10-Q 1 a2199982z10-q.htm FORM 10-Q
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-Q

(Mark One)    

ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: July 31, 2010

Or

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                             to                              

Commission file number 1-4423



HEWLETT-PACKARD COMPANY
(Exact name of registrant as specified in its charter)

Delaware   94-1081436
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. employer
identification no.)

3000 Hanover Street, Palo Alto, California

 

94304
(Address of principal executive offices)   (Zip code)

(650) 857-1501
(Registrant's telephone number, including area code)



        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ý    No o

        Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ý    No o

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o
(Do not check if a smaller
reporting company)
  Smaller reporting company o

        Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).    Yes o    No ý

        The number of shares of HP common stock outstanding as of August 31, 2010 was 2,267,742,673 shares.



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
INDEX

 
   
   
  Page
No.
 

Part I.

  Financial Information        

  Item 1.  

Financial Statements

    3  

     

Consolidated Condensed Statements of Earnings for the three and nine months ended July 31, 2010 and 2009 (Unaudited)

    3  

     

Consolidated Condensed Balance Sheets as of July 31, 2010 (Unaudited) and as of October 31, 2009 (Audited)

    4  

     

Consolidated Condensed Statements of Cash Flows for the nine months ended July 31, 2010 and 2009 (Unaudited)

    5  

     

Notes to Consolidated Condensed Financial Statements (Unaudited)

    6  

  Item 2.  

Management's Discussion and Analysis of Financial Condition and Results of Operations

    57  

  Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

    91  

  Item 4.  

Controls and Procedures

    91  

Part II.

  Other Information        

  Item 1.  

Legal Proceedings

    92  

  Item 1A.  

Risk Factors

    92  

  Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

    92  

  Item 6.  

Exhibits

    92  

Signature

    93  

Exhibit Index

    94  

Forward-Looking Statements

        This Quarterly Report on Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 2 of Part I of this report, contains forward-looking statements that involve risks, uncertainties and assumptions. If the risks or uncertainties ever materialize or the assumptions prove incorrect, the results of Hewlett-Packard Company and its consolidated subsidiaries ("HP") may differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including but not limited to any projections of revenue, margins, expenses, tax provisions, earnings, cash flows, benefit obligations, share repurchases, currency exchange rates, the impact of acquisitions or other financial items; any statements of the plans, strategies and objectives of management for future operations, including the execution of cost reduction programs and restructuring plans; any statements concerning expected development, performance or market share relating to products or services; any statements regarding future economic conditions or performance; any statements regarding pending investigations, claims or disputes; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. Risks, uncertainties and assumptions include macroeconomic and geopolitical trends and events; the execution and performance of contracts by HP and its customers, suppliers and partners; the challenge of managing asset levels, including inventory; the difficulty of aligning expense levels with revenue changes; assumptions related to pension and other post-retirement costs; expectations and assumptions relating to the execution and timing of cost reduction programs and restructuring plans; the resolution of pending investigations, claims and disputes; and other risks that are described herein, including but not limited to the items discussed in "Factors that Could Affect Future Results" set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 2 of Part I of this report, and that are otherwise described from time to time in HP's Securities and Exchange Commission reports, including HP's Annual Report on Form 10-K for the fiscal year ended October 31, 2009. HP assumes no obligation and does not intend to update these forward-looking statements.

2



PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements.


HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Consolidated Condensed Statements of Earnings

(Unaudited)

 
  Three months ended July 31   Nine months ended July 31  
 
  2010   2009   2010   2009  
 
  In millions, except per share amounts
 

Net revenue:

                         
 

Products

  $ 20,547   $ 17,693   $ 62,120   $ 53,740  
 

Services

    10,078     9,796     30,317     29,760  
 

Financing income

    104     96     318     275  
                   
   

Total net revenue

    30,729     27,585     92,755     83,775  
                   

Costs and expenses:

                         
 

Cost of products

    15,730     13,598     47,936     41,127  
 

Cost of services

    7,597     7,352     22,902     22,671  
 

Financing interest

    75     81     227     251  
 

Research and development

    742     667     2,145     2,115  
 

Selling, general and administrative

    3,154     2,874     9,150     8,647  
 

Amortization of purchased intangible assets

    383     379     1,060     1,171  
 

In-process research and development charges

                6  
 

Restructuring charges

    598     362     909     602  
 

Acquisition-related charges

    127     59     242     182  
                   
   

Total operating expenses

    28,406     25,372     84,571     76,772  
                   

Earnings from operations

    2,323     2,213     8,184     7,003  
                   

Interest and other, net

    (134 )   (177 )   (424 )   (589 )
                   

Earnings before taxes

    2,189     2,036     7,760     6,414  

Provision for taxes

    416     365     1,537     1,166  
                   

Net earnings

  $ 1,773   $ 1,671   $ 6,223   $ 5,248  
                   

Net earnings per share:

                         
 

Basic

  $ 0.76   $ 0.70   $ 2.66   $ 2.19  
                   
 

Diluted

  $ 0.75   $ 0.69   $ 2.60   $ 2.15  
                   

Cash dividends declared per share

  $ 0.16   $ 0.16   $ 0.32   $ 0.32  

Weighted-average shares used to compute net earnings per share:

                         
 

Basic

    2,322     2,382     2,342     2,395  
                   
 

Diluted

    2,376     2,436     2,398     2,442  
                   

The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.

3



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Consolidated Condensed Balance Sheets

 
  July 31,
2010
  October 31,
2009
 
 
  In millions, except par value
 
 
  (Unaudited)
   
 

ASSETS

 

Current assets:

             
 

Cash and cash equivalents

  $ 14,718   $ 13,279  
 

Short-term investments

    5     55  
 

Accounts receivable

    15,621     16,537  
 

Financing receivables

    2,799     2,675  
 

Inventory

    7,206     6,128  
 

Other current assets

    14,016     13,865  
           
   

Total current assets

    54,365     52,539  
           

Property, plant and equipment

    11,477     11,262  

Long-term financing receivables and other assets

    11,681     11,289  

Goodwill

    35,409     33,109  

Purchased intangible assets

    7,085     6,600  
           

Total assets

  $ 120,017   $ 114,799  
           


LIABILITIES AND STOCKHOLDERS' EQUITY


 

Current liabilities:

             
 

Notes payable and short-term borrowings

  $ 7,842   $ 1,850  
 

Accounts payable

    14,885     14,809  
 

Employee compensation and benefits

    3,703     4,071  
 

Taxes on earnings

    947     910  
 

Deferred revenue

    6,583     6,182  
 

Accrued restructuring

    985     1,109  
 

Other accrued liabilities

    14,343     14,072  
           
   

Total current liabilities

    49,288     43,003  
           

Long-term debt

    12,204     13,980  

Other liabilities

    15,690     17,052 (1)

Commitments and contingencies

             

Stockholders' equity:

             

HP stockholders' equity

             
 

Preferred stock, $0.01 par value (300 shares authorized; none issued)

         
 

Common stock, $0.01 par value (9,600 shares authorized; 2,296 and 2,365 shares issued and outstanding, respectively)

    23     24  
 

Additional paid-in capital

    13,668     13,804  
 

Retained earnings

    31,784     29,936  
 

Accumulated other comprehensive loss

    (2,940 )   (3,247 )
           
   

Total HP stockholders' equity

    42,535     40,517  
   

Noncontrolling interests

    300     247 (1)
           
   

Total stockholders' equity

    42,835     40,764  
           

Total liabilities and stockholders' equity

  $ 120,017   $ 114,799  
           

(1)
Reflects the adoption of the accounting standard related to the presentation of noncontrolling interests in consolidated financial statements.

The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.

4



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Consolidated Condensed Statements of Cash Flows

(Unaudited)

 
  Nine months ended
July 31
 
 
  2010   2009  
 
  In millions
 

Cash flows from operating activities:

             
 

Net earnings

  $ 6,223   $ 5,248  
 

Adjustments to reconcile net earnings to net cash provided by operating activities:

             
   

Depreciation and amortization

    3,556     3,546  
   

Stock-based compensation expense

    547     501  
   

Provision for doubtful accounts—accounts and financing receivables

    122     273  
   

Provision for inventory

    127     189  
   

In-process research and development charges

        6  
   

Restructuring charges

    909     602  
   

Deferred taxes on earnings

    (191 )   272  
   

Excess tax benefit from stock-based compensation

    (283 )   (67 )
   

Other, net

    193     47  
   

Changes in operating assets and liabilities:

             
     

Accounts and financing receivables

    845     1,635  
     

Inventory

    (981 )   1,843  
     

Accounts payable

    (128 )   (2,228 )
     

Taxes on earnings

    641     826  
     

Restructuring

    (1,053 )   (844 )
     

Other assets and liabilities

    (1,756 )   (1,903 )
           
       

Net cash provided by operating activities

    8,771     9,946  
           

Cash flows from investing activities:

             
 

Investment in property, plant and equipment

    (2,901 )   (2,749 )
 

Proceeds from sale of property, plant and equipment

    353     401  
 

Purchases of available-for-sale securities and other investments

    (50 )   (105 )
 

Maturities and sales of available-for-sale securities and other investments

    197     103  
 

Payments made in connection with business acquisitions, net

    (4,017 )   (348 )
 

Proceeds from business divestiture, net

    125      
           
     

Net cash used in investing activities

    (6,293 )   (2,698 )
           

Cash flows from financing activities:

             
 

Issuance (payments) of commercial paper and notes payable, net

    4,993     (6,866 )
 

Issuance of debt

    121     6,778  
 

Payment of debt

    (1,274 )   (1,181 )
 

Issuance of common stock under employee stock plans

    2,507     936  
 

Repurchase of common stock

    (7,079 )   (3,038 )
 

Excess tax benefit from stock-based compensation

    283     67  
 

Dividends

    (590 )   (576 )
           
     

Net cash used in financing activities

    (1,039 )   (3,880 )
           

Increase in cash and cash equivalents

    1,439     3,368  

Cash and cash equivalents at beginning of period

    13,279     10,153  
           

Cash and cash equivalents at end of period

  $ 14,718   $ 13,521  
           

Supplemental schedule of non-cash investing and financing activities:

             
 

Issuance of common stock and stock awards assumed in business acquisitions

  $ 62   $ (3 )
 

Purchase of assets under financing arrangement

  $   $ 283  
 

Purchase of assets under capital lease

  $ 105   $ 74  

The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.

5



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements

(Unaudited)

Note 1: Basis of Presentation and Changes in Significant Accounting Policies

        In the opinion of management, the accompanying Consolidated Condensed Financial Statements of Hewlett-Packard Company and its consolidated subsidiaries ("HP") contain all adjustments, including normal recurring adjustments, necessary to present fairly HP's financial position as of July 31, 2010, its results of operations for the three and nine months ended July 31, 2010 and 2009 and its cash flows for the nine months ended July 31, 2010 and 2009. The Consolidated Condensed Balance Sheet as of October 31, 2009 is derived from the October 31, 2009 audited consolidated financial statements. Certain reclassifications have been made to prior-period amounts in order to conform to the current period presentation.

        The results of operations for the three and nine months ended July 31, 2010 are not necessarily indicative of the results to be expected for the full year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with "Risk Factors," "Legal Proceedings," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Quantitative and Qualitative Disclosures About Market Risk" and the Consolidated Financial Statements and notes thereto included in Items 1A, 3, 7, 7A and 8, respectively, of the Hewlett-Packard Company Annual Report on Form 10-K for the fiscal year ended October 31, 2009.

        The preparation of financial statements in accordance with U.S. generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the amounts reported in HP's Consolidated Condensed Financial Statements and accompanying notes. Actual results could differ materially from those estimates.

    Accounting Pronouncements

        The following disclosure on accounting pronouncements includes those that may apply to the historical financial statements.

        In December 2007, the Financial Accounting Standards Board ("FASB") issued a new accounting standard related to business combinations that expands the definition of a "business" and a "business combination"; requires recognition of assets acquired, liabilities assumed, and contingent consideration at their fair value on the acquisition date and through the defined measurement period with subsequent changes recognized in earnings; requires acquisition-related expenses and restructuring costs to be recognized separately from the business combination and expensed as incurred; requires in-process research and development ("IPR&D") to be capitalized initially at fair value as an indefinite-lived intangible asset; and requires that changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period be recognized as a component of provision for taxes. The standard also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. In November 2008, the FASB issued a new accounting standard related to defensive intangible assets. Defensive intangible assets are acquired intangible assets that the acquirer does not intend to actively use but intends to hold to prevent its competitors from obtaining access to them. Under this standard, defensive intangible assets must be initially recognized at fair value and amortized over the benefit period. In April 2009, the FASB issued an accounting standard which clarified the accounting for pre-acquisition contingencies. HP adopted all of these standards in the first quarter of fiscal 2010. The impact of these standards depends on the size and nature of the business combinations completed after the effective date.

6



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 1: Basis of Presentation and Changes in Significant Accounting Policies (Continued)

        In December 2007, the FASB issued a new accounting standard related to noncontrolling interests. The standard establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interests, changes in a parent's ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. The standard also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. In January 2010, the FASB issued Accounting Standards Update No. 2010-02, "Consolidation: Accounting and Reporting for Decreases in Ownership of a Subsidiary—a Scope Clarification." This update clarifies the scope of the decrease in ownership provisions and also requires expanded disclosures. HP adopted these standards in the first quarter of fiscal 2010 with retrospective application of the presentation and disclosure requirements. Noncontrolling interests of $247 million at October 31, 2009 were reclassified from Other liabilities to Stockholders' equity in the Consolidated Condensed Balance Sheet as of October 31, 2009. Income attributable to noncontrolling interests was immaterial for the three and nine months ended July 31, 2010 and July 31, 2009.

        In June 2008, the FASB issued a new accounting standard that clarifies when instruments granted in share-based payment transactions should be included in computing earnings per share ("EPS"). Under the new standard, companies are required to include unvested share-based payment awards that contain non-forfeitable rights to receive dividends in their calculation of EPS and are required to calculate EPS using the "two-class method." The two-class method of computing EPS is an earnings allocation formula that determines EPS for each class of common stock and participating securities according to dividends declared (or accumulated) and participation rights in undistributed earnings. HP adopted this new accounting standard on a retrospective basis in the first quarter of fiscal 2010. The adoption did not have a material impact on EPS for the three and nine months ended July 31, 2010 and July 31, 2009.

Note 2: Stock-Based Compensation

        HP's stock-based compensation plans include incentive compensation plans and an employee stock purchase plan. Incentive compensation plans include principal equity plans as well as various equity plans assumed through acquisitions. Principal equity plans include performance-based restricted units ("PRU"), stock options and restricted stock awards.

        Total stock-based compensation expense before income taxes for the three and nine months ended July 31, 2010 was $166 million and $547 million, respectively. The resulting income tax benefit for the three and nine months ended July 31, 2010 was $54 million and $176 million, respectively. Total stock-based compensation expense before income taxes for the three and nine months ended July 31, 2009 was $150 million and $501 million, respectively. The resulting income tax benefit for the three and nine months ended July 31, 2009 was $51 million and $158 million, respectively.

    Performance-based Restricted Units

        In fiscal 2008, HP implemented a program that provides for the issuance of PRUs representing hypothetical shares of HP common stock. Under the PRU program, HP annually awards a target number of units at the beginning of each three-year performance period. The number of shares released at the end of the performance period will range from zero to two times the target number

7



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 2: Stock-Based Compensation (Continued)

depending on performance during the period. 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. 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 PRU share using the 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:

 
  Nine months ended
July 31
 
 
  2010   2009  

Weighted-average fair value of grants per share

  $ 57.13 (1) $ 40.56 (2)

Expected volatility(3)

    38 %   35 %

Risk-free interest rate

    0.73 %   1.34 %

Dividend yield

    0.64 %   0.88 %

Expected life in months

    22     30  

(1)
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 fiscal 2010. The estimated fair value of a target share for the third year for PRUs granted in fiscal 2009 and for the second and third years for PRUs granted in fiscal 2010 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 second year of the three-year performance period applicable to PRUs granted in fiscal 2008 and for the first year of the three-year performance period applicable to PRUs granted in fiscal 2009.

(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.

8



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 2: Stock-Based Compensation (Continued)

        Non-vested PRUs as of July 31, 2010 and changes during the nine months ended July 31, 2010 were as follows:

 
  Shares
(in thousands)
 

Outstanding at October 31, 2009

    24,723  

Granted

    7,388  

Vested

     

Change in units due to performance and market conditions

    (4,409 )

Forfeited

    (1,541 )
       

Outstanding at July 31, 2010

    26,161  
       

Outstanding PRUs assigned a fair value at July 31, 2010

    17,382 (1)
       

(1)
Excludes target shares for the third year for PRUs granted in fiscal 2009 and for the second and third years for PRUs granted in fiscal 2010 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 July 31, 2010, there was $362 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.

    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
July 31
  Nine months ended
July 31
 
 
  2010   2009   2010   2009  

Weighted-average fair value of grants per share(1)

  $ 13.66   $ 11.57   $ 14.04   $ 12.89  

Implied volatility

    32 %   36 %   29 %   45 %

Risk-free interest rate

    1.96 %   2.43 %   2.29 %   2.01 %

Dividend yield

    0.69 %   0.91 %   0.64 %   0.95 %

Expected life in months

    60     61     61     61  

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

9



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 2: Stock-Based Compensation (Continued)

        Option activity as of July 31, 2010 and changes during the nine months ended July 31, 2010 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, 2009

    233,214   $ 33              

Granted and assumed through acquisitions

    3,068   $ 43              

Exercised

    (70,693 ) $ 34              

Forfeited/cancelled/expired

    (23,234 ) $ 55              
                         

Outstanding at July 31, 2010

    142,355   $ 29     2.5   $ 2,498  
                         

Vested and expected to vest at July 31, 2010

    141,313   $ 29     2.5   $ 2,493  
                         

Exercisable at July 31, 2010

    132,312   $ 28     2.3   $ 2,452  
                         

        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 July 31, 2010. The aggregate intrinsic value is the difference between HP's closing stock price on the last trading day of the third quarter of fiscal 2010 and the exercise price, multiplied by the number of in-the-money options. Total intrinsic value of options exercised for the three months and nine months ended July 31, 2010 was $0.1 billion and $1.2 billion, respectively.

        At July 31, 2010, there was $95 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 1.4 years.

    Restricted Stock Awards

        Restricted stock awards are non-vested stock awards that include grants of restricted stock and grants of restricted stock units.

10



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 2: Stock-Based Compensation (Continued)

        Non-vested restricted stock awards as of July 31, 2010 and changes during the nine months ended July 31, 2010 were as follows:

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

Outstanding at October 31, 2009

    6,864   $ 44  

Granted and assumed through acquisitions

    3,293   $ 51  

Vested

    (4,699 ) $ 45  

Forfeited

    (482 ) $ 46  
             

Outstanding at July 31, 2010

    4,976   $ 47  
             

        At July 31, 2010, there was $133 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 1.4 years.

Note 3: Net Earnings Per Share

        HP calculates basic earnings per share using net earnings and the weighted-average number of shares outstanding during the reporting period. Diluted EPS includes any dilutive effect of outstanding stock options, PRUs, restricted stock units, and restricted stock.

        The reconciliation of the numerators and denominators of the basic and diluted EPS calculations was as follows:

 
  Three months ended
July 31
  Nine months ended
July 31
 
 
  2010   2009   2010   2009  
 
  In millions, except per share amounts
 

Numerator:

                         
 

Net earnings(1)

  $ 1,773   $ 1,671   $ 6,223   $ 5,248  
                   

Denominator:

                         
 

Weighted-average shares used to compute basic EPS

    2,322     2,382     2,342     2,395  
 

Dilutive effect of employee stock plans

    54     54     56     47  
                   
 

Weighted-average shares used to compute diluted EPS

    2,376     2,436     2,398     2,442  
                   

Net earnings per share:

                         
 

Basic

  $ 0.76   $ 0.70   $ 2.66   $ 2.19  
 

Diluted

  $ 0.75   $ 0.69   $ 2.60   $ 2.15  

(1)
Net earnings available to participating securities were not significant for the three and nine months ended July 31, 2010 and 2009. HP considers restricted stock that provides the holder with a non-forfeitable right to receive dividends to be a participating security.

11



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 3: Net Earnings Per Share (Continued)

        HP excludes options with exercise prices that are greater than the average market price from the calculation of diluted EPS because their effect would be anti-dilutive. For the three and nine months ended July 31, 2010, HP excluded from the calculation of diluted EPS options to purchase 8 million shares and 5 million shares, respectively, compared to 96 million shares and 100 million shares, respectively, in the prior-year comparable periods. HP also excluded from the calculation of diluted EPS options to purchase an additional 2 million shares and 3 million shares in the third quarter and the first nine months of fiscal 2010, respectively, compared to an additional 2 million shares in the prior-year comparable periods, whose combined exercise price, unamortized fair value and excess tax benefits were greater in each of those periods than the average market price for HP's common stock because their effect would be anti-dilutive.

        As discussed in Note 2, HP implemented the PRU program in fiscal 2008. Accordingly, for the three and nine months ended July 31, 2010, HP has included 9 million shares and 8 million shares, respectively, underlying the PRU awards granted in fiscal 2009 and 2008 when calculating diluted EPS as those shares became contingently issuable upon the satisfaction of the cash flow from operations condition with respect to the first year of the three-year performance period applicable to the fiscal 2009 awards and the first and second years of the three-year performance period applicable to the fiscal 2008 awards. HP has excluded all other shares underlying the fiscal 2010, 2009 and 2008 PRU awards when calculating diluted EPS as those shares are not contingently issuable. For the three and nine months ended July 31, 2009, HP has included 4 million shares and 3 million shares, respectively, underlying the PRU awards granted in fiscal 2008 when calculating diluted EPS as those shares became contingently issuable upon the satisfaction of the cash flow from operations condition with respect to the first year of the three-year performance period applicable to the fiscal 2008 awards. HP has excluded all other shares underlying the fiscal 2009 and 2008 PRU awards when calculating diluted EPS as those shares were not contingently issuable.

Note 4: Balance Sheet Details

        Balance sheet details were as follows:

    Accounts and Financing Receivables

 
  July 31,
2010
  October 31,
2009
 
 
  In millions
 

Accounts receivable

  $ 16,157   $ 17,166  

Allowance for doubtful accounts

    (536 )   (629 )
           

  $ 15,621   $ 16,537  
           

Financing receivables

  $ 2,855   $ 2,723  

Allowance for doubtful accounts

    (56 )   (48 )
           

  $ 2,799   $ 2,675  
           

        HP has revolving trade receivables-based facilities permitting it to sell certain trade receivables to third parties on a non-recourse basis. The aggregate maximum capacity under these programs was

12



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 4: Balance Sheet Details (Continued)


$493 million as of July 31, 2010. HP sold $1.3 billion of trade receivables during the first nine months of fiscal 2010. As of July 31, 2010, HP had $209 million available under these programs.

    Inventory

 
  July 31,
2010
  October 31,
2009
 
 
  In millions
 

Finished goods

  $ 4,887   $ 4,092  

Purchased parts and fabricated assemblies

    2,319     2,036  
           

  $ 7,206   $ 6,128  
           

    Property, Plant and Equipment

 
  July 31,
2010
  October 31,
2009
 
 
  In millions
 

Land

  $ 529   $ 513  

Buildings and leasehold improvements

    8,252     7,472  

Machinery and equipment

    13,652     12,959  
           

    22,433     20,944  
           

Accumulated depreciation

    (10,956 )   (9,682 )
           

  $ 11,477   $ 11,262  
           

Note 5: Acquisitions

        In fiscal 2010, HP adopted a new accounting standard related to business combinations. HP has included the results of operations of the businesses that it acquired in fiscal 2010 in HP's consolidated results as of the respective dates of acquisitions. HP allocates the purchase price of its acquisitions to the tangible assets, liabilities and intangible assets acquired, including IPR&D, based on their estimated fair values. The excess of the purchase price over those fair values is recorded as goodwill. IPR&D is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When the IPR&D project is complete, it is reclassified as an amortizable purchased intangible asset and is amortized over its estimated useful life. If an IPR&D project is abandoned, HP will record a charge for the value of the related intangible asset to HP's Consolidated Statement of Earnings in the period it is abandoned. Acquisition-related expenses and restructuring costs are recognized separately from the business combination and are expensed as incurred.

        In the first nine months of fiscal 2010, HP completed seven acquisitions. The purchase price allocation for these acquisitions as set forth in the table below reflects various preliminary fair value estimates and analyses, including preliminary work performed by third-party valuation specialists, which are subject to change within the measurement period as valuations are finalized. The primary areas of the preliminary purchase price allocations that are not yet finalized relate to the fair values of certain tangible assets and liabilities acquired, the valuation of intangible assets acquired, certain legal matters, income and non-income based taxes and residual goodwill. We expect to continue to obtain information

13



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 5: Acquisitions (Continued)


to assist us in determining the fair value of the net assets acquired at the acquisition date during the measurement period. Measurement period adjustments that HP determines to be material will be applied retrospectively to the period of acquisition in HP's consolidated financial statements and, depending on the nature of the adjustments, other periods subsequent to the period of acquisition could also be affected.

        Pro forma results of operations for these acquisitions have not been presented because they are not material to HP's consolidated results of operations, either individually or in the aggregate. Goodwill, which represents the excess of the purchase price over the net tangible and intangible assets acquired, is not deductible for tax purposes.

 
  In millions  

Net assets

  $ 1,380  

Amortizable intangible assets

    1,377  

In-process research and development

    186  

Goodwill

    2,217  
       

Total purchase price

  $ 5,160  
       

    Acquisition of 3Com Corporation ("3Com")

        On April 12, 2010, HP completed its acquisition of 3Com, a global enterprise provider of networking switching, routing and security solutions, at a price of $7.90 per share in cash. HP reports the financial results of the 3Com business in the Corporate Investments segment. The aggregate purchase price of $3.3 billion consisted of cash paid for outstanding common stock, vested in-the-money stock awards and the estimated fair value of earned unvested stock awards assumed by HP. In connection with this acquisition, HP recorded approximately $1.3 billion of goodwill, amortizable purchased intangible assets of $987 million and IPR&D assets of $106 million. HP is amortizing the purchased intangible assets on a straight-line basis over an estimated weighted-average life of 5.1 years.

    Acquisition of Palm, Inc. ("Palm")

        On July 1, 2010, HP completed the acquisition of Palm, a provider of smartphones powered by the Palm webOS mobile operating systems. HP reports the financial results of the Palm business in the Corporate Investments segment. The aggregate purchase price was $1.8 billion, which included cash paid for common stock, vested-in-the-money stock awards, the estimated fair value of earned unvested stock awards assumed as well as certain debt that was repaid at the acquisition date. In connection with this acquisition, HP recorded approximately $917 million of goodwill, amortizable purchased intangible assets of $344 million and IPR&D assets of $80 million. HP is amortizing the purchased intangible assets on a straight-line basis over an estimated weighted-average life of 6.2 years.

    Pending Acquisition

        On September 2, 2010, HP entered into a definitive agreement to acquire 3PAR Inc., a provider of utility storage, through a cash tender offer of $33.00 per share or an enterprise value of approximately

14



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 5: Acquisitions (Continued)

$2.3 billion. The transaction is subject to customary closing conditions and is expected to be completed by the end of the calendar year.

Note 6: Goodwill and Purchased Intangible Assets

    Goodwill

        Goodwill allocated to HP's business segments as of July 31, 2010 and changes in the carrying amount of goodwill for the nine months ended July 31, 2010 are as follows:

 
  Services   Enterprise
Storage
and
Servers
  HP
Software
  Personal
Systems
Group
  Imaging
and
Printing
Group
  HP
Financial
Services
  Corporate
Investments
  Total  
 
  In millions
 

Balance at October 31, 2009

  $ 16,829   $ 5,005   $ 6,140   $ 2,487   $ 2,460   $ 144   $ 44   $ 33,109  

Goodwill acquired during the period

                18             2,199     2,217  

Goodwill adjustments

    124     (30 )   (2 )   (5 )   (4 )           83  
                                   

Balance at July 31, 2010

  $ 16,953   $ 4,975   $ 6,138   $ 2,500   $ 2,456   $ 144   $ 2,243   $ 35,409  
                                   

        During the first nine months of fiscal 2010, HP recorded approximately $2.2 billion of goodwill related to acquisitions based on its preliminary purchase price allocations. HP recorded goodwill adjustments primarily related to an increase to the deferred tax liability on outside basis differences of Electronic Data Systems Corporation ("EDS") foreign subsidiaries at acquisition. The increase to goodwill was partially offset by adjustments to goodwill primarily for tax adjustments related to tax deductible stock-based awards for certain acquisitions for which the acquisition date preceded the effective date of the new accounting standard for business combinations.

15



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 6: Goodwill and Purchased Intangible Assets (Continued)

    Purchased Intangible Assets

        HP's purchased intangible assets associated with completed acquisitions are composed of:

 
  July 31, 2010   October 31, 2009  
 
  Gross   Accumulated
Amortization
  Net   Gross   Accumulated
Amortization
  Net  
 
  In millions
 

Customer contracts, customer lists and distribution agreements

  $ 7,191   $ (3,643 ) $ 3,548   $ 6,763   $ (3,034 ) $ 3,729  

Developed and core technology and patents

    5,040     (3,187 )   1,853     4,171     (2,747 )   1,424  

Product trademarks

    310     (233 )   77     247     (222 )   25  
                           

Total amortizable purchased intangible assets

    12,541     (7,063 )   5,478     11,181     (6,003 )   5,178  

IPR&D

    185         185              

Compaq trade name

    1,422         1,422     1,422         1,422  
                           

Total purchased intangible assets

  $ 14,148   $ (7,063 ) $ 7,085   $ 12,603   $ (6,003 ) $ 6,600  
                           

        During the first nine months of fiscal 2010, HP recorded approximately $1.6 billion of purchased intangible assets related to acquisitions based on its preliminary purchase price allocations.

        Under the revised accounting standard adopted in the first quarter of fiscal 2010, IPR&D is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When the IPR&D project is complete, it is reclassified as an amortizable purchased intangible asset and is amortized over its estimated useful life. If an IPR&D project is abandoned, HP will record a charge for the value of the related intangible asset to HP's Consolidated Statement of Earnings in the period it is abandoned.

        Estimated future amortization expense related to finite-lived purchased intangible assets at July 31, 2010 is as follows:

Fiscal year:
  In millions  

2010 (remaining 3 months)

  $ 395  

2011

    1,326  

2012

    1,121  

2013

    984  

2014

    647  

2015

    530  

Thereafter

    475  
       

Total

  $ 5,478  
       

16



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 7: Restructuring Charges

    Fiscal 2010 Acquisitions

        On July 1, 2010, HP completed the acquisition of Palm. In connection with the acquisition, HP's management approved and initiated a $40 million plan to restructure the operations of Palm, including severance for Palm employees, contract cancellation costs and other items. HP recorded restructuring charges of approximately $40 million for the three months ended July 31, 2010. No further restructuring charges are anticipated, subject to changes in the Palm integration plan. HP expects the majority of these costs to be paid out by the fourth quarter of fiscal 2010.

        On April 12, 2010, HP completed the acquisition of 3Com. In connection with the acquisition, HP's management approved and initiated a $39 million plan to restructure the operation of 3Com, including severance costs and costs to vacate duplicative facilities. HP expects to record the majority of the cost of this restructuring plan by the second quarter of fiscal 2011 based upon the timing of planned terminations and facility closure dates. These costs are expected to be paid out through fiscal 2016.

    Fiscal 2010 ES Restructuring Plan

        On June 1, 2010, HP's management announced a plan to restructure its enterprise services business, which includes its infrastructure technology outsourcing, business process outsourcing and application services business units. The multi-year restructuring program includes plans to consolidate commercial data centers, tools and applications. The total expected cost of the plan is approximately $1 billion, including severance costs to eliminate approximately 9,000 positions and infrastructure charges. For the three and nine months ended July 31, 2010, a restructuring charge of $520 million was recorded primarily related to severance costs. HP expects to record the majority of the remaining severance costs by the second quarter of fiscal 2011, and the main infrastructure charges through fiscal 2012. The timing of the charges is based upon planned termination dates and site closure and consolidation plans. The majority of the associated cash payments are expected to be paid out through the fourth quarter of fiscal 2012. As of July 31, 2010, approximately 900 positions have been eliminated.

    Fiscal 2009 Restructuring Plan

        In May 2009, HP's management approved and initiated a restructuring plan to structurally change and improve the effectiveness of the Imaging and Printing Group ("IPG"), the Personal Systems Group ("PSG"), and Enterprise Storage and Servers ("ESS") businesses. The total expected cost of the plan is $303 million in severance-related costs associated with the planned elimination of approximately 5,000 positions. As of July 31, 2010, approximately 3,900 positions have been eliminated. HP expects a majority of the remaining positions to be eliminated and a majority of the restructuring costs to be paid out through the fourth quarter of fiscal 2010.

    Fiscal 2008 HP/EDS Restructuring Plan

        In connection with the acquisition of EDS on August 26, 2008, HP's management approved and initiated a restructuring plan to streamline the combined company's services business and to better align the structure and efficiency of that business with HP's operating model. The restructuring plan is

17



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 7: Restructuring Charges (Continued)

expected to be implemented over four years from the acquisition date and includes changes to the combined company's workforce as well as changes to corporate overhead functions such as real estate and information technology ("IT").

        The total expected cost of this restructuring plan is $3.1 billion, consisting mainly of severance costs to eliminate approximately 25,000 positions, costs to vacate duplicative facilities and costs associated with early termination of certain contractual obligations. As of July 31, 2010, the vast majority of the positions had been eliminated. In future quarters, as part of this action, HP expects to record charges of approximately $333 million related to the cost to vacate duplicative facilities.

        Approximately $1.5 billion of the expected costs were associated with pre-acquisition EDS and were reflected in the purchase price of EDS. These costs are subject to change based on the actual costs incurred. The remaining costs are primarily associated with HP and will be recorded as a restructuring charge.

    Summary of Restructuring Plans

        The adjustments to the accrued restructuring expenses related to all of HP's restructuring plans described above for the nine months ended July 31, 2010 were as follows:

 
   
  Three
months
ended
July 31,
2010
charges
  Nine
months
ended
July 31,
2010
charges
   
   
   
  As of July 31, 2010  
 
  Balance,
October 31,
2009
  Cash
payments
  Non-cash
settlements
and other
adjustments
  Balance,
July 31,
2010
  Total costs
and
adjustments
to date
  Total
expected
costs and
adjustments
 
 
  In millions
 

Fiscal 2010 acquisitions

  $   $ 42   $ 57   $ (3 ) $   $ 54   $ 57   $ 79  

Fiscal 2010 ES Plan:

                                                 
 

Severance

  $   $ 509   $ 509   $ (5 ) $ 22   $ 526   $ 509   $ 761  
 

Infrastructure

        11     11         (11 )       11     231  
                                   
 

Total ES Plan

  $   $ 520   $ 520   $ (5 ) $ 11   $ 526   $ 520   $ 992  

Fiscal 2009 Plan

  $ 248   $   $ 4   $ (150 ) $ (12 ) $ 90   $ 303   $ 303  

Fiscal 2008 HP/EDS Plan:

                                                 
 

Severance

  $ 747   $   $ 226   $ (789 ) $ (43 ) $ 141   $ 2,136   $ 2,136  
 

Infrastructure

    419     36     102     (89 )   (20 )   412     602     935  
                                   
 

Total HP/EDS Plan

  $ 1,166   $ 36   $ 328   $ (878 ) $ (63 ) $ 553   $ 2,738   $ 3,071  
                                   

Total restructuring plans

  $ 1,414   $ 598   $ 909   $ (1,036 ) $ (64 ) $ 1,223   $ 3,618   $ 4,445  
                                   

        At July 31, 2010 and October 31, 2009, HP had $30 million and $51 million, respectively, of restructuring liabilities associated with previous restructuring actions that are complete but have cash payouts anticipated to occur through 2012. For the nine months ended July 31, 2010, cash payouts of $17 million and other adjustments of $4 million were recorded against these liabilities.

        At July 31, 2010 and October 31, 2009, HP included the long-term portion of the restructuring liability of $268 million and $356 million, respectively, in Other liabilities, and the short-term portion in Accrued restructuring in the accompanying Consolidated Condensed Balance Sheets.

18



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Fair Value

        HP adopted the provisions related to the fair value of nonfinancial assets and nonfinancial liabilities in the first quarter of fiscal 2010 for the following major categories of nonfinancial items from the Consolidated Condensed Balance Sheet: Property, plant and equipment; Goodwill; Purchased intangible assets; Accrued restructuring; and the asset retirement obligations within Other accrued liabilities and Other liabilities. The provisions of the accounting standard related to measuring fair value and related disclosures are applied to nonfinancial assets and nonfinancial liabilities whenever they are required to be measured at fair value, such as when accounting for a business combination, when evaluating and/or determining impairment, or in accordance with certain other accounting pronouncements. Except for assets and liabilities acquired in business combinations as discussed in Note 5, HP did not measure any material nonfinancial assets and nonfinancial liabilities at fair value on a non-recurring basis for the three and nine months ended July 31, 2010.

        Except for the provisions noted above, the accounting standard relating to fair value measurements and disclosures became effective for HP since the beginning of fiscal 2009. This standard establishes a new framework for measuring fair value and expands related disclosures. The framework requires fair value to be determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants.

        Valuation techniques used by HP are based upon observable and unobservable inputs. Observable or market inputs reflect market data obtained from independent sources, while unobservable inputs reflect HP's assumptions about market participant assumptions based on best information available. Observable inputs are the preferred source of values. These two types of inputs create the following fair value hierarchy:

        Level 1—Quoted prices (unadjusted) for identical instruments in active markets.

        Level 2—Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

        Level 3—Prices or valuations that require management inputs that are both significant to the fair value measurement and unobservable.

        The following section describes the valuation methodologies HP uses to measure its financial assets and liabilities at fair value.

        Cash Equivalents and Investments: HP holds time deposits, money market funds, commercial paper, other debt securities primarily consisting of corporate and foreign government notes and bonds, and common stock and equivalents. Where applicable, HP uses quoted prices in active markets for identical assets to determine fair value. If quoted prices in active markets for identical assets are not available to determine fair value, HP uses quoted prices for similar assets and liabilities or inputs that are observable either directly or indirectly. If quoted prices for identical or similar assets are not available, HP uses internally developed valuation models, whose inputs include bid prices, and third-party valuations utilizing underlying assets assumptions.

19



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Fair Value (Continued)

        Derivative Instruments: As discussed in Note 9, HP mainly holds non-speculative forwards, swaps and options to hedge certain foreign currency and interest rate exposures. When active market quotes are not available, HP uses industry standard valuation models. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit risk, foreign exchange rates, and forward and spot prices for currencies. In certain cases, market-based observable inputs are not available and, in those cases, HP uses management judgment to develop assumptions which are used to determine fair value.

        The following table presents HP's assets and liabilities that are measured at fair value on a recurring basis:

 
  As of July 31, 2010   As of October 31, 2009  
 
  Fair Value
Measured Using
   
  Fair Value
Measured Using
   
 
 
  Total
Balance
  Total
Balance
 
 
  Level 1   Level 2   Level 3   Level 1   Level 2   Level 3  
 
  In millions
 

Assets

                                                 

Time deposits

  $   $ 9,363   $   $ 9,363   $   $ 8,925   $   $ 8,925  

Commercial paper

        1,774         1,774         1,388         1,388  

Money market funds

    763             763     262             262  

U.S. Treasury securities

    3             3     5             5  

Marketable equity securities

    9     3         12     7     3         10  

Foreign bonds

    7     342         349     10     367         377  

Corporate bonds and other debt securities

        7     48     55         5     36     41  

Derivatives:

                                                 
 

Interest rate contracts

        652         652         375         375  
 

Foreign exchange contracts

        416     61     477         379     1     380  
 

Other derivatives

        17     4     21         1         1  
                                   
   

Total Assets

  $ 782   $ 12,574   $ 113   $ 13,469   $ 284   $ 11,443   $ 37   $ 11,764  
                                   

Liabilities

                                                 

Derivatives:

                                                 
 

Interest rate contracts

  $   $ 81   $   $ 81   $   $ 51   $   $ 51  
 

Foreign exchange contracts

        531     17     548         720     1     721  
 

Other derivatives

                        2         2  
                                   
   

Total Liabilities

  $   $ 612   $ 17   $ 629   $   $ 773   $ 1   $ 774  
                                   

        The following table presents the changes in Level 3 instruments for the nine months ended July 31, 2010 that are measured at fair value on a recurring basis. The majority of the Level 3 balances

20



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Fair Value (Continued)


consist of investment securities classified as available-for-sale with changes in fair value recorded in other comprehensive income ("OCI").

 
  Fair Value Measured Using
Significant Unobservable Inputs
(Level 3)
 
Nine months ended July 31, 2010
  Other Debt
Securities
  Derivative
Instruments
  Total  
 
  In millions
 

Beginning balance at November 1, 2009

  $ 36   $   $ 36  
 

Total (losses) gains (realized/unrealized):

                   
   

Included in earnings(1)

    (8 )       (8 )
   

Included in OCI

    12     62     74  
 

Purchases, issuances, and settlements

    8     (14 )   (6 )
               

Ending balance at July 31, 2010

  $ 48   $ 48   $ 96  
               

The amount of total losses for the period included in earnings attributable to the change in unrealized losses relating to assets still held as of July 31, 2010

  $ (8 ) $   $ (8 )
               

(1)
Included in Interest and other, net in the accompanying Consolidated Condensed Statements of Earnings.

        The changes in Level 3 instruments for the three months ended July 31, 2010 that were measured at fair value on a recurring basis resulted in a total loss of $5 million. The loss for the period was included in earnings attributable to the changes in unrealized losses relating to assets still held as of July 31, 2010.

        The changes in Level 3 instruments for the three months ended July 31, 2009 that were measured at fair value on a recurring basis did not result in any gain or loss. The changes in Level 3 instruments for the nine months ended July 31, 2009 that were measured at fair value on a recurring basis resulted in a total loss of $3 million. The losses for the periods were included in earnings attributable to the changes in unrealized losses relating to assets still held as of July 31, 2009.

        HP measures certain assets including cost and equity method investments at fair value on a non-recurring basis. These assets are recognized at fair value when they are deemed to be other-than-temporarily impaired. In both the three and nine months ended July 31, 2010, HP recorded an impairment charge of $1 million. In the three and nine months ended July 31, 2009, HP recorded an impairment charge of $3 million and $4 million, respectively.

21



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 9: Financial Instruments

    Cash Equivalents and Available-for-Sale Investments

        Cash equivalents and available-for-sale investments at fair value as of July 31, 2010 and October 31, 2009 were as follows:

 
  July 31, 2010   October 31, 2009  
 
  Cost   Gross
Unrealized
Gain
  Gross
Unrealized
Loss
  Estimated
Fair Value
  Cost   Gross
Unrealized
Gain
  Gross
Unrealized
Loss
  Estimated
Fair Value
 
 
  In millions
 

Cash Equivalents

                                                 
 

Time deposits

  $ 9,356   $   $   $ 9,356   $ 8,870   $   $   $ 8,870  
 

Commercial paper

    1,774             1,774     1,388             1,388  
 

Money market funds

    763             763     262             262  
                                   

Total cash equivalents

    11,893             11,893     10,520             10,520  
                                   

Available-for-Sale Investments

                                                 

Debt securities:

                                                 
 

Time deposits

    7             7     55             55  
 

U.S. Treasury securities

    3             3     5             5  
 

Foreign bonds

    295     54         349     329     49         378  
 

Corporate bonds and other debt securities

    87         (32 )   55     85         (45 )   40  
                                   

Total debt securities

    392     54     (32 )   414     474     49     (45 )   478  
                                   

Equity securities in public companies

    5     2         7     3     2         5  
                                   

Total cash equivalents and available-for-sale investments

  $ 12,290   $ 56   $ (32 ) $ 12,314   $ 10,997   $ 51   $ (45 ) $ 11,003  
                                   

        Cash equivalents consist of investments with original maturities of ninety days or less. Available-for-sale securities consist of short-term investments which mature within twelve months or less and long-term investments with maturities longer than twelve months. Investments include primarily time deposits, fixed-interest securities, and institutional bonds. HP estimates the fair values of its investments based on quoted market prices or pricing models using current market rates. These estimated fair values may not be representative of actual values that will be realized in the future.

        The gross unrealized loss as of July 31, 2010 was due primarily to declines in the fair value of certain debt securities and included $30 million that has been in a continuous loss position for more than twelve months. The gross unrealized loss as of October 31, 2009 was due primarily to declines in the fair value of certain debt securities and included $20 million that had been in a continuous loss position for more than twelve months. HP does not intend to sell these debt securities, and it is not likely that HP will be required to sell these debt securities prior to the recovery of the amortized cost. In the three and nine months ended July 31, 2010, HP recognized an impairment charge of $6 million and $8 million, respectively, on total investments. In the three and nine months ended July 31, 2009, HP recognized an impairment charge of $4 million and $6 million, respectively, on total investments.

22



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 9: Financial Instruments (Continued)

        Contractual maturities of short-term and long-term investments in available-for-sale debt securities at July 31, 2010 were as follows:

 
  July 31, 2010  
 
  Cost   Estimated
Fair Value
 
 
  In millions
 

Due in less than one year

  $ 5   $ 5  

Due in 1-5 years

    21     21  

Due in more than five years

    366     388  
           

  $ 392   $ 414  
           

        Proceeds from sales and maturities of available-for-sale and other securities were $94 million and $197 million in the three and nine months ended July 31, 2010, respectively. There were $1 million and $8 million of gross realized gains on total investments in the three and nine months ended July 31, 2010, respectively. There were no sales or maturities of available-for-sale and other securities for the three months ended July 31, 2009. Proceeds from sales or maturities of available-for-sale and other securities were $103 million for the nine months ended July 31, 2009. There were no realized gains or losses on available-for-sale and other securities for the three and nine months ended July 31, 2009. The specific identification method is used to account for gains and losses on available-for-sale securities.

        A summary of the carrying values and balance sheet classification of all short-term and long-term investments in debt and equity securities as of July 31, 2010 and October 31, 2009 was as follows:

 
  July 31,
2010
  October 31,
2009
 
 
  In millions
 

Time deposits

  $   $ 55  

Available-for-sale debt securities

    5      
           
 

Short-term investments

    5     55  
           

Time deposits

    7      

Available-for-sale debt securities

    402     423  

Available-for-sale equity securities

    7     5  

Equity securities in privately-held companies

    164     129  

Other investments

    9     13  
           
 

Included in long-term financing receivables and other assets

    589     570  
           

Total investments

  $ 594   $ 625  
           

        Equity securities in privately held companies include cost basis and equity method investments. Other investments include marketable trading securities held to generate returns that HP expects to offset changes in certain liabilities related to deferred compensation arrangements. HP includes gains or losses from changes in fair value of these securities, offset by losses or gains on the related liabilities, in Interest and other, net, in HP's Consolidated Condensed Statements of Earnings. There were no net losses or gains associated with these securities for the three months ended July 31, 2010. The net losses associated with these securities were $5 million for the nine months ended July 31, 2010.

23



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 9: Financial Instruments (Continued)


The net losses associated with these securities were $4 million and $11 million for the three and nine months ended July 31, 2009, respectively.

    Derivative Financial Instruments

        HP is a global company that is exposed to foreign currency exchange rate fluctuations and interest rate changes in the normal course of its business. As part of its risk management strategy, HP uses derivative instruments, primarily forward contracts, option contracts, interest rate swaps, and total return swaps, to hedge certain foreign currency, interest rate and, to a lesser extent, equity exposures. HP's objective is to offset gains and losses resulting from these exposures with losses and gains on the derivative contracts used to hedge them, thereby reducing volatility of earnings or protecting fair values of assets and liabilities. HP does not have any leveraged derivatives. HP does not use derivative contracts for speculative purposes. HP designates its derivatives as fair value hedges, cash flow hedges or hedges of the foreign currency exposure of a net investment in a foreign operation ("net investment hedges"). Additionally, for derivatives not designated as hedging instruments, HP categorizes those economic hedges as other derivatives. HP recognizes all derivatives in the Consolidated Condensed Balance Sheets at fair value and reports them in Other current assets, Long-term financing receivables and other assets, Other accrued liabilities, or Other liabilities. HP classifies cash flows from the derivative programs as operating activities in the Consolidated Condensed Statements of Cash Flows.

        As a result of the use of derivative instruments, HP is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. To mitigate the counterparty credit risk, HP has a policy of only entering into contracts with carefully selected major financial institutions based upon their credit ratings and other factors, and HP maintains dollar and term limits that correspond to each institution's credit rating. HP's established policies and procedures for mitigating credit risk on principal transactions and short-term cash include reviewing and establishing limits for credit exposure and continually assessing the creditworthiness of counterparties. Master agreements with counterparties include master netting arrangements as further mitigation of credit exposure to counterparties. These arrangements permit HP to net amounts due from HP to a counterparty with amounts due to HP from a counterparty, which reduces the maximum loss from credit risk in the event of counterparty default.

        Certain of HP's derivative instruments contain credit-risk-related contingent features, such as a provision whereby HP and the counterparties to the derivative instruments could request collateralization on derivative instruments in net liability positions if HP's or the counterparties' credit rating falls below certain thresholds. As of July 31, 2010, HP was not required to post any collateral, and HP did not have any derivative instruments with credit-risk-related contingent features that were in a significant net liability position.

    Fair Value Hedges

        HP enters into fair value hedges to reduce the exposure of its debt portfolio to interest rate risk. HP issues long-term debt in U.S. dollars based on market conditions at the time of financing. HP uses interest rate swaps to mitigate the market risk exposures in connection with the debt to achieve primarily U.S. dollar LIBOR-based floating interest expense. The swap transactions generally involve principal and interest obligations for U.S. dollar-denominated amounts. Alternatively, HP may choose

24



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 9: Financial Instruments (Continued)

not to swap fixed for floating interest payments or may terminate a previously executed swap if it believes a larger proportion of fixed-rate debt would be beneficial. When investing in fixed-rate instruments, HP may enter into interest rate swaps that convert the fixed interest returns into variable interest returns and would classify these swaps as fair value hedges. For derivative instruments that are designated and qualify as fair value hedges, HP recognizes the gain or loss on the derivative instrument, as well as the offsetting loss or gain on the hedged item, in Interest and other, net in the Consolidated Condensed Statements of Earnings in the current period.

    Cash Flow Hedges

        HP uses a combination of forward contracts and options designated as cash flow hedges to protect against the foreign currency exchange rate risks inherent in its forecasted net revenue and, to a lesser extent, cost of sales, operating expense, and intercompany lease loan denominated in currencies other than the U.S. dollar. HP's foreign currency cash flow hedges mature generally within six to twelve months. However, certain leasing revenue-related forward contracts and intercompany lease loan forward contracts extend for the duration of the lease term, which can be up to five years. For derivative instruments that are designated and qualify as cash flow hedges, HP initially records the effective portion of the gain or loss on the derivative instrument in accumulated other comprehensive income or loss as a separate component of stockholders' equity and subsequently reclassifies these amounts into earnings in the period during which the hedged transaction is recognized in earnings. HP reports the effective portion of cash flow hedges in the same financial statement line item as the changes in value of the hedged item. During the nine months ended July 31, 2010, HP did not discontinue any cash flow hedge for which it was probable that a forecasted transaction would not occur.

    Net Investment Hedges

        HP uses forward contracts designated as net investment hedges to hedge net investments in certain foreign subsidiaries whose functional currency is the local currency. These derivative instruments are designated as net investment hedges and, as such, HP records the effective portion of the gain or loss on the derivative instrument together with changes in the hedged items in cumulative translation adjustment as a separate component of stockholders' equity.

    Other Derivatives

        Other derivatives not designated as hedging instruments consist primarily of forward contracts HP uses to hedge foreign currency balance sheet exposures. HP also uses total return swaps and, to a lesser extent, interest rate swaps, based on the equity and fixed income indices, to hedge its executive deferred compensation plan liability. For derivative instruments not designated as hedging instruments, HP recognizes changes in the fair values in earnings in the period of change. HP recognizes the gain or loss on foreign currency forward contracts used to hedge balance sheet exposures in Interest and other, net in the same period as the remeasurement gain and loss of the related foreign currency denominated assets and liabilities. HP recognizes the gain or loss on the total return swaps and interest rate swaps in Interest and other, net in the same period as the gain or loss from the change in market value of the executive deferred compensation plan liability.

25



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 9: Financial Instruments (Continued)

    Hedge Effectiveness

        For interest rate swaps designated as fair value hedges, HP measures effectiveness by offsetting the change in fair value of the hedged debt with the change in fair value of the derivative. For foreign currency options and forward contracts designated as cash flow or net investment hedges, HP measures effectiveness by comparing the cumulative change in the hedge contract with the cumulative change in the hedged item, both of which are based on forward rates. HP recognizes any ineffective portion of the hedge, as well as amounts not included in the assessment of effectiveness, in the Consolidated Condensed Statements of Earnings. As of July 31, 2010, the portion of hedging instruments' gain or loss excluded from the assessment of effectiveness was not material for fair value, cash flow or net investment hedges. Hedge ineffectiveness for fair value, cash flow and net investment hedges was not material in the three and nine months ended July 31, 2010.

    Fair Value of Derivative Instruments in the Consolidated Condensed Balance Sheets

        As discussed in Note 8, HP estimates the fair values of derivatives primarily based on pricing models using current market rates and records all derivatives on the balance sheet at fair value. The gross notional and fair value of derivative financial instruments in the Consolidated Condensed Balance Sheets were recorded as follows:

 
  As of July 31, 2010   As of October 31, 2009  
 
  Gross
Notional(1)
  Other
Current
Assets
  Long-term
Financing
Receivables and
Other Assets
  Other
Accrued
Liabilities
  Other
Liabilities
  Gross
Notional(1)
  Other
Current
Assets
  Long-term
Financing
Receivables and
Other Assets
  Other
Accrued
Liabilities
  Other
Liabilities
 
 
  In millions
 

Derivatives designated as hedging instruments

                                                             

Fair value hedges:

                                                             
 

Interest rate contracts

  $ 8,575   $   $ 583   $   $   $ 7,575   $   $ 346   $   $ 5  

Cash flow hedges:

                                                             
 

Foreign exchange contracts

    15,148     313     53     235     34     15,056     116     12     389     33  

Net investment hedges:

                                                             
 

Foreign exchange contracts

    1,454     17     7     40     34     1,350     13     12     47     39  
                                           

Total derivatives designated as hedging instruments

    25,177     330     643     275     68     23,981     129     370     436     77  
                                           

Derivatives not designated as hedging instruments

                                                             

Foreign exchange contracts

    10,725     70     17     170     35     16,104     206     20     163     51  

Interest rate contracts(2)

    2,200         69         81     2,211         29         45  

Other derivatives

    362     17     4             268     2         2      
                                           

Total derivatives not designated as hedging instruments

    13,287     87     90     170     116     18,583     208     49     165     96  
                                           

Total derivatives

  $ 38,464   $ 417   $ 733   $ 445   $ 184   $ 42,564   $ 337   $ 419   $ 601   $ 173  
                                           

(1)
Represents the face amounts of contracts that were outstanding as of July 31, 2010 and October 31, 2009, respectively.

(2)
Represents offsetting swaps acquired through previous business combination that were not designated as hedging instruments.

26



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 9: Financial Instruments (Continued)

    Effect of Derivative Instruments on the Consolidated Condensed Statements of Earnings

        The before-tax effect of a derivative instrument and related hedged item in a fair value hedging relationship for the three and nine months ended July 31, 2010 and July 31, 2009 was as follows:

 
  Gain (Loss) Recognized in Income on Derivative and Related Hedged Item  
Derivative
Instrument
  Location   Three
months
ended
July 31,
2010
  Nine
months
ended
July 31,
2010
  Hedged Item   Location   Three
months
ended
July 31,
2010
  Nine
months
ended
July 31,
2010
 
 
   
  In millions
   
   
  In millions
 

Interest rate contracts

  Interest and other, net   $ 215   $ 242     Fixed-rate debt   Interest and other, net   $ (206 ) $ (230 )

 

 
  Gain (Loss) Recognized in Income on Derivative and Related Hedged Item  
Derivative
Instrument
  Location   Three
months
ended
July 31,
2009
  Nine
months
ended
July 31,
2009
  Hedged Item   Location   Three
months
ended
July 31,
2009
  Nine
months
ended
July 31,
2009
 
 
   
  In millions
   
   
  In millions
 

Interest rate contracts

  Interest and other, net   $ (94 ) $ 155     Fixed-rate debt   Interest and other, net   $ 91   $ (161 )

27



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 9: Financial Instruments (Continued)

        The before-tax effect of derivative instruments in cash flow and net investment hedging relationships for the three and nine months ended July 31, 2010 and July 31, 2009 was as follows:

 
  Gain (Loss)
Recognized in
OCI on Derivative
(Effective Portion)
  Gain (Loss) Reclassified from
Accumulated OCI Into Income
(Effective Portion)
  Gain Recognized in
Income on Derivative(1)
(Ineffective Portion
and Amount Excluded
from Effectiveness Testing)
 
 
  Three
months
ended
July 31,
2010
  Nine
months
ended
July 31,
2010
  Location   Three
months
ended
July 31,
2010
  Nine
months
ended
July 31,
2010
  Location   Three
months
ended
July 31,
2010
  Nine
months
ended
July 31,
2010
 
 
  In millions
   
  In millions
   
  In millions
 

Cash flow hedges:

                                             
 

Foreign exchange contracts

  $ 114   $ 769  

Net revenue

  $ 375   $ 433  

Net revenue

  $   $  
 

Foreign exchange contracts

    45     38  

Cost of products

    17     44  

Cost of products

         
 

Foreign exchange contracts

    (1 )   (1 )

Other operating expenses

    (1 )    

Other operating expenses

         
 

Foreign exchange contracts

    11     12  

Interest and other, net

         

Interest and other, net

         
 

Foreign exchange contracts

    (26 )   10  

Net revenue

    5     20  

Interest and other, net

    1     7  
                                   
   

Total cash flow hedges

  $ 143   $ 828       $ 396   $ 497       $ 1   $ 7  
                                   

Net investment hedges:

                                             
 

Foreign exchange contracts

  $ 25   $ (19 )

Interest and other, net

  $   $  

Interest and other, net

  $   $  
                                   

(1)
Amount of gain recognized in income on derivative represents a $1 million gain and $7 million gain related to the amount excluded from the assessment of hedge effectiveness in the three and nine months ended July 31, 2010, respectively.

28



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 9: Financial Instruments (Continued)

 
  Gain (Loss)
Recognized in
OCI on Derivative
(Effective Portion)
  Gain (Loss) Reclassified from
Accumulated OCI Into Income
(Effective Portion)
  Gain Recognized in
Income on Derivative(1)
(Ineffective Portion
and Amount Excluded
from Effectiveness Testing)
 
 
  Three
months
ended
July 31,
2009
  Nine
months
ended
July 31,
2009
  Location   Three
months
ended
July 31,
2009
  Nine
months
ended
July 31,
2009
  Location   Three
months
ended
July 31,
2009
  Nine
months
ended
July 31,
2009
 
 
  In millions
   
  In millions
   
  In millions
 

Cash flow hedges:

                                             
 

Foreign exchange contracts

  $ (612 ) $ (743 )

Net revenue

  $ (162 ) $ 713  

Net revenue

  $   $  
 

Foreign exchange contracts

    38     72  

Cost of products

    43     124  

Cost of products

         
 

Foreign exchange contracts

    5     (4 )

Other operating expenses

    (1 )   (5 )

Other operating expenses

         
 

Foreign exchange contracts

    (5 )   (6 )

Interest and other, net

    (2 )   (4 )

Interest and other, net

         
 

Foreign exchange contracts

    14     19  

Net revenue

    2     7  

Interest and other, net

    2     4  
                                   
   

Total cash flow hedges

  $ (560 ) $ (662 )     $ (120 ) $ 835       $ 2   $ 4  
                                   

Net investment hedges:

                                             
 

Foreign exchange contracts

  $ (96 ) $ (127 )

Interest and other, net

  $   $  

Interest and other, net

  $   $  
                                   

(1)
Amount of gain recognized in income on derivative represents a $2 million gain and a $4 million gain related to the amount excluded from the assessment of hedge effectiveness in the three and nine months ended July 31, 2009, respectively.

        HP expects to reclassify an estimated net accumulated other comprehensive gain of $42 million, net of taxes, to earnings in the next twelve months along with the earnings effects of the related forecasted transactions in association with cash flow hedges.

29



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 9: Financial Instruments (Continued)

        The before-tax effect of derivative instruments not designated as hedging instruments on the Consolidated Condensed Statements of Earnings for the three and nine months ended July 31, 2010 and July 31, 2009 was as follows:

 
  Gain (Loss) Recognized in Income on Derivative  
 
  Location   Three months
ended
July 31,
2010
  Nine months
ended
July 31,
2010
 
 
   
  In millions
 

Foreign exchange contracts

  Interest and other, net   $ (142 ) $ (205 )

Other derivatives

  Interest and other, net     15     17  

Interest rate contracts

  Interest and other, net         5  
               

Total

      $ (127 ) $ (183 )
               

 

 
  Gain (Loss) Recognized in Income on Derivative  
 
  Location   Three months
ended
July 31,
2009
  Nine months
ended
July 31,
2009
 
 
   
  In millions
 

Foreign exchange contracts

  Interest and other, net   $ (452 ) $ (663 )

Other derivatives

  Interest and other, net     11     20  

Interest rate contracts

  Interest and other, net     8     16  
               

Total

      $ (433 ) $ (627 )
               

    Other Financial Instruments

        For the balance of HP's financial instruments, accounts receivable, financing receivables, notes payable and short-term borrowings, accounts payable and other accrued liabilities, the carrying amounts approximate fair value due to their short maturities. The estimated fair value of HP's short- and long-term debt was approximately $20.2 billion at July 31, 2010, compared to a carrying value of $20.0 billion at that date. The estimated fair value of HP's short- and long-term debt was approximately $16.0 billion at October 31, 2009, compared to a carrying value of $15.8 billion at that date. The estimated fair value of the debt is based primarily on quoted market prices, as well as borrowing rates currently available to HP for bank loans with similar terms and maturities.

30



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 10: Financing Receivables and Operating Leases

        Financing receivables represent sales-type and direct-financing leases resulting from the placement of HP and third-party products. These receivables typically have terms from two to five years and are usually collateralized by a security interest in the underlying assets. Financing receivables also include billed receivables from operating leases. The components of net financing receivables, which are included in financing receivables and long-term financing receivables and other assets, were as follows:

 
  July 31,
2010
  October 31,
2009
 
 
  In millions
 

Minimum lease payments receivable

  $ 6,602   $ 6,413  

Allowance for doubtful accounts

    (122 )   (108 )

Unguaranteed residual value

    228     244  

Unearned income

    (571 )   (571 )
           

Financing receivables, net

    6,137     5,978  

Less current portion

    (2,799 )   (2,675 )
           

Amounts due after one year, net

  $ 3,338   $ 3,303  
           

        Equipment leased to customers under operating leases was $3.4 billion at July 31, 2010 and $3.0 billion at October 31, 2009 and is included in machinery and equipment. Accumulated depreciation on equipment under lease was $1.0 billion at July 31, 2010 and $0.9 billion at October 31, 2009.

Note 11: Guarantees

    Guarantees and Indemnifications

        In the ordinary course of business, HP may provide certain clients with subsidiary performance guarantees and/or financial performance guarantees, which may be backed by standby letters of credit or surety bonds. In general, HP would be liable for the amounts of these guarantees in the event that the nonperformance of HP or HP's subsidiaries permits termination of the related contract by the client, the likelihood of which HP believes is remote. HP believes that the company is in compliance with the performance obligations under all material service contracts for which there is a performance guarantee.

        HP has certain service contracts supported by client financing or securitization arrangements. Under specific circumstances involving nonperformance resulting in service contract termination or failure to comply with terms under the financing arrangement, HP would be required to acquire certain assets. HP considers the possibility of its failure to comply to be remote and the asset amounts involved to be immaterial.

        In the ordinary course of business, HP enters into contractual arrangements under which HP may agree to indemnify the third party to such arrangement from any losses incurred relating to the services they perform on behalf of HP or for losses arising from certain events as defined within the particular contract, which may include, for example, litigation or claims relating to past performance. Such indemnification obligations may not be subject to maximum loss clauses. Historically, payments made related to these indemnifications have been immaterial.

31



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 11: Guarantees (Continued)

    Warranty

        HP provides for the estimated cost of product warranties at the time it recognizes revenue. HP engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers; however, product warranty terms offered to customers, ongoing product failure rates, material usage and service delivery costs incurred in correcting a product failure, as well as specific product class failures outside of HP's baseline experience, affect the estimated warranty obligation. If actual product failure rates, repair rates or any other post sales support costs differ from these estimates, revisions to the estimated warranty liability would be required.

        The changes in HP's aggregate product warranty liabilities for the nine months ended July 31, 2010 were as follows:

 
  In millions  

Product warranty liability at October 31, 2009

  $ 2,409  

Accruals for warranties issued

    2,043  

Adjustments related to pre-existing warranties (including changes in estimates)

    (48 )

Settlements made (in cash or in kind)

    (1,928 )
       

Product warranty liability at July 31, 2010

  $ 2,476  
       

Note 12: Borrowings

    Notes Payable and Short-Term Borrowings

        Notes payable and short-term borrowings, including the current portion of long-term debt, were as follows:

 
  July 31, 2010   October 31, 2009  
 
  Amount
Outstanding
  Weighted-
Average
Interest
Rate
  Amount
Outstanding
  Weighted-
Average
Interest
Rate
 
 
  In millions
 

Commercial paper

  $ 5,173     0.3 % $ 294     1.2 %

Current portion of long-term debt

    2,204     2.3 %   1,143     1.0 %

Notes payable to banks, lines of credit and other

    465     2.8 %   413     2.0 %
                       

  $ 7,842         $ 1,850        
                       

        Notes payable to banks, lines of credit and other includes deposits associated with HP's banking-related activities of approximately $348 million and $326 million at July 31, 2010 and October 31, 2009, respectively.

32



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 12: Borrowings (Continued)

    Long-Term Debt

        Long-term debt was as follows:

 
  July 31,
2010
  October 31,
2009
 
 
  In millions
 

U.S. Dollar Global Notes

             
 

2002 Shelf Registration Statement:

             
   

$500 issued at discount to par at a price of 99.505% in June 2002 at 6.5%, due July 2012

  $ 499   $ 499  
 

2006 Shelf Registration Statement:

             
   

$600 issued at par in February 2007 at three-month USD LIBOR plus 0.11%, due March 2012

    600     600  
   

$900 issued at discount to par at a price of 99.938% in February 2007 at 5.25%, due March 2012

    900     900  
   

$500 issued at discount to par at a price of 99.694% in February 2007 at 5.4%, due March 2017

    499     499  
   

$1,000 issued at par in June 2007 at three-month USD LIBOR plus 0.06%, paid June 2010

        1,000  
   

$1,500 issued at discount to par at a price of 99.921% in March 2008 at 4.5%, due March 2013

    1,499     1,499  
   

$750 issued at discount to par at a price of 99.932% in March 2008 at 5.5%, due March 2018

    750     750  
   

$2,000 issued at discount to par at a price of 99.561% in December 2008 at 6.125%, due March 2014

    1,994     1,992  
   

$275 issued at par in February 2009 at three-month USD LIBOR plus 1.75%, due February 2011

    275     275  
   

$1,000 issued at discount to par at a price of 99.956% in February 2009 at 4.25%, due February 2012

    1,000     1,000  
   

$1,500 issued at discount to par at a price of 99.993% in February 2009 at 4.75%, due June 2014

    1,500     1,500  
 

2009 Shelf Registration Statement:

             
   

$750 issued at par in May 2009 at three-month USD LIBOR plus 1.05%, due May 2011

    750     750  
   

$1,000 issued at discount to par at a price of 99.967% in May 2009 at 2.25%, due May 2011

    1,000     1,000  
   

$250 issued at discount to par at a price of 99.984% in May 2009 at 2.95%, due August 2012

    250     250  
           

    11,516     12,514  
           

EDS Senior Notes

             
 

$1,100 issued June 2003 at 6.0%, due August 2013

    1,133     1,140  
 

$300 issued October 1999 at 7.45%, due October 2029

    315     315  
           

    1,448     1,455  
           

Other, including capital lease obligations, at 0.59%-8.63%, due in calendar year 2010-2024

    844     785  

Fair value adjustment related to hedged debt

    600     369  

Less: current portion

    (2,204 )   (1,143 )
           

Total long-term debt

  $ 12,204   $ 13,980  
           

33



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 12: Borrowings (Continued)

        As disclosed in Note 9 to the Consolidated Condensed Financial Statements in Item 1, HP uses interest rate swaps to mitigate the market risk exposures in connection with certain fixed interest global notes to achieve primarily U.S. dollar LIBOR-based floating interest expense. The table above does not reflect the interest rate swap impact on the interest rate.

        HP may redeem some or all of the Global Notes set forth in the above table at any time at the redemption prices described in the prospectus supplements relating thereto. The Global Notes are senior unsecured debt.

        In May 2009, HP filed a shelf registration statement (the "2009 Shelf Registration Statement") with the SEC to enable the company to offer for sale, from time to time, in one or more offerings, an unspecified amount of debt securities, common stock, preferred stock, depositary shares and warrants. The 2009 Shelf Registration Statement replaced other registration statements filed in March 2002 and May 2006.

        In May 2008, HP's Board of Directors approved an increase in the capacity of HP's U.S. commercial paper program by $10.0 billion to $16.0 billion. HP's subsidiaries are authorized to issue up to an additional $1.0 billion of commercial paper, of which $500 million of capacity is currently available to be used by Hewlett-Packard International Bank PLC, a wholly-owned subsidiary of HP, for its Euro Commercial Paper/Certificate of Deposit Programme.

        In October 2008, HP registered for the Commercial Paper Funding Facility ("CPFF") provided by the Federal Reserve Bank of New York. The CPFF program expired on February 1, 2010. HP did not issue any commercial paper under the CPFF program.

        HP has a $3.0 billion five-year credit facility expiring in May 2012. In February 2009, HP entered into a $3.5 billion 364-day credit facility. The February credit facility expired in February 2010, at which time HP entered into a new $3.5 billion 364-day credit facility maintaining the total amount available under its credit facilities at $6.5 billion. Commitment fees, interest rates and other terms of borrowing under the credit facilities vary based on HP's external credit ratings. The credit facilities are senior unsecured committed borrowing arrangements primarily to support the issuance of U.S. commercial paper. HP's ability to have a U.S. commercial paper outstanding balance that exceeds the $6.5 billion supported these credit facilities is subject to a number of factors, including liquidity conditions and business performance.

        HP also maintains uncommitted lines of credit from a number of financial institutions that are available through various foreign subsidiaries. The amount available for use as of July 31, 2010 was approximately $1.5 billion.

        Included in Other, including capital lease obligations, are borrowings that are collateralized by certain financing receivable assets. As of July 31, 2010, the carrying value of the assets approximated the carrying value of the borrowings of $106 million.

        As of July 31, 2010, HP had the capacity to issue an unspecified amount of additional debt securities, common stock, preferred stock, depositary shares and warrants under the 2009 Shelf Registration Statement. As of that date, HP also had up to approximately $12.8 billion of available borrowing resources, including $11.3 billion under its commercial paper programs, and approximately $1.5 billion under other programs.

34



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 12: Borrowings (Continued)

    Subsequent Event

        On September 8, 2010, HP commenced an offering of $3 billion of U.S. Dollar Global Notes under the 2009 Shelf Registration Statement. The Global Notes included floating rate and fixed rate notes at market rates with maturities ranging from two to five years from the date of issuance. The offering is expected to be completed on September 13, 2010.

Note 13: Income Taxes

    Provision for Taxes

        HP's effective tax rate was 19.0% and 17.8% for the three months ended July 31, 2010 and July 31, 2009, respectively, and 19.8% and 18.1% for the nine months ended July 31, 2010 and July 31, 2009, respectively. HP's effective tax rate increased due to a decline in the percentage of total earnings earned in lower-tax jurisdictions and a decline in its discrete tax benefits relative to consolidated pretax earnings. HP's effective tax rate generally differs from the U.S. federal statutory rate of 35% due to favorable tax rates associated with certain earnings from HP's operations in lower-tax jurisdictions throughout the world. HP has not provided U.S. taxes for all of such earnings because HP plans to reinvest some of those earnings indefinitely outside the United States.

        In the three and nine months ended July 31, 2010, HP recorded discrete items with a net tax benefit of $236 million and $375 million, respectively, decreasing the effective tax rate. These amounts included net tax benefits of $206 million and $340 million, respectively, from restructuring and acquisition charges; and net tax benefits of $30 million and $35 million, respectively, associated with adjustments to prior year foreign income tax accruals and credits, settlement of tax audit matters, valuation allowance releases, and other miscellaneous discrete items.

        In the three and nine months ended July 31, 2009, HP recorded discrete items with a net tax benefit of $273 million and $411 million respectively, decreasing the effective tax rate. These amounts included net tax benefits of $128 million and $248 million, respectively, from restructuring and acquisition charges; and net tax benefits of $145 million and $163 million, respectively, associated with a net tax benefit of $141 million for the adjustment to estimated fiscal 2008 tax accruals upon filing the 2008 U.S. federal income tax return, and other miscellaneous discrete items that resulted in a net tax benefit of $4 million and $22 million for the three and nine months ended July 31, 2009, respectively.

        As of July 31, 2010, the amount of gross unrecognized tax benefits was $2.0 billion, of which up to $980 million would affect HP's effective tax rate if realized. HP recognizes interest expense and penalties on unrecognized tax benefits within income tax expense. As of July 31, 2010 HP had accrued a net $170 million income tax payable for interest and penalties. In the three and nine months ended July 31, 2010, HP recognized net interest expense on tax deficiencies and overpayments, net of tax, of $40 million and $50 million, respectively.

        HP engages in continuous discussions and negotiations with tax authorities regarding tax matters in the various jurisdictions. HP does not expect complete resolution of any Internal Revenue Service ("IRS") audit cycle within the next 12 months. However, it is reasonably possible that certain federal, foreign and state tax issues may be concluded in the next 12 months, including issues involving transfer

35



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 13: Income Taxes (Continued)


pricing and other matters. Accordingly, HP believes it is reasonably possible that its existing unrecognized tax benefits may be reduced by an amount up to $290 million within the next 12 months.

        HP is subject to income tax in the United States and approximately 80 foreign countries and is subject to routine corporate income tax audits in many of these jurisdictions. In addition, HP is subject to numerous ongoing audits by state and foreign tax authorities. HP has received from the IRS Notices of Deficiency for its fiscal 1999, 2000, 2003, 2004 and 2005 tax years, and Revenue Agent's Reports ("RAR") for its fiscal 2001, 2002 and 2006 tax years. The IRS began an audit of HP's 2007 income tax returns in 2009, and began its audit of 2008 during 2010. With respect to major foreign and state tax jurisdictions, HP is no longer subject to tax authority examinations for years prior to 1999. HP believes that adequate accruals have been provided for all open tax years.

        The breakdown between current and long-term deferred tax assets and deferred tax liabilities was as follows:

 
  July 31,
2010
  October 31,
2009
 
 
  In millions
 

Current deferred tax assets

  $ 4,399   $ 4,979  

Current deferred tax liabilities

    (1 )   (83 )

Long-term deferred tax assets

    1,862     1,751  

Long-term deferred tax liabilities

    (3,443 )   (4,230 )
           

Total deferred tax assets net of deferred tax liabilities

  $ 2,817   $ 2,417  
           

Note 14: Stockholders' Equity

    Share Repurchase Program

        HP's share repurchase program authorizes both open market and private repurchase transactions. In the three and nine months ended July 31, 2010, HP executed share repurchases of 56 million shares and 144 million shares, respectively. For the three months ended July 31, 2010, repurchases of 55 million shares were settled for $2.6 billion. For the nine months ended July 31, 2010, repurchases of 144 million shares were settled for $7.1 billion, which included 3 million shares repurchased in transactions that were executed in fiscal 2009 but settled in the first quarter of fiscal 2010. HP had approximately 3 million shares repurchased in the third quarter of fiscal 2010 that will be settled in the fourth quarter of fiscal 2010. HP paid approximately $1.0 billion in connection with repurchases of approximately 28 million shares during the three months ended July 31, 2009 and paid approximately $3.0 billion in connection with repurchases of approximately 85 million shares in the first nine months of fiscal 2009.

        As of July 31, 2010, HP had remaining authorization of $4.9 billion for future share repurchases under the $8.0 billion repurchase authorization approved by HP's Board of Directors on November 19, 2009. On August 29, 2010, HP's Board of Directors authorized an additional $10.0 billion for future share repurchases.

36



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 14: Stockholders' Equity (Continued)

    Comprehensive Income

        The changes in the components of OCI, net of taxes, were as follows:

 
  Three months ended
July 31
 
 
  2010   2009  
 
  In millions
 

Net earnings

  $ 1,773   $ 1,671  

Net change in unrealized gains on available-for-sale securities:

             
 

Change in net unrealized gains, net of tax of $1 million in 2010 and in 2009

    2     2  
           

    2     2  
           

Net change in unrealized gains (losses) on cash flow hedges:

             
 

Unrealized gains (losses) recognized in OCI, net of tax of $58 million in 2010 and net of tax benefit of $209 million in 2009

    85     (351 )
 

(Gains) losses reclassified into income, net of tax of $145 million in 2010 and net of tax benefit of $44 million in 2009

    (251 )   76  
           

    (166 )   (275 )
           

Net change in cumulative translation adjustment, net of tax of $18 million in 2010 and $189 million in 2009

    (53 )   423  

Net change in unrealized components of defined benefit plans, net of tax of $5 million in 2010 and net of tax benefit of $30 million in 2009

    32     (20 )
           

Comprehensive income

  $ 1,588   $ 1,801  
           

37



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 14: Stockholders' Equity (Continued)

 

 
  Nine months ended
July 31
 
 
  2010   2009  
 
  In millions
 

Net earnings

  $ 6,223   $ 5,248  

Net change in unrealized gains (losses) on available-for-sale securities:

             
 

Change in net unrealized gains, net of tax of $6 million in 2010 and $1 million in 2009

    11     6  
 

Net unrealized gains reclassified into income with no tax effect in 2009

        (1 )
           

    11     5  
           

Net change in unrealized gains (losses) on cash flow hedges:

             
 

Unrealized gains (losses) recognized in OCI, net of tax of $296 million in 2010 and net of tax benefit of $242 million in 2009

    532     (420 )
 

(Gains) reclassified into income, net of tax of $176 million in 2010 and $296 million in 2009

    (321 )   (539 )
           

    211     (959 )
           

Net change in cumulative translation adjustment, net of tax of $16 million in 2010 and $180 million in 2009

    (42 )   178  

Net change in unrealized components of defined benefit plans, net of tax of $73 million in 2010 and $24 million in 2009

    127     45  
           

Comprehensive income

  $ 6,530   $ 4,517  
           

        The components of accumulated other comprehensive loss, net of taxes, were as follows:

 
  July 31,
2010
  October 31,
2009
 
 
  In millions
 

Net unrealized gain on available-for-sale securities

  $ 15   $ 4  

Net unrealized gain (loss) on cash flow hedges

    42     (169 )

Cumulative translation adjustment

    (501 )   (459 )

Unrealized components of defined benefit plans

    (2,496 )   (2,623 )
           

Accumulated other comprehensive loss

  $ (2,940 ) $ (3,247 )
           

Note 15: Retirement and Post-Retirement Benefit Plans

    Modifications to Defined Contribution Plans

        HP offers various defined contribution plans for U.S. and non-U.S. employees. As disclosed in our Consolidated Financial Statements for the fiscal year ended October 31, 2009, prior to April 1, 2009, HP matched employee contributions to the U.S. HP 401(k) Plan with cash contributions up to a maximum of 6% of eligible compensation for U.S. employees hired prior to August 1, 2008 and up to a maximum of 4% of eligible compensation for U.S. employees hired on or after August 1, 2008. Further, effective from January 1, 2009 through March 31, 2009, U.S. employees participating in the EDS 401(k) Plan were eligible for a 4% HP matching contribution on eligible compensation.

38



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 15: Retirement and Post-Retirement Benefit Plans (Continued)

        Effective April 1, 2009, HP matching contributions under both the U.S. HP 401(k) Plan and the EDS 401(k) Plan were changed to a quarterly, discretionary, performance-based match of up to a maximum of 4% of eligible compensation for all U.S. employees, which is determined each fiscal quarter based on business results. HP matching contributions vary from 0% to 100% of the maximum 4% match, based on such factors as quarterly earnings, market share growth, and performance relative to market and economic conditions. HP's matching contributions for each of the three quarters in the nine months ended July 31, 2010 were 100% of the maximum 4% match.

        HP's net pension and post-retirement benefit costs were as follows:

 
  Three months ended July 31  
 
  U.S.
Defined
Benefit Plans
  Non-U.S.
Defined
Benefit Plans
  Post-
Retirement
Benefit Plans
 
 
  2010   2009   2010   2009   2010   2009  
 
  In millions
 

Service cost

  $ 1   $ 7   $ 80   $ 79   $ 3   $ 3  

Interest cost

    144     148     157     159     11     18  

Expected return on plan assets

    (166 )   (133 )   (181 )   (170 )   (9 )   (8 )

Amortization and deferrals:

                                     
 

Actuarial loss (gain)

    7     (19 )   51     18     2     2  
 

Prior service benefit

            (3 )   (2 )   (21 )   (20 )
                           

Net periodic benefit (gain) cost

    (14 )   3     104     84     (14 )   (5 )

Settlement loss (gain)

    4         (2 )            

Special termination benefits

            7     1          
                           

Net benefit (gain) cost

  $ (10 ) $ 3   $ 109   $ 85   $ (14 ) $ (5 )
                           

 

 
  Nine months ended July 31  
 
  U.S.
Defined
Benefit Plans
  Non-U.S.
Defined
Benefit Plans
  Post-
Retirement
Benefit Plans
 
 
  2010   2009   2010   2009   2010   2009  
 
  In millions
 

Service cost

  $ 1   $ 20   $ 248   $ 231   $ 9   $ 10  

Interest cost

    433     444     494     458     35     53  

Expected return on plan assets

    (497 )   (399 )   (567 )   (493 )   (24 )   (24 )

Amortization and deferrals:

                                     
 

Actuarial loss (gain)

    21     (53 )   160     52     12     5  
 

Prior service benefit

            (7 )   (6 )   (64 )   (59 )
                           

Net periodic benefit (gain) cost

    (42 )   12     328     242     (32 )   (15 )

Settlement loss (gain)

    4     (1 )   (2 )            

Curtailment gain

                    (13 )   (2 )

Special termination benefits

            18     4          
                           

Net benefit (gain) cost

  $ (38 ) $ 11   $ 344   $ 246   $ (45 ) $ (17 )
                           

39



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 15: Retirement and Post-Retirement Benefit Plans (Continued)

    Employer Contributions and Funding Policy

        HP previously disclosed in its Consolidated Financial Statements for the fiscal year ended October 31, 2009 that it expected to contribute approximately $745 million to its pension plans and approximately $30 million to cover benefit payments to U.S. non-qualified plan participants during 2010. In addition, HP expected to pay approximately $45 million to cover benefit claims for HP's post-retirement benefit plans. HP's funding policy is to contribute cash to its pension plans so that it meets at least the minimum contribution requirements, as established by local government, funding and taxing authorities.

        As of July 31, 2010, HP has made $653 million of contributions to its pension plans, paid $15 million to cover benefit payments to U.S. non-qualified plan participants, and paid $21 million to cover benefit claims under post-retirement benefit plans. HP presently anticipates making additional contributions of approximately $92 million to its pension plans and approximately $15 million to its U.S. non-qualified plan participants and expects to pay up to $24 million to cover benefit claims under post-retirement benefit plans during the remainder of fiscal 2010. HP's pension and other post-retirement benefit costs and obligations are dependent on various assumptions. Differences between expected and actual returns on investments will be reflected as unrecognized gains or losses, and such gains or losses will be amortized and recorded in future periods. Poor financial performance of asset markets in any year could lead to increased contributions in certain countries and increased future pension plan expense. Asset gains or losses are determined at the measurement date and amortized over the remaining service life or life expectancy of plan participants. HP's next expected measurement date is October 31, 2010.

Note 16: Litigation and Contingencies

        HP is involved in lawsuits, claims, investigations and proceedings, including those identified below, consisting of intellectual property, commercial, securities, employment, employee benefits and environmental matters that arise in the ordinary course of business. HP records a provision for a liability when management believes that it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. HP believes it has adequate provisions for any such matters. HP reviews these provisions at least quarterly and adjusts these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. Based on its experience, HP believes that any damage amounts claimed in the specific matters discussed below are not a meaningful indicator of HP's potential liability. Litigation is inherently unpredictable. However, HP believes that it has valid defenses with respect to legal matters pending against it. Nevertheless, it is possible that cash flows or results of operations could be materially affected in any particular period by the unfavorable resolution of one or more of these contingencies or because of the diversion of management's attention and the creation of significant expenses.

Litigation, Proceedings and Investigations

        Copyright levies. As described below, proceedings are ongoing or have been concluded involving HP in certain European Union ("EU") member countries, including litigation in Germany and Belgium, seeking to impose or modify levies upon equipment (such as multifunction devices ("MFDs"), personal

40



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 16: Litigation and Contingencies (Continued)


computers ("PCs") and printers) and alleging that these devices enable producing private copies of copyrighted materials. The levies are generally based upon the number of products sold and the per-product amounts of the levies, which vary. Some EU member countries that do not yet have levies on digital devices are expected to implement similar legislation to enable them to extend existing levy schemes, while some other EU member countries are expected to limit the scope of levy schemes and applicability in the digital hardware environment. HP, other companies and various industry associations have opposed the extension of levies to the digital environment and have advocated alternative models of compensation to rights holders.

        VerwertungsGesellschaft Wort ("VG Wort"), a collection agency representing certain copyright holders, instituted legal proceedings against HP in June 2001 in Germany relating to whether and to what extent German copyright levies for photocopiers should be imposed on MFDs. On July 6, 2005, the Court of Appeals in Stuttgart Germany ordered HP to pay VG Wort levies based on the published tariffs for photocopiers in Germany (which range from €38.35 to €613.56 per unit), plus interest, on MFDs sold in Germany up to December 2001, and the German Federal Supreme Court later affirmed that ruling on appeal. HP subsequently appealed the decision by filing a claim with the German Federal Constitutional Court, which declined to hear HP's appeal, thus concluding these proceedings. HP has made the payments required under the court ruling.

        On September 26, 2005, VG Wort filed an additional lawsuit against HP in the Stuttgart Civil Court in Stuttgart, Germany seeking assurance of full payment of levies on MFD units sold in Germany between 1997 and 2001, as well as for MFDs sold from 2002 onwards. On March 25, 2009, the German Association for Information Technology, Telecommunications and New Media e.V. entered into a settlement agreement with VG Wort and Verwertungsgesellschaft Bild-Kunst, another collection agency representing copyright holders ("VG Bild-Kunst"), that provides for the payment of levies on MFDs sold from 2002 through 2007. The levies vary from approximately €13 to €307 per unit depending on the type of device, the date sold and the copy speed and are subject to reduction if VG Wort or VG Bild-Kunst grants more favorable rates in the future to parties within Germany that are not covered by the settlement. HP has acceded to the settlement and paid all amounts due thereunder.

        In July 2004, VG Wort filed a separate lawsuit against HP in the Stuttgart Civil Court seeking levies on printers. On December 22, 2004, the court held that HP is liable for payments regarding all printers using ASCII code sold in Germany but did not determine the amount payable per unit. HP appealed this decision in January 2005 to the Stuttgart Court of Appeals. On May 11, 2005, the Stuttgart Court of Appeals issued a decision confirming that levies are due. On June 6, 2005, HP filed an appeal to the German Federal Supreme Court in Karlsruhe. On December 6, 2007, the German Federal Supreme Court issued a judgment that printers are not subject to levies under the existing law. The court issued a written decision on January 25, 2008, and VG Wort subsequently filed an application with the German Federal Supreme Court under Section 321a of the German Code of Civil Procedure contending that the court did not consider their arguments. On May 9, 2008, the German Federal Supreme Court denied VG Wort's application. In addition, VG Wort has appealed the decision by filing a claim with the German Federal Constitutional Court challenging the ruling that printers are not subject to levies. HP and the German Association for Information Technology, Telecommunications and New Media e.V. ("BITKOM") have responded to VG Wort's claim, and the parties are awaiting a decision by the court as to whether it will accept the claim for judicial review.

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        In September 2003, VG Wort filed a lawsuit against Fujitsu Siemens Computer GmbH ("FSC") in the Munich Civil Court in Munich, Germany seeking levies on PCs. This is an industry test case in Germany, and HP has agreed not to object to the delay if VG Wort sues HP for such levies on PCs following a final decision against FSC. On December 23, 2004, the Munich Civil Court held that PCs are subject to a levy and that FSC must pay €12 plus compound interest for each PC sold in Germany since March 2001. FSC appealed this decision in January 2005 to the Munich Court of Appeals. On December 15, 2005, the Munich Court of Appeals affirmed the Munich Civil Court decision. FSC filed an appeal with the German Federal Supreme Court in February 2006. On October 2, 2008, the German Federal Supreme Court issued a judgment that PCs were not photocopiers within the meaning of the German copyright law that was in effect until December 31, 2007 and, therefore, not subject to the levies on photocopiers established by that law. VG Wort has filed a claim with the German Federal Constitutional Court challenging that ruling. FSC and BITKOM have responded to VG Wort's claim, and the parties are awaiting a decision by the court as to whether it will accept the claim for judicial review.

        ZPU, a joint association of various German collection societies, instituted legal proceedings against HP in 2005 demanding reporting of every PC sold by HP in Germany from January 2002 through December 2005 and seeking a levy of €18.42 plus tax for each PC sold during that period. On December 23, 2009, the German industry association Bundesverband Computerhersteller ("BCH") entered into a settlement agreement with ZPU that provides for the payment of €3.15 per unit for PCs sold in Germany between 2002 and 2003 and €6.30 per unit for PCs sold in Germany between 2005 and 2007. The settlement is only valid for those companies who are members of BCH and accede to the settlement and who also agree to pay a levy of €12.15 per unit for PCs without a built-in CD-R or DVD-R and €13.65 per unit for PCs with a built-in CD-R or DVD-R sold in Germany between 2008 and 2010. HP is a member of BCH and has acceded to the settlement and paid all amounts due thereunder.

        Reprobel, a cooperative society with the authority to collect and distribute the remuneration for reprography to Belgian copyright holders, requested HP by extra-judicial means to amend certain copyright levy declarations submitted for inkjet MFDs sold in Belgium from January 2005 to December 2009 to enable it to collect copyright levies calculated based on the generally higher copying speed when the MFDs are operated in draft print mode rather than when operated in normal print mode. In March 2010, HP filed a lawsuit against Reprobel in the French-speaking chambers of the Court of First Instance of Brussels seeking a declaratory judgment that no copyright levies are payable on sales of MFDs in Belgium or, alternatively, that copyright levies payable on such MFDs must be assessed based on the copying speed when operated in the normal print mode set by default in the device. The schedule for the court proceedings has not yet been determined, and no decision from the court is expected before 2011.

        Based on industry opposition to the extension of levies to digital products, HP's assessments of the merits of various proceedings and HP's estimates of the units impacted and levies, HP has accrued amounts that it believes are adequate to address the matters described above. However, the ultimate resolution of these matters and the associated financial impact on HP, including the number of units impacted, the amount of levies imposed and the ability of HP to recover such amounts through increased prices, remains uncertain.

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(Unaudited)

Note 16: Litigation and Contingencies (Continued)

        Skold, et al. v. Intel Corporation and Hewlett-Packard Company is a lawsuit in which HP was joined on June 14, 2004 that is pending in state court in Santa Clara County, California. The lawsuit alleges that HP (along with Intel) misled the public by suppressing and concealing the alleged material fact that systems that use the Intel Pentium 4 processor are less powerful and slower than systems using the Intel Pentium III processor and processors made by a competitor of Intel. The plaintiffs seek unspecified damages, restitution, attorneys' fees and costs, and certification of a nationwide class. On February 27, 2009, the court denied with prejudice plaintiffs' motion for nationwide class certification for a third time. The plaintiffs have appealed the court's decision.

        Inkjet Printer Litigation.    As described below, HP is involved in several lawsuits claiming breach of express and implied warranty, unjust enrichment, deceptive advertising and unfair business practices where the plaintiffs have alleged, among other things, that HP employed a "smart chip" in certain inkjet printing products in order to register ink depletion prematurely and to render the cartridge unusable through a built-in expiration date that is hidden, not documented in marketing materials to consumers, or both. The plaintiffs have also contended that consumers received false ink depletion warnings and that the smart chip limits the ability of consumers to use the cartridge to its full capacity or to choose competitive products.

    A consolidated lawsuit captioned In re HP Inkjet Printer Litigation is pending in the United States District Court for the Northern District of California where the plaintiffs are seeking class certification, restitution, damages (including enhanced damages), injunctive relief, interest, costs, and attorneys' fees. On January 4, 2008, the court heard plaintiffs' motions for class certification and to add a class representative and HP's motion for summary judgment. On July 25, 2008, the court denied all three motions. On March 30, 2009, the plaintiffs filed a renewed motion for class certification. A hearing on the plaintiffs' motion for class certification scheduled for April 9, 2010 was postponed.

    A lawsuit captioned Blennis v. HP was filed on January 17, 2007 in the United States District Court for the Northern District of California where the plaintiffs are seeking class certification, restitution, damages (including enhanced damages), injunctive relief, interest, costs, and attorneys' fees. A class certification hearing was scheduled for May 21, 2010 but was taken off of the calendar.

    A lawsuit captioned Rich v. HP was filed against HP on May 22, 2006 in the United States District Court for the Northern District of California. The suit alleges that HP designed its color inkjet printers to unnecessarily use color ink in addition to black ink when printing black and white images and text. The plaintiffs are seeking to certify a nationwide injunctive class and a California-only damages class. A class certification hearing was scheduled for May 7, 2010 but was taken off of the calendar.

    Four class actions against HP and its subsidiary, Hewlett-Packard (Canada) Co., are pending in Canada, one commenced in British Columbia in February 2006, two commenced in Quebec in April 2006 and May 2006, respectively, and one commenced in Ontario in June 2006, where the plaintiffs are seeking class certification, restitution, declaratory relief, injunctive relief and unspecified statutory, compensatory and punitive damages. In March 2010, one of the Quebec cases was voluntarily dismissed by the plaintiff.

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Note 16: Litigation and Contingencies (Continued)

        On August 25, 2010, HP and the plaintiffs in In re HP Inkjet Printer Litigation, Blennis v. HP and Rich v. HP entered into an agreement to settle those lawsuits on behalf of the proposed classes, which agreement is subject to approval of the court before it becomes final. Under the terms of the proposed settlement, the lawsuits will be consolidated, and eligible class members will each have the right to obtain e-credits not to exceed $5 million in the aggregate for use in purchasing printers or printer supplies through HP's website. As part of the proposed settlement, HP also agreed to provide class members with additional information regarding HP inkjet printer functionality and to change the content of certain software and user guide messaging provided to users regarding the life of inkjet printer cartridges. In addition, class counsel and the class representatives will be paid attorneys' fees and expenses and stipends in an amount that is yet to be approved by the court.

        Baggett v. HP is a consumer class action filed against HP on June 6, 2007 in the United States District Court for the Central District of California alleging that HP employs a technology in its LaserJet color printers whereby the printing process shuts down prematurely, thus preventing customers from using the toner that is allegedly left in the cartridge. The plaintiffs also allege that HP fails to disclose to consumers that they will be unable to utilize the toner remaining in the cartridge after the printer shuts down. The complaint seeks certification of a nationwide class of purchasers of all HP LaserJet color printers and seeks unspecified damages, restitution, disgorgement, injunctive relief, attorneys' fees and costs. On September 29, 2009, the court granted HP's motion for summary judgment against the named plaintiff and denied plaintiff's motion for class certification as moot. On November 3, 2009, the court entered judgment against the named plaintiff. On November 17, 2009, plaintiff filed an appeal of the court's summary judgment ruling with the United States Court of Appeals for the Ninth Circuit. On August 25, 2010, HP and the plaintiff entered into an agreement to settle the lawsuit on behalf of the proposed class, which agreement is subject to approval of the court before it becomes final. Under the terms of the proposed settlement, eligible class members will each have the right to obtain e-credits not to exceed $5 million in the aggregate for use in purchasing printers or printer supplies through HP's website. In addition, class counsel and the class representative will be paid attorneys' fees and expenses and stipends in an amount that is yet to be approved by the court.

        Fair Labor Standards Act Litigation.    HP is involved in several lawsuits in which the plaintiffs are seeking unpaid overtime compensation and other damages based on allegations that various employees of EDS or HP have been misclassified as exempt employees under the Fair Labor Standards Act and/or in violation of the California Labor Code or other state laws. Those matters include the following:

    Cunningham and Cunningham, et al. v. Electronic Data Systems Corporation is a purported collective action filed on May 10, 2006 in the U.S. District Court for the Southern District of New York claiming that current and former EDS employees involved in installing and/or maintaining computer software and hardware were misclassified as exempt employees. Another purported collective action, Steavens, et al. v. Electronic Data Systems Corporation, which was filed on October 23, 2007, is also now pending in the same court alleging similar facts. The Steavens case has been consolidated for pretrial purposes with the Cunningham case. A third purported collective action, Azar v. Electronic Data Systems Corporation, which was filed in the same court on February 20, 2009, has been settled. Under the terms of the Azar settlement, HP agreed to pay an amount that is immaterial to HP.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 16: Litigation and Contingencies (Continued)

    Heffelfinger, et al. v. Electronic Data Systems Corporation is a class action filed in November 2006 in California Superior Court claiming that certain EDS information technology workers in California were misclassified as exempt employees. The case was subsequently transferred to the U.S. District Court for the Central District of California, which, on January 7, 2008, certified a class of information technology workers in California. On June 6, 2008, the court granted the defendant's motion for summary judgment. The plaintiffs subsequently filed an appeal with the U.S. Court of Appeals for the Ninth Circuit, which is pending. Two other purported class actions originally filed in California Superior Court, Karlbom, et al. v. Electronic Data Systems Corporation, which was filed on March 16, 2009, and George, et al. v. Electronic Data Systems Corporation, which was filed on April 2, 2009, allege similar facts. The Karlbom case is pending in San Diego County Superior Court, and the George case is pending in the U.S. District Court for the Southern District of New York, and has been consolidated for pretrial purposes with the Cunningham and Steavens cases.

        The United States of America, ex rel. Norman Rille and Neal Roberts v. Hewlett-Packard Company, et al. In 2004, two private individuals filed a civil "qui tam" complaint under the False Claims Act in the United States District Court for the Eastern District of Arkansas containing generalized allegations that HP and several other companies participated in an industry-wide practice of using partnership and alliance programs to make improper payments and cause the submission of false claims in connection with contracts to provide products and services to the federal government. On April 12, 2007, the U.S. Department of Justice intervened in the qui tam action and filed a complaint against HP (and several other companies in separate actions) on behalf of the United States containing allegations that HP violated the False Claims Act and the Anti-Kickback Act of 1986 by providing millions of dollars in kickbacks to its alliance partners, including "influencer fees" and "new business opportunity rebates." The U.S. complaint further alleged that HP violated the False Claims Act and the Anti-Kickback Act, breached its federal government contracts, induced the federal government to make payments to HP that HP was not entitled to receive under those contracts, and was unjustly enriched by expressly or impliedly making false statements, records or certifications to the federal government that it complied with and would continue to comply with the Anti-Kickback Act and by submitting claims to the government that allegedly were inflated because they included the amounts of the influencer fees and new business opportunity rebates. The U.S. complaint sought treble damages plus civil penalties in connection with the alleged violations of the False Claims Act, double damages plus civil penalties in connection with the alleged violations of the Anti-Kickback Act and disgorgement of profits earned in connection with the breach of contract and unjust enrichment claims. On August 30, 2010, HP reached a settlement with the U.S. Department of Justice to resolve all of the allegations associated with the qui tam action. Under the terms of the settlement, HP will pay $55 million to the United States plus an additional amount in attorneys' fees to the private individuals' counsel. HP agreed to the settlement, without any admission of wrongdoing, in order to resolve the allegations in full.

        India Directorate of Revenue Intelligence Proceedings. As described below, Hewlett-Packard India Sales Private Ltd ("HPI"), a subsidiary of HP, and certain current and former HP employees have received show cause notices from the India Directorate of Revenue Intelligence (the "DRI") alleging underpayment of certain customs duties:

    On April 30 and May 10, 2010, the DRI issued show cause notices to HPI, seven current HP employees and one former HP employee alleging that HP has underpaid customs duties while

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 16: Litigation and Contingencies (Continued)

      importing products and spare parts into India and seeking to recover an aggregate of approximately $370 million, plus penalties. On June 2, 2010, the DRI issued an additional show cause notice to HPI and three current HPI employees alleging that HP failed to pay customs duties on the appropriate value of recovery CDs containing Microsoft operating systems and seeking to recover approximately $5.3 million, plus penalties. HP has deposited a total of approximately $16.7 million with the DRI and agreed to post a provisional bond in exchange for the DRI's agreement not to seize HP products and spare parts and not to interrupt the transaction of business by HP in India.

    On June 17, 2010, the DRI issued show cause notices to HPI and two current HPI employees regarding non-inclusion of the value of software contained in the products imported from third party original design manufacturers. The total amount of the alleged unpaid customs duties relating to such software, including the interest proposed to be demanded under these notices, is approximately $130,000, which amount HPI has deposited with the DRI. The DRI is also seeking to impose penalties.

HP intends to contest each of the show cause notices through the judicial process. HP is in the process of responding to the show cause notices.

        Russia GPO and Related Investigations. The German Public Prosecutor's Office ("German PPO") has been conducting an investigation into allegations that current and former employees of HP engaged in bribery, embezzlement and tax evasion relating to a transaction between Hewlett-Packard ISE GmbH in Germany, a former subsidiary of HP, and the Chief Public Prosecutor's Office of the Russian Federation. The €35 million transaction, which was referred to as the Russia GPO deal, spanned 2001 to 2006 and was for the delivery and installation of an IT network. The German PPO has recently requested information on several non-public sector transactions entered into by HP and its subsidiaries on or around 2006 involving one or more persons also involved in the Russia GPO deal.

        The U.S. Department of Justice and the SEC have also been conducting an investigation into the Russia GPO deal and potential violations of the Foreign Corrupt Practices Act ("FCPA"). Under the FCPA, a person or an entity could be subject to fines, civil penalties of up to $500,000 per violation and equitable remedies, including disgorgement and other injunctive relief. In addition, criminal penalties could range from the greater of $2 million per violation or twice the gross pecuniary gain or loss from the violation. The U.S. enforcement authorities have recently requested information from HP relating to certain governmental and quasi-governmental transactions in Russia and in the Commonwealth of Independent States subregion dating back to 2000.

        HP is cooperating with these investigating agencies.

        Leak Investigation Proceedings. As described below, HP is or has been the subject of various governmental inquiries concerning the processes employed in an investigation into leaks of HP confidential information to members of the media that concluded in May 2006:

    In August 2006, HP was informally contacted by the Attorney General of the State of California requesting information concerning the processes employed in the leak investigation. On December 7, 2006, HP announced that it entered into an agreement with the California Attorney General to resolve civil claims arising from the leak investigation, including a claim made by the California Attorney General in a Santa Clara County Superior Court action filed

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(Unaudited)

Note 16: Litigation and Contingencies (Continued)

      on December 7, 2006, that HP committed unfair business practices under California law in connection with the leak investigation. As a result of this agreement, which includes an injunction, the California Attorney General will not pursue civil claims against HP or its current and former directors, officers and employees. Under the terms of the agreement, HP paid a total of $14.5 million and agreed to implement and maintain for five years a series of measures designed to ensure that HP's corporate investigations are conducted in accordance with California law and the company's high ethical standards. Of the $14.5 million, $13.5 million has been used to create a Privacy and Piracy Fund to assist California prosecutors in investigating and prosecuting consumer privacy and information piracy violations, $650,000 was used to pay statutory damages and $350,000 reimbursed the California Attorney General's office for its investigation costs. There was no finding of liability against HP as part of the settlement.

    Beginning in September 2006, HP received requests from the Committee on Energy and Commerce of the U.S. House of Representatives (the "Committee") for records and information concerning the leak investigation, securities transactions by HP officers and directors, including an August 25, 2006, securities transaction by Mark Hurd, HP's former Chairman and Chief Executive Officer, and related matters. HP has responded to those requests. In addition, Mr. Hurd voluntarily gave testimony to the Committee regarding the leak investigation on September 28, 2006.

    In September 2006, HP was informally contacted by the U.S. Attorney for the Northern District of California requesting similar information concerning the processes employed in the leak investigation. HP has responded to that request.

    Beginning in September 2006, HP has received requests from the Division of Enforcement of the Securities and Exchange Commission for records and information and interviews with current and former HP directors and officers relating to the leak investigation, the resignation of Thomas J. Perkins from HP's Board of Directors, HP's May 22, 2006 and September 6, 2006 filings with the SEC on Form 8-K, stock repurchases by HP and securities transactions by its officers and directors that occurred between May 1 and October 1, 2006, and HP's policies, practices and approval of securities transactions. In May 2007, HP consented to the entry of an order by the SEC ordering HP to cease and desist from committing or causing violations of the public reporting requirements of the Securities Exchange Act of 1934, as amended. HP has been advised by the staff of the Division of Enforcement that the staff has completed its investigation and does not intend to recommend that any other SEC enforcement action be brought in connection with these matters.

    In September 2006, HP received a request from the U.S. Federal Communications Commission for records and information relating to the processes employed in the leak investigation. HP has responded to that request.

        In addition, four stockholder derivative lawsuits have been filed in California purportedly on behalf of HP stockholders seeking to recover damages for alleged breach of fiduciary duty and to require HP to improve its corporate governance and internal control procedures as a result of the activities of the leak investigation: Staehr v. Dunn, et al. was filed in Santa Clara County Superior Court on September 18, 2006; Worsham v. Dunn, et al. was filed in Santa Clara County Superior Court on September 14, 2006; Tansey v. Dunn, et al. was filed in Santa Clara County Superior Court on

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(Unaudited)

Note 16: Litigation and Contingencies (Continued)


September 20, 2006; and Hall v. Dunn, et al. was filed in Santa Clara County Superior Court on September 25, 2006. On October 19, 2006, the Santa Clara County Superior Court consolidated the four California cases under the caption In re Hewlett-Packard Company Derivative Litigation. The consolidated complaint filed on November 19, 2006, also seeks to recover damages in connection with sales of HP stock alleged to have been made by certain current and former HP officers and directors while in possession of material non-public information. Two additional stockholder derivative lawsuits, Pifko v. Babbio, et al., filed on September 19, 2006, and Gross v. Babbio, et al., filed on November 21, 2006, were filed in Chancery Court, County of New Castle, Delaware; both seek to recover damages for alleged breaches of fiduciary duty and to obtain an order instructing the defendants to refrain from further breaches of fiduciary duty and to implement corrective measures that will prevent future occurrences of the alleged breaches of fiduciary duty. On January 24, 2007, the Delaware court consolidated the two cases under the caption In re Hewlett-Packard Company Derivative Litigation and subsequently stayed the proceedings, as the parties had reached a tentative settlement. The HP Board of Directors appointed a Special Litigation Committee consisting of independent Board members authorized to investigate, review and evaluate the facts and circumstances asserted in these derivative matters and to determine how HP should proceed in these matters. On December 14, 2007, HP and the plaintiffs in the California and Delaware derivative actions entered into an agreement to settle those lawsuits. Under the terms of the settlement, HP agreed to continue certain corporate governance changes until December 31, 2012 and to pay the plaintiffs' attorneys' fees. The California court granted final approval to the settlement on March 11, 2008 and subsequently granted plaintiffs' counsel's fee application and dismissed the action. On June 12, 2008, the Delaware court granted final approval to the settlement and the plaintiffs' application for attorneys' fees and also dismissed the action. Because neither the dismissal of the California nor the Delaware derivative action was thereafter appealed, both cases are now concluded.

Concluded Litigation

        Sky Subscribers Services Limited and British Sky Broadcasting Limited v. EDS and EDS Limited (UK) is a lawsuit filed on August 17, 2004 by Sky Subscribers Services Limited and British Sky Broadcasting Limited against Electronic Data Systems Corporation ("EDS"), a company that HP acquired in August 2008, and EDS Limited (UK) ("EDS UK"), one of EDS's subsidiaries, alleging deceit, negligent misrepresentation, negligent misstatement and breach of contract. The claims arose out of a customer relationship management project that was awarded to EDS in 2000, the principal objective of which was to develop a customer call center in Scotland. EDS's main role in the project was as systems integrator. On November 12, 2004, EDS and EDS UK filed their defense and counterclaim denying the claims and seeking damages for monies owed under the contract. The trial of this action commenced on October 15, 2007, and final arguments concluded on July 30, 2008. At trial, the plaintiffs claimed damages in excess of £700 million, plus interest and costs, and EDS and EDS UK counterclaimed for damages of approximately £5 million. On January 26, 2010, the court issued a decision finding EDS UK liable to the plaintiffs for deceit in one area of the claim, for negligent misrepresentation and negligent misstatement in another area of the claim, and for breach of contract. The court dismissed all of plaintiffs' other claims. In February 2010, HP made a voluntary interim payment to the plaintiffs of £200 million. On March 1, 2010, the court ordered HP to make an additional interim payment to the plaintiffs of £70 million. In June 2010, the parties settled the litigation between them and all related

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(Unaudited)

Note 16: Litigation and Contingencies (Continued)


claims for a total amount of £318 million, inclusive of interest and costs. As a result of the settlement, HP has made a final payment to the plaintiffs of £48 million.

        On December 27, 2001, Cornell University and the Cornell Research Foundation, Inc. filed a complaint, amended on September 6, 2002, against HP in United States District Court for the Northern District of New York alleging that HP's PA-RISC 8000 family of microprocessors, and servers and workstations incorporating those processors, infringe a patent assigned to Cornell Research Foundation, Inc. that describes a way of executing microprocessor instructions. The complaint sought declaratory and injunctive relief and unspecified damages. In May 2010, the parties entered into a settlement agreement pursuant to which HP paid the plaintiffs an aggregate of $75 million in exchange for the settlement of all claims brought against HP relating to the patent at issue in the litigation.

Environmental

        HP is subject to various federal, state, local and foreign laws and regulations concerning environmental protection, including laws addressing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, the cleanup of contaminated sites, the content of its products and the recycling, treatment and disposal of its products including batteries. In particular, HP faces increasing complexity in its product design and procurement operations as it adjusts to new and future requirements relating to the chemical and materials composition of its products, their safe use, the energy consumption associated with those products and product take-back legislation. HP could incur substantial costs, its products could be restricted from entering certain jurisdictions, and it could face other sanctions, if it were to violate or become liable under environmental laws or if its products become non-compliant with environmental laws. HP's potential exposure includes fines and civil or criminal sanctions, third-party property damage or personal injury claims and clean up costs. The amount and timing of costs under environmental laws are difficult to predict.

        HP is party to, or otherwise involved in, proceedings brought by U.S. or state environmental agencies under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), known as "Superfund," or state laws similar to CERCLA. HP is also conducting environmental investigations or remediations at several current or former operating sites pursuant to administrative orders or consent agreements with state environmental agencies.

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Note 16: Litigation and Contingencies (Continued)

        HP is also subject to legislation in an increasing number of jurisdictions that makes producers of electrical goods, including computers and printers, financially responsible for specified collection, recycling, treatment and disposal of past and future covered products (sometimes referred to as "product take-back legislation"). For example, the European Union ("EU") adopted the Waste Electrical and Electronic Equipment Directive in January 2003. That directive makes producers of electrical goods, including computers and printers, financially responsible for specified collection, recycling, treatment and disposal of past and future covered products. The EU member states were obliged to make producers participating in the market financially responsible for implementing these responsibilities.

Note 17: Segment Information

    Description of Segments

        HP is a leading global provider of products, technologies, software, solutions and services to individual consumers, small- and medium-sized businesses, and large enterprises, including customers in the government, health and education sectors. HP's offerings span multi-vendor customer services, including infrastructure technology and business process outsourcing, technology support and maintenance, application development and support services, and consulting and integration services; enterprise information technology infrastructure, including enterprise storage and server technology, networking products and resources, and software that optimizes business technology investments; personal computing and other access devices; and imaging and printing-related products and services.

        HP and its operations are organized into seven business segments for financial reporting purposes: Services, ESS, HP Software, PSG, IPG, HP Financial Services ("HPFS"), and Corporate Investments. HP's organizational structure is based on a number of factors that management uses to evaluate, view and run its business operations, which include, but are not limited to, customer base, homogeneity of products and technology. The business segments disclosed in the accompanying Consolidated Condensed Financial Statements are based on this organizational structure and information reviewed by HP's management to evaluate the business segment results. Services, ESS and HP Software are reported collectively as a broader HP Enterprise Business. In order to provide a supplementary view of HP's business, aggregated financial data for the HP Enterprise Business is presented herein.

        HP has reclassified segment operating results for fiscal 2009 to conform to certain fiscal 2010 organizational realignments. None of the changes impacts HP's previously reported consolidated net revenue, earnings from operations, net earnings or net earnings per share. Future changes to this organizational structure may result in changes to the business segments disclosed.

        A description of the types of products and services provided by each business segment follows.

    HP Enterprise Business.

        Each of the business segments within the HP Enterprise Business is described in detail below.

    Services provides consulting, outsourcing and technology services across infrastructure, applications and business process domains. Services is divided into four main business units: infrastructure technology outsourcing, technology services, applications services and business process outsourcing. Infrastructure technology outsourcing delivers comprehensive services that encompass the data center and the workplace (desktop); network and communications; and security, compliance and

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(Unaudited)

Note 17: Segment Information (Continued)

      business continuity. HP also offers a set of managed services, providing a cross-section of its broader infrastructure services for smaller discrete engagements. Technology services include consulting and support services, such as mission critical services, converged infrastructure services, networking services, data center transformation services and infrastructure services, as well as warranty support across HP's product lines. Applications services help clients revitalize and manage their applications assets through flexible, project-based, consulting services and longer-term outsourcing contracts. These full lifecycle services encompass application development, testing, modernization, system integration, maintenance and management. Business process outsourcing solutions include a broad array of enterprise shared services, customer relationship management services, financial process management services and administrative services.

    Enterprise Storage and Servers provides storage and server products. The various server offerings range from entry-level servers to high-end scalable servers, including Superdome servers. Industry standard servers include primarily entry-level and mid-range ProLiant servers, which run primarily Windows®(1), Linux and Novell operating systems and leverage Intel Corporation ("Intel") and Advanced Micro Devices ("AMD") processors. The business spans a range of product lines, including pedestal-tower servers, density-optimized rack servers and HP's BladeSystem family of server blades. HP's StorageWorks offerings include entry-level, mid-range and high-end arrays, storage area networks ("SANs"), network attached storage ("NAS"), storage management software, and virtualization technologies, as well as tape drives, tape libraries and optical archival storage. Business critical systems focused on mission critical and highly scalable customer applications include: Itanium®(2)-based Integrity servers running on HP-UX, Windows®, Linux, OpenVMS and NonStop operating systems, including the high-end Integrity Superdome servers and fault-tolerant Integrity NonStop servers.

    HP Software provides enterprise software and services. Enterprise IT management products and services, which are marketed as HP's business technology optimization (BTO) portfolio, help customers to manage IT infrastructure and services, operations, applications, and business processes and to automate data center operations and IT processes. Solutions are delivered in the form of traditional software licenses and, in some cases, via a software-as-a-service (SaaS) distribution model. Other software includes information management, business intelligence, and communications and media solutions. Our information management products and services automate the retention, management, search and segregation of information across the enterprise. Business intelligence solutions enable businesses to standardize on consistent data management schemes, connect and share data across the enterprise and apply analytics. Communications and media solutions enable service providers, media companies, and network equipment providers to create, deliver, and manage consumer and enterprise communications services.

(1)
Windows® is a registered trademark of Microsoft Corporation.

(2)
Itanium® is a registered trademark of Intel Corporation.

51



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 17: Segment Information (Continued)

        HP's business segments not included in HP Enterprise Business are described below.

    Personal Systems Group provides commercial PCs, consumer PCs, workstations, handheld computing devices, calculators and other related accessories, software and services for the commercial and consumer markets. Commercial PCs are optimized for commercial uses, including enterprise and small- and medium-sized business ("SMB") customers, and for connectivity and manageability in networked environments. Commercial PCs include the HP Compaq, HP Pro, and HP Elite lines of business desktops and notebooks, as well as the Touchsmart PC, All in One PC, HP Mini-Note PC, HP Blade PCs, Retail POS systems, and HP Thin Clients. Consumer PCs are targeted at the home user and include the HP Pavilion and Compaq Presario series of multi media consumer desktops and notebooks, as well as the HP Pavilion Elite desktops, HP Envy Premium notebooks, Touchsmart PCs, All in One PC, HP and Compaq Mini notebooks, and the Media Smart Home Server. HP's Z series desktop workstations and HP Elitebook Mobile Workstations provide advanced graphics, computing, and large modeling capabilities, certified with applications in a wide range of industries and running both Windows® and Linux operating systems. PSG provides a series of HP iPAQ Pocket PC handheld computing devices that run on Windows® Mobile software. These products range from basic PDAs to advanced devices with voice and data capability.

    Imaging and Printing Group provides consumer and commercial printer hardware, printing supplies, printing media and scanning devices. IPG is also focused on imaging solutions in the commercial markets. These solutions range from managed print services solutions to addressing new growth opportunities in commercial printing and capturing high-value pages in areas such as industrial applications, outdoor signage, and the graphic arts business. Inkjet and Web Solutions delivers HP's consumer and SMB inkjet solutions (hardware, supplies, media) and develops HP's retail and web businesses. It includes single function and all-in-one inkjet printers targeted toward consumers and SMBs as well as retail publishing solutions, Snapfish, and Logoworks. LaserJet and Enterprise Solutions delivers products and services to the enterprise segment. It includes LaserJet printers and supplies, multi-function printers, scanners, and enterprise software solutions such as Exstream Software and Web Jetadmin. Graphics solutions include large format printing (Designjet and Scitex), large format supplies, WebPress supplies, Indigo printing, specialty printing systems and inkjet high-speed production solutions. Printer supplies include LaserJet toner and inkjet printer cartridges and other printing-related media.

    HP Financial Services supports and enhances HP's global product and services solutions, providing a broad range of value-added financial life-cycle management services. HPFS enables HP's worldwide customers to acquire complete IT solutions, including hardware, software and services. HPFS offers leasing, financing, utility programs, and asset recovery services, as well as financial asset management services, for large global and enterprise customers. HPFS also provides an array of specialized financial services to SMBs and educational and governmental entities. HPFS offers innovative, customized and flexible alternatives to balance unique customer cash flow, technology obsolescence and capacity needs.

    Corporate Investments includes HP Labs, network infrastructure products, mobile devices associated with the Palm acquisition, and certain business incubation projects. Revenue in this segment is attributable to the sale of certain network infrastructure products, which span from the data center to the edge of the network and are sold under the ProCurve, 3Com and

52



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 17: Segment Information (Continued)

      TippingPoint brands. The segment also includes certain video collaboration products sold under the brand "Halo," and Palm smartphones, which are targeted at the consumer segment and include the Pixi and Pre models running on the WebOS operating system.

    Segment Data

        HP derives the results of the business segments directly from its internal management reporting system. The accounting policies HP uses to derive business segment results are substantially the same as those the consolidated company uses. Management measures the performance of each business segment based on several metrics, including earnings from operations. Management uses these results, in part, to evaluate the performance of, and to assign resources to, each of the business segments. HP does not allocate to its business segments certain operating expenses, which it manages separately at the corporate level. These unallocated costs include primarily restructuring charges and any associated adjustments related to restructuring actions, amortization of purchased intangible assets, stock-based compensation expense related to HP-granted employee stock options, PRUs, restricted stock awards and the employee stock purchase plan, certain acquisition-related charges and charges for purchased IPR&D, as well as certain corporate governance costs.

        Selected operating results information for each business segment was as follows:

 
  Three months ended July 31  
 
  Net Revenue   Earnings (Loss)
from Operations
 
 
  2010   2009(1)   2010   2009(1)  
 
  In millions
 

Services

  $ 8,609   $ 8,520   $ 1,366   $ 1,302  

Enterprise Storage and Servers

    4,449     3,735     549     381  

HP Software

    863     847     183     153  
                   

HP Enterprise Business

    13,921     13,102     2,098     1,836  
                   

Personal Systems Group

    9,918     8,441     469     387  

Imaging and Printing Group

    6,167     5,660     1,040     960  

HP Financial Services

    764     670     72     53  

Corporate Investments

    607     193     83     (10 )
                   

Segment total

  $ 31,377   $ 28,066   $ 3,762   $ 3,226  
                   

53



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 17: Segment Information (Continued)

 

 
  Nine months ended July 31  
 
  Net Revenue   Earnings (Loss)
from Operations
 
 
  2010   2009(1)   2010   2009(1)  
 
  In millions
 

Services

  $ 25,972   $ 25,767   $ 4,112   $ 3,600  

Enterprise Storage and Servers

    13,382     11,141     1,672     1,037  

HP Software

    2,612     2,605     512     450  
                   

HP Enterprise Business

    41,966     39,513     6,296     5,087  
                   

Personal Systems Group

    30,458     25,443     1,464     1,201  

Imaging and Printing Group

    18,769     17,557     3,192     3,139  

HP Financial Services

    2,238     1,947     208     140  

Corporate Investments

    1,158     577     114     (48 )
                   

Segment total

  $ 94,589   $ 85,037   $ 11,274   $ 9,519  
                   

(1)
As a result of HP's adoption in fiscal 2009 of the revenue recognition standards related to multiple-deliverable revenue arrangements and revenue arrangements that included software, certain previously reported segment and business unit results have been restated. The adoption primarily impacted the Services, Enterprise Storage and Servers and Personal Systems Group financial reporting segments.

        The reconciliation of segment operating results information to HP consolidated totals was as follows:

 
  Three months ended
July 31
  Nine months ended
July 31
 
 
  2010   2009   2010   2009  
 
  In millions
 

Net revenue:

                         

Segment total

  $ 31,377   $ 28,066   $ 94,589   $ 85,037  

Elimination of inter-segment net revenue and other

    (648 )   (481 )   (1,834 )   (1,262 )
                   

Total HP consolidated net revenue

  $ 30,729   $ 27,585   $ 92,755   $ 83,775  
                   

Earnings before taxes:

                         

Total segment earnings from operations

  $ 3,762   $ 3,226   $ 11,274   $ 9,519  

Corporate and unallocated costs and eliminations

    (175 )   (81 )   (375 )   (119 )

Unallocated costs related to stock-based compensation expense

    (156 )   (132 )   (504 )   (436 )

Amortization of purchased intangible assets

    (383 )   (379 )   (1,060 )   (1,171 )

In-process research and development charges

                (6 )

Restructuring charges

    (598 )   (362 )   (909 )   (602 )

Acquisition-related charges

    (127 )   (59 )   (242 )   (182 )

Interest and other, net

    (134 )   (177 )   (424 )   (589 )
                   

Total HP consolidated earnings before taxes

  $ 2,189   $ 2,036   $ 7,760   $ 6,414  
                   

54



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 17: Segment Information (Continued)

        HP allocates its assets to its business segments based on the primary segments benefiting from the asset. The total assets allocated to Corporate Investments increased 836% to $4.3 billion as of July 31, 2010 from $0.5 billion as of October 31, 2009 mostly due to the 3Com and Palm acquisitions. There have been no material changes in the total assets of HP's other segments for the nine months ended July 31, 2010 as compared to the fiscal year ended October 31, 2009.

    Net revenue by segment and business unit

 
  Three months
ended July 31
  Nine months
ended July 31
 
 
  2010   2009(1)(2)   2010   2009(1)(2)  
 
  In millions
 

Net revenue:

                         
     

Infrastructure technology outsourcing

  $ 3,937   $ 3,906   $ 11,868   $ 11,511  
     

Technology services

    2,366     2,389     7,192     7,260  
     

Application services

    1,501     1,442     4,522     4,615  
     

Business process outsourcing

    727     719     2,177     2,192  
     

Other

    78     64     213     189  
                   
 

Services(1)

    8,609     8,520     25,972     25,767  
                   
     

Industry standard servers

    3,042     2,316     9,044     6,627  
     

Storage

    904     824     2,741     2,555  
     

Business critical systems

    503     595     1,597     1,959  
                   
 

Enterprise Storage and Servers

    4,449     3,735     13,382     11,141  
                   
     

Business technology optimization

    581     563     1,756     1,725  
     

Other software

    282     284     856     880  
                   
 

HP Software

    863     847     2,612     2,605  
                   
 

HP Enterprise Business

    13,921     13,102     41,966     39,513  
                   
     

Notebooks

    5,298     4,803     16,936     14,416  
     

Desktops

    3,930     3,098     11,558     9,383  
     

Workstations

    459     299     1,257     919  
     

Handhelds

    18     32     67     136  
     

Other

    213     209     640     589  
                   
 

Personal Systems Group

    9,918     8,441     30,458     25,443  
                   
     

Supplies

    4,130     3,949     12,542     12,102  
     

Commercial hardware

    1,389     1,085     4,028     3,517  
     

Consumer hardware

    648     626     2,199     1,938  
                   
 

Imaging and Printing Group

    6,167     5,660     18,769     17,557  
                   
 

HP Financial Services

    764     670     2,238     1,947  
 

Corporate Investments

    607     193     1,158     577  
                   
   

Total segments

    31,377     28,066     94,589     85,037  
                   
     

Eliminations of inter-segment net revenue and other

    (648 )   (481 )   (1,834 )   (1,262 )
                   
       

Total HP consolidated net revenue

  $ 30,729   $ 27,585   $ 92,755   $ 83,775  
                   

(1)
Certain fiscal 2010 organizational reclassifications have been reflected retroactively to provide improved visibility and comparability. For each of the quarters in fiscal year 2009, the reclassifications resulted in the

55



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 17: Segment Information (Continued)

    transfer of revenue among the business units within the Services segment only. There was no impact to the previously reported segment financial results.

(2)
As a result of HP's adoption in fiscal 2009 of the revenue recognition standards related to multiple-deliverable revenue arrangements and revenue arrangements that included software, certain previously reported segment and business unit results have been restated. The adoption primarily impacted the Services, Enterprise Storage and Servers and Personal Systems Group financial reporting segments.

56



Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of
Financial Condition and Results of Operations

        The following discussion should be read in conjunction with the Consolidated Condensed Financial Statements and the related notes that appear elsewhere in this document.

OVERVIEW

        We are a leading global provider of products, technologies, software, solutions and services to individual consumers, small- and medium-sized businesses, and large enterprises, including customers in the government, health and education sectors. Our offerings span:

    multi-vendor customer services, including infrastructure technology and business process outsourcing, technology support and maintenance, application development and support services, and consulting and integration services;

    enterprise information technology infrastructure, including enterprise storage and server technology, networking products and resources, information management software and software that optimizes business technology investments;

    personal computing and other access devices; and

    imaging and printing-related products and services.

        We have seven business segments for financial reporting purposes: Services, Enterprise Storage and Servers ("ESS"), HP Software, the Personal Systems Group ("PSG"), the Imaging and Printing Group ("IPG"), HP Financial Services ("HPFS"), and Corporate Investments. Services, ESS and HP Software are reported collectively as a broader HP Enterprise Business. While the HP Enterprise Business is not an operating segment, we sometimes provide financial data aggregating the segments within it in order to provide a supplementary view of our business.

        Our strategy and operations are currently focused on the following initiatives:

    Competitive Positioning

        We are positioning our businesses to take advantage of important trends in the markets for our products and services. For example, we are aligning our printing business to capitalize on key market trends such as the shift from analog to digital printing and the growth in printable content by developing innovative products for consumers such as the first web-connected home printer, working to enable web and mobile printing, expanding our presence in high-usage annuity businesses including graphics and retail publishing printing, and growing our managed print services business. We are also positioning our enterprise business to capitalize on the trend towards converged infrastructure products that integrate storage, networking, servers and management software, while also delivering services for that converged infrastructure in a manner that best fits each client's needs, be it at a client site, as an outsourced service or via the Internet. In addition, we have developed IT management software offerings that seek to satisfy the increasing demand for virtualization management and increased automation.

    Driving Operational Efficiency

        We have implemented an ongoing program to optimize efficiency and reduce cost across the company. As part of those efforts, we are continuing to execute on our multi-year program to

57


consolidate real estate locations worldwide to fewer core sites in order to reduce our IT spending and real estate costs. We are also continuing to implement the restructuring plan announced in the fourth quarter of fiscal 2008 to optimize the cost structure of our Services business and the restructuring plan announced in May 2009 to structurally change and improve the effectiveness of several of our product businesses. In June 2010, we announced and started implementing a new restructuring plan that will consolidate data centers, systems and tools to better position for growth our enterprise services business, which includes our infrastructure technology outsourcing, business process outsourcing and application services business units. See Note 7 to the Consolidated Condensed Financial Statements in Item 1 for further discussion of these restructuring plans and the associated restructuring charges.

    Investing for Growth

        We are investing some of the savings derived from our efficiency initiatives for growth. For example, we are increasing our sales coverage to better address the markets we cover, including further expansion in emerging markets such as China, India and Brazil. We are creating innovative new products and developing new channels to connect with our customers. In addition, we are expanding our portfolio of products and services that we can offer to our customers, both through acquisitions and through organic growth. A critical component of this strategy was our acquisition of Electronic Data Systems Corporation ("EDS") in August 2008, which has increased the size and breadth of our services business and enabled us to provide comprehensive IT product and services solutions to our customers. In addition, with the completion of the acquisition of 3Com Corporation ("3Com") in April 2010, we are accelerating our investments in networking. In July 2010, we completed the acquisition of Palm, Inc. ("Palm"), which enhances our ability to participate more aggressively in the growing smartphone and connected mobile device markets.

    Leveraging our Portfolio and Scale

        We now offer one of the IT industry's broadest portfolios of products and services, and we leverage that portfolio to our strategic advantage. For example, in our enterprise business, we are able to provide servers, storage and networking products packaged with services that can be delivered to customers in the manner of their choosing, be it in-house, outsourced or as a service via the Internet. Our portfolio of management software completes the package by allowing our customers to manage their IT operations in an efficient and cost-effective manner. In addition, we are working to optimize our supply chain by eliminating complexity, reducing fixed costs, and leveraging our scale to ensure the availability of components at favorable prices even during shortages. We are also expanding our use of industry standard components in our enterprise products to further leverage our scale.

58


        The following provides an overview of our key financial metrics in the third quarter and first nine months of fiscal 2010 and demonstrates how our execution has translated into financial performance:

 
   
  HP Enterprise Business    
   
   
</