Note 2: 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
Stock-based compensation expense and the resulting tax benefits were as follows:
| |
2013 | 2012 | 2011 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
In millions |
|||||||||
|
Stock-based compensation expense |
$ | 500 | $ | 635 | $ | 685 | ||||
|
Income tax benefit |
(158 | ) | (197 | ) | (219 | ) | ||||
|
Stock-based compensation expense, net of tax |
$ | 342 | $ | 438 | $ | 466 | ||||
Cash received from option exercises and purchases under the ESPP was $0.3 billion in fiscal 2013, $0.7 billion in fiscal 2012 and $0.9 billion in fiscal 2011. The benefit realized for the tax deduction from option exercises of share-based payment awards in fiscal 2013, 2012 and 2011 was $13 million, $57 million and $220 million, respectively.
Incentive Compensation Plans
HP's incentive compensation plans include equity plans adopted in 2004 (as amended in 2013 and 2010), 2000 and 1995 ("principal equity plans"), as well as various equity plans assumed through acquisitions under which stock-based awards are outstanding. Stock-based awards granted from the principal equity plans include restricted stock awards, stock options and performance-based restricted units ("PRUs"). Employees meeting certain employment qualifications are eligible to receive stock-based awards.
Under the principal equity plans, HP has granted certain employees restricted stock awards, cash-settled awards or both. Restricted stock awards are non-vested stock awards that may include grants of restricted stock or grants of restricted stock units. Restricted stock awards and cash-settled awards are generally subject to forfeiture if employment terminates prior to the release of the restrictions. Such awards generally vest one to three years from the date of grant. During that period, ownership of the restricted stock cannot be transferred. Restricted stock has the same cash dividend and voting rights as other common stock and is considered to be currently issued and outstanding. Restricted stock units have dividend equivalent rights equal to the cash dividend paid on restricted stock. Restricted stock units do not have the voting rights of common stock, and the shares underlying the restricted stock units are not considered issued and outstanding. However, shares underlying restricted stock units are included in the calculation of diluted net earnings per share ("EPS"). HP expenses the fair value of restricted stock awards ratably over the period during which the restrictions lapse.
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 fair market value of HP's stock on the option grant date (as determined by the reported sale prices of HP's stock when the market closes on that date). The majority of the stock options issued by HP contain only service vesting conditions. However, starting in fiscal 2011, HP began granting performance-contingent stock options that vest only upon the satisfaction of both service and market conditions prior to the expiration of the awards.
HP's PRU program provides for the issuance of PRUs representing hypothetical shares of HP 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. No PRUs were granted in fiscal 2013. The performance goals for PRUs granted in fiscal 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 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.
Recipients of a PRU award generally must remain employed by HP on a continuous basis through the end of the applicable three-year performance period in order to receive shares subject to that award. Target Shares subject to PRU awards 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 performance goals during the performance period.
Restricted Stock Awards
Non-vested restricted stock awards as of October 31, 2013, 2012 and 2011 and changes during fiscal 2013, 2012 and 2011 were as follows:
| |
2013 | 2012 | 2011 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
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 |
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| |
In thousands |
|
In thousands |
|
In thousands |
|
|||||||||||||
|
Outstanding at beginning of year |
25,532 | $ | 31 | 16,813 | $ | 39 | 5,848 | $ | 45 | ||||||||||
|
Granted |
20,707 | $ | 15 | 20,316 | $ | 27 | 17,569 | $ | 38 | ||||||||||
|
Vested |
(10,966 | ) | $ | 33 | (8,521 | ) | $ | 38 | (5,660 | ) | $ | 41 | |||||||
|
Forfeited |
(3,011 | ) | $ | 24 | (3,076 | ) | $ | 34 | (944 | ) | $ | 43 | |||||||
|
Outstanding at end of year |
32,262 | $ | 21 | 25,532 | $ | 31 | 16,813 | $ | 39 | ||||||||||
At October 31, 2013, 2012 and 2011, there was $330 million, $508 million and $526 million, respectively, of unrecognized pre-tax stock-based compensation expense related to non-vested restricted stock awards, which HP expected to recognize over the remaining weighted-average vesting period of 1.3 years, 1.3 years and 1.4 years, respectively.
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:
| |
2013 | 2012 | 2011 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
|
Weighted-average fair value of grants per option(1) |
$ | 4.26 | $ | 9.06 | $ | 7.85 | ||||
|
Expected volatility(2) |
42 | % | 42 | % | 41 | % | ||||
|
Risk-free interest rate(3) |
1.07 | % | 1.17 | % | 1.20 | % | ||||
|
Expected dividend yield(4) |
3.64 | % | 1.83 | % | 1.97 | % | ||||
|
Expected term in months(5) |
71 | 67 | 63 | |||||||
Option activity as of October 31 during each fiscal year was as follows:
| |
2013 | 2012 | 2011 | ||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
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 |
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| |
In thousands |
|
In years |
In millions |
In thousands |
|
In years |
In millions |
In thousands |
|
In years |
In millions |
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|
Outstanding at beginning of year |
87,296 | $ | 29 | 120,243 | $ | 28 | 142,916 | $ | 28 | ||||||||||||||||||||||||||||
|
Granted(1) |
25,785 | $ | 15 | 7,529 | $ | 27 | 18,804 | $ | 21 | ||||||||||||||||||||||||||||
|
Exercised |
(10,063 | ) | $ | 19 | (29,683 | ) | $ | 20 | (37,121 | ) | $ | 23 | |||||||||||||||||||||||||
|
Forfeited/cancelled/expired |
(18,976 | ) | $ | 25 | (10,793 | ) | $ | 35 | (4,356 | ) | $ | 39 | |||||||||||||||||||||||||
|
Outstanding at end of year |
84,042 | $ | 27 | 3.9 | $ | 303 | 87,296 | $ | 29 | 3.0 | $ | 15 | 120,243 | $ | 28 | 3.0 | $ | 460 | |||||||||||||||||||
|
Vested and expected to vest at end of year |
80,004 | $ | 27 | 3.7 | $ | 274 | 85,935 | $ | 29 | 2.9 | $ | 15 | 117,066 | $ | 28 | 2.9 | $ | 442 | |||||||||||||||||||
|
Exercisable at end of year |
49,825 | $ | 33 | 1.8 | $ | 58 | 68,437 | $ | 31 | 1.9 | $ | 12 | 97,967 | $ | 29 | 2.0 | $ | 332 | |||||||||||||||||||
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 October 31, 2013, 2012 and 2011. The aggregate intrinsic value is the difference between HP's closing stock price on the last trading day of fiscal 2013, 2012 and 2011 and the exercise price, multiplied by the number of in-the-money options. Total intrinsic value of options exercised in fiscal 2013, 2012 and 2011 was $36 million, $176 million and $673 million, respectively. Total grant date fair value of options vested in fiscal 2013, 2012 and 2011 was $64 million, $104 million and $95 million, respectively, net of taxes.
Information about options outstanding at October 31, 2013 was as follows:
| |
Options Outstanding | |
|
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|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
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Options Exercisable | |||||||||||||||
| |
|
Weighted- Average Remaining Contractual Life |
|
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|
Range of Exercise Prices |
Shares Outstanding |
Weighted- Average Exercise Price |
Shares Exercisable |
Weighted- Average Exercise Price |
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| |
In thousands |
In years |
|
In thousands |
|
|||||||||||
|
$0-$9.99 |
616 | 4.3 | $ | 7 | 595 | $ | 7 | |||||||||
|
$10-$19.99 |
27,161 | 6.7 | $ | 14 | 3,991 | $ | 14 | |||||||||
|
$20-$29.99 |
18,906 | 5.6 | $ | 25 | 8,204 | $ | 25 | |||||||||
|
$30-$39.99 |
20,018 | 0.5 | $ | 32 | 19,940 | $ | 32 | |||||||||
|
$40-$49.99 |
16,422 | 1.4 | $ | 43 | 16,263 | $ | 43 | |||||||||
|
$50-$59.99 |
667 | 3.2 | $ | 52 | 580 | $ | 52 | |||||||||
|
$60 and over |
252 | 0.7 | $ | 73 | 252 | $ | 73 | |||||||||
|
|
84,042 | 3.9 | $ | 27 | 49,825 | $ | 33 | |||||||||
At October 31, 2013, 2012 and 2011 there was $112 million, $157 million and $264 million, respectively, of unrecognized pre-tax stock-based compensation expense related to stock options, which HP expected to recognize over a weighted-average vesting period of 2.2 years, 1.8 years and 2.3 years, respectively.
Performance-Based Restricted Units
For PRU awards granted in fiscal 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:
| |
2013 | 2012 | |||||
|---|---|---|---|---|---|---|---|
|
Weighted-average fair value of grants per unit |
$ | 13.14 | (1) | $ | 27.00 | (2) | |
For PRU awards granted prior to fiscal 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 for fiscal years ended October 31:
| |
2013 | 2012 | 2011 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
|
Weighted-average fair value of grants per unit |
$ | 0.00 | (1) | $ | 3.35 | (2) | $ | 27.59 | (3) | |
|
Expected volatility(4) |
33 | % | 41 | % | 30 | % | ||||
|
Risk-free interest rate |
0.18 | % | 0.14 | % | 0.38 | % | ||||
|
Expected dividend yield |
3.94 | % | 1.78 | % | 0.75 | % | ||||
|
Expected term in months |
12 | 15 | 19 | |||||||
Non-vested PRUs as of October 31, 2013, 2012 and 2011 and changes during fiscal 2013, 2012 and 2011 were as follows:
| |
2013 | 2012 | 2011 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
Shares in thousands |
|||||||||
|
Outstanding Target Shares at beginning of year |
5,688 | 11,382 | 18,508 | |||||||
|
Granted |
— | 1,251 | 5,950 | |||||||
|
Change in units due to performance and market conditions achievement for PRUs vested in the year(1) |
(4,307 | ) | (5,617 | ) | (10,862 | ) | ||||
|
Forfeited |
(356 | ) | (1,328 | ) | (2,214 | ) | ||||
|
Outstanding Target Shares at end of year |
1,025 | 5,688 | 11,382 | |||||||
|
Outstanding Target Shares of PRUs assigned a fair value at end of year |
690 | (2) | 3,492 | (3) | 5,867 | (4) | ||||
At October 31, 2013, 2012 and 2011, there was $3 million, $17 million and $82 million, respectively, of unrecognized pre-tax stock-based compensation expense related to PRUs with an assigned fair value, which HP expected to recognize over the remaining weighted-average vesting period of 1 year, 1.1 years and 1.4 years, respectively.
Employee Stock Purchase Plan
HP sponsors the Hewlett-Packard Company 2011 Employee Stock Purchase Plan (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.
For purchases made on or after October 31, 2011, employees purchased stock under the 2011 ESPP at a price equal to 95% of the fair market value on the purchase date. Because all the criteria of a non-compensatory plan were met, no stock-based compensation expense was recorded in connection with those purchases.
Shares Reserved
Shares available for future grant and shares reserved for future issuance under the ESPP and incentive compensation plans were as follows:
| |
2013 | 2012 | 2011 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
Shares in thousands |
|||||||||
|
Shares available for future grant at October 31 |
300,984 | 152,837 | 172,259 | |||||||
|
Shares reserved for future issuance under all stock-related benefit plans at October 31 |
417,642 | 270,498 | 319,602 | |||||||