10-Q 1 a2207600z10-q.htm 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: January 31, 2012

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 February 29, 2012 was 1,977,342,839 shares.


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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
INDEX

 
   
   
  Page
No.
 

Part I.

  Financial Information        

  Item 1.  

Financial Statements

    4  

     

Consolidated Condensed Statements of Earnings for the three months ended January 31, 2012 and 2011 (Unaudited)

    4  

     

Consolidated Condensed Balance Sheets as of January 31, 2012 (Unaudited) and as of October 31, 2011 (Audited)

    5  

     

Consolidated Condensed Statements of Cash Flows for the three months ended January 31, 2012 and 2011 (Unaudited)

    6  

     

Notes to Consolidated Condensed Financial Statements (Unaudited)

    7  

  Item 2.  

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

    52  

  Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

    84  

  Item 4.  

Controls and Procedures

    84  

Part II.

  Other Information        

  Item 1.  

Legal Proceedings

    86  

  Item 1A.  

Risk Factors

    86  

  Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

    86  

  Item 6.  

Exhibits

    86  

Signature

    87  

Exhibit Index

    88  

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, earnings, earnings per share, tax provisions, 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 execution of cost reduction programs and restructuring and integration plans; any statements concerning the expected development, performance or market share relating to products or services; any statements regarding current or future macroeconomic trends or events and the impact of those trends and events on HP and its financial 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 the impact of macroeconomic and geopolitical trends and events; the competitive pressures faced by HP's businesses; the development and transition of new products and services (and the enhancement of existing products and services) to meet customer needs and respond to emerging technological trends; the execution and performance of contracts by HP and its suppliers, customers and partners; the protection of HP's intellectual property assets, including intellectual property licensed from third parties; integration and other risks associated with business combination and investment transactions; the hiring and retention of key employees; assumptions related to pension and other post-retirement costs; expectations and assumptions relating to the execution and timing of cost reduction programs and restructuring and integration plans; the resolution of pending investigations, claims and disputes; and other risks that are described herein, including

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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, 2011. HP assumes no obligation and does not intend to update these forward-looking statements.

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PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements.


HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Consolidated Condensed Statements of Earnings

(Unaudited)

 
  Three months ended
January 31
 
 
  2012   2011  
 
  In millions, except per share amounts
 

Net revenue:

             

Products

  $ 19,511   $ 22,194  

Services

    10,409     10,002  

Financing income

    116     106  
           

Total net revenue

    30,036     32,302  
           

Costs and expenses:

             

Cost of products

    15,049     16,798  

Cost of services

    8,186     7,508  

Financing interest

    78     75  

Research and development

    786     798  

Selling, general and administrative

    3,367     3,117  

Amortization of purchased intangible assets

    466     425  

Restructuring charges

    40     158  

Acquisition-related charges

    22     29  
           

Total operating expenses

    27,994     28,908  
           

Earnings from operations

    2,042     3,394  
           

Interest and other, net

    (221 )   (97 )
           

Earnings before taxes

    1,821     3,297  

Provision for taxes

    353     692  
           

Net earnings

  $ 1,468   $ 2,605  
           

Net earnings per share:

             

Basic

  $ 0.74   $ 1.19  
           

Diluted

  $ 0.73   $ 1.17  
           

Cash dividends declared per share

  $ 0.24   $ 0.16  

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

             

Basic

    1,981     2,182  
           

Diluted

    1,998     2,226  
           

   

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

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Consolidated Condensed Balance Sheets

 
  January 31, 2012   October 31, 2011  
 
  In millions, except par value
 
 
  (Unaudited)
   
 

ASSETS

 

Current assets:

             

Cash and cash equivalents

  $ 8,113   $ 8,043  

Accounts receivable

    15,892     18,224  

Financing receivables

    3,123     3,162  

Inventory

    7,271     7,490  

Other current assets

    14,350     14,102  
           

Total current assets

    48,749     51,021  
           

Property, plant and equipment

    12,122     12,292  

Long-term financing receivables and other assets

    11,057     10,755  

Goodwill

    44,639     44,551  

Purchased intangible assets

    10,029     10,898  
           

Total assets

  $ 126,596   $ 129,517  
           


LIABILITIES AND STOCKHOLDERS' EQUITY


 

Current liabilities:

             

Notes payable and short-term borrowings

  $ 5,438   $ 8,083  

Accounts payable

    12,375     14,750  

Employee compensation and benefits

    3,136     3,999  

Taxes on earnings

    929     1,048  

Deferred revenue

    7,530     7,449  

Accrued restructuring

    362     654  

Other accrued liabilities

    14,523     14,459  
           

Total current liabilities

    44,293     50,442  
           

Long-term debt

    25,462     22,551  

Other liabilities

    17,269     17,520  

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; 1,978 and 1,991 shares issued and outstanding, respectively)

    20     20  

Additional paid-in capital

    6,466     6,837  

Retained earnings

    36,183     35,266  

Accumulated other comprehensive loss

    (3,507 )   (3,498 )
           

Total HP stockholders' equity

    39,162     38,625  

Non-controlling interests

    410     379  
           

Total stockholders' equity

    39,572     39,004  
           

Total liabilities and stockholders' equity

  $ 126,596   $ 129,517  
           

   

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

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Consolidated Condensed Statements of Cash Flows

(Unaudited)

 
  Three months ended
January 31
 
 
  2012   2011  
 
  In millions
 

Cash flows from operating activities:

             

Net earnings

  $ 1,468   $ 2,605  

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

             

Depreciation and amortization

    1,303     1,255  

Stock-based compensation expense

    175     180  

Provision for doubtful accounts—accounts and financing receivables

    18     34  

Provision for inventory

    34     52  

Restructuring charges

    40     158  

Deferred taxes on earnings

    (110 )   632  

Excess tax benefit from stock-based compensation

    (11 )   (64 )

Other, net

    44     (104 )

Changes in operating assets and liabilities:

             

Accounts and financing receivables

    2,311     1,752  

Inventory

    180     (333 )

Accounts payable

    (2,376 )   (912 )

Taxes on earnings

    (12 )   (242 )

Restructuring

    (174 )   (272 )

Other assets and liabilities

    (1,697 )   (1,671 )
           

Net cash provided by operating activities

    1,193     3,070  
           

Cash flows from investing activities:

             

Investment in property, plant and equipment

    (883 )   (926 )

Proceeds from sale of property, plant and equipment

    96     543  

Purchases of available-for-sale securities and other investments

        (19 )

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

    96     53  

Payments in connection with business acquisitions, net of cash acquired

    (141 )   (14 )

Proceeds from business divestiture, net

    81      
           

Net cash used in investing activities

    (751 )   (363 )
           

Cash flows from financing activities:

             

Repayment of commercial paper and notes payable, net

    (2,607 )   (3,710 )

Issuance of debt

    3,035     2,117  

Payment of debt

    (100 )   (138 )

Issuance of common stock under employee stock plans

    313     430  

Repurchase of common stock

    (780 )   (2,290 )

Excess tax benefit from stock-based compensation

    11     64  

Cash dividends paid

    (244 )   (175 )
           

Net cash used in financing activities

    (372 )   (3,702 )
           

Increase (decrease) in cash and cash equivalents

    70     (995 )

Cash and cash equivalents at beginning of period

    8,043     10,929  
           

Cash and cash equivalents at end of period

  $ 8,113   $ 9,934  
           

Supplemental schedule of non-cash investing and financing activities:

             

Purchase of assets under capital lease

  $ 12   $ 5  

   

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

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements

(Unaudited)

Note 1: Basis of Presentation

        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 January 31, 2012, its results of operations and cash flows for the three months ended January 31, 2012 and January 31, 2011. The Consolidated Condensed Balance Sheet as of October 31, 2011 is derived from the October 31, 2011 audited consolidated financial statements.

        The results of operations for the three months ended January 31, 2012 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, 2011.

        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.

    Reclassifications and Segment Reorganization

        In connection with organizational realignments implemented in the first quarter of fiscal 2012, certain costs previously reported as cost of sales have been reclassified as selling, general and administrative expenses to better align those costs with the functional areas that benefit from those expenditures. HP has made certain segment and business unit realignments in order to optimize its operating structure. Reclassifications of prior year financial information have been made to conform to the current year presentation. None of the changes impacts HP's previously reported consolidated net revenue, earnings from operations, net earnings or net earnings per share. See Note 16 for a further discussion of HP's segment reorganization.

Note 2: Stock-Based Compensation

        HP's stock-based compensation plans include HP's principal equity plans as well as various equity plans assumed through acquisitions. HP's principal equity plans include restricted stock awards, stock options and performance-based restricted units ("PRUs").

        Total stock-based compensation expense before income taxes for the three months ended January 31, 2012 and 2011 was $175 million and $180 million, respectively. The resulting income tax benefit for the three months ended January 31, 2012 and 2011 was $57 million and $43 million, respectively.

    Restricted Stock Awards

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

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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 January 31, 2012 and changes during the three months ended January 31, 2012 were as follows:

 
  Shares   Weighted-
Average
Grant Date
Fair Value
Per Share
 
 
  In thousands
   
 

Outstanding at October 31, 2011

    16,813   $ 39  

Granted

    17,336   $ 28  

Vested

    (2,550 ) $ 43  

Forfeited

    (601 ) $ 37  
             

Outstanding at January 31, 2012

    30,998   $ 33  
             

        At January 31, 2012, there was $891 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 1.6 years.

    Stock Options

        HP utilized the Black-Scholes option pricing model to value the service-based stock options granted under its principal equity plans. HP estimates the fair value of the performance-contingent stock options using a combination of the Monte Carlo simulation model and lattice model, as these awards contain market conditions.

        HP estimated the weighted-average fair value of stock options using the following weighted-average assumptions:

 
  Three months ended
January 31
 
 
  2012   2011  

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

  $ 9.49   $ 11.42  

Implied volatility

    43 %   29 %

Risk-free interest rate

    1.20 %   1.75 %

Dividend yield

    1.73 %   0.74 %

Expected life in months

    67     60  

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

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 2: Stock-Based Compensation (Continued)

        Option activity as of January 31, 2012 and changes during the three months ended January 31, 2012 were as follows:

 
  Shares   Weighted-
Average
Exercise
Price
Per Share
  Weighted-
Average
Remaining
Contractual
Term
  Aggregate
Intrinsic
Value
 
 
  In thousands
   
  In years
  In millions
 

Outstanding at October 31, 2011

    120,243   $ 28              

Granted

    6,705   $ 28              

Exercised

    (14,585 ) $ 20              

Forfeited/cancelled/expired

    (2,504 ) $ 38              
                         

Outstanding at January 31, 2012

    109,859   $ 28     3.4   $ 434  
                         

Vested and expected to vest at January 31, 2012

    106,040   $ 29     3.2   $ 414  
                         

Exercisable at January 31, 2012

    83,081   $ 30     2.1   $ 296  
                         

        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 January 31, 2012. The aggregate intrinsic value is the difference between HP's closing stock price on the last trading day of the first quarter of fiscal 2012 and the exercise price, multiplied by the number of in-the-money options. Total intrinsic value of options exercised for the three months ended January 31, 2012 was $109 million.

        At January 31, 2012, there was $280 million of unrecognized pre-tax stock-based compensation expense related to stock options, which HP expects to recognize over the remaining weighted-average vesting period of 2.3 years.

    Performance-based Restricted Units

        HP's PRU program provides for the issuance of PRUs representing hypothetical shares of HP common stock. Each PRU award reflects a target number of shares ("Target Shares") that may be issued to the award recipient before adjusting for performance and market conditions. The actual number of shares the recipient receives is determined at the end of a three-year performance period based on results achieved versus company performance goals and may range from 0% to 200% of the Target Shares granted. The performance goals for PRUs granted in fiscal year 2012 are based on HP's annual cash flow from operations as a percentage of revenue and on HP's annual revenue growth. The performance goals for PRUs granted in previous years are based on HP's annual cash flow from operations as a percentage of revenue and on a market condition based on total shareholder return ("TSR") relative to the S&P 500 over the three-year performance period.

        For PRU awards granted in fiscal year 2012, HP estimates the fair value of the Target Shares using HP's closing stock price on the measurement date. The weighted-average fair value for the first year of the three-year performance period applicable to PRUs granted in the three months ended January 31, 2012 was $27.00. The estimated fair value of the Target Shares for the second and third years for PRUs granted in the three months ended January 31, 2012 will be determined on the measurement date

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 2: Stock-Based Compensation (Continued)

applicable to those PRUs, which will occur during the period that the annual performance goals are approved for those PRUs, and the expense will be amortized over the remainder of the applicable three-year performance period.

        For PRU awards granted prior to fiscal year 2012, HP estimates the fair value of the Target Shares subject to those awards using the Monte Carlo simulation model, as the TSR modifier represents a market condition. The following weighted-average assumptions, in addition to projections of market conditions, were used to determine the weighted-average fair values of these PRU awards:

 
  Three months ended
January 31
 
 
  2012   2011  

Weighted-average fair value of grants per share

  $ 3.35 (1) $ 27.59 (2)

Expected volatility(3)

    41 %   30 %

Risk-free interest rate

    0.14 %   0.38 %

Dividend yield

    1.78 %   0.75 %

Expected life in months

    15     19  

(1)
Reflects the weighted-average fair value for the third year of the three-year performance period applicable to PRUs granted in fiscal 2010 and for the second year of the three-year performance period applicable to PRUs granted in fiscal 2011. The estimated fair value of the Target Shares for the third year for PRUs granted in fiscal 2011 will be determined on the measurement date applicable to those PRUs, which will occur during the period that the annual performance goals are approved for those PRUs, and the expense will be amortized over the remainder of the applicable three-year performance period.

(2)
Reflects the weighted-average fair value for the third year of the three-year performance period applicable to PRUs granted in fiscal 2009, for the second year of the three-year performance period applicable to PRUs granted in fiscal 2010 and for the first year of the three-year performance period applicable to PRUs granted in the three months ended January 31, 2011.

(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.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 2: Stock-Based Compensation (Continued)

        Non-vested PRUs as of January 31, 2012 and changes during the three months ended January 31, 2012 were as follows:

 
  Shares  
 
  In thousands
 

Outstanding Target Shares at October 31, 2011

    11,382  

Granted

    1,157  

Vested

     

Change in units due to performance and market conditions achievement for PRUs vested in the period

     

Forfeited

    (442 )
       

Outstanding Target Shares at January 31, 2012

    12,097  
       

Outstanding Target Shares assigned a fair value at January 31, 2012

    9,672 (1)
       

(1)
Excludes Target Shares for the third year for PRUs granted in fiscal 2011 and for the second and third years for PRUs granted in the three months ended January 31, 2012 as the measurement date has not yet been established. The measurement date and related fair value for the excluded PRUs will be established when the annual performance goals are approved.

        At January 31, 2012, there was $80 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 1.4 years.

Note 3: Net Earnings Per Share

        HP calculates basic earnings per share ("EPS") 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.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 3: Net Earnings Per Share (Continued)

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

 
  Three months ended
January 31
 
 
  2012   2011  
 
  In millions, except
per share amounts

 

Numerator:

             

Net earnings(1)

  $ 1,468   $ 2,605  
           

Denominator:

             

Weighted-average shares used to compute basic EPS

    1,981     2,182  

Dilutive effect of employee stock plans

    17     44  
           

Weighted-average shares used to compute diluted EPS

    1,998     2,226  
           

Net earnings per share:

             

Basic

  $ 0.74   $ 1.19  

Diluted

  $ 0.73   $ 1.17  

(1)
Net earnings available to participating securities were not significant for the first quarter of fiscal 2012 and 2011. HP considers restricted stock that provides the holder with a non-forfeitable right to receive dividends to be a participating security.

        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. In the first quarter of fiscal 2012 and 2011, HP excluded from the calculation of diluted EPS options to purchase 51 million shares and 7 million shares, respectively. In addition, HP also excluded from the calculation of diluted EPS options to purchase an additional 10 million shares and 1 million shares in the first quarter of fiscal 2012 and 2011, respectively, 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.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 4: Balance Sheet Details

        Balance sheet details were as follows:

    Accounts and Financing Receivables

 
  January 31,
2012
  October 31,
2011
 
 
  In millions
 

Accounts receivable

  $ 16,348   $ 18,694  

Allowance for doubtful accounts

    (456 )   (470 )
           

  $ 15,892   $ 18,224  
           

Financing receivables

  $ 3,185   $ 3,220  

Allowance for doubtful accounts

    (62 )   (58 )
           

  $ 3,123   $ 3,162  
           

        HP has revolving trade receivables-based facilities permitting it to sell certain trade receivables to third parties. In accordance with the accounting requirements under the Accounting Standards Codification relating to "Transfers and Servicing," trade receivables are derecognized from the Consolidated Condensed Balance Sheets when sold to third parties. The total aggregate capacity of the facilities was $1.4 billion as of January 31, 2012, including a $0.9 billion partial recourse facility entered into in May 2011 and an aggregate capacity of $0.5 billion in non-recourse facilities. The recourse obligation is measured using market data from similar transactions and reported as a current liability in the Consolidated Condensed Balance Sheets. The recourse obligation as of January 31, 2012 was not material. The total aggregate capacity of the facilities was $1.5 billion as of October 31, 2011.

        For the first three months of fiscal 2012 and 2011, trade receivables sold under these facilities were $1.1 billion and $463 million, respectively, which approximates the amount of cash received. The resulting loss on the sales of trade accounts receivable for the three months ended January 31, 2012, was not material. HP had $646 million as of January 31, 2012 and $701 million as of October 31, 2011 of available capacity under these programs.

    Inventory

 
  January 31,
2012
  October 31,
2011
 
 
  In millions
 

Finished goods

  $ 4,626   $ 4,869  

Purchased parts and fabricated assemblies

    2,645     2,621  
           

  $ 7,271   $ 7,490  
           

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 4: Balance Sheet Details (Continued)

    Property, Plant and Equipment

 
  January 31,
2012
  October 31,
2011
 
 
  In millions
 

Land

  $ 652   $ 687  

Buildings and leasehold improvements

    8,683     8,620  

Machinery and equipment

    16,581     16,155  
           

    25,916     25,462  
           

Accumulated depreciation

    (13,794 )   (13,170 )
           

  $ 12,122   $ 12,292  
           

Note 5: Goodwill and Purchased Intangible Assets

    Goodwill

        Goodwill allocated to HP's business segments as of January 31, 2012 and changes in the carrying amount of goodwill for the three months ended January 31, 2012 are as follows:

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

Balance at October 31, 2011

  $ 2,498   $ 17,280   $ 2,471   $ 8,070   $ 14,063   $ 144   $ 25   $ 44,551  

Goodwill acquired during the period

            12                     12  

Goodwill adjustments/reclassifications

                (307 )   398         (15 )   76  
                                   

Balance at January 31, 2012

  $ 2,498   $ 17,280   $ 2,483   $ 7,763   $ 14,461   $ 144   $ 10   $ 44,639  
                                   

        In connection with certain fiscal 2012 organizational realignments, HP reclassified $280 million of goodwill related to the TippingPoint network security solutions business from the Enterprise Servers, Storage and Networking segment to the Software segment. Additionally, during the three months ended January 31, 2012, HP recorded additional goodwill of $224 million in the Software segment due to a change in the estimated fair values of purchased intangible assets and net tangible assets associated with the acquisition of Autonomy Corporation plc ("Autonomy"). This increase to goodwill was partially offset by a currency translation adjustment of $106 million on goodwill related to Autonomy subsidiaries whose functional currency is not the U.S. dollar.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 5: Goodwill and Purchased Intangible Assets (Continued)

    Purchased Intangible Assets

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

 
  January 31, 2012   October 31, 2011  
 
  Gross   Accumulated
Amortization
  Net   Gross   Accumulated
Amortization
  Net  
 
  In millions
 

Customer contracts, customer lists and distribution agreements

  $ 6,175   $ (2,471 ) $ 3,704   $ 6,346   $ (2,376 ) $ 3,970  

Developed and core technology and patents

    6,895     (2,197 )   4,698     7,226     (1,944 )   5,282  

Product trademarks

    333     (135 )   198     336     (121 )   215  
                           

Total amortizable purchased intangible assets

    13,403     (4,803 )   8,600     13,908     (4,441 )   9,467  

In-process research and development ("IPR&D")

    7         7     9         9  

Compaq trade name

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

Total purchased intangible assets

  $ 14,832   $ (4,803 ) $ 10,029   $ 15,339   $ (4,441 ) $ 10,898  
                           

        For the first three months of fiscal 2012, the majority of the decrease in gross intangibles was related to a $293 million change in the estimated fair value of Autonomy's purchased intangible assets acquired, $104 million of fully amortized intangible assets which have been eliminated from both the gross and accumulated amortization amounts, and a $92 million reduction in intangibles due to currency translation on intangibles related to Autonomy subsidiaries whose functional currency is not the U.S. dollar.

        Estimated future amortization expense related to finite-lived purchased intangible assets at January 31, 2012 is as follows:

Fiscal year:
  In millions  

2012 (remaining 9 months)

  $ 1,379  

2013

    1,702  

2014

    1,359  

2015

    1,170  

2016

    1,012  

2017

    586  

Thereafter

    1,392  
       

Total

  $ 8,600  
       

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 6: Restructuring Charges

        HP records restructuring charges associated with management approved restructuring plans to either reorganize one or more of HP's business segments, or to remove duplicative headcount and infrastructure associated with one or more business acquisitions. Restructuring charges can include severance costs to eliminate a specified number of employees, infrastructure charges to vacate facilities and consolidate operations, and contract cancellation costs. Restructuring charges are recorded based upon planned employee termination dates and site closure and consolidation plans. The timing of associated cash payments is dependent upon the type of restructuring charge and can extend over a multi-year period. HP records the short-term portion of the restructuring liability in Accrued restructuring and the long-term portion in Other liabilities in the Consolidated Condensed Balance Sheets.

    Fiscal 2010 Acquisitions

        In connection with the acquisitions of Palm, Inc. ("Palm") and 3Com Corporation ("3Com") in fiscal 2010, HP's management approved and initiated plans to restructure the operations of the acquired companies, including severance for employees, contract cancellation costs, costs to vacate duplicative facilities and other items. The total expected combined cost of the plans is $121 million, which includes $33 million of additional restructuring costs recorded in the fourth quarter of fiscal 2011 in connection with HP's decision to wind down the webOS device business. As of October 31, 2011, HP had recorded the majority of the costs of the plans based upon the anticipated timing of planned terminations and facility closure costs. With respect to the Palm plan, no further restructuring charges are anticipated, and the majority of the remaining costs are expected to be paid out through fiscal 2012. The remaining costs pertaining to the 3Com plan are expected to be paid out through fiscal 2016 as fixed lease payments are made.

    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 and Application and Business 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 that will be recorded as restructuring charges is approximately $1.0 billion, and includes severance costs to eliminate approximately 8,000 positions and infrastructure charges. As the execution of the restructuring activities has evolved, certain components and their related cost estimates have been revised. While the total cost of the plan remains consistent, during the three months ended January 31, 2012, HP reduced the severance accrual by $100 million and recognized additional infrastructure related charges of $104 million. HP expects to record the majority of the 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 first quarter of fiscal 2013. As of January 31, 2012, approximately 6,000 positions had 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 Servers, Storage and Networking ("ESSN") businesses. The total expected

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 6: Restructuring Charges (Continued)

cost of the plan was $301 million in severance-related costs associated with the planned elimination of approximately 4,400 positions. All planned eliminations had occurred and the vast majority of the restructuring costs had been paid out as of October 31, 2011.

    Fiscal 2008 HP/EDS Restructuring Plan

        In connection with the acquisition of Electronic Data Systems Corporation ("EDS") on August 26, 2008, HP's management approved and initiated a restructuring plan to combine and align HP's services businesses, eliminate duplicative overhead functions and consolidate and vacate duplicative facilities. The restructuring plan is expected to be implemented over four years from the acquisition date at a total expected cost of $3.4 billion. Approximately $1.5 billion of the expected costs were associated with pre-acquisition EDS and were reflected in the fair value of purchase consideration 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.

        The restructuring plan includes severance costs related to eliminating approximately 25,000 positions. As of October 31, 2011, all planned eliminations had occurred and the vast majority of the associated severance costs had been paid out. The infrastructure charges in the restructuring plan include facility closure and consolidation costs and the costs associated with early termination of certain contractual obligations. HP has recorded the majority of these costs based upon the execution of site closure and consolidation plans. The associated cash payments are expected to be paid out through fiscal 2016.

    Summary of Restructuring Plans

        The adjustments to the accrued restructuring expenses related to all of HP's restructuring plans described above for the three months ended January 31, 2012 were as follows:

 
   
  Three
months
ended
January 31,
2012
charges
   
   
   
  As of January 31, 2012  
 
  Balance,
October 31,
2011
  Cash
payments
  Non-cash
settlements
and other
adjustments
  Balance,
January 31,
2012
  Total
costs and
adjustments
to date
  Total
expected
costs and
adjustments
 
 
  In millions
 

Fiscal 2010 acquisitions

  $ 59   $   $ (15 ) $ (1 ) $ 43   $ 114   $ 121  

Fiscal 2010 ES Plan:

                                           

Severance

  $ 493   $ (100 ) $ (42 ) $ (18 ) $ 333   $ 623   $ 623  

Infrastructure

    3     104     (68 )   (38 )   1     297     369  
                               

Total ES Plan

  $ 496   $ 4   $ (110 ) $ (56 ) $ 334   $ 920   $ 992  

Fiscal 2009 Plan

  $   $ 7   $ (7 ) $   $   $ 301   $ 301  

Fiscal 2008 HP/EDS Plan:

                                           

Severance

  $   $ 5   $ (5 ) $   $   $ 2,195   $ 2,195  

Infrastructure

    258     24     (37 )   (2 )   243     998     1,167  
                               

Total HP/EDS Plan

  $ 258   $ 29   $ (42 ) $ (2 ) $ 243   $ 3,193   $ 3,362  
                               

Total restructuring plans

  $ 813   $ 40   $ (174 ) $ (59 ) $ 620   $ 4,528   $ 4,776  
                               

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 6: Restructuring Charges (Continued)

        At January 31, 2012 and October 31, 2011, HP included the long-term portion of the restructuring liability of $258 million and $159 million, respectively, in Other liabilities, and the short-term portion of $362 million and $654 million, respectively, in Accrued restructuring in the accompanying Consolidated Condensed Balance Sheets.

Note 7: Fair Value

        HP determines fair value 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 the best information available. Observable inputs are the preferred basis of valuation. 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, 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.

        Derivative Instruments: As discussed in Note 8, 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.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 7: Fair Value (Continued)

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

 
  As of January 31, 2012   As of October 31, 2011  
 
  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

  $   $ 3,181   $   $ 3,181   $   $ 5,120   $   $ 5,120  

Money market funds

    2,063             2,063     236             236  

Marketable equity securities

    55     2         57     120     2         122  

Foreign bonds

    7     363         370     7     376         383  

Corporate bonds and other debt securities

    3     2     48     53     3     2     48     53  

Derivatives:

                                                 

Interest rate contracts

        589         589         593         593  

Foreign exchange contracts

        566     16     582         269     35     304  

Other derivatives

        12     8     20         25     6     31  
                                   

Total Assets

  $ 2,128   $ 4,715   $ 72   $ 6,915   $ 366   $ 6,387   $ 89   $ 6,842  
                                   

Liabilities

                                                 

Derivatives:

                                                 

Interest rate contracts

  $   $ 55   $   $ 55   $   $ 71   $   $ 71  

Foreign exchange contracts

        563     8     571         823     9     832  

Other derivatives

                        1         1  
                                   

Total Liabilities

  $   $ 618   $ 8   $ 626   $   $ 895   $ 9   $ 904  
                                   

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments

    Cash Equivalents and Available-for-Sale Investments

        Cash equivalents and available-for-sale investments at fair value as of January 31, 2012 and October 31, 2011 were as follows:

 
  January 31, 2012   October 31, 2011  
 
  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

  $ 3,173   $   $   $ 3,173   $ 5,112   $   $   $ 5,112  

Money market funds

    2,063             2,063     236             236  
                                   

Total cash equivalents

    5,236             5,236     5,348             5,348  
                                   

Available-for-Sale Investments

                                                 

Debt securities:

                                                 

Time deposits

    8             8     8             8  

Foreign bonds

    305     65         370     317     66         383  

Corporate bonds and other debt securities

    72         (19 )   53     74         (21 )   53  
                                   

Total debt securities

    385     65     (19 )   431     399     66     (21 )   444  
                                   

Equity securities in public companies

    113     1     (60 )   54     114     4         118  
                                   

Total cash equivalents and available-for-sale investments

  $ 5,734   $ 66   $ (79 ) $ 5,721   $ 5,861   $ 70   $ (21 ) $ 5,910  
                                   

        Cash equivalents consist of investments in time deposits and money market funds with original maturities of three months or less. Time deposits were primarily issued by institutions outside the U.S. as of January 31, 2012 and October 31, 2011. Available-for-sale securities consist of short-term investments which mature within twelve months or less and long-term investments with maturities greater than twelve months. Investments primarily include institutional bonds, equity securities in public companies, fixed-interest securities and time deposits. 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. As of January 31, 2012, the majority of available-for-sale securities had contractual maturities greater than five years.

        As of January 31, 2012, $19 million of the total gross unrealized losses were related to certain debt securities that had been in a continuous loss position for more than twelve months. The gross unrealized loss as of October 31, 2011 was due primarily to declines in certain debt securities of $21 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.

        HP has evaluated the near-term prospects of its equity investments in a gross unrealized loss position in relation to the severity and duration of the impairment and considers the decline in market value of the equity investments to be temporary in nature.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments (Continued)

        For the three months ended January 31, 2012, HP recognized an insignificant impairment charge associated with debt securities. For the three months ended January 31, 2011, HP did not recognize any impairment charge associated with debt securities.

        Equity securities in privately held companies include cost basis and equity method investments. These amounted to $49 million and $48 million for the periods ended January 31, 2012 and October 31, 2011, respectively, and are included in long-term financing receivables and other assets.

    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 and 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, on a gross basis, 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 risk limits that correspond to each institution's credit rating and other factors. 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 the same counterparty.

        To further mitigate credit exposure to counterparties, HP may enter into collateral security arrangements with its counterparties. These arrangements require HP to post collateral or to hold collateral from counterparties when the derivative fair values exceed contractually established thresholds which are generally based on the credit ratings of HP and its counterparties. Such funds are generally transferred within two business days. As of January 31, 2012, HP held $240 million of collateral and posted $23 million through re-hypothecation in association with the counterparties under these collateralized arrangements. Collateral amounts posted as of January 31, 2011 were not material. As of January 31, 2012 and 2011, HP did not have any derivative instruments under these collateralized arrangements that were in a significant net liability position.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments (Continued)

    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 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 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 three months ended January 31, 2012 and 2011, 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

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments (Continued)

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.

    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 January 31, 2012 and 2011, 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 months ended January 31, 2012 and 2011.

    Fair Value of Derivative Instruments in the Consolidated Condensed Balance Sheets

        As discussed in Note 7, 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

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments (Continued)

gross notional and fair value of derivative financial instruments in the Consolidated Condensed Balance Sheets was recorded as follows:

 
  As of January 31, 2012   As of October 31, 2011  
 
  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

  $ 10,075   $ 11   $ 530   $   $   $ 10,075   $ 30   $ 508   $   $  

Cash flow hedges:

                                                             

Foreign exchange contracts

    20,706     435     56     210     88     21,666     192     30     324     126  

Net investment hedges:

                                                             

Foreign exchange contracts

    1,642     11     11     49     36     1,556     7     4     44     56  
                                           

Total derivatives designated as hedging instruments

    32,423     457     597     259     124     33,297     229     542     368     182  
                                           

Derivatives not designated as hedging instruments

                                                             

Foreign exchange contracts

    16,572     64     5     165     23     13,994     66     5     244     38  

Interest rate contracts(2)

    2,200         48         55     2,200         55         71  

Other derivatives

    384     12     8             410     25     6         1  
                                           

Total derivatives not designated as hedging instruments

    19,156     76     61     165     78     16,604     91     66     244     110  
                                           

Total derivatives

  $ 51,579   $ 533   $ 658   $ 424   $ 202   $ 49,901   $ 320   $ 608   $ 612   $ 292  
                                           

(1)
Represents the face amounts of contracts that were outstanding as of January 31, 2012 and October 31, 2011, respectively.

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

    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 months ended January 31, 2012 and 2011 was as follows:

 
  Gain (Loss) Recognized in Income on Derivative and Related Hedged Item  
Derivative Instrument
  Location   Three
months
ended
January 31,
2012
  Hedged Item   Location   Three
months
ended
January 31,
2012
 
 
   
  In millions
   
   
  In millions
 

Interest rate contracts

  Interest and other, net   $ 4   Fixed-rate debt   Interest and other, net   $  

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments (Continued)

 

 
  Gain (Loss) Recognized in Income on Derivative and Related Hedged Item  
Derivative Instrument
  Location   Three
months
ended
January 31,
2011
  Hedged Item   Location   Three
months
ended
January 31,
2011
 
 
   
  In millions
   
   
  In millions
 

Interest rate contracts

  Interest and other, net   $ (178 ) Fixed-rate debt   Interest and other, net   $ 174  

        The before-tax effect of derivative instruments in cash flow and net investment hedging relationships for the three months ended January 31, 2012 and 2011 was as follows:

 
  Gain (Loss)
Recognized in
Other
Comprehensive
Income ("OCI")
on Derivative
(Effective
Portion)
  Gain (Loss) Reclassified from
Accumulated OCI Into Income
(Effective Portion)
  Gain Recognized in
Income on Derivative
(Ineffective portion
and Amount Excluded
from Effectiveness Testing)
 
 
  Three
months
ended
January 31,
2012
  Location   Three
months
ended
January 31,
2012
  Location   Three
months
ended
January 31,
2012
 
 
  In millions
   
  In millions
   
  In millions
 

Cash flow hedges:

                           

Foreign exchange contracts

  $ 427   Net revenue   $ 88   Net revenue   $  

Foreign exchange contracts

    (8 ) Cost of products     16   Cost of products      

Foreign exchange contracts

    (3 ) Other operating expenses     (1 ) Other operating expenses      

Foreign exchange contracts

    (9 ) Net revenue     (5 ) Interest and other, net      
                       

Total cash flow hedges

  $ 407       $ 98       $  
                       

Net investment hedges:

                           

Foreign exchange contracts

  $ 25   Interest and other, net   $   Interest and other, net   $  
                       

 

 
  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
(Ineffective portion
and Amount Excluded
from Effectiveness Testing)
 
 
  Three
months
ended
January 31,
2011
  Location   Three
months
ended
January 31,
2011
  Location   Three
months
ended
January 31,
2011
 
 
  In millions
   
  In millions
   
  In millions
 

Cash flow hedges:

                           

Foreign exchange contracts

  $ 100   Net revenue   $ (24 ) Net revenue   $  

Foreign exchange contracts

    (9 ) Cost of products     26   Cost of products      

Foreign exchange contracts

    (2 ) Other operating expenses     1   Other operating expenses      

Foreign exchange contracts

    16   Interest and other, net     7   Interest and other, net      

Foreign exchange contracts

    (13 ) Net revenue     4   Interest and other, net     2  
                       

Total cash flow hedges

  $ 92       $ 14       $ 2  
                       

Net investment hedges:

                           

Foreign exchange contracts

  $ (6 ) Interest and other, net   $   Interest and other, net   $  
                       

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments (Continued)

        As of January 31, 2012, HP expects to reclassify an estimated net accumulated other comprehensive gain of approximately $149 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.

        The before-tax effect of derivative instruments not designated as hedging instruments on the Consolidated Condensed Statements of Earnings for the three months ended January 31, 2012 and 2011 was as follows:

 
  Gain (Loss) Recognized in
Income on Derivative
 
 
  Location   Three months
ended
January 31,
2012
 
 
   
  In millions
 

Foreign exchange contracts

  Interest and other, net   $ (82 )

Other derivatives

  Interest and other, net     (10 )

Interest rate contracts

  Interest and other, net     10  
           

Total

      $ (82 )
           

 

 
  Gain (Loss) Recognized in
Income on Derivative
 
 
  Location   Three months
ended
January 31,
2011
 
 
   
  In millions
 

Foreign exchange contracts

  Interest and other, net   $ (77 )

Other derivatives

  Interest and other, net     (2 )

Interest rate contracts

  Interest and other, net     2  
           

Total

      $ (77 )
           

    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 $31.9 billion at January 31, 2012, compared to a carrying value of $30.9 billion at that date. The estimated fair value of HP's short- and long-term debt was approximately $31.1 billion at October 31, 2011, compared to a carrying value of $30.6 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.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 9: 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 financing receivables, which are included in Financing receivables and Long-term financing receivables and other assets in the accompanying Consolidated Condensed Balance Sheets, were as follows:

 
  January 31,
2012
  October 31,
2011
 
 
  In millions
 

Minimum lease payments receivable

  $ 7,748   $ 7,721  

Unguaranteed residual value

    231     233  

Unearned income

    (655 )   (647 )
           

Financing receivables, gross

    7,324     7,307  

Allowance for doubtful accounts

    (140 )   (130 )
           

Financing receivables, net

    7,184     7,177  

Less current portion

    (3,123 )   (3,162 )
           

Amounts due after one year, net

  $ 4,061   $ 4,015  
           

        Equipment leased to customers under operating leases was $3.9 billion and $4.0 billion at January 31, 2012 and October 31, 2011, respectively, and is included in machinery and equipment. Accumulated depreciation on equipment under lease was $1.4 billion at January 31, 2012 and $1.3 billion at October 31, 2011.

        Due to the homogenous nature of the leasing transactions, HP manages its financing receivables on an aggregate basis when assessing and monitoring credit risk. Credit risk is generally diversified due to the large number of entities comprising HP's customer base and their dispersion across many different industries and geographical regions. The credit quality of an obligor is evaluated at lease inception and monitored over the term of a transaction. Risk ratings are assigned to each lease based on the creditworthiness of the obligor and other variables that augment or diminish the inherent credit risk of a particular transaction. Such variables include the underlying value and liquidity of the collateral, the essential use of the equipment, the term of the lease, and the inclusion of guarantees, letters of credit, security deposits or other credit enhancements.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 9: Financing Receivables and Operating Leases (Continued)

        The credit risk profile of the gross financing receivables, based on internally assigned ratings, was as follows:

 
  January 31,
2012
  October 31,
2011
 
 
  In millions
 

Risk Rating

             

Low

  $ 4,303   $ 4,261  

Moderate

    2,954     2,989  

High

    67     57  
           

Total

  $ 7,324   $ 7,307  
           

        Accounts rated low risk typically have the equivalent of a Standard & Poor's rating of BBB- or higher, while accounts rated moderate risk would generally be the equivalent of BB+ or lower. HP closely monitors accounts rated high risk and, based upon an impairment analysis, may establish specific reserves against a portion of these leases.

        The allowance for doubtful accounts balance is comprised of a general reserve, which is determined based on a percentage of the financing receivables balance, and a specific reserve, which is established for certain leases with identified exposures, such as customer default, bankruptcy or other events, that make it unlikely that HP will recover its investment in the lease. The general reserve percentages are maintained on a regional basis and are based on several factors, which include consideration of historical credit losses and portfolio delinquencies, trends in the overall weighted-average risk rating of the portfolio, and information derived from competitive benchmarking.

        The allowance for doubtful accounts and the related financing receivables were as follows:

 
  Three months ended
January 31, 2012
 
 
  In millions
 

Allowance for doubtful accounts

       

Balance, beginning of period

  $ 130  

Additions to allowance

    12  

Deductions, net of recoveries

    (2 )
       

Balance, end of period

  $ 140  
       

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 9: Financing Receivables and Operating Leases (Continued)


 
  January 31,
2012
  October 31,
2011
 
 
  In millions
 

Allowance for financing receivables individually evaluated for loss

  $ 44   $ 35  

Allowance for financing receivables collectively evaluated for loss

    96     95  
           

Total

  $ 140   $ 130  
           

Gross financing receivables individually evaluated for loss

  $ 278   $ 228  

Gross financing receivables collectively evaluated for loss

    7,046     7,079  
           

Total

  $ 7,324   $ 7,307  
           

        Accounts are generally put on non-accrual status (cessation of interest accrual) when they reach 90 days past due. The non-accrual status may not impact a customer's risk rating. In certain circumstances, such as when the delinquency is deemed to be of an administrative nature, accounts may still accrue interest when they reach 90 days past due. A write-off or specific reserve is generally recorded when an account reaches 180 days past due. Total financing receivables on non-accrual status were $177 million and $157 million at January 31, 2012 and October 31, 2011, respectively. Total financing receivables greater than 90 days past due and still accruing interest were $101 million and $71 million at January 31, 2012 and October 31, 2011, respectively.

Note 10: 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 HP or HP's subsidiaries' nonperformance 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.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 10: 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 three months ended January 31, 2012 were as follows:

 
  In millions  

Product warranty liability at October 31, 2011

  $ 2,451  

Accruals for warranties issued

    585  

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

    (53 )

Settlements made (in cash or in kind)

    (618 )
       

Product warranty liability at January 31, 2012

  $ 2,365  
       

Note 11: Borrowings

    Notes Payable and Short-Term Borrowings

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

 
  January 31, 2012   October 31, 2011  
 
  Amount
Outstanding
  Weighted-
Average
Interest
Rate
  Amount
Outstanding
  Weighted-
Average
Interest
Rate
 
 
  In millions
   
  In millions
   
 

Commercial paper

  $ 520     1.4 % $ 3,215     0.4 %

Current portion of long-term debt

    4,341     2.0 %   4,345     2.4 %

Notes payable to banks, lines of credit and other

    577     2.9 %   523     2.9 %
                       

  $ 5,438         $ 8,083        
                       

        Notes payable to banks, lines of credit and other includes deposits associated with HP's banking-related activities of approximately $366 million and $355 million at January 31, 2012 and October 31, 2011, respectively.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 11: Borrowings (Continued)

    Long-Term Debt

        Long-term debt was as follows:

 
  January 31,
2012
  October 31,
2011
 
 
  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

  $ 500   $ 500  

2006 Shelf Registration Statement:

             

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

    600     600  

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

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

    1,500     1,500  

$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

    1,997     1,996  

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

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 11: Borrowings (Continued)

 
  January 31,
2012
  October 31,
2011
 
 
  In millions
 

2009 Shelf Registration Statement:

             

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

    250     250  

$800 issued at par in September 2010 at three-month USD LIBOR plus 0.125%, due September 2012

    800     800  

$1,100 issued at discount to par at a price of 99.921% in September 2010 at 1.25%, due September 2013

    1,100     1,099  

$1,100 issued at discount to par at a price of 99.887% in September 2010 at 2.125%, due September 2015

    1,099     1,099  

$650 issued at discount to par at a price of 99.911% in December 2010 at 2.2%, due December 2015

    650     650  

$1,350 issued at discount to par at a price of 99.827% in December 2010 at 3.75%, due December 2020

    1,348     1,348  

$1,750 issued at par in May 2011 at three month USD LIBOR plus 0.28%, due May 2013

    1,750     1,750  

$500 issued at par in May 2011 at three month USD LIBOR plus 0.4%, due May 2014

    500     500  

$500 issued at discount to par at a price of 99.971% in May 2011 at 1.55%, due May 2014

    500     500  

$1,000 issued at discount to par at a price of 99.958% in May 2011 at 2.65%, due June 2016

    1,000     1,000  

$1,250 issued at discount to par at a price of 99.799% in May 2011 at 4.3%, due June 2021

    1,248     1,248  

$750 issued at discount to par at a price of 99.977% in September 2011 at 2.35%, due March 2015

    750     750  

$1,300 issued at discount to par at a price of 99.784% in September 2011 at 3.0%, due September 2016

    1,297     1,297  

$1,000 issued at discount to par at a price of 99.816% in September 2011 at 4.375%, due September 2021

    998     998  

$1,200 issued at discount to par at a price of 99.863% in September 2011 at 6.0%, due September 2041

    1,198     1,198  

$350 issued at par in September 2011 at three-month USD LIBOR plus 1.55%, due September 2014

    350     350  

$650 issued at discount to par at a price of 99.946% in December 2011 at 2.625%, due December 2014

    650      

$850 issued at discount to par at a price of 99.790% in December 2011 at 3.3%, due December 2016

    848      

$1,500 issued at discount to par at a price of 99.707% in December 2011 at 4.65%, due December 2021

    1,496      
           

    27,078     24,082  
           

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 11: Borrowings (Continued)

 
  January 31,
2012
  October 31,
2011
 
 
  In millions
 

EDS Senior Notes

             

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

    1,117     1,120  

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

    315     315  
           

    1,432     1,435  
           

Other, including capital lease obligations, at 0.60%-8.63%, due in calendar years 2012-2024

    749     836  

Fair value adjustment related to hedged debt

    544     543  

Less: current portion

    (4,341 )   (4,345 )
           

Total long-term debt

  $ 25,462   $ 22,551  
           

        As disclosed in Note 8 to the Consolidated Condensed Financial Statements, 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.

        HP's Board of Directors has approved a $16.0 billion U.S. commercial paper program. 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.

        HP has a $3.0 billion five-year credit facility that expires in May 2012 and a $4.5 billion four-year credit facility that expires in February 2015. 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 $7.5 billion supported by these credit facilities is subject to a number of factors, including liquidity conditions and business performance.

        Within Other, including capital lease obligations, are borrowings that are collateralized by certain financing receivable assets. As of January 31, 2012, the carrying value of the assets approximated the carrying value of the borrowings of $258 million.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 11: Borrowings (Continued)

        As of January 31, 2012, 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 $17.3 billion of available borrowing resources, including $16.0 billion under its commercial paper programs and approximately $1.3 billion relating to uncommitted lines of credit.

    Subsequent Event

        On March 12, 2012, HP issued $2.0 billion of U.S. Dollar Global Notes under the 2009 Shelf Registration Statement. The Global Notes consisted of fixed-rate notes at market rates with maturities of five and ten years from the date of issuance.

Note 12: Income Taxes

    Provision for Taxes

        HP's effective tax rate was 19.4% and 21.0% for the three months ended January 31, 2012 and January 31, 2011, respectively. HP's effective tax rate decreased due to an increase in the percentage of total earnings earned in lower-tax jurisdictions. 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 months ended January 31, 2012, HP recorded discrete items with a net tax benefit of $49 million, decreasing the effective tax rate. These amounts included net tax benefits of $28 million from restructuring and acquisition charges, and $23 million from reversals of accrued interest expense and penalties on uncertain tax positions, net of tax.

        In the three months ended January 31, 2011, HP recorded discrete items with a net tax benefit of $101 million, decreasing the effective tax rate. These amounts included net tax benefits of $58 million from restructuring and acquisition charges. In addition, in December 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was signed into law. HP recorded a tax benefit of $43 million arising from the retroactive research and development credit provided by that legislation in the first quarter of fiscal 2011.

        As of January 31, 2012, the amount of gross unrecognized tax benefits was $2.3 billion, of which up to $1.1 billion would affect HP's effective tax rate if realized. HP recognizes interest income from favorable settlements and income tax receivables and interest expense and penalties accrued on unrecognized tax benefits within income tax expense. As of January 31, 2012, HP had accrued a net $182 million payable for interest and penalties.

        HP engages in continuous discussion and negotiation with taxing authorities regarding tax matters in 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 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 $238 million within the next 12 months.

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(Unaudited)

Note 12: Income Taxes (Continued)

        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. The IRS began an audit of HP's 2008 income tax returns in 2010 and began its audit of HP's 2009 income tax returns during 2011. 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, 2006 and 2007 tax years. The proposed IRS adjustments for these tax years would, if sustained, reduce the benefits of tax refund claims HP has filed for net operating loss carrybacks to earlier fiscal years and tax credit carryforwards to subsequent years by approximately $558 million. HP has filed petitions with the United States Tax Court regarding certain proposed IRS adjustments regarding tax years 1999 through 2003 and is continuing to contest additional adjustments proposed by the IRS for other tax years. HP believes that it has provided adequate reserves for any tax deficiencies or reductions in tax benefits that could result from the IRS actions. 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.

        Tax years of EDS through 2002 have been audited by the IRS, and all proposed adjustments have been resolved. EDS has received RAR's for exam years 2003, 2004, 2005, 2006, 2007 and the short period ended August 26, 2008, proposing total tax deficiencies of $320 million. HP is contesting certain issues and believes it has provided adequate reserves for any tax deficiencies or reductions in tax benefits that could result from the IRS actions.

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

 
  January 31,
2012
  October 31,
2011
 
 
  In millions
 

Current deferred tax assets

  $ 4,857   $ 5,374  

Current deferred tax liabilities

    (29 )   (41 )

Long-term deferred tax assets

    1,439     1,283  

Long-term deferred tax liabilities

    (4,992 )   (5,163 )
           

Total deferred tax assets net of deferred tax liabilities

  $ 1,275   $ 1,453  
           

Note 13: Stockholders' Equity

    Share Repurchase Program

        HP's share repurchase program authorizes both open market and private repurchase transactions. In the first quarter of fiscal 2012, HP executed share repurchases of 30 million shares. Repurchases of 29 million shares were settled for $780 million in the first quarter of fiscal 2012. HP had approximately 1 million shares repurchased in the first quarter of fiscal 2012 that will be settled in the second quarter of fiscal 2012. HP paid approximately $2.3 billion in connection with repurchases of approximately 54 million shares during the three months ended January 31, 2011. As of January 31, 2012, HP had remaining authorization of $10.0 billion for future share repurchases.

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    Comprehensive Income

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

 
  Three months ended
January 31
 
 
  2012   2011  
 
  In millions
 

Net earnings

  $ 1,468   $ 2,605  

Net change in unrealized (losses) gains on available-for-sale securities, net of tax benefit of $5 million in 2012 and net of tax of $5 million in 2011

    (57 )   10  

Net change in unrealized gains on cash flow hedges:

             

Unrealized gains recognized in OCI, net of tax of $152 million in 2012 and $32 million in 2011

    255     60  

Gains reclassified into income, net of tax of $37 million in 2012 and $1 million in 2011

    (61 )   (13 )
           

    194     47  
           

Net change in cumulative translation adjustment, net of tax benefit of $14 million in 2012 and net of tax of $17 million in 2011

    (233 )   51  

Net change in unrealized components of defined benefit plans, net of tax of $70 million in 2012 and $10 million in 2011

    87     31  
           

Comprehensive income

  $ 1,459   $ 2,744  
           

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

 
  January 31,
2012
  October 31,
2011
 
 
  In millions
 

Net unrealized (loss) gain on available-for-sale securities

  $ (20 ) $ 37  

Net unrealized gain (loss) on cash flow hedges

    153     (41 )

Cumulative translation adjustment

    (618 )   (385 )

Unrealized components of defined benefit plans

    (3,022 )   (3,109 )
           

Accumulated other comprehensive loss

  $ (3,507 ) $ (3,498 )
           

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(Unaudited)

Note 14: Retirement and Post-Retirement Benefit Plans

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

 
  Three months ended January 31  
 
  U.S.
Defined
Benefit Plans
  Non-U.S.
Defined
Benefit Plans
  Post-
Retirement
Benefit Plans
 
 
  2012   2011   2012   2011   2012   2011  
 
  In millions
 

Service cost

  $   $   $ 74   $ 85   $ 2   $ 2  

Interest cost

    141     148     176     169     8     8  

Expected return on plan assets

    (198 )   (186 )   (208 )   (213 )   (9 )   (9 )

Amortization and deferrals:

                                     

Actuarial loss

    11     9     60     62     (1 )   1  

Prior service benefit

            (6 )   (3 )   (21 )   (21 )
                           

Net periodic benefit (gain) cost

  $ (46 ) $ (29 ) $ 96   $ 100   $ (21 ) $ (19 )

Special termination benefits

            1     2          

Settlements

            (28 )            
                           

Net benefit (gain) cost

  $ (46 ) $ (29 ) $ 69   $ 102   $ (21 ) $ (19 )
                           

        During the first quarter of fiscal 2012, HP completed the transfer of the substitutional portion of its Japan pension liability and obligation to the Japanese government. This resulted in recognizing a net gain of $28 million, which is comprised of a net settlement loss of $150 million and a gain on government subsidy of $178 million. The government subsidy consisted of the elimination of $344 million of pension obligations and the transfer of $166 million of pension assets to the Japanese government.

    Employer Contributions and Funding Policy

        HP previously disclosed in its Consolidated Financial Statements for the fiscal year ended October 31, 2011 that it expected to contribute approximately $597 million to its pension plans and approximately $31 million to cover benefit payments to U.S. non-qualified plan participants. HP expects to pay approximately $30 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 makes at least the minimum contribution required by local government, funding and taxing authorities.

        During the three months ended January 31, 2012, HP made $88 million of contributions to its pension plans, paid $9 million to cover benefit payments to U.S. non-qualified plan participants, and paid $7 million to cover benefit claims under post-retirement benefit plans. During the remainder of fiscal 2012, HP anticipates making additional contributions of approximately $509 million to its pension plans and approximately $22 million to its U.S. non-qualified plan participants and expects to pay up to $23 million to cover benefit claims under post-retirement benefit plans. 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 invested assets 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

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amortized over the remaining service life or life expectancy of plan participants. HP's next measurement date is October 31, 2012.

Note 15: 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, and, as of January 31, 2012, it was not reasonably possible that an additional material loss had been incurred in an amount in excess of the amounts already recognized on HP's financial statements. 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, 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.

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, Belgium and Austria, seeking to impose or modify levies upon equipment (such as multifunction devices ("MFDs"), personal computers ("PCs") and printers) and alleging that these devices enable producing private copies of copyrighted materials. Descriptions of some of the ongoing proceedings are included below. 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 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

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Supreme Court denied VG Wort's application. VG Wort appealed the decision by filing a claim with the German Federal Constitutional Court challenging the ruling that printers are not subject to levies. On September 21, 2010, the Constitutional Court published a decision holding that the German Federal Supreme Court erred by not referring questions on interpretation of German copyright law to the Court of Justice of the European Union ("CJEU") and therefore revoked the German Federal Supreme Court decision and remitted the matter to it. On July 21, 2011, the German Federal Supreme Court stayed the proceedings and referred several questions to the CJEU with regard to the interpretation of the European Copyright Directive.

        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 subsequently filed a claim with the German Federal Constitutional Court challenging that ruling. In January 2011, the Constitutional Court published a decision holding that the German Federal Supreme Court decision was inconsistent with the German Constitution and revoking the German Federal Supreme Court decision. The Constitutional Court remitted the matter to the German Federal Supreme Court for further action. On July 21, 2011, the German Federal Supreme Court stayed the proceedings and referred several questions to the CJEU with regard to the interpretation of the European Copyright Directive.

        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 been determined, and no decision from the court is expected before September 2012.

        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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        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 Intel Corporation ("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 lawsuit alleges that HP aided and abetted Intel's allegedly unlawful conduct. 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. On August 31, 2011, the California Court of Appeal reversed the trial court's denial of class certification and remanded the case back to the trial court for further proceedings. On November 23, 2011, plaintiffs filed a motion seeking to certify a nationwide class asserting claims under the California Consumers Legal Remedies Act and the California Unfair Competition Law. A hearing on plaintiffs' motion is currently scheduled for April 13, 2012.

        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 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 the calendar.

    Two class actions against HP and its subsidiary, Hewlett-Packard (Canada) Co., are pending in Canada, one commenced in British Columbia in February 2006 and one commenced in Ontario

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      in June 2006, where the plaintiffs are seeking class certification, restitution, declaratory relief, injunctive relief and unspecified statutory, compensatory and punitive damages.

        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. On March 29, 2011, the court granted final approval of the settlement. On April 27, 2011, certain class members who objected to the settlement filed an appeal of the court's order granting final approval of the settlement.

        Sinacori v. HP is a consumer class action originally filed against HP on December 1, 2011 in the United States District Court for the Northern District of California alleging that HP printers have a design defect in the software installed on the printers which could allow hackers and unauthorized users to gain access to the printers, steal personal and confidential information from consumers and otherwise control and cause physical damage to the printers. The original complaint also alleged that HP was aware of this security vulnerability and failed to disclose it to consumers. The original complaint sought certification of a nationwide class of purchasers of all HP printers and unspecified damages, restitution, punitive damages, injunctive relief, attorneys' fees and costs. On February 3, 2012, an amended complaint was filed substituting a new plaintiff from the state of New York in place of the original plaintiff. The amended complaint asserts only a single claim under the New York consumer protection statute, and the amended complaint now seeks to certify a class of consumers in the state of New York who purchased an HP printer that lacks a "digital signature" or "code signing" security feature. Like the original complaint, the amended complaint seeks unspecified damages, restitution, punitive damages, injunctive relief, attorneys' fees and costs.

        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 allegedly 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. On December 14, 2010, the court granted conditional certification of a class consisting of employees in 20 legacy EDS job codes in the consolidated Cunningham and Steavens matter. Plaintiffs also allege various state law class claims for misclassification, but plaintiffs have not yet sought class certification for those.

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    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. A hearing on the appeal was held in August 2011, and the decision 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 but has been temporarily stayed based on the pending Steavens consolidated matter. The George case was pending in the U.S. District Court for the Southern District of New York and had been consolidated for pretrial purposes with the Cunningham and Steavens cases. On September 9, 2011, the court granted a request by the plaintiffs' counsel in the George matter to amend the plaintiffs' complaint and sever the case from the Steavens consolidated matter. The plaintiff thereafter filed his first amended complaint on October 21, 2011. On November 23, 2011, the court transferred the George matter back to the U.S. District Court for the Central District of California.

    Blake, et al. v. Hewlett-Packard Company is a purported nationwide collective action filed on February 17, 2011 in the U.S. District Court for the Southern District of Texas claiming that a class of information technology support personnel were misclassified as exempt employees under the Fair Labor Standards Act. On February 10, 2012, plaintiffs filed a motion requesting that the court conditionally certify the case as a collective action. Only one opt-in plaintiff had joined the named plaintiff in the lawsuit at the time that the motion was filed.

    Fenn, et al. v. Hewlett-Packard Company is a purported collective action filed on May 24, 2011 in the United States District Court for the District of Idaho. The suit alleges that customer service representatives working in HP's U.S. call centers are not paid for time spent on start-up and shut-down tasks (such as booting up and shutting down their computers) in violation of the Fair Labor Standards Act. On December 12, 2011, the court denied plaintiffs' motion for conditional class certification but allowed plaintiffs to re-file that motion following limited discovery on the issue of conditional certification.

        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 underpaid customs duties while 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

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      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.

    On October 1, 2010, in connection with an existing DRI investigation commenced against SAP AG, the DRI issued a show cause notice to HPI alleging underpayment of customs duties related to the importation of certain SAP software. The amount of the alleged duty differential is approximately $38,000, which amount has been deposited with the DRI. The DRI is also seeking to impose interest and penalties.

HPI has responded to the show cause notices, and the Commissioner of Customs has been conducting hearings into the products show cause notice since late October 2011. HP expects the Commissioner to issue his decision in spring 2012. The spare parts show cause notice hearings will be heard by the Commissioner of Customs after the conclusion of the products show cause hearings. If HPI is unsuccessful in the proceedings before the Commissioner of Customs, it can appeal to the Customs Tribunal and, eventually, to the India courts, but such appeals could require HP or HPI to deposit additional monies with the Commissioner of Customs.

        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 General Prosecutor's Office of the Russian Federation. The approximately €35 million transaction, which was referred to as the Russia GPO deal, spanned the years 2001 to 2006 and was for the delivery and installation of an IT network.

        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.

        In addition to information about the Russia GPO deal, the U.S. enforcement authorities have requested (i) information related to certain other transactions, including transactions in Russia, Serbia and in the Commonwealth of Independent States (CIS) subregion dating back to 2000, and (ii) information related to two former HP executives seconded to Russia and to whether HP personnel in Russia, Germany, Austria, Serbia, the Netherlands or CIS were involved in kickbacks or other improper payments to channel partners or state-owned or private entities.

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Note 15: Litigation and Contingencies (Continued)

        HP is cooperating with these investigating agencies.

        ECT Proceedings.    In January 2011, the postal service of Brazil, Empresa Brasileira de Correios e Telégrafos ("ECT"), notified HP that it had initiated administrative proceedings against an HP subsidiary in Brazil ("HP Brazil") to consider whether to suspend HP Brazil's right to bid and contract with ECT related to alleged improprieties in the bidding and contracting processes whereby employees of HP Brazil and employees of several other companies coordinated their bids for three ECT contracts in 2007 and 2008. In late July 2011, ECT notified HP it had decided to apply the penalties against HP Brazil, suspending HP Brazil's right to bid and contract with ECT for five years, based upon the evidence before it. In August 2011, HP filed petitions with ECT requesting that the decision be revoked and seeking injunctive relief to have the application of the penalties suspended until a final, non-appealable decision is made on the merits of the case. HP is currently awaiting a response from ECT on both petitions. Because ECT did not rule on the substance of HP's petitions in a timely manner, HP filed a lawsuit seeking similar relief from the court. The court of first instance has not decided the merits of HP's lawsuit, but has denied HP's request for injunctive relief suspending application of the penalties pending a final, non-appealable decision on the merits of the case. HP appealed the denial of its request for injunctive relief to the intermediate appellate court, which issued a preliminary ruling denying the request for injunctive relief but reducing the length of the sanctions from five to two years. HP appealed that decision and, in December 2011, obtained a ruling staying enforcement of ECT's sanctions until HP can be heard on the full merits of the case. HP expects the appeal on the merits to last several years.

        Stockholder Litigation.    As described below, HP is involved in stockholder litigation commenced against certain current and former HP executive officers and certain current and former members of the HP Board of Directors in which the plaintiffs are seeking to recover certain compensation paid by HP to the defendants and other damages:

    Heather M. Bendit, et al. v. Mark V. Hurd, et al. (formerly Henrietta Klein v. Mark V. Hurd, et al.), is a lawsuit filed on September 24, 2010 in California Superior Court alleging the individual defendants wasted corporate assets and breached their fiduciary duties by failing to implement and oversee HP's compliance with the FCPA.

    Saginaw Police & Fire Pension Fund v. Marc L. Andreessen, et al. is a lawsuit filed on October 19, 2010 in United States District Court for the Northern District of California alleging, among other things, that the defendants breached their fiduciary duties and were unjustly enriched by consciously disregarding HP's alleged violations of the FCPA. On August 15, 2011, the defendants filed a motion to dismiss the lawsuit. The court has not yet ruled on that motion.

    A.J. Copeland v. Raymond J. Lane, et al. is a lawsuit filed on March 7, 2011 in the United States District Court for the Northern District of California alleging, among other things, that the defendants breached their fiduciary duties and wasted corporate assets in connection with HP's alleged violations of the FCPA, severance payments made to former Chairman and Chief Executive Officer Mark Hurd, and HP's acquisition of 3PAR Inc. The lawsuit also alleges violations of Section 14(a) of the Exchange Act in connection with HP's 2010 and 2011 proxy statements. On February 8, 2012, the defendants filed a motion to dismiss the lawsuit. The court has not yet ruled on that motion.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 15: Litigation and Contingencies (Continued)

    Richard Gammel v. Hewlett-Packard Company, et al. is a putative securities class action filed on September 13, 2011 in the United States Court for the Central District of California alleging, among other things, that from November 22, 2010 to August 18, 2011, the defendants violated Section 10(b) and 20(a) of the Exchange Act by concealing material information and making false statements about HP's business model, the future of the webOS operating system, and HP's commitment to developing and integrating webOS products, including the TouchPad tablet PC.

    Ernesto Espinoza v. Léo Apotheker, et al. and Larry Salat v. Léo Apotheker, et al. are consolidated lawsuits filed on September 21, 2011 in the United States Court for the Central District of California alleging, among other things, that the defendants violated Section 10(b) and 20(a) of the Exchange Act by concealing material information and making false statements about HP's business model and the future of webOS, the TouchPad and HP's PC business. The lawsuits also allege that the defendants breached their fiduciary duties, wasted corporate assets and were unjustly enriched when they authorized HP's repurchase of its own stock on August 29, 2010 and July 21, 2011.

    Luis Gonzalez v. Léo Apotheker, et al. and Richard Tyner v. Léo Apotheker, et al. are consolidated lawsuits filed on September 29, 2011 and October 5, 2011, respectively, in California Superior Court alleging, among other things, that the defendants breached their fiduciary duties, wasted corporate assets and were unjustly enriched by concealing material information and making false statements about HP's business model and the future of webOS, the TouchPad and HP's PC business and by authorizing the HP's repurchase of its own stock on August 29, 2010 and July 21, 2011. The lawsuits are currently stayed pending resolution of the Espinoza/Salat consolidated action in federal court.

Environmental

        Our operations and our products are 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. 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, and the energy consumption associated with those products, including requirements relating to climate change. We also are 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"). 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.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 15: Litigation and Contingencies (Continued)

        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.

Note 16: 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 ("SMBs"), and large enterprises, including customers in the government, health and education sectors. HP's offerings span personal computing and other access devices; 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; imaging and printing-related products and services; and enterprise information technology ("IT") infrastructure, including enterprise storage and server technology, networking products and solutions, IT management software, information management solutions and security intelligence/risk management solutions.

        HP and its operations are organized into seven business segments for financial reporting purposes: PSG, Services, IPG, ESSN, Software, 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 are based on this organizational structure and information reviewed by HP's management to evaluate the business segment results.

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

    Personal Systems Group provides commercial PCs, consumer PCs, workstations, calculators and other related accessories, software and services for the commercial and consumer markets. Commercial PCs are optimized for commercial uses, including enterprise and SMB customers, and for connectivity and manageability in networked environments. Commercial PCs include the HP ProBook and HP EliteBook lines of notebooks and the Compaq Pro, Compaq Elite, HP Pro and HP Elite lines of business desktops, as well as the All-in-One Touchsmart and Omni PCs, HP Mini-Note PCs, retail POS systems, HP Thin Clients, and HP Slate Tablet PCs. Consumer PCs include the HP Pavilion, HP Elite, Envy and Compaq Presario series of multi-media consumer notebooks, desktops and mini notebooks, including the TouchSmart line of touch-enabled all-in-one notebooks and desktops. HP's workstations are designed for users demanding enhanced performance, such as computer animation, engineering design and other programs requiring high-resolution graphics, and run on both Windows and Linux-based operating systems.

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

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 16: Segment Information (Continued)

      and business continuity; and enterprise managed services. Technology Services provides consulting and support services, including mission critical services, converged infrastructure services, networking services, data center transformation services and infrastructure services for storage, server and unified communication environments, as well as warranty support across HP's product lines. Application and Business Services helps clients revitalize and manage their applications assets through flexible, project-based consulting services encompassing application development, testing, modernization, system integration, maintenance and management for both package and custom-built applications. In addition, the business unit provides clients with industry-based intellectual property, assets and process models through a broad array of enterprise shared services, customer relationship management services, financial process management services and administrative processing and outsourcing services.

    Imaging and Printing Group provides consumer and commercial printer hardware, supplies, media and scanning devices. IPG is also focused on imaging solutions in the commercial markets. These solutions range from managed print services to 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, web-connected hardware and services) and develops HP's retail publishing 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 ePrintCenter. LaserJet and Enterprise Solutions delivers products, services and solutions to the medium-sized business and enterprise segments, including LaserJet printers and supplies, multi-function devices, scanners, web-connected hardware and services and enterprise software solutions, such as Exstream Software and Web Jetadmin. Managed Enterprise Solutions include managed print service products, support and solutions delivered to enterprise customers partnering with third-party software providers to offer workflow solutions in the enterprise environment. 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. HP's printer supplies offerings include LaserJet toner and inkjet printer cartridges, graphic solutions ink products and other printing-related media.

    Enterprise Servers, Storage and Networking provides server, storage, networking and, when combined with HP Software's Cloud Service Automation software suite, HP's CloudSystem. The CloudSystem enables infrastructure, platform and software as a service in private, public or hybrid environments. Industry Standard Servers offers primarily entry-level and mid-range ProLiant servers, which run primarily Windows, Linux and Novell operating systems and leverage Intel and 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. Business Critical Systems offers HP Integrity servers based on the Intel Itanium-based processor as well as HP Integrity NonStop solutions. Business Critical Systems also offers scale-up x86 ProLiant Servers for scalability of systems with more than four industry standard processors. HP's Storage business offers a broad range of products including storage area networks, network attached storage, storage management software and virtualization technologies, StoreOnce data deduplication solutions, tape drives and tape libraries. HP's Networking offerings include switches, router, and wireless LAN.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 16: Segment Information (Continued)

    Software provides enterprise information management solutions for both structured and unstructured data, IT management software and security intelligence/risk management solutions. Solutions are delivered in the form of traditional software licenses, software-as-a-service hybrid or appliance deployment models. Augmented by support and professional services, Software solutions allow IT organizations to gain customer insight and optimize infrastructure, operations, application life cycles, application quality, security, IT services and business processes. In addition, these solutions help businesses proactively safeguard digital assets, comply with corporate and regulatory policies, and control internal and external security risks.

    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 business intelligence solutions, HP Labs and certain business incubation projects. Business intelligence solutions enable business to standardize on consistent data management schemes, connect and share data across the enterprise and apply analytics. This segment also derives revenue from licensing specific HP technology to third parties.

    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.

        To provide improved visibility and comparability HP has reclassified segment operating results for fiscal 2011 to conform to certain fiscal 2012 organizational realignments. The realignment resulted in transfer of revenue and operating profit among Services, IPG, ESSN, Software and Corporate Investments. In addition, revenue was transferred among the business units within Services. These realignments include:

    The transfer of Indigo Scitex support and the LaserJet and enterprise solutions trade support business from the Technology Services business unit within Services to the Commercial Hardware business unit within IPG;

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 16: Segment Information (Continued)

    The transfer of the TippingPoint business from the Networking business unit within ESSN to Software;

    The transfer of the business intelligence services business from Corporate Investments to a newly formed Application and Business Services business unit within Services;

    The consolidation of the Application Services, Business Process Outsourcing and Other Services business units within Services into the new Application and Business Services business unit; and

    The transfer of the information management services business from Software to the new Application and Business Services business unit within Services.

        These changes had no impact on the previously reported financial results for PSG or HPFS. In addition, none of these changes impacted HP's previously reported consolidated net revenue, earnings from operations, net earnings or net earnings per share.

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

 
  Three months ended January 31  
 
  Net Revenue   Earnings (Loss)
from Operations
 
 
  2012   2011   2012   2011  
 
  In millions
 

Personal Systems Group

  $ 8,873   $ 10,449   $ 464   $ 672  

Services

    8,626     8,529     905     1,381  

Imaging and Printing Group

    6,258     6,731     761     1,119  

Enterprise Servers, Storage and Networking

    5,018     5,599     562     830  

Software(1)

    946     725     162     120  

HP Financial Services

    950     827     91     79  

Corporate Investments

    58     62     (48 )   (178 )
                   

Total segments

  $ 30,729   $ 32,922   $ 2,897   $ 4,023  
                   

(1)
Includes results of Autonomy from the date of acquisition in October 2011.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 16: Segment Information (Continued)

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

 
  Three months ended
January 31
 
 
  2012   2011  
 
  In millions
 

Net revenue:

             

Segment total

  $ 30,729   $ 32,922  

Eliminations of intersegment net revenue and other

    (693 )   (620 )
           

Total HP consolidated net revenue

  $ 30,036   $ 32,302  
           

Earnings before taxes:

             

Total segment earnings from operations

  $ 2,897   $ 4,023  

Corporate and unallocated costs, gains and eliminations

    (153 )   149  

Unallocated costs related to stock-based compensation expense

    (174 )   (166 )

Amortization of purchased intangible assets

    (466 )   (425 )

Restructuring charges

    (40 )   (158 )

Acquisition-related charges

    (22 )   (29 )

Interest and other, net

    (221 )   (97 )
           

Total HP consolidated earnings before taxes

  $ 1,821   $ 3,297  
           

        In connection with certain fiscal 2012 organizational realignments, HP reclassified total assets between its Services, Imaging and Printing Group, Enterprise Servers, Storage and Networking, Software and Corporate Investments financial reporting segments. There have been no material changes to the total assets of HP's individual segments.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 16: Segment Information (Continued)

    Net revenue by segment and business unit

 
  Three months ended
January 31
 
 
  2012   2011  
 
  In millions
 

Net revenue:

             

Notebooks

  $ 4,942   $ 5,808  

Desktops

    3,206     3,896  

Workstations

    535     535  

Other

    190     210  
           

Personal Systems Group

    8,873     10,449  
           

Infrastructure Technology Outsourcing

    3,701     3,644  

Technology Services

    2,562     2,514  

Application and Business Services

    2,363     2,371  
           

Services

    8,626     8,529  
           

Supplies

    4,079     4,358  

Commercial Hardware

    1,489     1,565  

Consumer Hardware

    690     808  
           

Imaging and Printing Group

    6,258     6,731  
           

Industry Standard Servers

    3,072     3,448  

Storage

    955     1,012  

Business Critical Systems

    405     555  

Networking

    586     584  
           

Enterprise Servers, Storage and Networking

    5,018     5,599  
           

Software(1)

    946     725  

HP Financial Services

    950     827  

Corporate Investments

    58     62  
           

Total segments

    30,729     32,922  
           

Eliminations of intersegment net revenue and other

    (693 )   (620 )
           

Total HP consolidated net revenue

  $ 30,036   $ 32,302  
           

(1)
Includes results of Autonomy from the date of acquisition in October 2011.

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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:

    personal computing and other access devices;

    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;

    imaging and printing-related products and services; and

    enterprise information technology infrastructure, including enterprise storage and server technology, networking products and solutions, IT management software, information management solutions and security intelligence/risk management solutions.

        We have seven business segments for financial reporting purposes: the Personal Systems Group ("PSG"), Services, the Imaging and Printing Group ("IPG"), Enterprise Servers, Storage and Networking ("ESSN"), Software, HP Financial Services ("HPFS") and Corporate Investments.

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

    Strategic Focus

        The core of our business is our hardware products, which include our PC, server, storage, networking, and imaging and printing products. Our software business provides enterprise IT management software, information management solutions and security intelligence/risk management solutions delivered in the form of traditional software licenses or as software-as-a-service that allow us to differentiate our hardware products and deploy them in a manner that helps our customers solve problems and meets our customers' needs to manage their infrastructure, operations, application life cycles, application quality and security, business processes, and structured and unstructured data. Our Converged Infrastructure portfolio of servers, storage and networking combined with our Cloud Service Automation software suite enables enterprise and service provider clients to deliver infrastructure, platform and software-as-a-service in a private, public or hybrid cloud environment. Layered on top of our hardware and software businesses is our services business, which provides opportunities to drive usage of HP products and solutions, enables us to implement and manage all the technologies upon which our customers rely, and gives us a platform to be more solution-oriented, particularly in our focus areas of cloud, security and analytics, and a better strategic partner with our customers.

    Leveraging our Portfolio and Scale

        We offer one of the IT industry's broadest portfolios of products and services, and we leverage that portfolio to our strategic advantage. For example, we are able to provide servers, storage and networking products packaged with services that can be delivered to customers in the manner of their

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choosing, be it in-house, outsourced as a service via the Internet or via a hybrid environment. 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.

    Investing in our Business

        We are working to improve our execution and financial performance and align our cost structure to facilitate increased investment in our business to respond to industry shifts, strengthen our position in our core markets and accelerate growth in adjacent markets in anticipation of market trends, such as cloud computing, unstructured data, data center consolidation and automation, digitization, analytics and IT security. As part of these efforts, we are evaluating all of our businesses and looking for specific areas to improve our performance and effectiveness and rationalize costs. We are also creating innovative new products and developing new channels to connect with our customers. In addition, we have been making focused investments to strengthen our portfolio of products and services that we can offer to our customers, both through organic investments as well as through acquisitions. These investments will allow us to expand in higher margin and higher growth industry segments and further strengthen our portfolio of hardware, software and services to solve customer problems.

    Aligning our Cost Structure

        We are working to align our cost structure to our current revenue and margin profile and continuing to work to optimize operational effectiveness across the company. As part of those efforts, we are streamlining operations, optimizing and reducing complexity in our supply chain, removing unnecessary complexity from the way we design, manufacture, and deliver products, upgrading, standardizing and automating our sales tools and other key systems and processes, and taking other actions. In addition, we are continuing to implement the multi-year restructuring plan announced in June 2010 relating to our enterprise services business. See Note 6 to the Consolidated Condensed Financial Statements in Item 1 for further discussion of this restructuring plan and the associated restructuring charges.

        The following provides an overview of our key first quarter fiscal 2012 financial metrics:

 
  HP(1)
Consolidated
  PSG   Services   IPG   ESSN   Software   HPFS  
 
  In millions, except per share amounts
 

Net revenue

  $ 30,036   $ 8,873   $ 8,626   $ 6,258   $ 5,018   $ 946   $ 950  

Year-over-year net revenue % (decrease) increase

    (7.0 )%   (15.1 )%   1.1 %   (7.0 )%   (10.4 )%   30.5 %   14.9 %

Earnings from operations

  $ 2,042   $ 464   $ 905   $ 761   $ 562   $ 162   $ 91  

Earnings from operations as a % of net revenue

    6.8 %   5.2 %   10.5 %   12.2 %   11.2 %   17.1 %   9.6 %

Net earnings

  $ 1,468                                      

Net earnings per share

                                           

Basic

  $ 0.74                                      

Diluted

  $ 0.73                                      

(1)
Includes Corporate Investments and eliminations.

        Cash and cash equivalents at January 31, 2012 totaled $8.1 billion, an increase of $0.1 billion from the October 31, 2011 balance of $8.0 billion. The increase for the first three months of fiscal 2012 was due primarily to $1.2 billion of cash provided from operations, the effect of which was partially offset by $1.0 billion of cash used to repurchase common stock and payment of dividends.

        We intend the discussion of our financial condition and results of operations that follows to provide information that will assist in understanding our Consolidated Condensed Financial Statements,

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the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect our Consolidated Condensed Financial Statements.

        The discussion of results of operations at the consolidated level is followed by a more detailed discussion of results of operations by segment.

        For a further discussion of trends, uncertainties and other factors that could impact our operating results, see the section entitled "Factors That Could Affect Future Results."

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

        Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our Consolidated Condensed Financial Statements, which we have prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). The preparation of these financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, net revenue and expenses, and disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of our Board of Directors. Management believes that the accounting estimates employed and the resulting balances are reasonable; however, actual results may differ from these estimates under different assumptions or conditions.

        An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably possible could materially impact the financial statements. Management believes that there have been no significant changes during the three months ended January 31, 2012 to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended October 31, 2011.

CONSTANT CURRENCY PRESENTATION

        Revenue from our international operations has historically represented, and we expect will continue to represent, a majority of our overall net revenue. As a result, our revenue growth has been impacted, and we expect will continue to be impacted, by fluctuations in foreign currency exchange rates. In order to provide a framework for assessing how each of our business segments performed excluding the impact of foreign currency fluctuations, we present the year-over-year percentage change in revenue performance on a constant currency basis, which assumes no change in the exchange rate from the prior-year period. This constant currency disclosure is provided in addition to, and not as a substitute for, the year-over-year percentage change in revenue on an as-reported basis.

RESULTS OF OPERATIONS

        Set forth below is an analysis of our financial results comparing the three months ended January 31, 2012 to the three months ended January 31, 2011. Unless otherwise noted, all comparative performance data included below reflect year-over-year comparisons.

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        Results of operations in dollars and as a percentage of net revenue were as follows:

 
  Three months ended January 31  
 
  2012   2011(1)  
 
  Dollars   % of
Revenue
  Dollars   % of
Revenue
 
 
  In millions
 

Net revenue

  $ 30,036     100 % $ 32,302     100 %

Cost of sales(2)

    23,313     77.6 %   24,381     75.5 %
                   

Gross profit

    6,723     22.4 %   7,921     24.5 %

Research and development

    786     2.6 %   798     2.5 %

Selling, general and administrative

    3,367     11.2 %   3,117     9.6 %

Amortization of purchased intangible assets

    466     1.6 %   425     1.3 %

Restructuring charges

    40     0.1 %   158     0.5 %

Acquisition-related charges

    22     0.1 %   29     0.1 %
                   

Earnings from operations

    2,042     6.8 %   3,394     10.5 %

Interest and other, net

    (221 )   (0.7 )%   (97 )   (0.3 )%
                   

Earnings before taxes

    1,821     6.1 %   3,297     10.2 %

Provision for taxes

    353     1.2 %   692     2.1 %
                   

Net earnings

  $ 1,468     4.9 % $ 2,605     8.1 %
                   

(1)
In connection with organizational realignments implemented in the first quarter of fiscal 2012, certain costs previously reported as Cost of sales have been reclassified as Selling, general and administrative expenses to better align those costs with the functional areas that benefit from those expenditures.

(2)
Cost of products, cost of services and financing interest.

Net Revenue

        The components of the weighted net revenue change were as follows:

 
  Three months ended
January 31, 2012
 
 
  Percentage Points
 

Software

    0.7  

HP Financial Services

    0.4  

Services

    0.3  

Corporate Investments/Other

    (0.2 )

Imaging and Printing Group

    (1.5 )

Enterprise Servers, Storage and Networking

    (1.8 )

Personal Systems Group

    (4.9 )
       

Total HP

    (7.0 )
       

        For the three months ended January 31, 2012, total HP net revenue decreased 7.0% (7.9% on a constant currency basis). U.S. net revenue decreased 10.1% to $10.2 billion for the first quarter of fiscal 2012, while net revenue from outside of the United States decreased 5.3% to $19.8 billion. Thailand has recently experienced severe flooding which impacted the manufacturing of hard disk drive ("HDD") components used in PCs, servers and storage devices, resulting in short-term supply constraints. HP's revenue decreased primarily due to volume declines in the PSG and ESSN segments, with more than half of those declines being a result of HDD supply constraints. In addition,

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macroeconomic uncertainty adversely impacted revenue from our hardware businesses. The Software segment contributed favorably to the total HP net revenue change primarily as a result of the acquisition of Autonomy Corporation plc ("Autonomy"). An analysis of the change in net revenue for each business segment is included under "Segment Information" below.

Gross Margin

        Total HP gross margin decreased by 2.1 percentage points for the three months ended January 31, 2012. Gross margins were impacted by an unfavorable currency impact driven primarily by the strength of the yen, a lower mix of ink supplies volume, competitive pricing in our hardware businesses and continued margin pressure in Services.

        PSG gross margin decreased primarily as a result of a volume decline driven by HDD supply constraints and higher logistics costs, the effect of which was partially offset by a favorable commodity pricing environment, combined with a favorable currency impact and lower warranty costs.

        Services gross margin decreased due primarily to rate concessions arising from contract renewals, investments in service delivery headcount and additional costs associated with contract deliverable delays.

        IPG gross margin declined due primarily to an unfavorable currency impact driven by the strength of the yen and from lower ink supplies volume as a result of actions taken to reduce channel inventory coupled with soft demand in all regions.

        ESSN gross margin decreased due primarily to lower selling prices as a result of competitive pressures and an unfavorable product mix and a volume decline driven in part by HDD supply constraints, the effect of which was partially offset by lower component costs.

        Software gross margin decreased due primarily to a lower mix of license revenue and higher acquisition-related deferred revenue write-downs, the effect of which was partially offset by rate increases in services.

        HPFS gross margin decreased due primarily to lower portfolio margins from a higher mix of revenue from operating leases.

        Corporate Investments gross margin increased primarily as a result of a lower impact from the mobile device business associated with the Palm acquisition.

Operating Expenses

    Research and Development

        Total research and development ("R&D") expense decreased in the three months ended January 31, 2012 due primarily to elimination of R&D expense associated with the webOS device business, the effect of which was partially offset by additional expense from the acquisition of Autonomy. R&D expense increased for Software, Services and IPG and decreased for Corporate Investments, ESSN and PSG.

    Selling, General and Administrative

        Excluding the net gains on sale of real estate reported in the first quarter of fiscal 2011, selling, general and administrative ("SG&A") expense was flat for the three months ended January 31, 2012. SG&A expense as a percentage of net revenue increased for PSG, Services and ESSN and decreased for Corporate Investments, Software, IPG and HPFS.

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    Amortization of Purchased Intangible Assets

        The increase in amortization expense for the three months ended January 31, 2012 was due primarily to amortization expenses related to the intangible assets purchased as part of the Autonomy acquisition. This increase was partially offset by decreased amortization expenses related to certain intangible assets associated with prior acquisitions reaching the end of their amortization periods.

    Restructuring

        Restructuring charges for the three months ended January 31, 2012 were $40 million. These charges included $29 million of severance and facility costs related to our fiscal 2008 restructuring plan, $7 million of severance costs related to our fiscal 2009 restructuring plan and $4 million of severance and facility costs related to our fiscal 2010 enterprise services restructuring plan.

        Restructuring charges for the three months ended January 31, 2011 were $158 million. These charges included $97 million of severance and facility costs related to our fiscal 2010 enterprise services restructuring plan and $61 million of severance and facility costs related to our fiscal 2008 restructuring plan.

        As part of our ongoing business operations, we incurred workforce rebalancing charges for severance and related costs within certain business segments during the first three months of fiscal 2012. Workforce rebalancing activities are considered part of normal operations as we continue to optimize our cost structure. Workforce rebalancing costs are included in our business segment results, and we expect to incur additional workforce rebalancing costs in the future.

    Acquisition-related Charges

        For the three months ended January 31, 2012, we recorded acquisition-related charges of $22 million primarily for retention bonuses associated with acquisitions completed in fiscal 2010 and 2011.

        For the three months ended January 31, 2011, we recorded acquisition-related charges of $29 million primarily for consulting and integration costs, acquisition costs and retention bonuses associated with the acquisition of Electronic Data Systems Corporation and acquisitions completed in fiscal 2010.

Interest and Other, Net

        Interest and other, net expense increased by $124 million for the three months ended January 31, 2012. The increase was driven primarily by higher average debt balances and higher currency transaction losses.

Provision for Taxes

        Our effective tax rate was 19.4% and 21.0% for the three months ended January 31, 2012 and January 31, 2011, respectively. Our effective tax rate decreased due to an increase in the percentage of total earnings earned in lower-tax jurisdictions. Our effective tax rate generally differs from the U.S. federal statutory rate of 35% due to favorable tax rates associated with certain earnings from our operations in lower-tax jurisdictions throughout the world. We have not provided U.S. taxes for all of such earnings because we plan to reinvest some of those earnings indefinitely outside the United States.

        In the three months ended January 31, 2012, we recorded discrete items with a net tax benefit of $49 million, decreasing the effective tax rate. These amounts included net tax benefits of $28 million from restructuring and acquisition charges, and $23 million from reversals of accrued interest expense and penalties on uncertain tax positions, net of tax.

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        In the three months ended January 31, 2011, we recorded discrete items with a net tax benefit of $101 million, decreasing the effective tax rate. These amounts included net tax benefits of $58 million from restructuring and acquisition charges. In addition, in December 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was signed into law. We recorded a tax benefit of $43 million arising from the retroactive research and development credit provided by that legislation in the first quarter of fiscal 2011.

Segment Information

        A description of the products and services for each segment can be found in Note 16 to the Consolidated Condensed Financial Statements. Future changes to this organizational structure may result in changes to the business segments disclosed.

Personal Systems Group

 
  Three months ended
January 31
 
 
  2012   2011   % Decrease  
 
  In millions
 

Net revenue

  $ 8,873   $ 10,449     (15.1 )%

Earnings from operations

  $ 464   $ 672     (31.0 )%

Earnings from operations as a % of net revenue

    5.2 %   6.4 %      

        The components of the weighted net revenue change by business unit were as follows:

 
  Three months ended
January 31, 2012
 
 
  Percentage Points
 

Notebook PCs

    (8.3 )

Desktop PCs

    (6.6 )

Workstations

     

Other

    (0.2 )
       

Total PSG

    (15.1 )
       

        PSG net revenue decreased 15.1% (16.2% when adjusted for currency) for the three months ended January 31, 2012. The industry-wide HDD supply constraints had an unfavorable impact on unit volumes and related revenue for the quarter. In addition, softness in both the consumer and commercial markets led to unit declines of 18%. In the first quarter of fiscal 2012, net revenue for consumer clients decreased 25% and commercial client net revenue decreased 7%. Net revenue for Notebook PCs decreased 15%, while net revenue for Desktop PCs decreased 18%. Workstations revenue remained flat. Net revenue in Other decreased 10% due primarily to the impact of the wind down of the Windows-based handheld business and a decrease in sales of consumer warranty extensions. The unfavorable impact of HDD supply constraints and market softness on PSG net revenue was partially offset by a 4% increase in average selling prices ("ASPs").

        PSG earnings from operations as a percentage of net revenue decreased 1.2 percentage points for the three months ended January 31, 2012. The decrease was driven by a decline in gross margin due primarily to a volume decline driven by HDD supply constraints and higher logistics costs, the effect of which was partially offset by a favorable commodity pricing environment combined with a favorable currency impact and lower warranty costs. In addition to the decline in gross margin, operating expenses as a percentage of net revenue increased due primarily to the revenue decline and increased selling costs.

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Services

 
  Three months ended
January 31
 
 
  2012   2011   % Increase
(Decrease)
 
 
  In millions
 

Net revenue

  $ 8,626   $ 8,529     1.1 %

Earnings from operations

  $ 905   $ 1,381     (34.5 )%

Earnings from operations as a % of net revenue

    10.5 %   16.2 %      

        The components of the weighted net revenue change by business unit were as follows:

 
  Three months ended
January 31, 2012
 
 
  Percentage Points
 

Infrastructure Technology Outsourcing

    0.7  

Technology Services

    0.5  

Application and Business Services

    (0.1 )
       

Total Services

    1.1  
       

        Services net revenue increased 1.1% (0.3% when adjusted for currency) for the three months ended January 31, 2012 due to revenue increases in Infrastructure Technology Outsourcing and Technology Services. Infrastructure Technology Outsourcing net revenue increased by 2% due to an increase in product-related revenue and a favorable currency impact, the effect of which was partially offset by a decline in short-term project contracts with existing clients. Net revenue in Technology Services increased by 2% due primarily to growth in our consulting and support businesses, the effect of which was partially offset by reduced sales of third-party hardware. Application and Business Services net revenue was flat due primarily to a decline in short-term project work, the effect of which was offset by a favorable currency impact.

        Services earnings from operations as a percentage of net revenue decreased by 5.7 percentage points in the three months ended January 31, 2012. Operating margin decreased due primarily to rate concessions arising from contract renewals, investments in service delivery and sales headcount and additional costs associated with contract deliverable delays.

Imaging and Printing Group

 
  Three months ended January 31  
 
  2012   2011   % Decrease  
 
  In millions
 

Net revenue

  $ 6,258   $ 6,731     (7.0 )%

Earnings from operations

  $ 761   $ 1,119     (32.0 )%

Earnings from operations as a % of net revenue

    12.2 %   16.6 %      

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        The components of the weighted net revenue change as compared to the prior-year period by business unit were as follows:

 
  Three months ended
January 31, 2012
 
 
  Percentage Points
 

Supplies

    (4.1 )

Consumer Hardware

    (1.8 )

Commercial Hardware

    (1.1 )
       

Total IPG

    (7.0 )
       

        IPG net revenue decreased 7.0% (7.2% when adjusted for currency) for the three months ended January 31, 2012, due primarily to revenue decreases in Supplies, Consumer Hardware and Commercial Hardware. Net revenue for Supplies decreased 6% in the first quarter of fiscal 2012, driven by actions taken to reduce channel inventory coupled with soft demand in all regions. These effects were partially offset by growth in large format printing supplies. Net revenue for Consumer Hardware decreased 15% in the first quarter of fiscal 2012, driven primarily by softness in consumer spending. Net revenue for Commercial Hardware decreased 5% in the first quarter of fiscal 2012, due primarily to volume reductions in high-end printers and a continued mix shift from high-end to low-end printers. In addition, the LaserJet business was impacted by supply constraints of printer components as a result of flooding in Thailand. These effects were partially offset by double-digit net revenue growth in the graphics business and managed print services business.

        IPG earnings from operations as a percentage of net revenue decreased by 4.4 percentage points in the first quarter of fiscal 2012, due primarily to a decline in gross margin, the effect of which was partially offset by lower operating expenses as a percentage of net revenue. The gross margin declined due to an unfavorable currency impact driven by the strength of the yen and from lower ink supplies volume as a result of actions taken to reduce channel inventory, coupled with soft demand in all regions. The decrease in operating expenses as a percentage of net revenue in the first quarter of fiscal 2012 was due primarily to reduced marketing expenses, the effect of which was partially offset by higher research and development investments.

Enterprise Servers, Storage and Networking

 
  Three months ended January 31  
 
  2012   2011   % Decrease  
 
  In millions
 

Net revenue

  $ 5,018   $ 5,599     (10.4 )%

Earnings from operations

  $ 562   $ 830     (32.3 )%

Earnings from operations as a % of net revenue

    11.2 %   14.8 %      

        The components of the weighted net revenue change by business unit were as follows:

 
  Three months ended
January 31, 2012
 
 
  Percentage Points
 

Industry Standard Servers ("ISS")

    (6.7 )

Business Critical Systems ("BCS")

    (2.7 )

Storage

    (1.0 )

Networking

     
       

Total ESSN

    (10.4 )
       

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        ESSN net revenue decreased 10.4% (11.9% when adjusted for currency) for the three months ended January 31, 2012 due to revenue decreases in ISS, Storage and BCS. ISS net revenue decreased by 11%, driven primarily by HDD supply constraints as a result of flooding in Thailand and weaker market conditions. These effects were partially offset by strong demand from public and private cloud customers. BCS net revenue decreased by 27% for the three months ended January 31, 2012, mainly as a result of declining demand following an announcement by an alliance partner that it intends to cease software support for our Itanium-based servers. The impact from reduced sales of Itanium-based servers was partially offset by higher demand for the latest generation of BCS scale-up x86 products and growth in NonStop servers. Storage net revenue decreased by 6% due to a decline in storage networking and tape products, the effect of which was partially offset by strong performance in 3PAR products and StoreOnce data deduplication solutions. Networking net revenue was flat for the three months ended January 31, 2012, with higher market demand for our core data center products offset by competitive pressures.

        ESSN earnings from operations as a percentage of net revenue decreased by 3.6 percentage points for the three months ended January 31, 2012 driven by a decrease in gross margin coupled with an increase in operating expenses as a percentage of net revenue. The gross margin decrease was driven by lower selling prices as a result of competitive pressures and an unfavorable product mix and a volume decline driven in part by HDD supply constraints, the effect of which was partially offset by lower component costs. The increase in operating expenses as a percentage of net revenue was driven by a decline in revenues, the effect of which was partially offset by benefits from certain government incentive programs in Asia.

Software

 
  Three months ended January 31  
 
  2012   2011   % Increase  
 
  In millions
 

Net revenue

  $ 946   $ 725     30.5 %

Earnings from operations

  $ 162   $ 120     35.0 %

Earnings from operations as a % of net revenue

    17.1 %   16.6 %      

        Software net revenue increased 30.5% (29.1% when adjusted for currency) for the three months ended January 31, 2012 due to revenues from acquired companies, primarily Autonomy, as well as growth in the organic business. Net revenue from services, support and licenses increased by 108%, 22% and 12%, respectively.

        Software earnings from operations as a percentage of net revenue increased by 0.5 percentage points for the three months ended January 31, 2012. The operating margin improvement was due primarily to rate increases in services and lower integration costs associated with fiscal 2010 acquisitions, the effect of which was partially offset by a lower mix of license revenue, higher deferred revenue write-downs, and integration costs associated with the Autonomy acquisition.

HP Financial Services

 
  Three months ended January 31  
 
  2012   2011   % Increase  
 
  In millions
 

Net revenue

  $ 950   $ 827     14.9 %

Earnings from operations

  $ 91   $ 79     15.2 %

Earnings from operations as a % of net revenue

    9.6 %   9.6 %      

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        HPFS net revenue increased by 14.9% for the three months ended January 31, 2012. The net revenue increase was due primarily to portfolio growth, a higher operating lease mix due to higher services-led financing volume, along with higher buyout and end-of-lease revenue from residual expirations in line with portfolio growth.

        HPFS earnings from operations as a percentage of net revenue was flat for the three months ended January 31, 2012 due primarily to a decrease in gross margin, the effect of which was offset by a decrease in operating expenses as a percentage of net revenue. The decrease in gross margin was the result of lower portfolio margins from a higher mix of revenue from operating leases. The decrease in operating expenses as a percentage of net revenue was due primarily to continued improvement in cost efficiencies.

Financing Originations

 
  Three months ended January 31  
 
  2012   2011  
 
  In millions
 

Total financing originations

  $ 1,543   $ 1,543  

        New financing originations, which represent the amounts of financing provided to customers for equipment and related software and services, including intercompany activity, was flat for the three months ended January 31, 2012.

Portfolio Assets and Ratios

        HPFS maintains a strategy to generate a competitive return on equity by effectively leveraging its portfolio against the risks associated with interest rates and credit. The HPFS business model is asset-intensive and uses certain internal metrics to measure its performance against other financial services companies, including a segment balance sheet that is derived from our internal management reporting system. The accounting policies used to derive these amounts are substantially the same as those used by the consolidated company. However, certain intercompany loans and accounts that are reflected in the segment balances are eliminated in our Consolidated Condensed Financial Statements.

        The portfolio assets and ratios derived from the segment balance sheet for HPFS were as follows:

 
  January 31,
2012
  October 31,
2011
 
 
  In millions
 

Portfolio assets(1)

  $ 12,622   $ 12,699  
           

Allowance for doubtful accounts(2)

    140     130  

Operating lease equipment reserve

    87     84  
           

Total reserves

    227     214  
           

Net portfolio assets

  $ 12,395   $ 12,485  
           

Reserve coverage

    1.8 %   1.7 %

Debt to equity ratio(3)

    7.0x     7.0x  

(1)
Portfolio assets include gross financing receivables of approximately $7.3 billion at both January 31, 2012 and October 31, 2011 and net equipment under operating leases of $2.5 billion and $2.7 billion at January 31, 2012 and October 31, 2011, respectively, as disclosed in Note 9 to the Consolidated Condensed Financial Statements in Item 1, which is incorporated herein by reference. Portfolio assets also include capitalized profit on intercompany equipment transactions of approximately $1.0 billion at both January 31, 2012 and October 31, 2011 and intercompany

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    leases of approximately $1.8 billion and $1.7 billion at January 31, 2012 and October 31, 2011, respectively, both of which are eliminated in consolidation.

(2)
Allowance for doubtful accounts includes both the short-term and the long-term portions of the allowance on financing receivables.

(3)
HPFS debt consists of intercompany equity that is treated as debt for segment reporting purposes, intercompany debt and debt issued directly by HPFS.

        Net portfolio assets at January 31, 2012 decreased 0.7% from October 31, 2011. The decrease resulted from an unfavorable currency impact, the effect of which was partially offset by new financing originations during the first three months of fiscal 2012. The overall percentage of portfolio asset reserves increased as a percentage of the portfolio assets.

        For the three months ended January 31, 2012 and 2011, HPFS recorded net bad debt expenses of $18 million against specific reserves.

Corporate Investments

 
  Three months ended January 31  
 
  2012   2011   % Increase
(Decrease)
 
 
  In millions
 

Net revenue

  $ 58   $ 62     (6.5 )%

Loss from operations

  $ (48 ) $ (178 )   73.0 %

Loss from operations as a % of net revenue

    (82.8 )%   (287.1 )%      

        Net revenue in Corporate Investments relates primarily to business intelligence solutions, mobile devices associated with the Palm acquisition and licensing of HP technology to third parties. The revenue decrease in Corporate Investments was due primarily to the divestiture of HP's Halo video collaboration products business in July 2011, the effect of which was partially offset by higher revenue from business intelligence solutions.

        Corporate Investments reported a lower loss from operations for the three months ended January 31, 2012, due primarily to a lower impact from the former mobile device business associated with the Palm acquisition. The loss from operations in Corporate Investments was also due to expenses carried in the segment associated with corporate development, global alliances and HP Labs, which expenses decreased for the three months ended January 31, 2012.

LIQUIDITY AND CAPITAL RESOURCES

        Our cash balances are held in numerous locations throughout the world, with substantially all of those amounts held outside of the United States. A majority of the amounts held outside of the United States are generally utilized to support non-U.S. liquidity needs. Most of the amounts held outside of the United States could be repatriated to the United States but, under current law, would be subject to United States federal income taxes, less applicable foreign tax credits. Repatriation of some foreign balances is restricted by local laws. We have provided for the U.S. federal tax liability on these amounts for financial statement purposes, except for foreign earnings that are considered indefinitely reinvested outside of the United States. Repatriation could result in additional U.S. federal income tax payments in future years. Where local restrictions prevent an efficient intercompany transfer of funds, our intent is that cash balances would remain outside of the United States and we would meet U.S. liquidity needs through ongoing cash flows, external borrowings, or both. We utilize a variety of tax planning and financing strategies in an effort to ensure that our worldwide cash is available in the locations in which it is needed. We do not expect restrictions or potential taxes on repatriation of amounts held outside of the United States to have a material effect on HP's overall liquidity, financial condition or results of operations.

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FINANCIAL CONDITION (Sources and Uses of Cash)

 
  Three months ended January 31  
 
  2012   2011  
 
  In millions
 

Net cash provided by operating activities

  $ 1,193   $ 3,070  

Net cash used in investing activities

    (751 )   (363 )

Net cash used in financing activities

    (372 )   (3,702 )
           

Net increase (decrease) in cash and cash equivalents

  $ 70   $ (995 )
           

Operating Activities

        Compared to the corresponding period in 2011, net cash provided by operating activities decreased by approximately $1.9 billion for the three months ended January 31, 2012. The decrease was due primarily to lower net earnings and higher utilization of cash resources for payment of accounts payable, the impact of which was partially offset by a decrease in accounts and financing receivables and inventory.

        Our key working capital metrics are as follows:

 
  Three months ended
January 31
 
 
  2012   2011  

Days of sales outstanding in accounts receivable

    48     46  

Days of supply in inventory

    28     25  

Days of purchases outstanding in accounts payable. 

    (48 )   (50 )
           

Cash conversion cycle

    28     21  
           

        Days of sales outstanding in accounts receivable ("DSO") is calculated by dividing ending accounts receivable, net of allowance for doubtful accounts, by a 90-day average net revenue.

        Days of supply in inventory ("DOS") measures the average number of days from procurement to sale of our product. DOS is calculated by dividing ending inventory by a 90-day average cost of goods sold.

        Days of purchases outstanding in accounts payable ("DPO") is calculated by dividing ending accounts payable by a 90-day average cost of goods sold.

        Our working capital requirements depend upon our effective management of the cash conversion cycle, which represents effectively the number of days that elapse from the day we pay for the purchase of raw materials to the collection of cash from our customers. The cash conversion cycle is the sum of DSO and DOS less DPO.

        The increase in DSO was due primarily to unfavorable revenue linearity, extended payment terms, an increase in unbilled and aged accounts receivables and longer payment terms related to receivables acquired with the Autonomy acquisition. These effects were offset by a favorable U.S. dollar currency impact and a higher customer usage of cash discounts. The increase in DOS was a result of higher inventory levels at January 31, 2012 due primarily to strategic purchases of certain components and macroeconomic softness impacting our consumer businesses and commercial hardware businesses. The decrease in DPO was due primarily to purchasing linearity during the quarter. These changes contributed to the increase in the cash conversion cycle for the three months ended January 31, 2012.

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Investing Activities

        Compared to the corresponding period in fiscal 2011, net cash used in investing activities increased by approximately $0.4 billion for the three months ended January 31, 2012, due primarily to lower proceeds from the sale of property, plant and equipment.

Financing Activities

        Compared to the corresponding period in fiscal 2011, net cash used in financing activities decreased by approximately $3.3 billion for the three months ended January 31, 2012. The decrease was due primarily to lower net repayments of commercial paper, a decrease in cash paid for the repurchase of common stock and higher net proceeds from the issuance of debt, the impact of which was partially offset by lower cash received from the issuance of common stock under employee stock plans.

        For more information on our share repurchase programs, see Note 13 to the Consolidated Condensed Financial Statements in Item 1, which is incorporated herein by reference.

CAPITAL RESOURCES

Debt Levels

        We maintain debt levels that we establish through consideration of a number of factors, including cash flow expectations, cash requirements for operations, investment plans (including acquisitions), share repurchase activities, overall cost of capital, and targeted capital structure. Outstanding borrowings increased to $30.9 billion as of January 31, 2012, as compared to $30.6 billion at October 31, 2011, bearing weighted-average interest rates of 2.7% and 2.4%, respectively. During the first three months of fiscal 2012, we issued $4.8 billion and repaid $7.4 billion of commercial paper and also issued $3.0 billion in U.S. Dollar Global Notes under the 2009 Shelf Registration Statement.

        Since January 31, 2012, we have repaid $2.5 billion in U.S. Dollar Global Notes. In addition, on March 12, 2012, we issued $2.0 billion of U.S. Dollar Global Notes under the 2009 Shelf Registration Statement. The newly issued Global Notes consist of fixed-rate notes at market rates with maturities of five and ten years from the date of issuance.

        We have $1.6 billion in U.S. Dollar Global Notes that will mature during the remainder of fiscal 2012. We expect to use a combination of cash from operations and our available borrowing resources to repay those maturing Global Notes.

        Our weighted-average interest rate reflects the average effective rate on our borrowings prevailing during the period; it factors in the impact of swapping some of our global notes with fixed interest rates for global notes with floating interest rates. For more information on our interest rate swaps, see Note 8 to the Consolidated Condensed Financial Statements in Item 1, which is incorporated herein by reference.

        For more information on our borrowings, see Note 11 to the Consolidated Condensed Financial Statements in Item 1, which is incorporated herein by reference.

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Available Borrowing Resources

        At January 31, 2012, we had the following resources available to obtain short-term or long-term financings if we need additional liquidity:

 
  At January 31, 2012  
 
  In millions
 

2009 Shelf Registration Statement(1)

    Unspecified  

Commercial paper programs(1)

  $ 15,980  

Uncommitted lines of credit(1)

  $   1,300  

Revolving trade receivables-based facilities(2)

  $      646  

(1)
For more information on our available borrowings resources, see Note 11 to the Consolidated Condensed Financial Statements in Item 1, which is incorporated herein by reference.

(2)
For more information on our revolving trade receivables-based facilities, see Note 4 to the Consolidated Condensed Financial Statements in Item 1, which is incorporated herein by reference.

Credit Ratings

        Our credit risk is evaluated by three independent rating agencies based upon publicly available information as well as information obtained in our ongoing discussions with them. Standard & Poor's Ratings Services downgraded our short-term and long-term ratings on November 30, 2011, Fitch Ratings Services downgraded our long-term ratings on December 2, 2011 and Moody's Investors Service downgraded our short-term and long-term ratings on January 20, 2012. Accordingly, our ratings as of January 31, 2012 were:

 
  Standard & Poor's
Ratings Services
  Moody's Investors
Service
  Fitch Ratings Services  

Short-term debt ratings

    A-2     Prime-2     F1  

Long-term debt ratings

    BBB+     A3     A  

        Our credit ratings remain under negative outlook by Fitch Ratings Services. While we do not have any rating downgrade triggers that would accelerate the maturity of a material amount of our debt, these downgrades have increased the cost of borrowing under our credit facilities, have reduced market capacity for our commercial paper, and may require the posting of additional collateral under some of our derivative contracts. In addition, any further downgrade in our credit ratings by any of the three rating agencies may further impact us in a similar manner, and, depending on the extent of the downgrade, could have a negative impact on our liquidity and capital position. We will rely on alternative sources of funding, including drawdowns under our credit facilities or the issuance of debt or other securities under our existing shelf registration statement, if necessary to offset reductions in the market capacity for our commercial paper.

CONTRACTUAL AND OTHER OBLIGATIONS

Income Tax Obligations

        At January 31, 2012 we had approximately $2.2 billion of recorded liabilities and related interest and penalties pertaining to uncertainty in income tax positions, which will be partially offset by $283 million of deferred tax assets and interest receivable. These liabilities and related interest and penalties include $72 million expected to be paid within one year. For the remaining amount, we are unable to make a reasonable estimate as to when cash settlement with the tax authorities might occur due to the uncertainties related to these tax matters. See Note 12 to the Consolidated Condensed

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Financial Statements in Item 1, which is incorporated herein by reference, for additional information on taxes.

Guarantees and Indemnifications

        For more information on liabilities that may arise from guarantees and indemnification, see Note 10 to the Consolidated Condensed Financial Statements in Item 1, which is incorporated herein by reference.

Litigation and Contingencies

        For more information on liabilities that may arise from litigation and contingencies, see Note 15 to the Consolidated Condensed Financial Statements in Item 1, which is incorporated herein by reference.

Off-Balance Sheet Arrangements

        As part of our ongoing business, we have not participated in transactions that generate material relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities ("SPEs"), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of January 31, 2012, we are not involved in any material unconsolidated SPEs.

        We have revolving trade receivables-based facilities permitting us to sell certain trade receivables to third parties on both a non-recourse and partial recourse basis. The total aggregate capacity of the facilities was $1.4 billion as of January 31, 2012. For more information on our revolving trade receivables-based facilities, see Note 4 to the Consolidated Condensed Financial Statements in Item 1, which is incorporated herein by reference.

FACTORS THAT COULD AFFECT FUTURE RESULTS

        Because of the following factors, as well as other variables affecting our operating results, past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods.

If we are unsuccessful at improving our execution and financial performance and aligning our cost structure, our results of operations may be adversely affected.

        We are working to improve our execution and financial performance and align our cost structure with our revenue and margin profile. These efforts are designed to enable us to invest in our business to respond to industry shifts and capitalize on emerging opportunities in areas like cloud computing, security, and information management, and to better serve our customers and partners in both the short- and long-term. As part of these efforts, we are evaluating all of our businesses and looking for specific areas to improve our performance and effectiveness and rationalize costs. For example, we have undertaken a multi-year initiative to turn around our services business, including expanding into higher-margin enterprise services and improving resource utilization. We are also optimizing and reducing complexity in our supply chain that supports our product businesses. In addition, we are working to improve sales productivity and execution in our businesses. If we do not succeed in these efforts, or if these efforts are more costly or time consuming than expected, our results of operations may be adversely affected.

Competitive pressures could harm our revenue, gross margin and prospects.

        We encounter aggressive competition from numerous and varied competitors in all areas of our business, and our competitors may target our key market segments. We compete primarily on the basis

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of technology, performance, price, quality, reliability, brand, reputation, distribution, range of products and services, ease of use of our products, account relationships, customer training, service and support, security, availability of application software, and Internet infrastructure offerings. If our products, services, support and cost structure do not enable us to compete successfully based on any of those criteria, our operations, results and prospects could be harmed.

        Unlike many of our competitors, we have a portfolio of businesses and must allocate resources across these businesses while competing with companies that specialize in one or more of these product lines. As a result, we may invest less in certain areas of our businesses than our competitors do, and these competitors may have greater financial, technical and marketing resources available to them than our businesses that compete against them. Industry consolidation also may affect competition by creating larger, more homogeneous and potentially stronger competitors in the markets in which we compete, and our competitors also may affect our business by entering into exclusive arrangements with existing or potential customers or suppliers.

        Companies with whom we have alliances in some areas may be competitors in other areas. For example, in the second quarter of fiscal 2011, an alliance partner that also markets a line of competing servers announced that it intends to cease software development for our Itanium-based servers, which has resulted in orders for our servers being canceled or delayed. If that decision is not reversed or if another solution is not successfully implemented, there would be reduced demand for our Itanium-based servers over the longer term. In addition, companies with whom we have alliances also may acquire or form alliances with our competitors, thereby reducing their business with us. Any inability to effectively manage these complicated relationships with alliance partners could have an adverse effect on our results of operations.

        We may have to continue to lower the prices of many of our products and services to stay competitive, while at the same time trying to maintain or improve revenue and gross margin. The markets in which we do business, particularly the personal computer and printing markets, are highly competitive, and we encounter aggressive price competition for all of our products and services from numerous companies globally. Over the past several years, price competition in the market for personal computers, printers and related products has been particularly intense as competitors have aggressively cut prices and lowered their product margins for these products. In addition, competitors in some of the markets in which we compete with a greater presence in lower-cost jurisdictions may be able to offer lower prices than we are able to offer. Our results of operations and financial condition may be adversely affected by these and other industry-wide pricing pressures.

        Because our business model is based on providing innovative and high quality products, we may spend a proportionately greater amount on research and development than some of our competitors. If we cannot proportionately decrease our cost structure on a timely basis in response to competitive price pressures, our gross margin and, therefore, our profitability could be adversely affected. In addition, if our pricing and other factors are not sufficiently competitive, or if there is an adverse reaction to our product decisions, we may lose market share in certain areas, which could adversely affect our revenue and prospects.

        Even if we are able to maintain or increase market share for a particular product, revenue could decline because the product is in a maturing industry. Revenue and margins also could decline due to increased competition from other types of products. For example, growing demand for an increasing array of mobile computing devices and the development of cloud-based solutions may reduce demand for some of our existing hardware products. In addition, refill and remanufactured alternatives for some of HP's LaserJet toner and inkjet cartridges compete with HP's supplies business. Other companies have also developed and marketed new compatible cartridges for HP's LaserJet and inkjet products, particularly in jurisdictions outside of the United States where adequate intellectual property protection may not exist.

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