10-Q 1 a2210845z10-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: July 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 August 31, 2012 was 1,966,161,234 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 and nine months ended July 31, 2012 and 2011 (Unaudited)

    4  

     

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

    5  

     

Consolidated Condensed Statements of Cash Flows for the nine months ended July 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

    59  

  Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

    95  

  Item 4.  

Controls and Procedures

    95  

Part II.

  Other Information        

  Item 1.  

Legal Proceedings

    96  

  Item 1A.  

Risk Factors

    96  

  Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

    96  

  Item 6.  

Exhibits

    96  

Signature

    97  

Exhibit Index

    98  

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 projections of the amount, timing or impact of cost savings, restructuring charges, early retirement programs, workforce reductions or impairment charges; any statements of the plans, strategies and objectives of management for future operations, including the execution of restructuring plans and any resulting cost savings or revenue or profitability improvements; any statements concerning the expected development, performance, market share or competitive performance 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 and

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retirement programs; the execution, timing and results of restructuring plans, including estimates and assumptions related to the cost and the anticipated benefits of implementing those plans; the resolution of pending investigations, claims and disputes; and other risks that are described herein, including but not limited to the items discussed in "Factors that Could Affect Future Results" set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 2 of Part I of this report, and that are otherwise described from time to time in HP's Securities and Exchange Commission ("SEC") 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
July 31
  Nine months ended
July 31
 
 
  2012   2011   2012   2011  
 
  In millions, except per share amounts
 

Net revenue:

                         

Products

  $ 19,053   $ 20,412   $ 58,526   $ 63,661  

Services

    10,503     10,662     31,526     31,130  

Financing income

    113     115     346     332  
                   

Total net revenue

    29,669     31,189     90,398     95,123  
                   

Costs and expenses:

                         

Cost of products

    14,524     15,669     44,754     48,286  

Cost of services

    8,216     8,152     24,682     23,599  

Financing interest

    80     80     238     229  

Research and development

    854     812     2,490     2,425  

Selling, general and administrative

    3,366     3,430     10,273     9,972  

Impairment of goodwill and purchased intangible assets

    9,188         9,188      

Restructuring charges

    1,795     150     1,888     466  

Amortization of purchased intangible assets

    476     358     1,412     1,196  

Acquisition-related charges

    3     18     42     68  
                   

Total operating expenses

    38,502     28,669     94,967     86,241  
                   

(Loss) earnings from operations

    (8,833 )   2,520     (4,569 )   8,882  
                   

Interest and other, net

    (224 )   (121 )   (688 )   (294 )
                   

(Loss) earnings before taxes

    (9,057 )   2,399     (5,257 )   8,588  

(Benefit) provision for taxes

    (200 )   473     539     1,753  
                   

Net (loss) earnings

  $ (8,857 ) $ 1,926   $ (5,796 ) $ 6,835  
                   

Net (loss) earnings per share:

                         

Basic

  $ (4.49 ) $ 0.94   $ (2.93 ) $ 3.21  
                   

Diluted

  $ (4.49 ) $ 0.93   $ (2.93 ) $ 3.16  
                   

Cash dividends declared per share

  $ 0.26   $ 0.24   $ 0.50   $ 0.40  

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

                         

Basic

    1,971     2,054     1,977     2,129  
                   

Diluted

    1,971     2,080     1,977     2,161  
                   

   

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

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

ASSETS

 

Current assets:

             

Cash and cash equivalents

  $ 9,509   $ 8,043  

Accounts receivable

    15,686     18,224  

Financing receivables

    3,116     3,162  

Inventory

    7,292     7,490  

Other current assets

    14,634     14,102  
           

Total current assets

    50,237     51,021  
           

Property, plant and equipment

    12,069     12,292  

Long-term financing receivables and other assets

    10,479     10,755  

Goodwill

    36,805     44,551  

Purchased intangible assets

    7,966     10,898  
           

Total assets

  $ 117,556   $ 129,517  
           

LIABILITIES AND STOCKHOLDERS' EQUITY

 

Current liabilities:

             

Notes payable and short-term borrowings

  $ 5,681   $ 8,083  

Accounts payable

    12,554     14,750  

Employee compensation and benefits

    3,701     3,999  

Taxes on earnings

    712     1,048  

Deferred revenue

    7,598     7,449  

Accrued restructuring

    742     654  

Other accrued liabilities

    13,931     14,459  
           

Total current liabilities

    44,919     50,442  
           

Long-term debt

    24,063     22,551  

Other liabilities

    16,564     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; 1,967 and 1,991 shares issued and outstanding, respectively)

    20     20  

Additional paid-in capital

    6,478     6,837  

Retained earnings

    28,379     35,266  

Accumulated other comprehensive loss

    (3,276 )   (3,498 )
           

Total HP stockholders' equity

    31,601     38,625  

Non-controlling interests

    409     379  
           

Total stockholders' equity

    32,010     39,004  
           

Total liabilities and stockholders' equity

  $ 117,556   $ 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)

 
  Nine months ended
July 31
 
 
  2012   2011  
 
  In millions
 

Cash flows from operating activities:

             

Net (loss) earnings

  $ (5,796 ) $ 6,835  

Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:

             

Depreciation and amortization

    3,894     3,722  

Impairment of goodwill and purchased intangible assets

    9,188      

Stock-based compensation expense

    494     475  

Provision for doubtful accounts—accounts and financing receivables

    60     41  

Provision for inventory

    194     167  

Restructuring charges

    1,888     466  

Deferred taxes on earnings

    (690 )   804  

Excess tax benefit from stock-based compensation

    (12 )   (160 )

Other, net

    330     (202 )

Changes in operating assets and liabilities:

             

Accounts and financing receivables

    2,435     (220 )

Inventory

    (2 )   (1,139 )

Accounts payable

    (2,196 )   122  

Taxes on earnings

    (40 )   251  

Restructuring

    (472 )   (750 )

Other assets and liabilities

    (2,763 )   (173 )
           

Net cash provided by operating activities

    6,512     10,239  
           

Cash flows from investing activities:

             

Investment in property, plant and equipment

    (2,833 )   (3,154 )

Proceeds from sale of property, plant and equipment

    321     782  

Purchases of available-for-sale securities and other investments

    (793 )    

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

    516     59  

Payments made in connection with business acquisitions, net of cash acquired

    (141 )   (269 )

Proceeds from business divestiture, net

    87     89  
           

Net cash used in investing activities

    (2,843 )   (2,493 )
           

Cash flows from financing activities:

             

Repayment of commercial paper and notes payable, net

    (2,553 )   (1,532 )

Issuance of debt

    5,100     7,298  

Payment of debt

    (3,222 )   (2,271 )

Issuance of common stock under employee stock plans

    710     845  

Repurchase of common stock

    (1,495 )   (9,617 )

Excess tax benefit from stock-based compensation

    12     160  

Cash dividends paid

    (755 )   (605 )
           

Net cash used in financing activities

    (2,203 )   (5,722 )
           

Increase in cash and cash equivalents

    1,466     2,024  

Cash and cash equivalents at beginning of period

    8,043     10,929  
           

Cash and cash equivalents at end of period

  $ 9,509   $ 12,953  
           

Supplemental schedule of non-cash investing and financing activities:

             

Issuance of common stock and stock awards assumed in business acquisitions

      $ 2  

Purchase of assets under capital lease

  $ 12   $ 9  

   

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 July 31, 2012, its results of operations for the three and nine months ended July 31, 2012 and 2011 and its cash flows for the nine months ended July 31, 2012 and 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 and nine months ended July 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 and nine months ended July 31, 2012 was $150 million and $494 million, respectively. The resulting income tax benefit for the three and nine months ended July 31, 2012 was $43 million and $154 million, respectively. Total stock-based compensation expense before income taxes for the three and nine months ended July 31, 2011 was $148 million and $475 million, respectively. The resulting income tax benefit for the three and nine months ended July 31, 2011 was $46 million and $150 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 July 31, 2012 and changes during the nine months ended July 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

    19,119   $ 28  

Vested

    (3,678 ) $ 42  

Forfeited

    (2,266 ) $ 35  
             

Outstanding at July 31, 2012

    29,988   $ 32  
             

        At July 31, 2012, there was $611 million of unrecognized pre-tax stock-based compensation expense related to non-vested restricted stock awards, which HP expects to recognize over the remaining weighted-average vesting period of 1.4 years.

    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
July 31
  Nine months ended
July 31
 
 
  2012   2011   2012   2011  

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

  $ 6.70   $ 8.44   $ 9.30   $ 10.24  

Implied volatility

    36 %   28 %   42 %   28 %

Risk-free interest rate

    1.20 %   1.64 %   1.20 %   1.87 %

Dividend yield

    2.40 %   1.34 %   1.77 %   0.94 %

Expected life in months

    77     61     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 July 31, 2012 and changes during the nine months ended July 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

    7,173   $ 27              

Exercised

    (29,290 ) $ 20              

Forfeited/cancelled/expired

    (8,357 ) $ 37              
                         

Outstanding at July 31, 2012

    89,769   $ 29     3.3   $ 51  
                         

Vested and expected to vest at July 31, 2012

    88,062   $ 29     3.2   $ 49  
                         

Exercisable at July 31, 2012

    66,114   $ 31     2.0   $ 31  
                         

        The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value that option holders would have received had all option holders exercised their options on July 31, 2012. The aggregate intrinsic value is the difference between HP's closing stock price on the last trading day of the third 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 and nine months ended July 31, 2012 was $10 million and $174 million, respectively.

        At July 31, 2012, there was $189 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 2.0 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 per share for the first year of the three-year performance period applicable to PRUs granted in the nine months ended July 31, 2012 was $27.00. The estimated fair value of the Target Shares for the second and third years for PRUs granted in the nine months ended July 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:

 
  Nine months ended
July 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 nine months ended July 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 July 31, 2012 and changes during the nine months ended July 31, 2012 were as follows:

 
  Shares  
 
  In thousands
 

Outstanding Target Shares at October 31, 2011

    11,382  

Granted

    1,252  

Vested

     

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

     

Forfeited

    (1,062 )
       

Outstanding Target Shares at July 31, 2012

    11,572  
       

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

    9,259 (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 nine months ended July 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 July 31, 2012, there was $29 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 1.0 years.

Note 3: Net Earnings Per Share

        HP calculates basic earnings and loss per share and diluted loss per share using net earnings or loss and the weighted-average number of shares outstanding during the reporting period. Diluted earnings per share 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 earnings and loss per share calculations was as follows:

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

Numerator:

                         

Net (loss) earnings(1)

  $ (8,857 ) $ 1,926   $ (5,796 ) $ 6,835  
                   

Denominator:

                         

Weighted-average shares used to compute basic EPS

    1,971     2,054     1,977     2,129  

Dilutive effect of employee stock plans(2)

        26         32  
                   

Weighted-average shares used to compute diluted EPS(2)

    1,971     2,080     1,977     2,161  
                   

Net (loss) earnings per share:

                         

Basic

  $ (4.49 ) $ 0.94   $ (2.93 ) $ 3.21  

Diluted(2)

  $ (4.49 ) $ 0.93   $ (2.93 ) $ 3.16  

(1)
Net (loss) earnings available to participating securities were not significant for the three and nine months ended July 31, 2012 and 2011. HP considers restricted stock that provides the holder with a non-forfeitable right to receive dividends to be a participating security.

(2)
For the three and nine months ended July 31, 2012, HP excluded from the calculation of basic loss per share 4 million shares and 15 million shares, respectively, potentially issuable under employee stock plans as their effect would be anti-dilutive.

        HP excludes options with exercise prices that are greater than the average market price from the calculation of diluted earnings per share because their effect would be anti-dilutive. For the three and nine months ended July 31, 2012, HP excluded from the calculation of diluted earnings per share options to purchase 74 million shares and 48 million shares, respectively, compared to 26 million shares and 23 million shares for the three and nine months ended July 31, 2011, respectively. In addition, HP also excluded from the calculation of diluted earnings per share options to purchase an additional 1 million shares and 9 million shares for the three and nine months ended July 31, 2012, respectively, compared to an additional 1 million shares for both the three and nine months ended July 31, 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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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 4: Balance Sheet Details

        Balance sheet details were as follows:

    Accounts and Financing Receivables

 
  July 31,
2012
  October 31,
2011
 
 
  In millions
 

Accounts receivable

  $ 16,136   $ 18,694  

Allowance for doubtful accounts

    (450 )   (470 )
           

  $ 15,686   $ 18,224  
           

        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. As of July 31, 2012, the capacity of the partial recourse facility was $831 million and the total aggregate capacity of the non-recourse facilities was $748 million. 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 July 31, 2012 was not material.

        For the first nine months of fiscal 2012 and 2011, trade receivables sold under these facilities were $3.1 billion and $1.8 billion, respectively, which approximates the amount of cash received. The resulting loss on the sales of trade accounts receivable for the three months and nine months ended July 31, 2012 was not material. HP had $1.0 billion as of July 31, 2012 and $0.7 billion as of October 31, 2011 of available capacity under these programs.

    Inventory

 
  July 31,
2012
  October 31,
2011
 
 
  In millions
 

Finished goods

  $ 4,418   $ 4,869  

Purchased parts and fabricated assemblies

    2,874     2,621  
           

  $ 7,292   $ 7,490  
           

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 4: Balance Sheet Details (Continued)

    Property, Plant and Equipment

 
  July 31,
2012
  October 31,
2011
 
 
  In millions
 

Land

  $ 652   $ 687  

Buildings and leasehold improvements

    8,835     8,620  

Machinery and equipment

    16,802     16,155  
           

    26,289     25,462  
           

Accumulated depreciation

    (14,220 )   (13,170 )
           

  $ 12,069   $ 12,292  
           

        For the nine months ended July 31, 2012, additions to gross property, plant and equipment of $2.8 billion were partially offset by sales and retirements totaling $1.6 billion. Accumulated depreciation associated with the assets sold and retired was $1.3 billion.

Note 5: Goodwill and Purchased Intangible Assets

    Goodwill

        Goodwill allocated to HP's reportable segments as of July 31, 2012 and changes in the carrying amount of goodwill for the nine months ended July 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
 

Net balance at October 31, 2011

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

Goodwill acquired during the period

            14                     14  

Goodwill adjustments/reclassifications

        (40 )       (311 )   567         (15 )   201  

Impairment loss

        (7,961 )                       (7,961 )
                                   

Net balance at July 31, 2012

  $ 2,498   $ 9,279   $ 2,485   $ 7,759   $ 14,630   $ 144   $ 10   $ 36,805  
                                   

        For the first nine months of fiscal 2012, the decrease in goodwill is related to the impairment loss within the Services segment as discussed further below. 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 ("ESSN") segment to the Software segment. Additionally, HP recorded an increase to goodwill of $249 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").

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 5: Goodwill and Purchased Intangible Assets (Continued)

        Goodwill at October 31, 2011 is net of accumulated impairment losses of $813 million, related to the Corporate Investments segment. Goodwill at July 31, 2012 is net of accumulated impairment losses of $8,774 million, of which $813 million and $7,961 million relates to the Corporate Investments and Services segments, respectively.

        HP reviews goodwill for impairment annually at the beginning of its fourth fiscal quarter and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. The goodwill impairment test involves a two-step process. In the first step, HP compares the fair value of each reporting unit to its carrying value. If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired and no further testing is required. If the fair value of the reporting unit is less than the carrying value, HP must perform the second step of the impairment test to measure the amount of impairment loss. In the second step, the reporting unit's fair value is allocated to all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill in the same manner as if the reporting unit was being acquired in a business combination. If the implied fair value of the reporting unit's goodwill is less than the carrying value, the difference is recorded as an impairment loss.

        Except for Services, Software and Corporate Investments, HP's reporting units are consistent with the reportable segments identified in Note 16. The enterprise services ("ES") and technology services ("TS") businesses are the reporting units within the Services segment. ES includes the Infrastructure Technology Outsourcing ("ITO") and Application and Business Services ("ABS") business units. The Software segment includes two reporting units, which are Autonomy and the legacy HP software business. The webOS business is also a separate reporting unit within the Corporate Investments segment.

        During the third quarter of fiscal 2012, HP determined that sufficient indicators of potential impairment existed to require an interim goodwill impairment analysis for the ES reporting unit. These indicators included the recent trading values of HP's stock, coupled with market conditions and business trends within ES.

        HP estimated the fair value of the ES reporting unit using a weighting of fair values derived from the income approach and the market approach. Under the income approach, HP calculates the fair value of a reporting unit based on the present value of estimated future cash flows. Cash flow projections are based on management's estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate used is based on a weighted average cost of capital adjusted for the relevant risk associated with the characteristics of the business and the projected cash flows. The market approach estimates fair value based on market multiples of revenue and earnings derived from comparable publicly traded companies with similar operating and investment characteristics as the reporting unit.

        Due to the complexity and the effort required to estimate the fair value of the ES reporting unit in step one of the impairment test and to estimate the fair value of all assets and liabilities of the ES reporting unit in the second step of the test, the fair value estimates were derived based on preliminary assumptions and analyses that are subject to change. Based on HP's preliminary analyses, the implied fair value of goodwill was substantially lower than the carrying value of goodwill for the ES reporting unit. As a result, HP recorded its best estimate of $8.0 billion for the goodwill impairment charge in

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 5: Goodwill and Purchased Intangible Assets (Continued)

the third quarter of fiscal 2012. The impairment charge is included in Impairment of goodwill and purchased intangible assets in the Consolidated Condensed Statements of Earnings. Any adjustments to the estimated impairment loss following the completion of the measurement of the impairment will be recorded in the fourth quarter of fiscal 2012.

        During its fourth quarter of fiscal 2012, HP will perform its annual goodwill impairment review for all of its reporting units as of August 1, 2012. If there are changes in HP's stock price, or significant changes in the business climate or operating results of its reporting units, HP may incur additional goodwill impairment charges. The Software segment includes $14.6 billion of goodwill, of which $7.7 billion relates to the legacy HP software business and $6.9 billion relates to the Autonomy acquisition. Based on HP's last annual goodwill impairment review completed as of August 1, 2011, the excess of fair value over carrying value of the legacy HP software business was 38% of the carrying value, which is lower than that of HP's other reporting units. At the time of the Autonomy acquisition in October 2011, the fair value of Autonomy approximated the carrying value.

    Purchased Intangible Assets

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

 
  July 31, 2012   October 31, 2011  
 
  Gross   Accumulated
Amortization
  Impairment
Loss
  Net   Gross   Accumulated
Amortization
  Impairment
Loss
  Net  
 
  In millions
 

Customer contracts, customer lists and distribution agreements

  $ 5,942   $ (2,603 )     $ 3,339   $ 6,409   $ (2,390 )   (49 ) $ 3,970  

Developed and core technology and patents

    6,824     (2,569 )       4,255     7,226     (1,944 )       5,282  

Compaq trade name

    1,422     (8 )   (1,227 )   187     1,422             1,422  

Other product trademarks

    314     (136 )       178     367     (129 )   (23 )   215  

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

    7             7     9             9  
                                   

Total purchased intangible assets

  $ 14,509   $ (5,316 ) $ (1,227 ) $ 7,966   $ 15,433   $ (4,463 )   (72 ) $ 10,898  
                                   

        For the first nine months of fiscal 2012, the majority of the decrease in gross intangibles was related to $537 million of fully amortized intangible assets which have been eliminated from both the gross and accumulated amortization amounts and a $293 million change in the estimated fair value of Autonomy's purchased intangible assets acquired.

        On May 23, 2012, HP approved a change to its branding strategy for personal computers, which will result in a more limited and focused use of the "Compaq" trade name acquired in 2002. In conjunction with the change in branding strategy, HP revised its assumption as to the useful life of that intangible asset, which resulted in a reclassification of the asset from an indefinite-lived intangible to a

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 5: Goodwill and Purchased Intangible Assets (Continued)

finite-lived intangible with a remaining useful life of approximately five years. These changes triggered an impairment review of the Compaq trade name intangible asset. In conducting an impairment review of a purchased intangible asset, HP compares the fair value of the asset to its carrying value. If the fair value of the asset is less than the carrying value, the difference is recorded as an impairment loss. HP estimated the fair value of the Compaq trade name by calculating the present value of the royalties saved that would have been paid to a third party had HP not owned the trade name. Following the completion of that analysis, HP determined that the fair value of the trade name asset was less than the carrying value due primarily to the change in the useful life assumption and a decrease in expected future revenues related to Compaq-branded products resulting from the more focused branding strategy. As a result, HP recorded an impairment charge of $1.2 billion in the third quarter of fiscal 2012, which is included in Impairment of goodwill and purchased intangible assets in the Consolidated Condensed Statements of Earnings.

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

Fiscal year:
  In millions  

2012 (remaining three months)

  $ 467  

2013

    1,747  

2014

    1,410  

2015

    1,221  

2016

    1,063  

2017

    621  

Thereafter

    1,430  
       

Total

  $ 7,959  
       

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 2012 Restructuring Plan

        On May 23, 2012, HP adopted a multi-year restructuring plan (the "2012 Plan") designed to simplify business processes, accelerate innovation and deliver better results for customers, employees and stockholders. HP estimates that it will eliminate approximately 29,000 positions in connection with the 2012 Plan through fiscal year 2014, with a portion of those employees exiting the company as part of a voluntary enhanced early retirement ("EER") program for U.S. employees. As discussed in

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 6: Restructuring Charges (Continued)

Note 14, a majority of the EER program will be funded through HP's U.S. pension plans. In connection with the 2012 Plan, HP expects to record aggregate charges of approximately $3.7 billion through the end of HP's 2014 fiscal year as accounting recognition criteria are met. Of that amount, HP expects approximately $3.3 billion to relate to the workforce reductions and the EER program and approximately $0.4 billion to relate to other items, including data center and real estate consolidation.

        HP recorded an initial charge of approximately $1.7 billion in the third fiscal quarter of 2012 relating to the 2012 Plan. This amount included $41 million of stock-based compensation expense for accelerated vesting of stock-based awards held by participating EER employees and a special termination benefit ("STB") expense of $53 million for certain EER participants whose retirement incentive benefit will be paid in cash outside of HP's U.S. pension plans. As of July 31, 2012, HP had eliminated approximately 3,800 positions as part of the 2012 Plan. The $1.7 billion charge also includes $52 million for data center and real estate consolidation, of which $45 million related to asset impairments. The cash payments associated with the 2012 Plan are expected to be paid out through the first half of fiscal 2015.

    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 Enterprise Services Business Restructuring Plan

        On June 1, 2010, HP's management announced a plan to restructure its ES business, which includes the ITO and ABS 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 first quarter of fiscal 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 July 31, 2012, approximately 7,300 positions had been eliminated.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 6: Restructuring Charges (Continued)

    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 ESSN businesses. The total expected 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 at a total expected cost of $3.3 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.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 6: Restructuring Charges (Continued)

    Summary of Restructuring Plans

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

 
   
  Three
months
ended
July 31,
2012
charges
  Nine
months
ended
July 31,
2012
charges
   
   
   
  As of July 31, 2012  
 
   
   
  Other
adjustments
and non-cash
settlements
   
 
 
  Balance,
October 31,
2011
  Cash
payments
  Balance,
July 31,
2012
  Total
costs and
adjustments
to date
  Total
expected
costs and
adjustments
 
 
  In millions
 

Fiscal 2012 Plan

                                                 

Severance and EER

  $   $ 1,680   $ 1,680   $ (81 ) $ (1,106) (1) $ 493   $ 1,680   $ 3,279  

Infrastructure and other

        52     52     (1 )   (46 )   5     52     404  
                                   

Total 2012 Plan

        1,732     1,732     (82 )   (1,152 )   498     1,732     3,683  

Fiscal 2010 acquisitions

    59             (19 )   (1 )   39     114     121  

Fiscal 2010 ES Plan:

                                                 

Severance

    493         (100 )   (111 )   (27 )   255     623     623  

Infrastructure

    3     33     172     (137 )   (37 )   1     365     369  
                                   

Total ES Plan

    496     33     72     (248 )   (64 )   256     988     992  

Fiscal 2009 Plan

            7     (9 )   2         301     301  

Fiscal 2008 HP/EDS Plan:

                                                 

Severance

            5     (7 )   2         2,195     2,195  

Infrastructure

    258     30     72     (107 )   (11 )   212     1,046     1,085  
                                   

Total HP/EDS Plan

    258     30     77     (114 )   (9 )   212     3,241     3,280  
                                   

Total restructuring plans

  $ 813   $ 1,795   $ 1,888   $ (472 ) $ (1,224 ) $ 1,005   $ 6,376   $ 8,377  
                                   

(1)
Includes adjustments related to the EER plan of $833 million for additional pension benefits and $227 million for certain healthcare and medical savings account benefits as described further in Note 14.

        At July 31, 2012 and October 31, 2011, HP included the long-term portion of the restructuring liability of $263 million and $159 million, respectively, in Other liabilities, and the short-term portion of $742 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.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 7: Fair Value (Continued)

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, mutual 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.

        Short- and Long-Term Debt: The estimated fair value of publicly-traded debt is based on quoted market prices for the identical liability when traded as an asset in an active market. For other debt for which a quoted market price is not available, an expected present value method that uses rates currently available to HP for debt with similar terms and remaining maturities is used to estimate fair value. The portion of the company's fixed-rate debt obligations that is hedged is reflected in the Consolidated Condensed Balance Sheets as an amount equal to the debt's carrying value, including a fair value adjustment representing changes in the fair value of the hedged debt obligations arising from movements in benchmark interest rates. The estimated fair value of HP's short- and long-term debt was approximately $30.3 billion at July 31, 2012, compared to a carrying value of $29.7 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. If measured at fair value in the Consolidated Condensed Balance Sheets, short- and long-term debt would be classified as Level 2 in the fair value hierarchy.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 7: Fair Value (Continued)

        HP's non-marketable equity investments and non-financial assets, such as intangible assets, goodwill and property, plant and equipment, are recorded at fair value only if an impairment charge is recognized. During the quarter ended July 31, 2012, HP recognized a goodwill impairment charge of $8.0 billion and an intangible asset impairment charge of $1.2 billion. HP classified each of these measurements as Level 3 fair value assessments, as HP used unobservable inputs to the valuation methodologies that were significant to the fair value measurements, and the valuation required management judgment due to the absence of quoted market prices. For more information on these nonrecurring fair value adjustments, see Note 5.

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

 
  As of July 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

  $   $ 2,993   $   $ 2,993   $   $ 5,120   $   $ 5,120  

Money market funds

    3,632             3,632     236             236  

Mutual funds

        396         396                  

Marketable equity securities

    35     3         38     120     2         122  

Foreign bonds

    7     352         359     7     376         383  

Corporate bonds and other debt securities

    3     2     46     51     3     2     48     53  

Derivatives:

                                                 

Interest rate contracts

        395         395         593         593  

Foreign exchange contracts

        706         706         269     35     304  

Other derivatives

        2     22     24         25     6     31  
                                   

Total Assets

  $ 3,677   $ 4,849   $ 68   $ 8,594   $ 366   $ 6,387   $ 89   $ 6,842  
                                   

Liabilities

                                                 

Derivatives:

                                                 

Interest rate contracts

  $   $ 37   $   $ 37   $   $ 71   $   $ 71  

Foreign exchange contracts

        440     13     453         823     9     832  

Other derivatives

        1         1         1         1  
                                   

Total Liabilities

  $   $ 478   $ 13   $ 491   $   $ 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 July 31, 2012 and October 31, 2011 were as follows:

 
  July 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

  $ 2,985   $   $   $ 2,985   $ 5,112   $   $   $ 5,112  

Money market funds

    3,632             3,632     236             236  

Mutual funds

    41             41                  
                                   

Total cash equivalents

    6,658             6,658     5,348             5,348  
                                   

Available-for-Sale Investments

                                                 

Debt securities:

                                                 

Time deposits

    8             8     8             8  

Foreign bonds

    287     72         359     317     66         383  

Mutual funds

    355             355                  

Corporate bonds and other debt securities

    69         (18 )   51     74         (21 )   53  
                                   

Total debt securities

    719     72     (18 )   773     399     66     (21 )   444  
                                   

Equity securities in public companies

    50     2     (18 )   34     114     4         118  
                                   

Total cash equivalents and available-for-sale investments

  $ 7,427   $ 74   $ (36 ) $ 7,465   $ 5,861   $ 70   $ (21 ) $ 5,910  
                                   

        Cash equivalents consist of investments in time deposits, money market funds and mutual funds with original maturities of three months or less. Time deposits were primarily issued by institutions outside the United States as of July 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, mutual funds, 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 July 31, 2012, $18 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

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments (Continued)

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.

        Contractual maturities of short-term and long-term investments in available-for-sale debt securities at July 31, 2012 were as follows:

 
  July 31, 2012  
 
  Cost   Estimated
Fair Value
 
 
  In millions
 

Due in less than one year

  $ 355   $ 355  

Due in one to five years

    13     13  

Due in more than five years

    351     405  
           

  $ 719   $ 773  
           

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

        During the quarter ended July 31, 2012, HP recognized approximately $10 million impairment charge related to a public equity investment as HP determined that such impairment was other than temporary. The total impairment related to this public equity investment for the nine months ended July 31, 2012 was $60 million. HP made its determination based on the closing prices for the nine months ended July 31, 2012. HP has evaluated the near-term prospects of its remaining 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.

        Equity securities in privately held companies include cost basis and equity method investments. These amounted to $50 million and $48 million for the periods ended July 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,

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments (Continued)

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 of the due date. As of July 31, 2012, HP held $613 million of collateral and posted $21 million through re-hypothecation in association with the counterparties under these collateralized arrangements. As of July 31, 2011 HP held $40 million of treasury securities under those collateralized arrangements. As of July 31, 2012 and 2011, HP did not have any derivative instruments under these collateralized arrangements that were in a significant net liability position.

    Fair Value Hedges

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

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments (Continued)

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 and nine months ended July 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 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 July 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 and nine months ended July 31, 2012 and 2011.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments (Continued)

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

 
  As of July 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

  $ 7,900   $ 23   $ 340   $   $   $ 10,075   $ 30   $ 508   $   $  

Cash flow hedges:

                                                             

Foreign exchange contracts

    19,620     496     84     220     53     21,666     192     30     324     126  

Net investment hedges:

                                                             

Foreign exchange contracts

    1,665     22     26     29     22     1,556     7     4     44     56  
                                           

Total derivatives designated as hedging instruments

    29,185     541     450     249     75     33,297     229     542     368     182  
                                           

Derivatives not designated as hedging instruments

                                                             

Foreign exchange contracts

    12,487     42     36     106     23     13,994     66     5     244     38  

Interest rate contracts(2)

    2,200         32         37     2,200         55         71  

Other derivatives

    401     2     22     1         410     25     6         1  
                                           

Total derivatives not designated as hedging instruments

    15,088     44     90     107     60     16,604     91     66     244     110  
                                           

Total derivatives

  $ 44,273   $ 585   $ 540   $ 356   $ 135   $ 49,901   $ 320   $ 608   $ 612   $ 292  
                                           

(1)
Represents the face amounts of contracts that were outstanding as of July 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 and nine months ended July 31, 2012 and 2011 were as follows:

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

Interest rate contracts

  Interest and other, net   $ (10 ) $ (86 ) Fixed-rate debt   Interest and other, net   $ 13   $ 93  

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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
July 31,
2011
  Nine
months
ended
July 31,
2011
  Hedged
Item
  Location   Three
months
ended
July 31,
2011
  Nine
months
ended
July 31,
2011
 
 
   
  In millions
   
   
  In millions
 

Interest rate contracts

  Interest and other, net   $ 68   $ (135 ) Fixed-rate debt   Interest and other, net   $ (63 ) $ 138  

        The before-tax effect of derivative instruments in cash flow and net investment hedging relationships for the three and nine months ended July 31, 2012 were 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
July 31,
2012
  Nine
months
ended
July 31,
2012
  Location   Three
months
ended
July 31,
2012
  Nine
months
ended
July 31,
2012
  Location   Three
months
ended
July 31,
2012
  Nine
months
ended
July 31,
2012
 
 
  In millions
   
  In millions
   
  In millions
 

Cash flow hedges:

                                             

Foreign exchange contracts

  $ 412   $ 729   Net revenue   $ 274   $ 360   Net revenue   $   $  

Foreign exchange contracts

    22     (39 ) Cost of products     (23 )   (5 ) Cost of products          

Foreign exchange contracts

    (5 )   (9 ) Other operating expenses     (2 )   (4 ) Other operating expenses          

Foreign exchange contracts

    17       Interest and other, net     21     6   Interest and other, net          

Foreign exchange contracts

    6     (13 ) Net revenue     9     9   Interest and other, net          
                                   

Total cash flow hedges

  $ 452   $ 668       $ 279   $ 366       $   $  
                                   

Net investment hedges:

                                             

Foreign exchange contracts

  $ 33   $ 71   Interest and other, net   $   $   Interest and other, net   $   $  
                                   

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments (Continued)

        The before-tax effect of derivative instruments in cash flow and net investment hedging relationships for the three and nine months ended July 31, 2011 were 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
July 31,
2011
  Nine
months
ended
July 31,
2011
  Location   Three
months
ended
July 31,
2011
  Nine
months
ended
July 31,
2011
  Location   Three
months
ended
July 31,
2011
  Nine
months
ended
July 31,
2011
 
 
  In millions
   
  In millions
   
  In millions
 

Cash flow hedges:

                                             

Foreign exchange contracts

  $ 115   $ (565 ) Net revenue   $ (333 ) $ (653 ) Net revenue   $   $  

Foreign exchange contracts

    10     28   Cost of products     9     31   Cost of products          

Foreign exchange contracts

        5   Other operating expenses     2     4   Other operating expenses          

Foreign exchange contracts

    (37 )   (57 ) Interest and other, net     (20 )   (52 ) Interest and other, net          

Foreign exchange contracts

    7     5   Net revenue     3     9   Interest and other, net     1     4  
                                   

Total cash flow hedges

  $ 95   $ (584 )     $ (339 ) $ (661 )     $ 1   $ 4  
                                   

Net investment hedges:

                                             

Foreign exchange contracts

  $ (21 ) $ (118 ) Interest and other, net   $   $   Interest and other, net   $   $  
                                   

        As of July 31, 2012, HP expects to reclassify an estimated net accumulated other comprehensive gain of approximately $146 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 and nine months ended July 31, 2012 and 2011 were as follows:

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

Foreign exchange contracts

  Interest and other, net   $ 172   $ 328  

Other derivatives

  Interest and other, net     9     (7 )

Interest rate contracts

  Interest and other, net         11  
               

Total

      $ 181   $ 332  
               

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments (Continued)


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

Foreign exchange contracts

  Interest and other, net   $ (49 ) $ (747 )

Other derivatives

  Interest and other, net     (22 )   (12 )

Interest rate contracts

  Interest and other, net         3  
               

Total

      $ (71 ) $ (756 )
               

    Other Financial Instruments

        For the balance of HP's financial instruments, accounts receivable, financing receivables, accounts payable and other accrued liabilities, the carrying amounts approximate fair value due to their short maturities.

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:

 
  July 31,
2012
  October 31,
2011
 
 
  In millions
 

Minimum lease payments receivable

  $ 7,774   $ 7,721  

Unguaranteed residual value

    235     233  

Unearned income

    (661 )   (647 )
           

Financing receivables, gross

    7,348     7,307  

Allowance for doubtful accounts

    (145 )   (130 )
           

Financing receivables, net

    7,203     7,177  

Less current portion

    (3,116 )   (3,162 )
           

Amounts due after one year, net

  $ 4,087   $ 4,015  
           

        Equipment leased to customers under operating leases was $3.9 billion and $4.0 billion at July 31, 2012 and October 31, 2011, respectively, and is included in machinery and equipment. Accumulated depreciation on equipment under lease was $1.5 billion and $1.3 billion at July 31, 2012 and October 31, 2011, respectively.

        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

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 9: Financing Receivables and Operating Leases (Continued)

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.

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

 
  July 31,
2012
  October 31,
2011
 
 
  In millions
 

Risk Rating

             

Low

  $ 4,280   $ 4,261  

Moderate

    2,985     2,989  

High

    83     57  
           

Total

  $ 7,348   $ 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:

 
  Nine months ended
July 31, 2012
 
 
  In millions
 

Allowance for doubtful accounts

       

Balance, beginning of period

  $ 130  

Additions to allowance

    33  

Deductions, net of recoveries

    (18 )
       

Balance, end of period

  $ 145  
       

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 9: Financing Receivables and Operating Leases (Continued)


 
  July 31,
2012
  October 31,
2011
 
 
  In millions
 

Allowance for financing receivables individually evaluated for loss

  $ 47   $ 35  

Allowance for financing receivables collectively evaluated for loss

    98     95  
           

Total

  $ 145   $ 130  
           

Gross financing receivables individually evaluated for loss

  $ 349   $ 228  

Gross financing receivables collectively evaluated for loss

    6,999     7,079  
           

Total

  $ 7,348   $ 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 $211 million and $157 million at July 31, 2012 and October 31, 2011, respectively. Total financing receivables greater than 90 days past due and still accruing interest were $138 million and $71 million at July 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 arrangements 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 nine months ended July 31, 2012 were as follows:

 
  In millions  

Product warranty liability at October 31, 2011

  $ 2,451  

Accruals for warranties issued

    1,700  

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

    (81 )

Settlements made (in cash or in kind)

    (1,854 )
       

Product warranty liability at July 31, 2012

  $ 2,216  
       

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:

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

Current portion of long-term debt

  $ 4,576     1.3 % $ 4,345     2.4 %

Commercial paper

    574     0.9 %   3,215     0.4 %

Notes payable to banks, lines of credit and other

    531     2.8 %   523     2.9 %
                       

  $ 5,681         $ 8,083        
                       

        Notes payable to banks, lines of credit and other includes deposits associated with HP's banking-related activities of approximately $357 million and $355 million at July 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:

 
  July 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%, paid July 2012

  $   $ 500  

2006 Shelf Registration Statement:

             

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

        600  

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

        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  

$1,500 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)

 
  July 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%, paid 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

    1,100     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

    1,298     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      

$1,500 issued at discount to par at a price of 99.985% in March 2012 at 2.6%, due September 2017

    1,500      

$500 issued at discount to par at a price of 99.771% in March 2012 at 4.05%, due September 2022

    499      
           

    26,079     24,082  
           

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 11: Borrowings (Continued)

 
  July 31,
2012
  October 31,
2011
 
 
  In millions
 

EDS Senior Notes

             

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

    1,111     1,120  

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

    314     315  
           

    1,425     1,435  
           

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

    689     836  

Fair value adjustment related to hedged debt

    446     543  

Less: current portion

    (4,576 )   (4,345 )
           

Total long-term debt

  $ 24,063   $ 22,551  
           

        As disclosed in Note 8, 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 interest rates in the table above have not been adjusted to reflect the impact of any interest rate swaps.

        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 respective prospectus supplements relating thereto. The Global Notes are senior unsecured debt.

        In May 2012, HP filed a shelf registration statement (the "2012 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 2012 Shelf Registration Statement replaced the registration statement filed in May 2009.

        HP's Board of Directors has approved the issuance of up to $16.0 billion in aggregate principal amount of commercial paper by HP. HP's subsidiaries are authorized to issue up to an additional $1.0 billion in aggregate principal amount of commercial paper, of which $500 million of capacity was available as of July 31, 2012 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 March 2017 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 July 31, 2012, the carrying value of the assets approximated the carrying value of the borrowings of $219 million.

        As of July 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 2012 Shelf Registration Statement. As of that date, HP also had up to approximately $17.4 billion of available

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 11: Borrowings (Continued)

borrowing resources, including $15.9 billion under its commercial paper programs and approximately $1.5 billion relating to uncommitted lines of credit.

Note 12: Income Taxes

    Provision for Taxes

        HP's effective tax rate was 2.2% and 19.7% for the three months ended July 31, 2012 and July 31, 2011, respectively, and (10.3)% and 20.4% for the nine months ended July 31, 2012 and July 31, 2011, respectively. HP's effective tax rate decreased in the three and nine month periods ended July 31, 2012 primarily due to the net tax effects of charges recorded for the impairment of goodwill and purchased intangible assets and restructuring charges. Excluding these charges, HP's effective tax rate generally differs from the U.S. federal statutory rate of 35% due to favorable tax rates associated with certain earnings from HP's operations in lower-tax jurisdictions throughout the world. HP has not provided U.S. taxes for all of such earnings because HP plans to reinvest some of those earnings indefinitely outside the United States.

        In the three and nine months ended July 31, 2012, HP recorded discrete items with a net tax benefit of $670 million and $744 million, respectively, decreasing the effective tax rate. These amounts included net tax benefits of $564 million and $614 million from restructuring and acquisition charges recorded for the three and nine months ended July 31, 2012, respectively. Also included in the three and nine months ended July 31, 2012 was an $823 million discrete income tax charge to record U.S. valuation allowances on certain deferred tax assets related to the Services segment. The ES business within the Services segment files a U.S. tax return separate from HP. As a result of the 2012 restructuring plan costs accompanied by market conditions and business trends, HP recognized a valuation allowance for the net deferred tax assets of the ES U.S. business. In addition, HP recorded $827 million of income tax benefits that were recognized from reversals of deferred income tax liabilities attributed to temporary basis differences related to certain foreign subsidiaries that were reduced by the impairment charges for goodwill and purchased intangible assets. There were also other miscellaneous discrete tax benefits in the three and nine months ended July 31, 2012 of $102 million and $126 million, respectively.

        In the three and nine months ended July 31, 2011, HP recorded discrete items with a net tax benefit of $145 million and $302 million, respectively. These amounts included net tax benefits of $62 million and $174 million, respectively, from restructuring and acquisition charges, and net tax benefits of $83 million and $85 million, respectively, for settlement of tax audit matters and other miscellaneous discrete items. 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 July 31, 2012, the amount of gross unrecognized tax benefits was $2.7 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 July 31, 2012, HP had accrued a net payable of $196 million for interest and penalties. In the three and nine months ended July 31, 2012, HP recognized $9 million of net interest expense on net tax underpayments, net of tax, and $10 million of net interest income on tax overpayments, net of tax, respectively.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 12: Income Taxes (Continued)

        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 $235 million within the next 12 months.

        HP is subject to income tax in the United States and approximately 80 foreign countries and is subject to routine corporate income tax audits in many of these jurisdictions. In addition, HP is subject to numerous ongoing audits by state and foreign tax authorities. 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, 2007 and 2008 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 $626 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. The United States Tax Court has recently ruled against HP regarding one of the IRS adjustments. HP currently intends to appeal the decision. 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 IRS began an audit of HP's U.S. group of subsidiaries providing enterprise services for its 2009 income tax return in 2011. That group of subsidiaries has received an RAR for the short period ended October 31, 2008 proposing a total tax deficiency of $17 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:

 
  July 31,
2012
  October 31,
2011
 
 
  In millions
 

Current deferred tax assets

  $ 4,614   $ 5,374  

Current deferred tax liabilities

    (86 )   (41 )

Long-term deferred tax assets

    1,176     1,283  

Long-term deferred tax liabilities

    (3,920 )   (5,163 )
           

Total deferred tax assets net of deferred tax liabilities

  $ 1,784   $ 1,453  
           

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 13: Stockholders' Equity

    Share Repurchase Program

        HP's share repurchase program authorizes both open market and private repurchase transactions. In the three and nine months ended July 31, 2012, HP executed share repurchases of 16 million shares and 59 million shares, respectively. Such repurchased shares were settled for $365 million and $1.5 billion, respectively. HP paid $4.6 billion in connection with repurchases of 128 million shares during the three months ended July 31, 2011 and paid $9.6 billion in connection with repurchases of 245 million shares in the first nine months of fiscal 2011. As of July 31, 2012, HP had remaining authorization of $9.3 billion for future share repurchases.

    Comprehensive Income

        The changes in the components of other comprehensive income ("OCI"), net of taxes, were as follows:

 
  Three months ended
July 31
 
 
  2012   2011  
 
  In millions
 

Net (loss) earnings

  $ (8,857 ) $ 1,926  

Net change in unrealized gains on available-for-sale securities, net of tax of $2 million in 2012 and $3 million in 2011

    6     5  

Net change in unrealized gains/losses on cash flow hedges:

             

Unrealized gains recognized in OCI, net of tax of $157 million in 2012 and $46 million in 2011

    295     49  

(Gains) losses reclassified into income, net of tax of $91 million in 2012 and net of tax benefit of $117 million in 2011

    (188 )   222  
           

    107     271  
           

Net change in cumulative translation adjustment, net of tax benefit of $43 million in 2012 and net of tax $6 million in 2011

    (344 )   3  

Net change in unrealized components of defined benefit plans, net of tax benefit of $1 million in 2012 and net of tax of $6 million in 2011

    21     39  
           

Comprehensive (loss) income

  $ (9,067 ) $ 2,244  
           

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 13: Stockholders' Equity (Continued)


 
  Nine months ended
July 31
 
 
  2012   2011  
 
  In millions
 

Net (loss) earnings

  $ (5,796 ) $ 6,835  

Net change in unrealized (losses) gains on available-for-sale securities, net of tax benefit of $3 million in 2012 and net of tax of $1 million in 2011

    (8 )   15  

Net change in unrealized gains/losses on cash flow hedges:

             

Unrealized gains (losses) recognized in OCI, net of tax of $249 million in 2012 and net of tax benefit of $195 million in 2011

    419     (389 )

(Gains) losses reclassified into income, net of tax of $128 million in 2012 and net of tax benefit of $226 million in 2011

    (238 )   435  
           

    181     46  
           

Net change in cumulative translation adjustment, net of tax benefit of $5 million in 2012 and net of tax of $24 million in 2011

    (106 )   135  

Net change in unrealized components of defined benefit plans, net of tax of $55 million in 2012 and $126 million in 2011

    155     367  
           

Comprehensive (loss) income

  $ (5,574 ) $ 7,398  
           

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

 
  July 31,
2012
  October 31,
2011
 
 
  In millions
 

Net unrealized gain on available-for-sale securities

  $ 29   $ 37  

Net unrealized gain (loss) on cash flow hedges

    140     (41 )

Cumulative translation adjustment

    (491 )   (385 )

Unrealized components of defined benefit plans

    (2,954 )   (3,109 )
           

Accumulated other comprehensive loss

  $ (3,276 ) $ (3,498 )
           

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 14: Retirement and Post-Retirement Benefit Plans

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

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

Service cost

  $   $   $ 72   $ 90   $ 2   $ 2  

Interest cost

    141     148     170     178     9     9  

Expected return on plan assets

    (198 )   (186 )   (201 )   (227 )   (9 )   (9 )

Amortization and deferrals:

                                     

Actuarial loss (benefit)

    11     9     57     57     (1 )    

Prior service benefit

            (6 )   (3 )   (20 )   (20 )
                           

Net periodic benefit (gain) cost

    (46 )   (29 )   92     95     (19 )   (18 )

Settlement loss

    5                      

Curtailment gain

                    (4 )    

Special termination benefits

    833             4     227      
                           

Net benefit cost (gain)

  $ 792   $ (29 ) $ 92   $ 99   $ 204   $ (18 )
                           

 

 
  Nine months ended July 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

  $ 1   $ 1   $ 219   $ 264   $ 6   $ 7  

Interest cost

    424     445     519     524     26     26  

Expected return on plan assets

    (594 )   (558 )   (614 )   (665 )   (28 )   (27 )

Amortization and deferrals:

                                     

Actuarial loss (benefit)

    32     25     177     180     (3 )   1  

Prior service benefit

            (18 )   (10 )   (63 )   (62 )
                           

Net periodic benefit (gain) cost

    (137 )   (87 )   283     293     (62 )   (55 )

Settlement loss (gain)

    5         (20 )   2          

Curtailment gain

                    (4 )    

Special termination benefits

    833         2     12     227      
                           

Net benefit cost (gain)

  $ 701   $ (87 ) $ 265   $ 307   $ 161   $ (55 )
                           

Settlements

        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 transfer 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

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 14: Retirement and Post-Retirement Benefit Plans (Continued)

$344 million of pension obligations and the transfer of $166 million of pension assets to the Japanese government.

Retirement Incentive Program

        As part of the 2012 restructuring plan, the company announced a voluntary enhanced early retirement program for its U.S employees. Participation in the EER program was limited to those employees whose combined age and years of service equaled 65 or more. Approximately 8,500 employees elected to participate in the EER program and will leave the company on dates designated by the company with the majority of the EER participants leaving the company on August 31, 2012 and others exiting through August 31, 2013. The U.S. defined benefit pension plan was amended to provide that the EER benefit will be paid from the plan for electing EER participants who are current participants in the pension plan. The retirement incentive benefit is calculated as a lump sum and ranges between five and fourteen months of pay depending on years of service at the time of retirement under the program. As a result of this retirement incentive, HP recognized a STB expense of $833 million, which reflected the present value of all additional benefits that HP will distribute from the pension plan assets. HP recorded these expenses as a restructuring charge. In addition, a U.S. defined benefit plan re-measurement was also required, which resulted in no material change to the 2012 net periodic pension expense.

        HP extended to all employees participating in the EER program the opportunity to continue health care coverage at active employee contribution rates for up to 24 months following retirement. In addition, for employees not grandfathered into certain employer-subsidized retiree medical plans, HP is providing up to $12,000 in employer credits under the HP Retirement Medical Savings Account (RMSA) program. These items resulted in an additional STB expense of $227 million, which was offset by net curtailment gains in those programs of $37 million, due primarily to the resulting accelerated recognition of existing prior service cost/credits. The entire STB and approximately $4 million in curtailment gains were recognized in the third quarter of fiscal 2012. HP reported this net expense as a restructuring charge.

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 nine months ended July 31, 2012, HP made $475 million of contributions to its pension plans, paid $29 million to cover benefit payments to U.S. non-qualified plan participants, and paid $19 million to cover benefit claims under post-retirement benefit plans. During the remainder of fiscal 2012, HP anticipates making additional contributions of approximately $130 million to its pension plans and approximately $8 million to its U.S. non-qualified plan participants and expects to pay up to $20 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,

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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 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 July 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

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a written decision on January 25, 2008, and VG Wort subsequently filed an application with the German Federal Supreme Court under Section 321a of the German Code of Civil Procedure contending that the court did not consider their arguments. On May 9, 2008, the German Federal Supreme Court denied VG Wort's application. 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. The CJEU is expected to conduct an oral hearing in October 2012 and issue a decision approximately six to eight months thereafter, after which the matter will be remitted back to the German Federal Supreme Court.

        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. The CJEU is expected to conduct an oral hearing in October 2012 and issue a decision approximately six to eight months thereafter, after which the matter will be remitted back to the German Federal Supreme Court.

        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

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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 number of units impacted and amounts of 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.

        Skold, et al. v. Intel Corporation and Hewlett-Packard Company is a lawsuit filed against HP on June 14, 2004 that is pending in state court in Santa Clara County, California. The lawsuit alleges that Intel Corporation ("Intel") concealed performance problems related to the Intel Pentium 4 processor by, among others things, the manipulation of performance benchmarks. The lawsuit alleges that HP aided and abetted Intel's allegedly unlawful conduct. The plaintiffs seek unspecified damages, restitution, attorneys' fees and costs. On November 23, 2011, plaintiffs filed a motion seeking to certify a nationwide class asserting claims under the California Unfair Competition Law. On April 19, 2012, the court issued an order granting in part and denying in part the plaintiffs' motion. As to Intel, the court certified a nationwide class excluding residents of Illinois. As to HP, the court certified a class limited to California residents. As required by the same order, the plaintiffs have filed an amended complaint that limits their claims against HP to a California class while reserving the right to seek additional state-specific subclasses as to HP.

        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.

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    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 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. HP has filed a motion to dismiss the amended complaint, and a hearing on HP's motion was scheduled to be held on September 6, 2012. Prior to the hearing on HP's motion to dismiss, the plaintiff voluntarily dismissed his complaint against HP. The dismissal was entered by the court on July 12, 2012.

        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

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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 United States 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. Approximately 2,600 current and former EDS employees have filed consents to opt-in to the litigation. Plaintiffs have also alleged separate "opt out" classes based on the overtime laws of the states of California, Washington, Massachusetts, and New York, but plaintiffs have not yet sought class certification for those classes.

    Salva v. Hewlett-Packard Company is a purported collective action filed on June 15, 2012 in the United States District Court for the Western District of New York alleging that certain information technology employees allegedly involved in installing and/or maintaining computer software and hardware were misclassified as exempt employees under the Fair Labor Standards Act.

    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 United States 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 United States Court of Appeals for the Ninth Circuit. On June 7, 2012, the Court of Appeals affirmed summary judgment for two of the named plaintiffs, but reversed summary judgment on the third named plaintiff, remanding the case back to the trial court and inviting the trial court to revisit its prior certification order. 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 is pending in the United States 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 United States 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. HP has opposed plaintiffs' motion for conditional certification, and the court has taken the motion under advisement. Only

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      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 alleging 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 the plaintiff's motion for conditional class certification but allowed the plaintiff to re-file that motion following limited discovery on the issue of conditional certification. On March 12, 2012, the plaintiff filed an amended motion for conditional certification seeking to certify a class of all HP customer service representatives located in Boise, Idaho. On May 17, 2012, the court granted in part and denied in part plaintiff's motion. The court authorized plaintiff to notify certain HP employees of the collective action, but narrowed the scope of the proposed class and shortened the length of the proposed class period.

        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 duties on the appropriate value of recovery CDs containing Microsoft operating systems and seeking to recover approximately $5 million, plus penalties. HP has deposited a total of approximately $17 million with the DRI and agreed to post a provisional bond in exchange for the DRI's agreement to not seize HP products and spare parts and to not 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 HPI has deposited with the DRI. The DRI is also seeking to impose interest and penalties.

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        As described below, HPI has responded to the show cause notices, and the Bangalore Commissioner of Customs has concluded hearings into, and issued orders under, the products and the parts show cause notices:

    On April 11, 2012, the Commissioner issued an order on the products show cause notice affirming certain duties and penalties against HPI and the named individuals of approximately $386 million, of which HPI had deposited $9 million during the investigation.

    On April 20, 2012, the Commissioner issued an order on the parts show cause notice affirming certain duties and penalties against HPI and certain of the named individuals of approximately $17 million. HPI had deposited $7 million during investigation and after the order deposited an additional $3 million against the parts show cause notice to avoid certain penalties.

    HPI filed appeals before the Customs Tribunal along with applications for waiver of the pre-deposit of remaining demand amounts as a condition for hearing the appeals. The customs department has also filed cross-appeals against the products and parts orders before the Customs Tribunal. The hearing on the deposit waiver is expected to be held in December 2012. After that hearing, the Customs Tribunal is expected to set the actual amount of the deposit that will be required for HPI to proceed with the appeal. The amount of the additional deposit for the products appeal is expected to be between zero and $377 million, plus interest. The amount of the additional deposit for the spare parts appeal is expected to be between zero and $3 million.

On March 12, 2012 the Chennai Additional Commissioner of Customs issued an order affirming duties, interest and penalties of approximately $254,000 on one of the two June 17, 2010 software show cause notices. HPI had deposited $108,000 during the investigation and after the order deposited an additional $21,500 against this software order to avoid certain penalties. HPI has filed an appeal before the Commissioner (Appeals) along with application for waiver of pre-deposit of the remaining demand amount as a condition for hearing the appeal. The amount of the additional deposit for the Chennai software appeal is expected to be between zero and $80,000.

        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 information technology 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

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(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.

        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 various stockholder litigation commenced against certain current and former HP executive officers and/or 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. On August 20, 2012, the defendants filed demurrers seeking dismissal of the lawsuit. The court has not yet ruled on the demurrers.

    In re HP Derivative Litigation involves four consolidated lawsuits filed beginning on August 16, 2010 in the United States District Court for the Northern District of California alleging, among other things, that the individual defendants wasted corporate assets and breached their fiduciary duties when approving the severance payments made to former Chairman and Chief Executive Officer, Mark Hurd. The plaintiffs also allege that the defendants breached their fiduciary duties and violated Section 14(a) of the Exchange Act by filing false and misleading statements in HP's 2010 proxy statement regarding Mr. Hurd's employment agreement. On January 20, 2012, the defendants filed a motion to dismiss the consolidated lawsuits. The court has not yet ruled on that motion.

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    In re Hewlett-Packard Company, a Derivative Litigation, involves three consolidated lawsuits filed beginning on August 10, 2010 in California Superior Court alleging, among other things, that the individual defendants breached their fiduciary duties, engaged in mismanagement and wasted corporate assets when approving severance payments made to Mr. Hurd. The plaintiffs also allege that certain individual defendants engaged in insider trading and thereby wasted corporate assets, were unjustly enriched, breached their fiduciary duties and violated Sections 25402 and 25502 of the California Corporations Code. The three consolidated lawsuits are currently stayed pending resolution of the four consolidated federal court derivative lawsuits.

    Saginaw Police & Fire Pension Fund v. Marc L. Andreessen, et al. is a lawsuit filed on October 19, 2010 in the 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. On March 21, 2012, the court granted the defendants' motion to dismiss, and the court entered judgment in the defendants' favor and closed the case on May 29, 2012. On June 28, 2012, the plaintiff filed an appeal with the United States Court of Appeals for the Ninth Circuit.

    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, HP's severance payments made to Mr. 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.

    Richard Gammel v. Hewlett-Packard Company, et al. is a putative securities class action filed on September 13, 2011 in the United States District Court for the Central District of California alleging, among other things, that from November 22, 2010 to August 18, 2011, the defendants violated Sections 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. On April 11, 2012, the defendants filed a motion to dismiss the lawsuit. On September 4, 2012, the court granted the defendants' motion to dismiss and gave plaintiff 30 days to file an amended complaint.

    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 District Court for the Central District of California alleging, among other things, that the defendants violated Sections 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.

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(Unaudited)

Note 15: Litigation and Contingencies (Continued)

    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 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.

    Cement & Concrete Workers District Council Pension Fund v. Hewlett-Packard Company, et al. is a putative securities class action filed on August 3, 2012 in the United States District Court for the Northern District of California alleging, among other things, that from November 13, 2007 to August 6, 2010 the defendants violated Sections 10(b) and 20(a) of the Exchange Act by making statements regarding HP's Standards of Business Conduct ("SBC") that were false and misleading because Mr. Hurd, who was serving as HP's Chairman and Chief Executive Officer during that period, had been violating the SBC and concealing his misbehavior in a manner that jeopardized his continued employment with HP.

Environmental

        HP's operations and 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 HP's products and the recycling, treatment and disposal of those 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. HP is also subject to legislation in an increasing number of jurisdictions that makes producers of electrical goods, including computers and printers, financially responsible for specified collection, recycling, treatment and disposal of past and future covered products (sometimes referred to as "product take-back legislation"). HP could incur substantial costs, its products could be restricted from entering certain jurisdictions, and it could face other sanctions, if it were to violate or become liable under environmental laws or if its products become non-compliant with environmental laws. HP's potential exposure includes fines and civil or criminal sanctions, third-party property damage or personal injury claims and clean up costs. The amount and timing of costs under environmental laws are difficult to predict.

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

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

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 reportable 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 reportable business segments are based on this organizational structure and information reviewed by HP's management to evaluate the business segment results.

        In March 2012, HP announced that it will realign the organizational structure of its business. As part of that realignment, HP has consolidated PSG and IPG into a newly formed Printing and Personal Systems Group. HP continues to report the results of IPG and PSG separately.

        A description of the types of products and services provided by each reportable 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 technology consulting, outsourcing and support services across infrastructure, applications and business process domains. Services is divided into three main areas: ITO, TS and ABS. ITO delivers comprehensive services that encompass the data center, IT security, Cloud-based computing, workplace technology, network, unified communications, and enterprise service management. TS provides technology consulting and support services for transforming IT, and converging and supporting IT infrastructure. The technology consulting portfolio includes strategic IT advisory services, cloud consulting services, unified communications solutions, data

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 16: Segment Information (Continued)

      center transformation services and education consulting services. In addition to warranty support across HP's product lines, support services includes HP Foundation Care, the portfolio of reactive hardware and software support services; HP Proactive Care, which includes advanced remote system-monitoring tools, continuous onsite rapid response and direct access to HP's technical experts and resources; HP Datacenter Care for flexible customer support for HP and multivendor systems; and Lifecycle Event services, which are event-based services offering HP's technology expertise and consulting for each phase of the technology lifecycle. ABS helps clients develop, revitalize and manage their applications and information assets. The full applications lifecycle approach encompasses application development, testing, modernization, system integration, maintenance and management for both packaged and custom built applications. The ABS portfolio also offers IP-based industry solutions, services and technologies to help clients better manage critical business processes. HP also offers services for customer relationship management, finance and administration, human resources, payroll and document processing.

    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). It includes single function and all-in-one inkjet printers targeted toward consumers and SMBs, as well as 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 ProLiant servers, running primarily Windows, Linux and virtualization platforms from Microsoft, VMware and other major vendors and leveraging Intel and Advanced Micro Devices, Inc. x86 processors. The business spans a range of server product lines, including pedestal tower, traditional rack, density optimized rack and HP's BladeSystem family of server blades. Business Critical Systems offers HP Integrity servers based on the Intel Itanium-based processor, HP Integrity NonStop solutions and scale-up x86 ProLiant Servers for scalability of systems with more than four industry standard processors. HP's storage offerings include storage area networks, network attached storage, storage management software and virtualization technologies, StoreOnce data deduplication solutions, tape drives and tape libraries. HP's networking portfolio includes switches and routers that span

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 16: Segment Information (Continued)

      the data center, campus & branch environments delivering network management and unified communications. HP's wireless networking offerings include WLAN access points and controllers/switches.

    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, HP's 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. For segment reporting purposes, our Software reportable segment aggregates two operating segments, Autonomy and the legacy HP software business.

    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, the webOS business 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, impairment and amortization of purchased intangible assets, impairment of goodwill, 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

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 16: Segment Information (Continued)

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 and Scitex support and the LaserJet and enterprise solutions trade support business from the TS business unit within Services to the Commercial Hardware business unit within IPG;

    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 ABS business unit within Services;

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

    The transfer of the information management services business from Software to the new ABS 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 July 31  
 
  Net Revenue   Earnings (Loss)
from Operations
 
 
  2012   2011   2012   2011  
 
  In millions
 

Personal Systems Group

  $ 8,620   $ 9,592   $ 409   $ 567  

Services

    8,754     9,030     959     1,240  

Imaging and Printing Group

    6,017     6,183     949     879  

Enterprise Servers, Storage and Networking

    5,143     5,348     562     690  

Software(1)

    973     822     175     160  

HP Financial Services

    935     932     97     88  

Corporate Investments

    19     235     (58 )   (334 )
                   

Total segments

  $ 30,461   $ 32,142   $ 3,093   $ 3,290  
                   

(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)


 
  Nine months ended July 31  
 
  Net Revenue   Earnings (Loss)
from Operations
 
 
  2012   2011   2012   2011  
 
  In millions
 

Personal Systems Group

  $ 26,945   $ 29,456   $ 1,397   $ 1,772  

Services

    26,211     26,475     2,861     3,993  

Imaging and Printing Group

    18,407     19,757     2,518     3,134  

Enterprise Servers, Storage and Networking

    15,372     16,463     1,709     2,280  

Software(1)

    2,889     2,344     509     438  

HP Financial Services

    2,853     2,644     284     250  

Corporate Investments

    95     339     (155 )   (711 )
                   

Total segments

  $ 92,772   $ 97,478   $ 9,123   $ 11,156  
                   

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

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

 
  Three months ended
July 31
  Nine months ended
July 31
 
 
  2012   2011   2012   2011  
 
  In millions
 

Net revenue:

                         

Segment total

  $ 30,461   $ 32,142   $ 92,772   $ 97,478  

Elimination of intersegment net revenue and other

    (792 )   (953 )   (2,374 )   (2,355 )
                   

Total HP consolidated net revenue

  $ 29,669   $ 31,189   $ 90,398   $ 95,123  
                   

Earnings before taxes:

                         

Total segment earnings from operations

  $ 3,093   $ 3,290   $ 9,123   $ 11,156  

Corporate and unallocated costs and eliminations

    (314 )   (114 )   (670 )   (118 )

Unallocated costs related to stock-based compensation expense

    (150 )   (130 )   (492 )   (426 )

Amortization of purchased intangible assets

    (476 )   (358 )   (1,412 )   (1,196 )

Restructuring charges

    (1,795 )   (150 )   (1,888 )   (466 )

Acquisition-related charges

    (3 )   (18 )   (42 )   (68 )

Impairment of goodwill and purchased intangible assets

    (9,188 )       (9,188 )    

Interest and other, net

    (224 )   (121 )   (688 )   (294 )
                   

Total HP consolidated (loss) earnings before taxes

  $ (9,057 ) $ 2,399   $ (5,257 ) $ 8,588  
                   

        In connection with certain fiscal 2012 organizational realignments, HP reclassified total assets between its Services, IPG, ESSN, Software and Corporate Investments financial reporting segments. Other than the impact of the impairment of goodwill and purchased intangible assets within the Services and PSG segments, respectively, in the third quarter of fiscal 2012, there have been no material changes to the total assets of HP's individual segments since October 31, 2011.

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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
July 31
  Nine months ended
July 31
 
 
  2012   2011   2012   2011  
 
  In millions
 

Net revenue:

                         

Notebooks

  $ 4,416   $ 5,082   $ 14,258   $ 15,929  

Desktops

    3,486     3,777     10,519     11,314  

Workstations

    526     547     1,598     1,623  

Other

    192     186     570     590  
                   

Personal Systems Group

    8,620     9,592     26,945     29,456  
                   

Infrastructure Technology Outsourcing

    3,665     3,899     11,035     11,329  

Technology Services

    2,634     2,671     7,834     7,814  

Application and Business Services

    2,455     2,460     7,342     7,332  
                   

Services

    8,754     9,030     26,211     26,475  
                   

Supplies

    4,005     4,143     12,144     13,113  

Commercial Hardware

    1,445     1,388     4,413     4,489  

Consumer Hardware

    567     652     1,850     2,155  
                   

Imaging and Printing Group

    6,017     6,183     18,407     19,757  
                   

Industry Standard Servers

    3,187     3,302     9,445     10,137  

Storage

    924     976     2,869     2,968  

Business Critical Systems

    385     459     1,211     1,560  

Networking

    647     611     1,847     1,798  
                   

Enterprise Servers, Storage and Networking

    5,143     5,348     15,372     16,463  
                   

Software(1)

    973     822     2,889     2,344  

HP Financial Services

    935     932     2,853     2,644  

Corporate Investments

    19     235     95     339  
                   

Total segments

    30,461     32,142     92,772     97,478  
                   

Eliminations of intersegment net revenue and other

    (792 )   (953 )   (2,374 )   (2,355 )
                   

Total HP consolidated net revenue

  $ 29,669   $ 31,189   $ 90,398   $ 95,123  
                   

(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 server and storage 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 to be 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 are leveraging 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

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manner of their 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.

    Realigning our Business and Cost Structure

        We are addressing trends in our businesses and the market by reducing our cost structure and realigning our workforce to create investment capacity, support growth initiatives and innovation, and facilitate more effective operations. As part of those efforts, in March 2012, we announced that we were realigning the organizational structure of our business. As part of that realignment, we consolidated our personal computer and printing businesses under the same senior executive leadership. We also consolidated our global accounts sales organization into ESSN and centralized all of our marketing and communications activities. Subsequently, in May 2012, we announced a company-wide restructuring plan that includes both a voluntary early retirement program for eligible U.S. employees and non-voluntary workforce reductions. We expect the restructuring plan to be implemented through the end of fiscal 2014. We are also continuing to implement the multi-year restructuring plan announced in June 2010 relating to our enterprise services business ("ES"). See Note 6 to the Consolidated Condensed Financial Statements in Item 1 for further discussion of these restructuring plans and the associated restructuring charges.

    Investing in our Business

        The realignment and restructuring discussed above are two components of an ongoing initiative designed to improve our execution and financial performance and align our cost structure to facilitate increased investment in our business. These efforts will include optimizing our supply chain, reducing the number of stock keeping units (SKUs) and platforms, continuing to refine our real estate strategy, simplifying our go-to-market, improving business processes and implementing consistent pricing and promotions. We expect to invest the majority of the savings from these efforts across our businesses, including investing to respond to market trends and customer expectations, strengthen our position in our core markets, accelerate growth in adjacent markets, and drive leadership in the three strategic areas of cloud computing, security and information management. We expect these investments to 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. The rate at which we are able to invest in our business and the returns that we are able to achieve from these investments will be affected by many factors, including external factors, such as macroeconomic conditions and industry trends, and internal factors, such as financial performance and operational execution. As a result, we may experience delays in the anticipated timing of activities related to these efforts, and the anticipated benefits of these efforts may not materialize.

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        The following provides an overview of our key third quarter and first nine months of fiscal 2012 financial metrics:

 
  HP(1)
Consolidated
  PSG   Services   IPG   ESSN   Software   HPFS