growth. The performance goals for PRUs granted prior to fiscal year 2012 are based on HP's adjusted 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 these PRUs was as follows:

	Nine months ended July 31

	2013			2012
Weighted-average fair value of grants per unit	$	13.14	⁽¹⁾	$	27.00	⁽²⁾

⁽¹⁾: Reflects the weighted-average fair value for the second year of the three-year performance period applicable to PRUs granted in fiscal 2012. The estimated fair value of the Target Shares for the third year for PRUs granted in fiscal year 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.
⁽²⁾: Reflects the weighted-average fair value for the first year of the three-year performance period applicable to PRUs granted in fiscal 2012.

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 weighted-average fair values of these PRU awards and the following weighted-average assumptions, in addition to projections of market conditions, used to measure the weighted-average fair values were as follows:

	Nine months ended July 31

	2013			2012
Weighted-average fair value of grants per unit	$	0.00	⁽¹⁾	$	3.35	⁽²⁾
Expected volatility⁽³⁾		33	%		41	%
Risk-free interest rate		0.18	%		0.14	%
Expected dividend yield		3.94	%		1.78	%
Expected term in months		12			15

⁽¹⁾: Reflects the weighted-average fair value for the third year of the three-year performance period applicable to PRUs granted in fiscal 2011.
⁽²⁾: 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.
⁽³⁾: HP uses historic volatility for PRU awards when simulating multivariate prices for companies in the S&P 500.

For the nine months ended July 31, 2013, HP did not grant any PRUs. Non-vested PRUs outstanding as of July 31, 2013 and changes during the nine months ended July 31, 2013 were as follows:

	Shares

	In thousands
Outstanding Target Shares at October 31, 2012		5,688
Forfeited		(293	)

Outstanding Target Shares at July 31, 2013		5,395

Outstanding Target Shares assigned a fair value at July 31, 2013		5,052	⁽¹⁾

⁽¹⁾: Excludes Target Shares for the third year for PRUs granted in fiscal 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 July 31, 2013, there was $5 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 0.6 years.