HP 2011 Annual Report Download - page 51

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
We will continue to evaluate goodwill and indefinite-lived intangibles on an annual basis as of the
beginning of its fourth fiscal quarter or whenever events, changes in circumstances or changes in
management business strategy indicate that there may be a potential indicator of impairment. On
December 9, 2011, we announced that we had determined to contribute the webOS software to the
open source community. We are currently evaluating the impact that this decision will have on the
$273 million in related intangible assets and goodwill recorded on the consolidated balance sheet.
Restructuring
We have engaged, and may continue to engage, in restructuring actions, which require
management to utilize significant estimates related to the timing and the expenses for severance and
other employee separation costs, realizable values of assets made redundant or obsolete, lease
cancellation and other exit costs. If the actual amounts differ from our estimates, the amount of the
restructuring charges could be materially impacted. For a full description of our restructuring actions,
refer to our discussions of restructuring in the Results of Operations section and Note 8 to the
Consolidated Financial Statements in Item 8, which are incorporated herein by reference.
Stock-Based Compensation Expense
We recognize stock-based compensation expense for all share-based payment awards, net of an
estimated forfeiture rate. We recognize compensation cost for only those shares expected to meet the
service and performance vesting conditions on a straight-line basis over the requisite service period of
the award. These compensation costs are determined at the aggregate grant level for service-based
awards and at the individual vesting tranche level for awards with performance and/or market
conditions.
Determining the appropriate fair value model and calculating the fair value of share-based
payment awards requires subjective assumptions, including the expected life of the share-based payment
awards and stock price volatility. We utilize the Black-Scholes option pricing model to value the
service-based stock options granted under our principal option plans. To implement this model, we
examined our historical pattern of option exercises to determine if there were any discernable activity
patterns based on certain employee populations. From this analysis, we identified three employee
populations to which to apply the Black-Scholes model. We determined that implied volatility
calculated based on actively traded options on HP common stock is a better indicator of expected
volatility and future stock price trends than historical volatility.
We issued performance-based restricted units (‘‘PRUs’’) representing hypothetical shares of HP
common stock. Each PRU award reflected a target number of shares that may be issued to the award
recipient. We determine the actual number of shares the recipient receives at the end of a three-year
performance period based on results achieved versus goals based on our annual cash flow from
operations as a percentage of revenue and total shareholder return (‘‘TSR’’) relative to the S&P 500
over the performance period. We use historic volatility for PRU awards, as implied volatility cannot be
used when simulating multivariate prices for companies in the S&P 500. We estimate the fair value of
PRUs using the Monte Carlo simulation model, as the TSR modifier contains a market condition. We
update the estimated expense, net of forfeitures, for the cash flow performance against the goal for
that year at the end of each reporting period.
The assumptions used in calculating the fair value of share-based payment awards represent
management’s best estimates, but these estimates involve inherent uncertainties and the application of
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