Stock-Based Compensation

HP’s stock-based compensation plans include incentive compensation plans and an employee stock purchase plan (“ESPP”).

Stock-Based Compensation Expense and Related Income Tax Benefits for Operations

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



	For the fiscal years ended October 31
	2018			2017			2016
	In millions
Stock-based compensation expense	$	268		$	224		$	182
Income tax benefit	(59		)	(71		)	(63		)
Stock-based compensation expense, net of tax	$	209		$	153		$	119

In connection with the Separation and in accordance with the employee matters agreement, HP has made certain adjustments to the exercise price and number of stock-based compensation awards with the intention of preserving the intrinsic value of the awards prior to the Separation. Exercisable and non-exercisable stock options have been converted to similar awards of the entity where the employee is working post-separation. Restricted stock unit awards and performance-contingent awards have been adjusted to provide holders with restricted stock units awards and performance-contingent awards in the company that employs such employee following the Separation. The pre-tax stock-based compensation expense due to the adjustments was $2 million in fiscal year 2016. All outstanding restricted stock units and stock options for employees transferred to Hewlett Packard Enterprise were canceled in connection with the Separation.

Cash received from option exercises and purchases under the HP Inc. 2011 Employee Stock Purchase Plan (the “2011 ESPP”) was $158 million in fiscal year 2018, $118 million in fiscal year 2017 and $48 million in fiscal year 2016. The benefit realized for the tax deduction from option exercises in fiscal years 2018, 2017 and 2016 was $23 million, $15 million and $9 million, respectively.

Stock-Based Incentive Compensation Plans

HP’s stock-based incentive compensation plans include equity plans adopted in 2004 and 2000, as amended and restated (“principal equity plans”), as well as various equity plans assumed through acquisitions under which stock-based awards are outstanding. Stock-based awards granted under the principal equity plans include restricted stock awards, stock options and performance-based awards. Employees meeting certain employment qualifications are eligible to receive stock-based awards. The aggregate number of shares of HP’s stock authorized for issuance under the 2004 principal equity plan is 593.1 million. No further grants may be made under the 2000 principal equity plan and all outstanding awards under this plan will remain outstanding according to the terms of the plan.

Restricted stock awards are non-vested stock awards that may include grants of restricted stock or restricted stock units. Restricted stock awards and cash-settled awards are generally subject to forfeiture if employment terminates prior to the lapse of the restrictions. Such awards generally vest one to three years from the date of grant. During the vesting period, ownership of the restricted stock cannot be transferred. Restricted stock has the same dividend and voting rights as common stock and is considered to be issued and outstanding upon grant. The dividends paid on restricted stock are non-forfeitable. 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. However, shares underlying restricted stock units are included in the calculation of diluted net EPS. Restricted stock units have forfeitable dividend equivalent rights equal to the dividend paid on common stock. HP expenses the fair value of restricted stock awards ratably over the period during which the restrictions lapse. The majority of restricted stock units issued by HP contain only service vesting conditions. However, starting in fiscal year 2014, HP began granting performance-adjusted restricted stock units that vest only on the satisfaction of both service and the achievement of certain performance goals including market conditions prior to the expiration of the awards.

Stock options granted under the principal equity plans are generally non-qualified stock options, but the principal equity plans permit some options granted to qualify as incentive stock options under the U.S. Internal Revenue Code. Stock options generally vest over three to four years from the date of grant. The exercise price of a stock option is equal to the closing price of HP’s stock on the option grant date. The majority of stock options issued by HP contain only service vesting conditions. However, starting in fiscal year 2011 through fiscal year 2016, HP granted performance-contingent stock options that vest only on the satisfaction of both service and market conditions prior to the expiration of the awards.

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 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 the 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:



	For the fiscal years ended October 31
	2018			2017			2016
Weighted-average fair value⁽¹⁾	$	24		$	20		$	13
Expected volatility⁽²⁾	29.5		%	30.5		%	32.5		%
Risk-free interest rate⁽³⁾	1.9		%	1.4		%	1.2		%
Expected performance period in years⁽⁴⁾	2.9			2.9			2.9


⁽¹⁾	The weighted-average 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 units activity is as follows:



	As of 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	31,822		$	14	28,710		$	13	29,717		$	32
Granted	16,364		$	21	15,858		$	16	29,286		$	10
Vested	(15,339	)	$	15	(11,915	)	$	14	(4,161	)	$	13
Awards canceled due to Separation	—		$	—	—		$	—	(23,926	)	$	32
Forfeited	(2,063	)	$	17	(831	)	$	14	(2,206	)	$	14
Outstanding at end of year	30,784		$	18	31,822		$	14	28,710		$	13

The total grant date fair value of restricted stock units vested in fiscal years 2018, 2017 and 2016 was $224 million, $162 million and $54 million, respectively. As of October 31, 2018, total unrecognized pre-tax stock-based compensation expense related to non-vested restricted stock units for operations was $238 million, which is expected to be recognized over the remaining weighted-average vesting period of 1.4 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. 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:



	For the fiscal years ended October 31
	2018			2017			2016
Weighted-average fair value⁽¹⁾	$	5		$	4		$	4
Expected volatility⁽²⁾	29.4		%	28.0		%	36.2		%
Risk-free interest rate⁽³⁾	2.5		%	1.9		%	1.8		%
Expected dividend yield⁽⁴⁾	2.6		%	2.8		%	3.5		%
Expected term in years⁽⁵⁾	5.0			5.5			6.0


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

⁽²⁾

For all awards granted in fiscal year 2018, expected volatility was estimated based on a blended volatility (50% historical volatility and 50% implied volatility from traded options on HP's common stock). For the awards granted in fiscal year 2017 and 2016, expected volatility was estimated using the leverage-adjusted average of the term-matching volatilities of peer companies due to the lack of volume of forward traded options, which precluded the use of implied volatility.


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

A summary of stock options activity is as follows:



	As of 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	18,067		$	13				28,218		$	12				36,278		$	26
Granted and assumed through acquisition	54		$	21				104		$	19				25,425		$	6
Exercised	(10,644	)	$	13				(9,407	)	$	11				(4,714	)	$	8
Awards canceled due to Separation	—		$	—				—		$	—				(26,252	)	$	26
Forfeited/canceled/expired	(391	)	$	16				(848	)	$	17				(2,519	)	$	17
Outstanding at end of year	7,086		$	14	4.2	$	73	18,067		$	13	4.2	$	152	28,218		$	12	5.0	$	73
Vested and expected to vest	7,084		$	14	4.2	$	73	17,692		$	13	4.1	$	149	26,850		$	12	4.9	$	71
Exercisable	4,707		$	14	3.7	$	49	10,898		$	12	3.1	$	102	15,418		$	11	3.7	$	62

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 years 2018, 2017 and 2016. The aggregate intrinsic value is the difference between HP’s closing stock price on the last trading day of the fiscal year and the exercise price, multiplied by the number of in-the-money options. The total intrinsic value of options exercised in fiscal years 2018, 2017 and 2016 was $109 million, $77 million and $26 million, respectively. The total grant date fair value of options vested in fiscal years 2018, 2017 and 2016 was $12 million, $19 million and $11 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	451	2.3	$	7	451	$	7
$10-$19.99	6,522	4.3	$	14	4,143	$	14
$20-$29.99	113	5.3	$	23	113	$	23
	7,086				4,707

As of October 31, 2018, total unrecognized pre-tax stock-based compensation expense related to stock options for operations was $0.1 million, which is expected to be recognized over a weighted-average vesting period of less than 1 month.

Employee Stock Purchase Plan

HP sponsors the 2011 ESPP, pursuant to which eligible employees may contribute up to 10% of base compensation, subject to certain income limits, to purchase shares of HP’s common stock.

Pursuant to the terms of the 2011 ESPP, employees purchase stock under the 2011 ESPP at a price equal to 95% of HP’s closing stock price on the purchase date. No stock-based compensation expense was recorded in connection with those purchases because the criteria of a non-compensatory plan were met. The aggregate number of shares of HP’s stock authorized for issuance under the 2011 ESPP is 100 million.

Shares Reserved

Shares available for future grant and shares reserved for future issuance under the stock-based incentive compensation plans and the 2011 ESPP were as follows:



	As of October 31
	2018	2017	2016
	In thousands
Shares available for future grant	305,767	419,071	453,865
Shares reserved for future issuance	343,076	468,531	510,176