10-Q 1 a2216474z10-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, 2013

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, 2013 was 1,921,823,787 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, 2013 and 2012 (Unaudited)

    4  

     

Consolidated Condensed Statements of Comprehensive Income for the three and nine months ended July 31, 2013 and 2012 (Unaudited)

    5  

     

Consolidated Condensed Balance Sheets as of July 31, 2013 (Unaudited) and as of October 31, 2012 (Audited)

    6  

     

Consolidated Condensed Statements of Cash Flows for the nine months ended July 31, 2013 and 2012 (Unaudited)

    7  

     

Notes to Consolidated Condensed Financial Statements (Unaudited)

    8  

  Item 2.  

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

    60  

  Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

    101  

  Item 4.  

Controls and Procedures

    101  

Part II.

  Other Information        

  Item 1.  

Legal Proceedings

    102  

  Item 1A.  

Risk Factors

    102  

  Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

    102  

  Item 6.  

Exhibits

    102  

Signature

    103  

Exhibit Index

    104  

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 or other financial items; any projections of the amount, timing or impact of cost savings or restructuring 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 need to address the many challenges facing HP's businesses; the competitive pressures faced by HP's businesses; risks associated with executing HP's strategy; the impact of macroeconomic and geopolitical trends and events; the need to manage third-party suppliers and the distribution of HP's products and services effectively; the protection of HP's intellectual property assets, including intellectual property licensed from third parties; risks associated with HP's international operations; the development and transition of new products and services and the enhancement of existing products and

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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 hiring and retention of key employees; integration and other risks associated with business combination and investment transactions; 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, 2012. 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
 
 
  2013   2012   2013   2012  
 
  In millions, except per share amounts
 

Net revenue:

                         

Products

  $ 17,375   $ 19,053   $ 53,103   $ 58,526  

Services

    9,741     10,503     29,722     31,526  

Financing income

    110     113     342     346  
                   

Total net revenue

    27,226     29,669     83,167     90,398  
                   

Costs and expenses:

                         

Cost of products

    13,397     14,524     40,669     44,754  

Cost of services

    7,385     8,216     23,036     24,682  

Financing interest

    77     80     238     238  

Research and development

    797     854     2,406     2,490  

Selling, general and administrative

    3,274     3,366     9,916     10,273  

Amortization of purchased intangible assets

    356     476     1,056     1,412  

Impairment of goodwill and purchased intangible assets

        9,188         9,188  

Restructuring charges

    81     1,795     619     1,888  

Acquisition-related charges

    4     3     19     42  
                   

Total operating expenses

    25,371     38,502     77,959     94,967  
                   

Earnings (loss) from operations

    1,855     (8,833 )   5,208     (4,569 )
                   

Interest and other, net

    (146 )   (224 )   (518 )   (688 )
                   

Earnings (loss) before taxes

    1,709     (9,057 )   4,690     (5,257 )

(Provision) benefit for taxes

    (319 )   200     (991 )   (539 )
                   

Net earnings (loss)

  $ 1,390   $ (8,857 ) $ 3,699   $ (5,796 )
                   

Net earnings (loss) per share:

                         

Basic

  $ 0.72   $ (4.49 ) $ 1.91   $ (2.93 )
                   

Diluted

  $ 0.71   $ (4.49 ) $ 1.89   $ (2.93 )
                   

Cash dividends declared per share

  $ 0.29   $ 0.26   $ 0.55   $ 0.50  

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

                         

Basic

    1,929     1,971     1,939     1,977  
                   

Diluted

    1,948     1,971     1,952     1,977  
                   

   

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 Comprehensive Income

(Unaudited)

 
  Three months ended
July 31
  Nine months ended
July 31
 
 
  2013   2012   2013   2012  
 
  In millions
 

Net earnings (loss)

  $ 1,390   $ (8,857 ) $ 3,699   $ (5,796 )
                   

Other comprehensive income (loss) before tax:

                         

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

                         

Unrealized gains (losses) arising during the period

    11     8     33     (11 )

(Gains) losses reclassified into earnings

    (49 )       (49 )    
                   

    (38 )   8     (16 )   (11 )
                   

Change in unrealized gains (losses) on cash flow hedges:          

                         

Unrealized gains (losses) arising during the period

    116     452     (44 )   668  

(Gains) losses reclassified into earnings

    (21 )   (279 )   19     (366 )
                   

    95     173     (25 )   302  
                   

Change in unrealized components of defined benefit plans:

                         

Gains (losses) arising during the period

    30     (7 )   31     (66 )

Amortization of actuarial loss and prior service (benefit)          

    78     41     242     125  

Curtailments, settlements and other

    15     (14 )   28     151  
                   

    123     20     301     210  
                   

Change in cumulative translation adjustment

    (99 )   (387 )   (157 )   (111 )
                   

Other comprehensive income (loss) before taxes

    81     (186 )   103     390  

Benefit (provision) for taxes

    8     (24 )   23     (168 )
                   

Other comprehensive income (loss), net of tax

    89     (210 )   126     222  
                   

Comprehensive income (loss)

  $ 1,479   $ (9,067 ) $ 3,825   $ (5,574 )
                   

   

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,
2013
  October 31,
2012
 
 
  In millions, except par value
 
 
  (Unaudited)
   
 

ASSETS

 

Current assets:

             

Cash and cash equivalents

  $ 13,251   $ 11,301  

Accounts receivable, net

    14,336     16,407  

Financing receivables, net

    3,113     3,252  

Inventory

    6,540     6,317  

Other current assets

    12,718     13,360  
           

Total current assets

    49,958     50,637  
           

Property, plant and equipment, net

    11,328     11,954  

Long-term financing receivables and other assets

    9,913     10,593  

Goodwill

    31,116     31,069  

Purchased intangible assets

    3,485     4,515  
           

Total assets

  $ 105,800   $ 108,768  
           

LIABILITIES AND STOCKHOLDERS' EQUITY

 

Current liabilities:

             

Notes payable and short-term borrowings

  $ 7,624   $ 6,647  

Accounts payable

    13,293     13,350  

Employee compensation and benefits

    4,075     4,058  

Taxes on earnings

    979     846  

Deferred revenue

    6,571     7,494  

Accrued restructuring

    841     771  

Other accrued liabilities

    12,629     13,500  
           

Total current liabilities

    46,012     46,666  
           

Long-term debt

    17,124     21,789  

Other liabilities

    17,686     17,480  

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; 1,929 and 1,963 shares issued and outstanding, respectively)

    19     20  

Additional paid-in capital

    5,868     6,454  

Retained earnings

    24,149     21,521  

Accumulated other comprehensive loss

    (5,433 )   (5,559 )
           

Total HP stockholders' equity

    24,603     22,436  

Non-controlling interests

    375     397  
           

Total stockholders' equity

    24,978     22,833  
           

Total liabilities and stockholders' equity

  $ 105,800   $ 108,768  
           

   

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
 
 
  2013   2012  
 
  In millions
 

Cash flows from operating activities:

             

Net earnings (loss)

  $ 3,699   $ (5,796 )

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

             

Depreciation and amortization

    3,491     3,894  

Impairment of goodwill and purchased intangible assets

        9,188  

Stock-based compensation expense

    398     494  

Provision for doubtful accounts—accounts and financing receivables

    43     60  

Provision for inventory

    222     194  

Restructuring charges

    619     1,888  

Deferred taxes on earnings

    542     (690 )

Excess tax benefit from stock-based compensation

    (1 )   (12 )

Other, net

    343     330  

Changes in operating assets and liabilities:

             

Accounts and financing receivables

    2,640     2,435  

Inventory

    (445 )   (2 )

Accounts payable

    (70 )   (2,196 )

Taxes on earnings

    (520 )   (40 )

Restructuring

    (644 )   (472 )

Other assets and liabilities

    (1,525 )   (2,763 )
           

Net cash provided by operating activities

    8,792     6,512  
           

Cash flows from investing activities:

             

Investment in property, plant and equipment

    (2,280 )   (2,833 )

Proceeds from sale of property, plant and equipment

    507     321  

Purchases of available-for-sale securities and other investments

    (793 )   (793 )

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

    874     516  

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

    (167 )   (141 )

Proceeds from business divestiture, net

        87  
           

Net cash used in investing activities

    (1,859 )   (2,843 )
           

Cash flows from financing activities:

             

Repayment of commercial paper and notes payable, net

    (170 )   (2,553 )

Issuance of long-term debt

    254     5,100  

Payment of long-term debt

    (3,473 )   (3,222 )

Issuance of common stock under employee stock plans

    279     710  

Repurchase of common stock

    (1,053 )   (1,495 )

Excess tax benefit from stock-based compensation

    1     12  

Cash dividends paid

    (821 )   (755 )
           

Net cash used in financing activities

    (4,983 )   (2,203 )
           

Increase in cash and cash equivalents

    1,950     1,466  

Cash and cash equivalents at beginning of period

    11,301     8,043  
           

Cash and cash equivalents at end of period

  $ 13,251   $ 9,509  
           

   

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 unaudited 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, 2013, its results of operations for the three and nine months ended July 31, 2013 and 2012 and its cash flows for the nine months ended July 31, 2013 and 2012.

        The results of operations for the three and nine months ended July 31, 2013 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 HP's Annual Report on Form 10-K for the fiscal year ended October 31, 2012.

        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.

        The accompanying unaudited Consolidated Condensed Financial Statements include the accounts of HP and other subsidiaries and affiliates in which HP has a controlling financial interest. Non-controlling interests are presented as a separate component within Total stockholder's equity in the Consolidated Condensed Balance Sheets. Net earnings attributable to the non-controlling interests are included within Interest and other, net in the Consolidated Condensed Statements of Earnings and are not presented separately as they were not material for any period presented.

    Segment Reorganization and Reclassifications

        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.

    Accounting Pronouncements

        In July 2013, the Financial Accounting Standards Board ("FASB") issued a new accounting standard that will require the presentation of certain unrecognized tax benefits as reductions to deferred tax assets rather than as liabilities in the Consolidated Condensed Balance Sheets when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. HP will be required to adopt this new standard on a prospective basis in the first quarter of fiscal 2015; however, early adoption is permitted as is a retrospective application. HP is currently evaluating the timing, transition method and impact of this new standard on its Consolidated Condensed Financial Statements.

        In July 2013, the FASB issued guidance which will permit the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) to be used as a U.S. benchmark interest rate for hedge accounting purposes. The guidance also removes the restriction on using different benchmark rates for similar

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 1: Basis of Presentation (Continued)

hedges. The guidance is effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The adoption of this guidance did not have any effect on HP's Consolidated Condensed Financial Statements.

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 permit the issuance of restricted stock awards, stock options and performance-based restricted units ("PRUs").

        Stock-based compensation expense and the resulting tax benefits were as follows:

 
  Three months
ended
July 31
  Nine months
ended
July 31
 
 
  2013   2012   2013   2012  
 
  In millions
 

Stock-based compensation expense

  $ 107   $ 150   $ 398   $ 494  

Income tax benefit

    (36 )   (43 )   (125 )   (154 )
                   

Stock-based compensation expense, net of tax

  $ 71   $ 107   $ 273   $ 340  
                   

    Restricted Stock Awards

        Restricted stock awards are non-vested stock awards that include grants of restricted stock and grants of restricted stock units. For the nine months ended July 31, 2013, HP granted only restricted stock units.

        Non-vested restricted stock awards as of July 31, 2013 and changes during the nine months ended July 31, 2013 were as follows:

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

Outstanding at October 31, 2012

    25,532   $ 31  

Granted

    19,677   $ 15  

Vested

    (10,341 ) $ 33  

Forfeited

    (2,328 ) $ 25  
             

Outstanding at July 31, 2013

    32,540   $ 21  
             

        At July 31, 2013, there was $392 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 1.3 years.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 2: Stock-Based Compensation (Continued)

    Stock Options

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

        The weighted-average fair value and the assumptions used to measure fair value were as follows:

 
  Three months ended
July 31
  Nine months ended
July 31
 
 
  2013   2012   2013   2012  

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

  $ 6.53   $ 6.70   $ 4.08   $ 9.30  

Implied volatility

    36 %   36 %   42 %   42 %

Risk-free interest rate

    1.14 %   1.20 %   0.98 %   1.20 %

Expected dividend yield

    2.36 %   2.40 %   3.72 %   1.77 %

Expected term in months

    62     77     70     67  

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

        Option awards outstanding as of July 31, 2013 and changes during the nine months ended July 31, 2013 were as follows:

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

Outstanding at October 31, 2012

    87,296   $ 29              

Granted

    23,967   $ 14              

Exercised

    (9,455 ) $ 19              

Forfeited/cancelled/expired

    (17,224 ) $ 25              
                         

Outstanding at July 31, 2013

    84,584   $ 27     4.1   $ 363  
                         

Vested and expected to vest at July 31, 2013

    80,322   $ 27     3.9   $ 328  
                         

Exercisable at July 31, 2013

    48,470   $ 33     1.9   $ 69  
                         

        The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value that option holders would have received had all outstanding options been exercised on July 31, 2013. The aggregate intrinsic value is the difference between HP's closing stock price on the last trading day of the third quarter of fiscal 2013 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, 2013 was $14 million and $31 million, respectively.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 2: Stock-Based Compensation (Continued)

        At July 31, 2013, there was $126 million of unrecognized pre-tax stock-based compensation expense related to stock options, which HP expects to recognize over the remaining weighted-average vesting period of 2.3 years.

    Performance-Based Restricted Units

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

        For PRU awards granted in fiscal year 2012, HP estimates the fair value of the Target Shares using HP's closing stock price on the measurement date. The weighted-average fair value for these PRUs was as follows:

 
  Nine months ended
July 31
 
 
  2013   2012  

Weighted-average fair value of grants per unit

  $ 13.14 (1) $ 27.00 (2)

(1)
Reflects the weighted-average fair value for the second year of the three-year performance period applicable to PRUs granted in fiscal 2012. The estimated fair value of the Target Shares for the third year for PRUs granted in fiscal year 2012 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 first year of the three-year performance period applicable to PRUs granted in fiscal 2012.

        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 weighted-average fair values of these PRU awards and the following weighted-

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 2: Stock-Based Compensation (Continued)

average assumptions, in addition to projections of market conditions, used to measure the weighted-average fair values were as follows:

 
  Nine months ended
July 31
 
 
  2013   2012  

Weighted-average fair value of grants per unit

  $ 0.00 (1) $ 3.35 (2)

Expected volatility(3)

    33 %   41 %

Risk-free interest rate

    0.18 %   0.14 %

Expected dividend yield

    3.94 %   1.78 %

Expected term in months

    12     15  

(1)
Reflects the weighted-average fair value for the third year of the three-year performance period applicable to PRUs granted in fiscal 2011.

(2)
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.

(3)
HP uses historic volatility for PRU awards when simulating multivariate prices for companies in the S&P 500.

        For the nine months ended July 31, 2013, HP did not grant any PRUs. Non-vested PRUs outstanding as of July 31, 2013 and changes during the nine months ended July 31, 2013 were as follows:

 
  Shares  
 
  In thousands
 

Outstanding Target Shares at October 31, 2012

    5,688  

Forfeited

    (293 )
       

Outstanding Target Shares at July 31, 2013

    5,395  
       

Outstanding Target Shares assigned a fair value at July 31, 2013

    5,052 (1)
       

(1)
Excludes Target Shares for the third year for PRUs granted in fiscal 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, 2013, there was $5 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 0.6 years.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 3: Net Earnings Per Share

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

        The reconciliations of the numerators and denominators of each of the basic and diluted EPS calculations were as follows:

 
  Three months ended
July 31
  Nine months ended
July 31
 
 
  2013   2012   2013   2012  
 
  In millions, except per share amounts
 

Numerator:

                         

Net earnings (loss)(1)

  $ 1,390   $ (8,857 ) $ 3,699   $ (5,796 )
                   

Denominator:

                         

Weighted-average shares used to compute basic EPS

    1,929     1,971     1,939     1,977  

Dilutive effect of employee stock plans

    19         13      
                   

Weighted-average shares used to compute diluted EPS

    1,948     1,971     1,952     1,977  
                   

Net earnings (loss) per share:

                         

Basic

  $ 0.72   $ (4.49 ) $ 1.91   $ (2.93 )

Diluted(2)

  $ 0.71   $ (4.49 ) $ 1.89   $ (2.93 )

(1)
Net earnings (loss) available to participating securities were not significant for the three and nine months ended July 31, 2013 and 2012. 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 diluted loss per share 4 million shares and 15 million shares, respectively, potentially issuable under employee stock plans, as their effect, if included, would have been anti-dilutive.

        HP excludes options with exercise prices that are greater than the average market price from the calculation of diluted EPS because their effect would be anti-dilutive. As such, for both the three and nine months ended July 31, 2013, HP excluded from the calculation of diluted EPS options to purchase 43 million shares and 52 million shares, respectively, compared to 74 million shares and 48 million shares for the three and nine months ended July 31, 2012, respectively. HP also excluded from the calculation of diluted EPS options to purchase an additional 8 million shares and 2 million shares for the three and nine months ended July 31, 2013, respectively, compared to an additional 1 million and 9 million shares for the three and nine months ended July 31, 2012, respectively, as their 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.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 4: Balance Sheet Details

        Balance sheet details were as follows:

    Accounts Receivable, Net

 
  July 31,
2013
  October 31,
2012
 
 
  In millions
 

Accounts receivable

  $ 14,703   $ 16,871  

Allowance for doubtful accounts

    (367 )   (464 )
           

  $ 14,336   $ 16,407  
           

        HP has third-party financing arrangements consisting of revolving short-term financing intended to facilitate the working capital requirements of certain customers. These financing arrangements, which in one case provides for partial recourse, result in a transfer of HP's trade receivables and risk to the third party. As these transfers qualify for sales accounting treatment, the trade receivables are derecognized from the Consolidated Condensed Balance Sheets upon transfer, and HP receives a payment for the trade receivables from the third party within a mutually agreed upon time period. For the arrangement involving an element of recourse, 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 obligations as of July 31, 2013 and October 31, 2012 were not material. The maximum program capacity and available program capacity under these arrangements were as follows:

 
  As of
July 31, 2013
  As of
October 31, 2012
 
 
  In millions
 

Non-recourse arrangements

             

Aggregate maximum program capacity

  $ 748   $ 636  

Aggregate available capacity

  $ 357   $ 434  

Aggregate utilized capacity

  $ 391   $ 202  

Partial-recourse arrangement

             

Maximum program capacity

  $ 866   $ 876  

Available capacity

  $ 481   $ 413  

Utilized capacity

  $ 385   $ 463  

Total arrangements

             

Aggregate maximum program capacity

  $ 1,614   $ 1,512  

Aggregate available capacity

  $ 838   $ 847  

Aggregate utilized capacity

  $ 776   $ 665  

        For the three and nine months ended July 31, 2013, trade receivables sold under these facilities were $1.1 billion and $3.8 billion, respectively. For the comparable periods of fiscal 2012, trade receivables sold under these facilities were $1.0 billion and $3.1 billion, respectively. The amount of trade receivables sold approximates the amount of cash received. The resulting costs associated with the sales of trade receivables for three and nine months ended July 31, 2013 and July 31, 2012 were not material.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 4: Balance Sheet Details (Continued)

    Inventory

 
  July 31,
2013
  October 31,
2012
 
 
  In millions
 

Finished goods

  $ 4,322   $ 4,094  

Purchased parts and fabricated assemblies

    2,218     2,223  
           

  $ 6,540   $ 6,317  
           

    Property, Plant and Equipment, Net

 
  July 31,
2013
  October 31,
2012
 
 
  In millions
 

Land

  $ 634   $ 636  

Buildings and leasehold improvements

    8,847     8,744  

Machinery and equipment

    16,471     16,503  
           

    25,952     25,883  
           

Accumulated depreciation

    (14,624 )   (13,929 )
           

  $ 11,328   $ 11,954  
           

        For the nine months ended July 31, 2013, the change in gross property, plant and equipment was due primarily to investments of $2.3 billion which were offset by sales and retirements totaling $2.6 billion. Accumulated depreciation associated with the assets sold and retired was $2.2 billion.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 5: Goodwill and Purchased Intangible Assets

    Goodwill

        Goodwill allocated to HP's reportable segments as of July 31, 2013 and changes in the carrying amount of goodwill for the nine months ended July 31, 2013 are as follows:

 
  Personal
Systems
  Printing   Enterprise
Group
  Enterprise
Services
  Software   HP
Financial
Services
  Corporate
Investments
  Total  
 
  In millions
 

Net balance at October 31, 2012(1)

  $ 2,498   $ 2,487   $ 17,041   $   $ 8,899   $ 144   $   $ 31,069  

Goodwill acquired during the period

                112                 112  

Goodwill adjustments/reclassifications

            30     (14 )   (81 )           (65 )
                                   

Net balance at July 31, 2013(1)

  $ 2,498   $ 2,487   $ 17,071   $ 98   $ 8,818   $ 144   $   $ 31,116  
                                   

(1)
Goodwill at October 31, 2012 and July 31, 2013 is net of accumulated impairment losses of $14,518 million. Of that amount, $7,961 million relates to Enterprise Services ("ES"), $5,744 million relates to Software, and the remaining $813 million relates to Corporate Investments.

        In the first quarter of fiscal 2013, HP implemented certain organizational realignments. As a result of these realignments, HP has re-evaluated its segment financial reporting structure and, effective in the first quarter of fiscal 2013, created two new financial reporting segments, the Enterprise Group ("EG") segment and the ES segment, and eliminated two other financial reporting segments, the Enterprise Servers, Storage and Networking ("ESSN") segment and the Services segment. The EG segment consists of the business units within the former ESSN segment and most of the services offerings of the Technology Services ("TS") business unit, which was previously a part of the former Services segment. The ES segment consists of the Applications and Business Services ("ABS") and Infrastructure Technology Outsourcing ("ITO") business units from the former Services segment, along with the end-user workplace support services business that was previously part of TS. As a result of the reporting segment changes described above, the net goodwill balance at October 31, 2012 includes the reclassification of $9.3 billion of goodwill related to the realignment of the TS business unit from the former Services segment to the EG segment. See Note 16 for a full description of the segment realignments.

        In the second quarter of fiscal 2013, MphasiS Limited, a majority-owned subsidiary of HP, acquired Digital Risk LLC for $174 million. HP recorded $112 million of goodwill related to this acquisition.

        HP reviews goodwill for impairment annually at the beginning of its fourth fiscal quarter and whenever events or changes in circumstances, such as significant adverse changes in business climate or operating results, changes in management's business strategy or significant declines in HP's stock price, indicate the carrying amount of goodwill may not be recoverable. Based on its last annual goodwill impairment test, the excess of fair value over carrying value for each of HP's reporting units as of August 1, 2012, the annual testing date, ranged from approximately 9% to approximately 330% of

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 5: Goodwill and Purchased Intangible Assets (Continued)

carrying value. Based on that same test, the Autonomy and legacy HP software reporting units, both of which were included in the Software segment, had the lowest excess of fair value over carrying value at 10% and 9%, respectively.

    Purchased Intangible Assets

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

 
  July 31, 2013   October 31, 2012  
 
  Gross   Accumulated
Amortization
  Accumulated
Impairment
Loss
  Net   Gross   Accumulated
Amortization
  Accumulated
Impairment Loss
  Net  
 
  In millions
 

Customer contracts, customer lists and distribution agreements

  $ 5,784   $ (3,010 ) $ (856 ) $ 1,918   $ 5,807   $ (2,625 ) $ (856 ) $ 2,326  

Developed and core technology and patents

    6,467     (2,964 )   (2,138 )   1,365     6,580     (2,501 )   (2,138 )   1,941  

"Compaq" trade name

    1,422     (47 )   (1,227 )   148     1,422     (18 )   (1,227 )   177  

Other product trademarks

    311     (151 )   (109 )   51     310     (137 )   (109 )   64  

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

    3             3     7             7  
                                   

Total purchased intangible assets

  $ 13,987   $ (6,172 ) $ (4,330 ) $ 3,485   $ 14,126   $ (5,281 ) $ (4,330 ) $ 4,515  
                                   

        For the first nine months of fiscal 2013, the majority of the decrease in gross intangibles was related to $137 million of fully amortized intangible assets which have been eliminated from both the gross and accumulated amortization amounts.

        Estimated future amortization expense related to finite-lived purchased intangible assets at July 31, 2013 is as follows:

Fiscal year:
  In millions  

2013 (remaining three months)

  $ 315  

2014

    1,028  

2015

    838  

2016

    682  

2017

    256  

2018

    145  

Thereafter

    218  
       

Total

  $ 3,482  
       

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 6: Restructuring Charges

        HP records restructuring charges associated with management-approved restructuring plans to reorganize one or more of HP's business segments, to remove duplicative headcount and infrastructure associated with one or more business acquisitions or to simplify business processes and accelerate innovation. 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 on estimated employee terminations 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 voluntary enhanced early retirement ("EER") programs in the United States and in certain other countries. The majority of the U.S. EER program was funded through HP's U.S. pension plan. In connection with the 2012 Plan, HP expects to record aggregate charges of approximately $3.6 billion through the end of HP's 2014 fiscal year as accounting recognition criteria are met. Of that amount, HP expects approximately $3.0 billion to relate to the workforce reductions and the EER programs and approximately $0.6 billion to relate to infrastructure, including data center and real estate consolidation and other items. Due to uncertainties associated with attrition and the acceptance rates of future international EER programs, the total expected headcount reductions could vary as much as 15% from HP's original estimates. HP could also experience similar variations in the total expense of the 2012 Plan.

        HP recorded a charge of approximately $813 million for the nine months ended July 31, 2013 relating to the 2012 Plan, of which $103 million related to data center and real estate consolidations. As of July 31, 2013, HP had eliminated approximately 22,700 positions as part of the 2012 Plan. The cash payments associated with the 2012 Plan are expected to be paid out through fiscal 2017.

    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 combined cost of the plans was $91 million. As of October 31, 2011, HP had recorded all of the costs of the plans based upon the anticipated timing of planned terminations and facility closure costs. In the second quarter of fiscal 2013, $10 million was credited to restructuring expense to close the Palm and 3Com plans as no further restructuring costs or payments are anticipated.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 6: Restructuring Charges (Continued)

    Fiscal 2010 Enterprise Services Business Restructuring Plan

        On June 1, 2010, HP's management announced a plan to restructure its enterprise services business, which included the ITO and ABS business units. The multi-year restructuring program included plans to consolidate commercial data centers, tools and applications. The total expected cost of the plan is approximately $813 million, which includes severance costs to eliminate approximately 8,200 positions and infrastructure charges. As of October 31, 2012 all 8,200 positions under the plan had been eliminated. As the restructuring plan was implemented, certain components and their related cost estimates were revised. For the nine months ended July 31, 2013, HP reversed $179 million of the restructuring accrual to reflect an updated estimate of expected cash payments for severance. The majority of the infrastructure charges were paid out during fiscal 2012 with the remaining charges expected to be paid out through the first half of fiscal 2015. This plan is now closed with no further restructuring charges anticipated. HP expects the majority of the remaining severance for the plan to be paid out through fiscal year 2013.

    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 purchase price of EDS. The remaining costs were primarily associated with HP and were recorded as a restructuring charge.

        The restructuring plan included severance costs related to eliminating approximately 25,000 positions. As of October 31, 2011, all actions had occurred and the associated severance costs had been paid out. The infrastructure charges in the restructuring plan included facility closure and consolidation costs and the costs associated with early termination of certain related contractual obligations. HP has recorded the majority of these costs based on the anticipated 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, 2013 were as follows:

 
   
  Three
months
ended
July 31,
2013
charges
  Nine
months
ended
July 31,
2013
charges
   
   
   
  As of July 31, 2013  
 
  Balance,
October 31,
2012
  Cash
payments
  Other
adjustments
and non-cash
settlements
  Balance,
July 31,
2013
  Total
costs
incurred
to date
  Total
expected
costs to be
incurred
 
 
  In millions
 

Fiscal 2012 Plan

                                                 

Severance and EER

  $ 597   $ 45   $ 710   $ (500 ) $ (14 ) $ 793   $ 2,694   $ 3,000  

Infrastructure and other

    11     45     103     (72 )   (1 )   41     208     600  
                                   

Total 2012 Plan

    608     90     813     (572 )   (15 )   834     2,902     3,600  

Fiscal 2010 acquisitions

    10         (10 )               91     91  

Fiscal 2010 ES Plan:

                                                 

Severance

    227     (8 )   (179 )   (33 )   2     17     444     444  

Infrastructure

    1                     1     369     369  
                                   

Total ES Plan

    228     (8 )   (179 )   (33 )   2     18     813     813  

Fiscal 2008 HP/EDS Plan:

                                                 

Severance

                            2,195     2,195  

Infrastructure

    181     (1 )   (5 )   (39 )   (2 )   135     1,070     1,073  
                                   

Total HP/EDS Plan

    181     (1 )   (5 )   (39 )   (2 )   135     3,265     3,268  
                                   

Total restructuring plans

  $ 1,027   $ 81   $ 619   $ (644 ) $ (15 ) $ 987   $ 7,071   $ 7,772  
                                   

At July 31, 2013 and October 31, 2012, HP included the short-term portion of the restructuring liability of $841 million and $771 million, respectively, in Accrued restructuring, and the long-term portion of $146 million and $256 million, respectively, in Other liabilities in the accompanying Consolidated Condensed Balance Sheets.

Note 7: Fair Value

        Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date.

    Fair Value Hierarchy

        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. Assets and liabilities are classified in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement:

        Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 7: Fair Value (Continued)

        Level 2—Quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities 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—Unobservable inputs for the asset or liability.

        The fair value hierarchy gives the highest priority to observable inputs and lowest priority to unobservable inputs.

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

 
  As of July 31, 2013   As of October 31, 2012  
 
  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

  $   $ 2,618   $   $ 2,618   $   $ 3,641   $   $ 3,641  

Money market funds

    7,818             7,818     4,630             4,630  

Mutual funds

        382         382         469         469  

Marketable equity securities

    7     6         13     60     3         63  

Foreign bonds

    8     372         380     8     377         385  

Other debt securities

        2     37     39     1         44     45  

Derivatives:

                                                 

Interest rate contracts

        162         162         344         344  

Foreign exchange contracts

        523     2     525         291         291  

Other derivatives

        10         10         1         1  
                                   

Total Assets

  $ 7,833   $ 4,075   $ 39   $ 11,947   $ 4,699   $ 5,126   $ 44   $ 9,869  
                                   

Liabilities

                                                 

Derivatives:

                                                 

Interest rate contracts

  $   $ 144   $   $ 144   $   $ 29   $   $ 29  

Foreign exchange contracts

        421     2     423         485     1     486  

Other derivatives

                        3         3  
                                   

Total Liabilities

  $   $ 565   $ 2   $ 567   $   $ 517   $ 1   $ 518  
                                   

        For the three and nine months ended July 31, 2013, there were no transfers between the levels within the fair value hierarchy.

    Valuation Techniques

        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. HP values cash equivalents and equity investments using quoted market prices, alternative pricing sources, including net asset value, or models utilizing market observable

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 7: Fair Value (Continued)

inputs. The fair value of debt instruments were based on quoted market prices or model driven valuations using inputs primarily derived from or corroborated by observable market data, and in certain instances internally developed valuation models that utilize assumptions which cannot be corroborated with observable market data.

        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 prices in active markets are not available for the identical asset or liability, HP uses industry standard valuation models to measure fair value. Where applicable, these models project future cash flows and discount the future amounts to present value using market-based observable inputs, including interest rate curves, HP and counterparty credit risk, foreign exchange rates, and forward and spot prices for currencies.

    Other Fair Value Disclosures

        Short- and Long-Term Debt:    HP calculates the estimated fair value of its debt primarily using an expected present value technique which is based upon observable market inputs using interest rates currently available to companies of similar credit standing for similar terms and remaining maturities and considers HP's own credit risk. The portion of HP'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, which includes 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 $24.8 billion at July 31, 2013, compared to its carrying value of $24.7 billion at that date. The estimated fair value of HP's short- and long-term debt approximated its carrying value of $28.4 billion at October 31, 2012. If measured at fair value in the Consolidated Condensed Balance Sheets, short- and long-term debt would be classified in Level 2 of the fair value hierarchy.

        Other Financial Instruments:    For the balance of HP's financial instruments, primarily accounts receivable, accounts payable and financial liabilities in other accrued liabilities, the carrying amounts approximate fair value due to their short maturities. If measured at fair value in the Consolidated Condensed Balance Sheets, these other financial instruments would be classified in Level 3 of the fair value hierarchy.

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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, 2013 and October 31, 2012 were as follows:

 
  July 31, 2013   October 31, 2012  
 
  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

  $ 2,605   $   $   $ 2,605   $ 3,633   $   $   $ 3,633  

Money market funds

    7,818             7,818     4,630             4,630  

Mutual funds

    16             16     69             69  
                                   

Total cash equivalents

    10,439             10,439     8,332             8,332  
                                   

Available-for-Sale Investments

                                                 

Debt securities:

                                                 

Time deposits

    13             13     8             8  

Foreign bonds

    302     78         380     303     82         385  

Other debt securities

    55         (16 )   39     62         (17 )   45  
                                   

Total debt securities

    370     78     (16 )   432     373     82     (17 )   438  
                                   

Equity securities:

                                                 

Mutual funds

    373         (7 )   366     400             400  

Equity securities in public companies

    6     4     (1 )   9     50     9         59  
                                   

Total equity securities

    379     4     (8 )   375     450     9         459  
                                   

Total available-for-sale investments

    749     82     (24 )   807     823     91     (17 )   897  
                                   

Total cash equivalents and available-for-sale investments

  $ 11,188   $ 82   $ (24 ) $ 11,246   $ 9,155   $ 91   $ (17 ) $ 9,229  
                                   

        All highly liquid investments with original maturities of three months or less at the date of acquisition are considered to be cash equivalents. Time deposits were primarily issued by institutions outside the United States as of July 31, 2013 and October 31, 2012. The estimated fair values of the available-for-sale investments may not be representative of actual values that will be realized in the future.

        The gross unrealized loss as of July 31, 2013 and October 31, 2012 was due primarily to decline in the fair value of a debt security of $16 million and $17 million, respectively, that has been in a continuous loss position for more than twelve months. HP does not intend to sell this debt security, and it is not likely that HP will be required to sell this debt security prior to the recovery of the amortized cost. HP has evaluated the near-term prospects of its debt and equity investments in a gross unrealized loss positions in relation to the severity and duration of the impairment and considers the decline in market value of these investments to be temporary in nature.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments (Continued)

        Contractual maturities of short-term and long-term investments in available-for-sale debt securities were as follows:

 
  July 31, 2013  
 
  Cost   Estimated
Fair Value
 
 
  In millions
 

Due in one to five years

  $ 14   $ 14  

Due in more than five years

    356     418  
           

  $ 370   $ 432  
           

        Equity securities in privately held companies include cost basis and equity method investments. These amounted to $53 million and $51 million for the periods ended July 31, 2013 and October 31, 2012 and are included in long-term financing receivables and other assets.

    Derivative Financial Instruments

        HP is a global company 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. HP classifies cash flows from the derivative programs as operating activities in the Consolidated Condensed Statements of Cash Flows.

        As a result of its use of derivative instruments, HP is exposed to the risk that its counterparties will fail to meet their contractual obligations. To mitigate this 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 include reviewing and establishing limits for credit exposure and periodically re-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 has collateral security arrangements with substantially all of its counterparties. These arrangements require HP to post collateral or to hold collateral from counterparties when 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, 2013, HP held $177 million of

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments (Continued)

collateral and posted $114 million under these collateralized arrangements, of which $101 million was through re-use of counterparty cash collateral and $13 million was in cash. As of October 31, 2012, HP held $198 million of collateral and posted $72 million under these collateralized arrangements, of which $49 million was through re-use of counterparty cash collateral and $23 million in cash.

    Fair Value Hedges

        HP enters into derivatives 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 a 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 period of change.

    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 expenses, and intercompany loans denominated in currencies other than the U.S. dollar. HP's foreign currency cash flow hedges mature generally within twelve months. However, certain leasing revenue-related forward contracts and intercompany loan forward contracts extend for the duration of the lease term, which can be up to five years.

        For derivative instruments that are designated and qualify as cash flow hedges, HP initially records the effective portion of the gain or loss on the derivative instrument in accumulated other comprehensive income or loss as a separate component of stockholders' equity and subsequently reclassifies these amounts into earnings in the period during which the hedged transaction is recognized in earnings. HP reports the effective portion of cash flow hedges in the same financial statement line item as the changes in value of the hedged item. During the three months ended July 31, 2013, HP did not discontinue any cash flow hedge for which it was probable that a forecasted transaction would not occur. During the nine months ended July 31, 2013 there was no significant impact to results of operations as a result of discontinued cash flow hedges. During the three and nine months ended July 31, 2012, HP did not discontinue any cash flow hedge for which it was probable that a forecasted transaction would not occur.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments (Continued)

    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.

    Fair Value of Derivative Instruments in the Consolidated Condensed Balance Sheets

        As discussed in Note 7, HP estimates the fair values of derivatives primarily based on pricing models using current market rates and records all derivatives on the balance sheet at fair value. The

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments (Continued)

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

 
  As of July 31, 2013   As of October 31, 2012  
 
  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

  $ 12,200   $ 47   $ 115   $   $ 144   $ 7,900   $ 43   $ 276   $   $  

Cash flow hedges:

                                                             

Foreign exchange contracts

    20,286     175     89     259     47     19,409     160     24     277     79  

Net investment hedges:

                                                             

Foreign exchange contracts

    1,885     35     50     12     8     1,683     14     15     36     24  
                                           

Total derivatives designated as hedging instruments

    34,371     257     254     271     199     28,992     217     315     313     103  
                                           

Derivatives not designated as hedging instruments

                                                             

Foreign exchange contracts

    16,783     134     42     71     26     18,687     61     17     51     19  

Interest rate contracts(2)

    2,200                     2,200     25         29      

Other derivatives

    335     9     1             383     1         3      
                                           

Total derivatives not designated as hedging instruments

    19,318     143     43     71     26     21,270     87     17     83     19  
                                           

Total derivatives

  $ 53,689   $ 400   $ 297   $ 342   $ 225   $ 50,262   $ 304   $ 332   $ 396   $ 122  
                                           

(1)
Represents the face amounts of contracts that were outstanding as of July 31, 2013 and October 31, 2012, respectively.

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

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments (Continued)

    Effect of Derivative Instruments on the Consolidated Condensed Statements of Earnings

        The before-tax effect of derivative instruments and related hedged items in fair value hedging relationships for the three and nine months ended July 31, 2013 and 2012 were as follows:

 
  Gain (Loss) Recognized in Earnings on Derivative and Related Hedged Item  
Derivative
Instrument
  Location   Three
months
ended
July 31,
2013
  Nine
months
ended
July 31,
2013
  Hedged
Item
  Location   Three
months
ended
July 31,
2013
  Nine
months
ended
July 31,
2013
 
 
   
  In millions
   
   
  In millions
 

Interest rate contracts

  Interest and other, net   $ (229 ) $ (300 ) Fixed-rate debt   Interest and other, net   $ 230   $ 300  

 

 
  Gain (Loss) Recognized in Earnings 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  

        The before-tax effect of derivative instruments in cash flow and net investment hedging relationships for the three and nine months ended July 31, 2013 were as follows:

 
  Gain (Loss)
Recognized in
Other
Comprehensive
Income ("OCI")
on Derivative
(Effective Portion)
  Gain (Loss) Reclassified from Accumulated OCI
Into Earnings (Effective Portion)
 
 
  Three
months
ended
July 31,
2013
  Nine
months
ended
July 31,
2013
  Location   Three
months
ended
July 31,
2013
  Nine
months
ended
July 31,
2013
 
 
  In millions
   
  In millions
 

Cash flow hedges:

                             

Foreign exchange contracts

  $ 139   $ 146   Net revenue   $ 88   $ 77  

Foreign exchange contracts

    (11 )   (180 ) Cost of products     (77 )   (107 )

Foreign exchange contracts

    (28 )   (17 ) Other operating expenses     1     6  

Foreign exchange contracts

    16     7   Interest and other, net     9     5  
                       

Total cash flow hedges

  $ 116   $ (44 )     $ 21   $ (19 )
                       

Net investment hedges:

                             

Foreign exchange contracts

  $ 81   $ 64   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, 2012 was as follows:

 
  Gain (Loss)
Recognized in
OCI on Derivatives
(Effective Portion)
  Gain (Loss) Reclassified from Accumulated OCI
Into Earnings (Effective Portion)
 
 
  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
 

Cash flow hedges:

                             

Foreign exchange contracts

  $ 418   $ 716   Net revenue   $ 283   $ 369  

Foreign exchange contracts

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

Foreign exchange contracts

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

Foreign exchange contracts

    17       Interest and other, net     21     6  
                       

Total cash flow hedges

  $ 452   $ 668       $ 279   $ 366  
                       

Net investment hedges:

                             

Foreign exchange contracts

  $ 33   $ 71   Interest and other, net   $   $  
                       

        As of July 31, 2013, no portion of the hedging instruments gain or loss was excluded from the assessment of effectiveness for fair value, cash flow or net investment hedges. As of July 31, 2012, 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 for the three and nine months ended July 31, 2013 and July 31, 2012.

        As of July 31, 2013, HP expects to reclassify an estimated net accumulated other comprehensive loss of approximately $83 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, 2013 and 2012 was as follows:

 
  Gain (Loss) Recognized in Earnings on Derivatives  
 
  Location   Three months
ended
July 31,
2013
  Nine months
ended
July 31,
2013
 
 
   
  In millions
 

Foreign exchange contracts

  Interest and other, net   $ 288   $ 233  

Other derivatives

  Interest and other, net     2     12  

Interest rate contracts

  Interest and other, net         3  
               

Total

      $ 290   $ 248  
               

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments (Continued)


 
  Gain (Loss) Recognized in Earnings on Derivatives  
 
  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  
               

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, net and Long-term financing receivables and other assets in the accompanying Consolidated Condensed Balance Sheets, were as follows:

 
  July 31,
2013
  October 31,
2012
 
 
  In millions
 

Minimum lease payments receivable

  $ 7,460   $ 8,133  

Unguaranteed residual value

    251     248  

Unearned income

    (625 )   (688 )
           

Financing receivables, gross

    7,086     7,693  

Allowance for doubtful accounts

    (132 )   (149 )
           

Financing receivables, net

    6,954     7,544  

Less current portion

    (3,113 )   (3,252 )
           

Amounts due after one year, net

  $ 3,841   $ 4,292  
           

        Operating lease assets included in machinery and equipment were as follows:

 
  July 31,
2013
  October 31,
2012
 
 
  In millions
 

Equipment leased to customers

  $ 3,671   $ 3,865  

Accumulated depreciation

    (1,392 )   (1,499 )
           

Operating lease assets, net

  $ 2,279   $ 2,366  
           

        Due to the homogenous nature of its leasing transactions, HP manages its financing receivables on an aggregate basis when assessing and monitoring credit risk. Credit risk is generally diversified due to the large number of entities comprising HP's customer base and their dispersion across many different

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 9: Financing Receivables and Operating Leases (Continued)

industries and geographical regions. HP evaluates the credit quality of an obligor at lease inception and monitors that credit quality over the term of a transaction. HP assigns risk ratings to each lease based on the creditworthiness of the obligor and other variables that augment or mitigate 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 gross financing receivables, based on internally assigned ratings, was as follows:

 
  July 31,
2013
  October 31,
2012
 
 
  In millions
 

Risk Rating

             

Low

  $ 3,942   $ 4,461  

Moderate

    3,026     3,151  

High

    118     81  
           

Total

  $ 7,086   $ 7,693  
           

        Accounts rated low risk typically have the equivalent of a Standard & Poor's rating of BBB- or higher, while accounts rated moderate risk generally have the equivalent of BB+ or lower. HP classifies accounts as high risk when it considers the financing receivable to be impaired or when management believes that there is a near-term risk of impairment.

        The allowance for doubtful accounts is comprised of a general reserve and a specific reserve. HP maintains general reserve percentages on a regional basis and bases such percentages on several factors, including consideration of historical credit losses and portfolio delinquencies, trends in the overall weighted-average risk rating of the portfolio, current economic conditions and information derived from competitive benchmarking. HP excludes accounts evaluated as part of the specific reserve from the general reserve analysis. HP establishes a specific reserve for leases with identified exposures, such as customer defaults, bankruptcy or other events, that make it unlikely that HP will recover its investment in the lease. For individually evaluated receivables, HP determines the expected cash flow for the receivable, which includes consideration of estimated proceeds from disposition of the collateral, and calculates an estimate of the potential loss and the probability of loss. For those accounts where a loss is probable, HP records a specific reserve. HP generally records a write-off or specific reserve when an account reaches 180 days past due, or sooner if HP determines that the account is not collectible.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 9: Financing Receivables and Operating Leases (Continued)

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

 
  Nine months ended
July 31, 2013
 
 
  In millions
 

Allowance for doubtful accounts

       

Balance, beginning of period

  $ 149  

Change in estimates

    22  

Deductions, net of recoveries

    (39 )
       

Balance, end of period

  $ 132  
       

 

 
  July 31,
2013
  October 31,
2012
 
 
  In millions
 

Allowance for financing receivables collectively evaluated for loss

  $ 92   $ 104  

Allowance for financing receivables individually evaluated for loss

    40     45  
           

Total

  $ 132   $ 149  
           

Gross financing receivables collectively evaluated for loss

  $ 6,662   $ 7,355  

Gross financing receivables individually evaluated for loss

    424     338  
           

Total

  $ 7,086   $ 7,693  
           

Gross financing receivables on non-accrual status

  $ 251   $ 225  

Gross financing receivables 90 days past due and still accruing interest

    173     113  
           

Total

  $ 424   $ 338  
           

        HP considers a financing receivable to be past due when the minimum payment is not received by the contractually specified due date. HP generally places financing receivables on non-accrual status (suspension of interest accrual) and considers such receivables to be non-performing at the earlier of the time at which full payment of principal and interest becomes doubtful or the receivable becomes contractually 90 days past due. Subsequently, HP may recognize revenue on non-accrual financing receivables as payments are received (i.e., on a cash basis) if HP deems the recorded financing receivable to be fully collectible; however, if there is doubt regarding the ultimate collectability of the recorded financing receivable, HP applies all cash receipts to reduce the carrying value of the financing receivable (i.e., the cost recovery method). In certain circumstances, such as when HP deems a delinquency to be of an administrative nature, financing receivables may accrue interest after they reach 90 days past due. The non-accrual status of a financing receivable may not impact a customer's risk rating. After all of a customer's delinquent principal and interest balances are settled, HP may return the related financing receivable to accrual status.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

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' non-performance permits termination of the related contract by the client, the likelihood of which HP believes is remote. HP believes it 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 non-performance resulting in service contract termination or failure to comply with terms under the financing arrangement, HP would be required to acquire certain assets. HP considers the possibility of its failure to comply to be remote and the asset amounts involved to be immaterial.

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

    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, 2013 were as follows:

 
  In millions  

Product warranty liability at October 31, 2012

  $ 2,170  

Accruals for warranties issued

    1,493  

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

    (4 )

Settlements made (in cash or in kind)

    (1,629 )
       

Product warranty liability at July 31, 2013

  $ 2,030  
       

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

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, 2013   October 31, 2012  
 
  Amount
Outstanding
  Weighted-
Average
Interest
Rate
  Amount
Outstanding
  Weighted-
Average
Interest
Rate
 
 
  In millions
   
  In millions
   
 

Current portion of long-term debt

  $ 6,907     2.6 % $ 5,744     1.6 %

Commercial paper(1)

    293     0.4 %   365     0.9 %

Notes payable to banks, lines of credit and other(1)

    424     1.3 %   538     2.3 %
                       

  $ 7,624         $ 6,647        
                       

(1)
Commercial paper includes $293 million and $365 million and Notes payable to banks, lines of credit and other includes $350 million and $465 million at July 31, 2013 and October 31, 2012, respectively, of borrowing and funding related activity associated with HP Financial Services ("HPFS") and its subsidiaries.

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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,
2013
  October 31,
2012
 
 
  In millions
 

U.S. Dollar Global Notes

             

2006 Shelf Registration Statement:

             

$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%, paid March 2013

        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

    1,999     1,998  

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

    1,500     1,500  

2009 Shelf Registration Statement:

             

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

    1,100     1,100  

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

    1,100     1,100  

$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%, paid May 2013

        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     1,298  

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

    999     998  

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 11: Borrowings (Continued)

 
  July 31,
2013
  October 31,
2012
 
 
  In millions
 

$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     650  

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

    849     849  

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

    1,496     1,496  

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

    1,500     1,500  

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

    499     499  
           

    21,783     25,031  
           

EDS Senior Notes

             

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

    1,100     1,109  

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

    314     314  
           

    1,414     1,423  
           

Other, including capital lease obligations, at 0.00%-8.39%, due in calendar years 2014-2024(1)

    710     680  

Fair value adjustment related to hedged debt

    124     399  

Less: current portion

    (6,907 )   (5,744 )
           

Total long-term debt

  $ 17,124   $ 21,789  
           

(1)
Other, including capital lease obligations includes $257 million and $225 million at July 31, 2013 and October 31, 2012, respectively, of borrowing and funding related activity associated with HPFS and its subsidiaries.

        As disclosed in Note 8, HP uses interest rate swaps to mitigate interest rate risk in connection with certain fixed-rate global notes in order 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 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

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 11: Borrowings (Continued)

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 authorized 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. HP maintains two commercial paper programs, and a wholly owned subsidiary maintains a third program. HP's U.S. program provides for the issuance of U.S. dollar-denominated commercial paper up to a maximum aggregate principal amount of $16.0 billion. HP's euro commercial paper program, which was established in September 2012, provides for the issuance of commercial paper outside of the United States denominated in U.S. dollars, euros or British pounds up to a maximum aggregate principal amount of $3.0 billion or the equivalent in those alternative currencies. The combined aggregate principal amount of commercial paper outstanding under those programs at any one time cannot exceed the $16.0 billion authorized by HP's Board of Directors. The HP subsidiary's Euro Commercial Paper/Certificate of Deposit Programme provides for the issuance of commercial paper in various currencies of up to a maximum aggregate principal amount of $500 million.

        HP maintains senior unsecured committed credit facilities primarily to support the issuance of commercial paper. 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. Both facilities support the U.S. commercial paper program and the euro commercial paper program. In addition, the five-year credit facility was amended in September 2012 to permit borrowings in euros and British pounds, with the amounts available in euros and pounds being limited to the U.S. dollar equivalent of $2.2 billion and $300 million, respectively. Commitment fees, interest rates and other terms of borrowing under the credit facilities vary based on HP's external credit ratings. HP's ability to have an outstanding U.S. commercial paper 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, 2013 and October 31, 2012, the carrying value of the assets approximated the carrying value of the borrowings of $234 million and $225 million, respectively.

        As of July 31, 2013, 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 $17.6 billion of available borrowing resources, including $16.2 billion in available capacity under its commercial paper programs and $1.4 billion relating to uncommitted lines of credit. The extent to which HP is able to utilize the 2012 Shelf Registration Statement and the commercial paper programs as sources of liquidity at any given time is subject to a number of factors, including market demand for HP securities and commercial paper, HP's financial performance, HP's credit ratings and market conditions generally.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 11: Borrowings (Continued)

        Interest expense on borrowings was as follows:

 
  Three months
ended July 31
  Nine months
ended July 31
 
 
  2013   2012   2013   2012  
 
  In millions
 

Financing interest

  $ 77   $ 80   $ 238   $ 238  

Interest expense

    107     141     332     379  
                   

Total interest expense

  $ 184   $ 221   $ 570   $ 617  
                   

Note 12: Income Taxes

    Provision for taxes

        HP's effective tax rate was 18.7% and 2.2% for the three months ended July 31, 2013 and 2012, respectively, and 21.1% and (10.3)% for the nine months ended July 31, 2013 and 2012, respectively. HP's effective tax rate increased in the three and nine month periods ended July 31, 2013 due primarily to the absence of net tax effects in the current period resulting from the impairment of goodwill and purchased intangible assets and lower restructuring 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 months ended July 31, 2013, HP recorded discrete items resulting in a net tax charge of $63 million, which included tax benefits of $13 million on restructuring and acquisition-related charges and tax charges of $76 million for various adjustments to estimated tax provisions, uncertain tax benefits and valuation allowances of U.S. and foreign jurisdictions. In the nine months ended July 31, 2013, HP recorded discrete items resulting in a net tax benefit of $40 million, which included tax benefits of $76 million on restructuring and acquisition-related charges and tax benefits of $64 million for various adjustments to estimated tax provisions, uncertain tax benefits and valuation allowances of U.S. and foreign jurisdictions. In addition, in January 2013, the American Taxpayer Relief Act of 2012 was signed into law. In the first quarter of fiscal 2013, HP recorded a tax benefit of $50 million arising from the retroactive research and development credit provided by that legislation. HP also recorded a tax charge of $150 million in the first quarter of fiscal 2013 related to a past uncertain tax position, increasing the effective tax rate.

        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 enterprise services business. The U.S. enterprise services business 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 U.S. enterprise services business. In addition,

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 12: Income Taxes (Continued)

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.

        As of July 31, 2013, the amount of gross unrecognized tax benefits was $3.0 billion, of which up to $1.6 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, 2013, HP had accrued a net payable of $169 million for interest and penalties.

        HP engages in continuous discussions and negotiations with taxing authorities regarding tax matters in various jurisdictions. HP does not expect complete resolution of any Internal Revenue Service 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 decreased by an amount up to $129 million within the next 12 months.

        In the Consolidated Condensed Financial Statements, current and long-term deferred tax assets and deferred tax liabilities are presented as follows:

 
  July 31,
2013
  October 31,
2012
 
 
  In millions
 

Current deferred tax assets

  $ 3,841   $ 3,783  

Current deferred tax liabilities

    (324 )   (230 )

Long-term deferred tax assets

    1,541     1,581  

Long-term deferred tax liabilities

    (3,582 )   (2,948 )
           

Net deferred tax position

  $ 1,476   $ 2,186  
           

Note 13: Stockholders' Equity

    Share Repurchase Program

        HP's share repurchase program authorizes both open market and private repurchase transactions. In the three months ended July 31, 2013, HP executed share repurchases which were settled for $3 million. In the nine months ended July 31, 2013, HP executed share repurchases of 56 million shares which were settled for $1.1 billion. HP paid approximately $365 million in connection with repurchases of 16 million shares during the three months ended July 31, 2012 and paid $1.5 billion in connection with repurchases of approximately 59 million shares in the first nine months of fiscal 2012. As of July 31, 2013, HP had remaining authorization of $8.1 billion for future share repurchases.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 13: Stockholders' Equity (Continued)

    Taxes related to Other Comprehensive Income/Loss

 
  Three months
ended
July 31
  Nine months
ended
July 31
 
 
  2013   2012   2013   2012  
 
  In millions
 

Tax benefit (expense) on change in unrealized gains/losses on available-for-sale securities:

                         

Tax benefit (expense) on unrealized gains/losses arising during the period

  $ 27   $ (2 ) $ (11 ) $ 3  

Tax expense (benefit) on gains/losses reclassified into earnings

                 
                   

    27     (2 )   (11 )   3  
                   

Tax (expense) benefit on change in unrealized gains/losses on cash flow hedges:

                         

Tax (expense) benefit on unrealized gains/losses arising during the period

    (14 )   (157 )   46     (249 )

Tax (benefit) expense on gains/losses reclassified into earnings

    (4 )   91     (11 )   128  
                   

    (18 )   (66 )   35     (121 )
                   

Tax (expense) benefit on change in unrealized components of defined benefit plans:

                         

Tax (expense) benefit on net losses arising during the period

    (8 )   6     (8 )   30  

Tax expense (benefit) on amortization of actuarial loss and prior service benefit

    10     (7 )   (11 )   (23 )

Tax (expense) benefit on curtailments, settlements and other

    (3 )   2     (4 )   (62 )
                   

    (1 )   1     (23 )   (55 )
                   

Tax benefit (expense) on change in cumulative translation adjustment

        43     22     5  
                   

Tax benefit (expense) on other comprehensive income/loss

  $ 8   $ (24 ) $ 23   $ (168 )
                   

    Components of accumulated other comprehensive loss, net of taxes:

 
  July 31,
2013
  October 31,
2012
 
 
  In millions
 

Net unrealized gain on available-for-sale securities

  $ 60   $ 87  

Net unrealized loss on cash flow hedges

    (89 )   (99 )

Unrealized components of defined benefit plans

    (4,812 )   (5,090 )

Cumulative translation adjustment

    (592 )   (457 )
           

Accumulated other comprehensive loss

  $ (5,433 ) $ (5,559 )
           

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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 (credit) costs were as follows:

 
  Three months ended July 31  
 
  U.S.
Defined
Benefit Plans
  Non-U.S.
Defined
Benefit Plans
  Post-
Retirement
Benefit Plans
 
 
  2013   2012   2013   2012   2013   2012  
 
  In millions
 

Service cost

  $ 1   $ 1   $ 83   $ 72   $ 2   $ 2  

Interest cost

    140     140     166     170     8     9  

Expected return on plan assets

    (211 )   (198 )   (247 )   (201 )   (8 )   (9 )

Amortization and deferrals:

                                     

Actuarial loss (gain)

    19     11     82     57         (1 )

Prior service benefit

            (7 )   (6 )   (16 )   (20 )
                           

Net periodic benefit (credit) cost

    (51 )   (46 )   77     92     (14 )   (19 )

Curtailment gain

                        (4 )

Settlement loss

    1     5     11              

Special termination benefits

        833     7             227  
                           

Net benefit (credit) cost

  $ (50 ) $ 792   $ 95   $ 92   $ (14 ) $ 204  
                           

 

 
  Nine months ended July 31  
 
  U.S.
Defined
Benefit Plans
  Non-U.S.
Defined
Benefit Plans
  Post-
Retirement
Benefit Plans
 
 
  2013   2012   2013   2012   2013   2012  
 
  In millions
 

Service cost

  $ 1   $ 1   $ 253   $ 219   $ 5   $ 6  

Interest cost

    420     424     507     519     23     26  

Expected return on plan assets

    (634 )   (594 )   (754 )   (614 )   (25 )   (28 )

Amortization and deferrals:

                                     

Actuarial loss (gain)

    58     32     254     177         (3 )

Prior service benefit

            (20 )   (18 )   (50 )   (63 )
                           

Net periodic benefit (credit) cost

    (155 )   (137 )   240     283     (47 )   (62 )

Curtailment gain

                    (7 )   (4 )

Settlement loss (gain)

    9     5     11     (20 )        

Special termination benefits

        833     12     2         227  
                           

Net benefit (credit) cost

  $ (146 ) $ 701   $ 263   $ 265   $ (54 ) $ 161  
                           

Employer Contributions and Funding Policy

        HP previously disclosed in its Consolidated Financial Statements for the fiscal year ended October 31, 2012 that it expected to contribute in fiscal 2013 approximately $674 million to its non-U.S. pension plans and approximately $33 million to cover benefit payments to U.S. non-qualified plan participants. HP expected to pay approximately $124 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.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

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

        During the nine months ended July 31, 2013, HP made $544 million of contributions to its non-U.S. pension plans, paid $42 million to cover benefit payments to U.S. non-qualified plan participants, and paid $72 million to cover benefit claims under HP's post-retirement benefit plans. During the remainder of fiscal 2013, HP anticipates making additional contributions of approximately $112 million to its non-U.S. pension plans and approximately $9 million to its U.S. non-qualified plan participants and expects to pay approximately $52 million to cover benefit claims under HP's 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 are reflected as unrecognized gains or losses, and such gains or losses are amortized to income in future periods. A deterioration in the funded status of a plan could result in a need for additional company contributions or an increase in post-retirement expense in future periods. Asset gains or losses are determined at the measurement date and amortized over the remaining service life for active plans or the life expectancy of plan participants for frozen plans.

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 accrues a liability when management believes that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. HP believes it has adequate provisions for any such matters, and, as of July 31, 2013, it was not reasonably possible that an additional material loss had been incurred in an amount in excess of the amounts already recognized in 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 have phased out levies or are expected to limit the scope of levy schemes and applicability in the digital hardware environment, particularly with respect to sales to business users. 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.

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(Unaudited)

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        VerwertungsGesellschaft Wort ("VG Wort"), a collection agency representing certain copyright holders, instituted legal proceedings against HP in the Stuttgart Civil Court seeking levies on printers. On December 22, 2004, the court held that HP is liable for payments regarding all printers using ASCII code sold in Germany but did not determine the amount payable per unit. HP appealed this decision in January 2005 to the Stuttgart Court of Appeals. On May 11, 2005, the Stuttgart Court of Appeals issued a decision confirming that levies are due. On June 6, 2005, HP filed an appeal to the German Federal Supreme Court in Karlsruhe. On December 6, 2007, the German Federal Supreme Court issued a judgment that printers are not subject to levies under the existing law. The court issued a written decision on January 25, 2008, and VG Wort subsequently filed an application with the German Federal Supreme Court under Section 321a of the German Code of Civil Procedure contending that the court did not consider their arguments. On May 9, 2008, the German Federal 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. On June 27, 2013, the CJEU issued its decision responding to those questions. The German Federal Supreme Court subsequently scheduled a joint hearing with other cases relating to reprographic levies on printers and PCs to be held on October 31, 2013, which will be followed by a decision.

        In September 2003, VG Wort filed a lawsuit against Fujitsu Technology Solutions GmbH ("Fujitsu") 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 Fujitsu. On December 23, 2004, the Munich Civil Court held that PCs are subject to a levy and that Fujitsu must pay €12 plus compound interest for each PC sold in Germany since March 2001. Fujitsu 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. Fujitsu 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. On June 27, 2013, the CJEU issued its decision responding to those questions. The German Federal Supreme Court subsequently scheduled a joint hearing with other cases relating to reprographic levies on printers to be held on October 31, 2013, which will be followed by a decision.

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        Reprobel, a cooperative society with the authority to collect and distribute the remuneration for reprography to Belgian copyright holders, requested HP by extra-judicial means to amend certain copyright levy declarations submitted for inkjet MFDs sold in Belgium from January 2005 to December 2009 to enable it to collect copyright levies calculated based on the generally higher copying speed when the MFDs are operated in draft print mode rather than when operated in normal print mode. In March 2010, HP filed a lawsuit against Reprobel in the French-speaking chambers of the Court of First Instance of Brussels seeking a declaratory judgment that no copyright levies are payable on sales of MFDs in Belgium or, alternatively, that copyright levies payable on such MFDs must be assessed based on the copying speed when operated in the normal print mode set by default in the device. On November 16, 2012, the court issued a decision holding that Belgium law is not in conformity with EU law in a number of respects and ordered that, by November 2013, Reprobel substantiate that the amounts claimed by Reprobel are commensurate with the harm resulting from legitimate copying under the reprographic exception. HP subsequently appealed that court decision to the Courts of Appeal in Brussels seeking to confirm that the Belgian law is not in conformity with EU law and that, if Belgian law is interpreted in a manner consistent with EU law, no payments by HP are required or, alternatively, the payments already made by HP are sufficient to comply with its obligations under Belgian law. Hearings on the appeal are scheduled to be held in mid-September 2013.

        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 the amounts of the 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 April 19, 2012, the court issued an order granting in part and denying in part the plaintiffs' motion to certify a nationwide class asserting claims under the California Unfair Competition Law. 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 who purchased their computers "from HP" for "personal, family or household use." As required by the same order, the plaintiffs 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. On May 9, 2013, the court entered an agreed order staying all claims against HP pending resolution of plaintiffs' claims against Intel.

        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

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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 was filed in the United States District Court for the Northern District of California seeking class certification, restitution, damages (including enhanced damages), injunctive relief, interest, costs, and attorneys' fees.

    A lawsuit captioned Blennis v. HP was filed on January 17, 2007 in the United States District Court for the Northern District of California seeking class certification, restitution, damages (including enhanced damages), injunctive relief, interest, costs, and attorneys' fees.

    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 alleging 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 and seeking to certify a nationwide injunctive class and a California-only damages class.

    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. Under the terms of the settlement, the lawsuits were consolidated, and eligible class members 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 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, the settlement provides for class counsel and the class representatives to 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 in the United States Court of Appeals for the Ninth Circuit of the court's order granting final approval of the settlement. On May 15, 2013, the United States Court of Appeals for the Ninth Circuit reversed the District Court's grant of final approval of the settlement on the grounds that the District Court did not properly calculate attorneys' fees. On July 17, 2013, the Ninth Circuit Court of Appeals remanded the case to the District Court for further proceedings.

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

    Cunningham and Cunningham, et al. v. Electronic Data Systems Corporation is a purported collective action filed on May 10, 2006 in the 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 SystemsCorporation, which was filed on

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      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 had alleged separate "opt-out" classes based on the overtime laws of the states of California, Washington, Massachusetts and New York, but plaintiffs have dismissed those claims.

    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. On August 31, 2012, HP filed its answer to plaintiffs' complaint and counterclaims against two of the three named plaintiffs. Also on August 31, 2012, HP filed a motion to transfer venue to the United States District Court for the Eastern District of Texas. A hearing on HP's motion to transfer venue was scheduled for November 21, 2012, but was postponed by the court.

    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. On February 26, 2013, the trial court issued a final order and opinion granting the defendant's motion to decertify the class. Another purported class action originally filed in California Superior Court, Karlbom, et al. v. Electronic Data Systems Corporation, which was filed on March 16, 2009, alleges similar facts and is pending in San Diego County Superior Court.

    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. On July 11, 2013, the court denied plaintiffs' motion for conditional certification in its entirety. Only one opt-in plaintiff had joined the named plaintiff in the lawsuit at the time that the motion was filed.

    Benedict v. Hewlett-Packard Company is a purported collective action filed on January 10, 2013 in the United States District Court for the Northern District of California alleging that certain technical support employees allegedly involved in installing, maintaining and/or supporting computer software and/or hardware for HP were misclassified as exempt employees under the Fair Labor Standards Act. The plaintiff has also alleged that HP violated California law by, among other things, allegedly improperly classifying these employees as exempt.

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        State of South Carolina Department of Social Services Contract Dispute.    In October 2012, the State of South Carolina Department of Social Services and related government agencies ("SCDSS") filed a proceeding before South Carolina's Chief Procurement Officer ("CPO") against Hewlett-Packard State & Local Enterprise Services, Inc., a subsidiary of HP ("HPSLES"). The dispute arises from a contract between SCDSS and HPSLES for the design, implementation and maintenance of a Child Support Enforcement and a Family Court Case Management System (the "CFS System"). SCDSS seeks aggregate damages of approximately $200 million, a declaration that HPSLES is in material breach of the contract and, therefore, that termination for cause by SCDSS would be appropriate, and a declaration that HPSLES is required to perform certain additional disputed work that expands the scope of the original contract. In November 2012, HPSLES filed responsive pleadings asserting defenses and seeking payment of past-due invoices totaling more than $12 million. On July 10, 2013, SCDSS terminated the contract with HPSLES for cause, and, in its termination notice, SCDSS asserted that HPSLES is responsible for all future federal penalties until the CFS System achieves federal certification, sought an order requiring HPSLES to transfer to SCDSS all work completed and in progress, and indicated that it intends to seek suspension and debarment of HPSLES from contracting with the State of South Carolina. HPSLES is disputing the termination as improper and defective. In addition, on August 9, 2013, HPSLES filed its own affirmative claim within the proceeding alleging that SCDSS materially breached the contract by its improper termination and that SCDSS was a primary and material cause of the project delays. The CPO has scheduled a hearing for October 21, 2013 to consider the issues raised in the parties' pleadings. Pending resolution of the contract controversies, the parties are disputing the extent of HPSLES's transition obligations.

        India Directorate of Revenue Intelligence Proceedings.    On April 30 and May 10, 2010, the India Directorate of Revenue Intelligence (the "DRI") issued show cause notices to Hewlett-Packard India Sales Private Ltd ("HPI"), a subsidiary of HP, 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. Prior to the issuance of the show cause notices, HP deposited approximately $16 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 April 11, 2012, the Bangalore Commissioner of Customs 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 already deposited $9 million. On December 11, 2012, HPI voluntarily deposited an additional $10 million in connection with the products show cause notice.

        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, of which HPI had already deposited $7 million. After the order, HPI deposited an additional $3 million in connection with the parts show cause notice so as to avoid certain penalties.

        HPI filed appeals of the Commissioner's orders 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 before the Customs Tribunal. On January 24, 2013, the Customs Tribunal ordered HPI to deposit an additional $24 million against the

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products order, which HP deposited in March 2013. The Customs Tribunal did not order any additional deposit to be made under the parts order.

        Russia GPO and Other FCPA Investigations.    The German Public Prosecutor's Office ("German PPO") has been conducting an investigation into allegations that current and former employees of HP engaged in bribery, embezzlement and tax evasion relating to a transaction between Hewlett-Packard ISE GmbH in Germany, a former subsidiary of HP, and the General Prosecutor's Office of the Russian Federation. The approximately €35 million transaction, which was referred to as the Russia GPO deal, spanned the years 2001 to 2006 and was for the delivery and installation of an IT network. The German PPO has issued an indictment of four individuals, including one current and two former HP employees, on charges including bribery, breach of trust and tax evasion. The German PPO has also asked that HP be made an associated party to the case, and, if the German PPO's request is granted, HP would participate in any portion of the court proceedings that could ultimately bear on the question of whether HP should be subject to potential disgorgement of profits based on the conduct of the indicted current and former employees.

        The U.S. Department of Justice and the SEC have been conducting an investigation into the Russia GPO deal and potential violations of the Foreign Corrupt Practices Act ("FCPA"). The agencies, as well as the Polish Central Anti-Corruption Bureau, are also conducting investigations into potential FCPA violations by an employee of Hewlett-Packard Polska Sp. z o.o., an indirect subsidiary of HP, in connection with certain public sector transactions in Poland. In addition, the agencies are conducting investigations into certain other public-sector transactions in Russia, Poland, the Commonwealth of Independent States, and Mexico, among other countries.

        Under the FCPA, a person or an entity could be subject to fines, civil penalties of up to $725,000 per violation and equitable remedies, including disgorgement of profits, pre-judgment interest and other injunctive relief. In addition, criminal penalties could range from the greater of $25 million per violation or twice the gross pecuniary gain or loss from the violation.

        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 and fixed results 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 appealed ECT's decision. In April 2013, ECT rejected HP's appeal, and the administrative proceedings were closed with the penalties against HP Brazil remaining in place. In parallel, in September 2011, HP filed a civil action against ECT seeking to have its decision revoked. HP also requested an injunction suspending the application of the penalties until a final ruling on the merits of the case. The court of first instance has not issued a decision on the merits of the case, but it has denied HP's request for injunctive relief. 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

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sanctions until a final ruling on the merits of the case. HP expects the court of first instance to issue a decision on the merits of the case during 2013 and any 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 damages related to HP's allegedly inflated stock price, certain compensation paid by HP to the defendants, other damages and/or injunctive relief:

    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. On October 10, 2012, the Court granted the defendants' motion to dismiss with leave to file an amended complaint. On November 1, 2012, plaintiff filed an amended complaint adding an unjust enrichment claim and claims that the defendants violated Section 14(a) of the Exchange Act and breached their fiduciary duties in connection with HP's 2012 proxy statement. On December 13, 14 and 17, 2012, the defendants moved to dismiss the amended complaint. On December 28, 2012, plaintiff moved for leave to file a third amended complaint. On May 6, 2013, the court denied the motion for leave to amend, granted the motions to dismiss with prejudice and entered judgment in the defendants' favor. On May 31, 2013, plaintiff filed an appeal with the United States Court of Appeals for the Ninth Circuit.

    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. On October 19, 2012, plaintiff filed an amended complaint that asserts the same causes of action but drops one of the defendants and shortens the period that the alleged violations of the Exchange Act occurred to February 9, 2011 to

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      August 18, 2011. On December 3, 2012, the defendants moved to dismiss the amended complaint. On May 8, 2013, the court granted the defendants' motion to dismiss in part and denied it in part. As a result of the court's ruling, the alleged class period in the action runs from June 1, 2011 to August 18, 2011.

    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 Section 10(b) and 20(a) of the Exchange Act by concealing material information and making false statements about HP's business model and the future of webOS, the TouchPad and HP's PC business. The lawsuits also allege that the defendants breached their fiduciary duties, wasted corporate assets and were unjustly enriched when they authorized HP's repurchase of its own stock on August 29, 2010 and July 21, 2011. These lawsuits were previously stayed pending developments in the Gammel matter, but those stays have been lifted.

    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. On February 7, 2013, the defendants moved to dismiss the amended complaint. On August 9, 2013, the court granted the defendants' motion to dismiss with leave to amend the complaint by September 9, 2013.

Autonomy-Related Legal Matters

        Investigations.    As a result of the findings of an ongoing investigation, HP has provided information to the U.K. Serious Fraud Office, the U.S. Department of Justice and the SEC related to the accounting improprieties, disclosure failures and misrepresentations at Autonomy that occurred prior to and in connection with HP's acquisition of Autonomy. On November 21, 2012, representatives of the U.S. Department of Justice advised HP that they had opened an investigation relating to Autonomy. On February 6, 2013, representatives of the U.K. Serious Fraud Office advised HP that they had also opened an investigation relating to Autonomy. HP is cooperating with the three investigating agencies.

        Litigation.    As described below, HP is involved in various stockholder litigation relating to, among other things, its November 20, 2012 announcement that it recorded a non-cash charge for the

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impairment of goodwill and intangible assets within its Software segment of approximately $8.8 billion in the fourth quarter of its 2012 fiscal year and HP's statements that, based on HP's findings from an ongoing investigation, the majority of this impairment charge related to accounting improprieties, misrepresentations to the market and disclosure failures at Autonomy that occurred prior to and in connection with HP's acquisition of Autonomy and the impact of those improprieties, failures and misrepresentations on the expected future financial performance of the Autonomy business over the long term. This stockholder litigation was commenced against, among others, certain current and former HP executive officers, certain current and former members of the HP Board of Directors, and certain advisors to HP. The plaintiffs in these litigation matters are seeking to recover certain compensation paid by HP to the defendants and/or other damages. These matters include the following:

    In re HP Securities Litigation consists of two consolidated putative class actions filed on November 26 and 30, 2012 in the United States District Court for the Northern District of California alleging, among other things, that from August 19, 2011 to November 20, 2012, the defendants violated Sections 10(b) and 20(a) of the Exchange Act by concealing material information and making false statements related to HP's acquisition of Autonomy and the financial performance of HP's enterprise services business. On May 3, 2013, the lead plaintiff filed a consolidated complaint alleging that, during that same period, all of the defendants violated Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5(b) by concealing material information and making false statements related to HP's acquisition of Autonomy and that certain defendants violated SEC Rule 10b-5(a) and (c) by engaging in a "scheme" to defraud investors. On July 2, 2013, HP filed a motion to dismiss the lawsuit.

    In re Hewlett-Packard Shareholder Derivative Litigation consists of seven consolidated lawsuits filed beginning on November 26, 2012 in the United States District Court for the Northern 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 related to HP's acquisition of Autonomy and the financial performance of HP's enterprise services business. The lawsuits also allege that the defendants breached their fiduciary duties, wasted corporate assets and were unjustly enriched in connection with HP's acquisition of Autonomy and by causing HP to repurchase its own stock at allegedly inflated prices between August 2011 and October 2012. One lawsuit further alleges that certain individual defendants engaged in or assisted insider trading and thereby breached their fiduciary duties, were unjustly enriched and violated Sections 25402 and 25403 of the California Corporations Code. On May 3, 2013, the lead plaintiff filed a consolidated complaint alleging, among other things, that the defendants concealed material information and made false statements related to HP's acquisition of Autonomy and Autonomy's IDOL technology and thereby violated Sections 10(b) and 20(a) of the Exchange Act, breached their fiduciary duties, engaged in "abuse of control" over HP and corporate waste and were unjustly enriched. The litigation was stayed by agreement until July 31, 2013. On July 30, 2013, HP filed a motion to further stay the litigation until HP's Board of Directors decides whether to pursue any of the claims asserted in the litigation or the court rules on HP's motion to dismiss the consolidated complaint in the In re HP Securities Litigation matter. The court has not yet ruled on that motion.

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    In re HP ERISA Litigation consists of three consolidated putative class actions filed beginning on December 6, 2012 in the United States District Court for the Northern District of California alleging, among other things, that from August 18, 2011 to November 22, 2012, the defendants breached their fiduciary obligations to HP's 401(k) Plan and its participants and thereby violated Sections 404(a)(1) and 405(a) of the Employee Retirement Income Security Act of 1974, as amended, by concealing negative information regarding the financial performance of Autonomy and HP's enterprise services business and by failing to restrict participants from investing in HP stock. On August 16, 2013, HP filed a motion to dismiss the lawsuit.

    Vincent Ho v. Margaret C. Whitman, et al. is a lawsuit filed on January 22, 2013 in California Superior Court alleging, among other things, that the defendants breached their fiduciary duties and wasted corporate assets in connection with HP's acquisition of Autonomy and by causing HP to repurchase its own stock at allegedly inflated prices between August 2011 and October 2012. On April 22, 2013, the court stayed the lawsuit pending resolution of the In re Hewlett-Packard Shareholder Derivative Litigation matter in federal court. Two additional derivative actions, James Gould v. Margaret C. Whitman, et al. and Leroy Noel v. Margaret C. Whitman, et al., were filed in California Superior Court on July 26, 2013 and August 16, 2013, respectively, containing substantially similar allegations and seeking substantially similar relief.

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 and may become a party to, or otherwise involved in, proceedings brought by private parties for contribution towards clean-up costs. HP is also conducting environmental investigations or remediations at several current or former operating sites pursuant to administrative orders or consent agreements with state environmental agencies.

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Note 16: 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; imaging and printing-related products and services; multi-vendor customer services, including infrastructure technology and business process outsourcing, application development and support services, and consulting and integration services; enterprise information technology ("IT") infrastructure, including enterprise storage and server technology, networking products and solutions, and technology support and maintenance; and IT management software, information management solutions and security intelligence/risk management solutions.

        HP's operations are organized into seven reportable business segments for financial reporting purposes: Personal Systems, Printing, the Enterprise Group, Enterprise Services, 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.

        The Personal Systems segment and the Printing segment are structured beneath a broader Printing and Personal Systems Group ("PPS"). While PPS is not a financial reporting segment, HP sometimes provides financial data aggregating the segments within it in order to provide a supplementary view of its business.

        HP has implemented certain organizational realignments. As a result of these realignments, HP re-evaluated its segment financial reporting structure and, effective in the first quarter of fiscal 2013, created two new financial reporting segments, the EG segment and the ES segment, and eliminated two other financial reporting segments, the ESSN segment and the Services segment. The EG segment consists of the business units within the former ESSN segment and most of the services offerings of the TS business unit, which was previously a part of the former Services segment. The ES segment consists of the ABS and ITO business units from the former Services segment, along with the end-user workplace support services business that was previously a part of the TS business unit.

        Also as a result of these realignments, the financial results of the Personal Systems commercial products support business, which were previously reported as part of the TS business unit, are now reported as part of the Other business unit within the Personal Systems segment, and the financial results of the portion of the business intelligence services business that had continued to be reported as part of the Corporate Investments segment following the implementation of prior realignment actions are now reported as part of the ABS business unit. In addition, the end-user workplace support business, which, as noted above, was previously a part of the TS business unit and is now a part of the ES segment, is reported as part of the ITO business unit within that segment.

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

        The Printing and Personal Systems Group's mission is to leverage the respective strengths of the Personal Systems business and the Printing business in creating a unified business that is customer-

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focused and poised to capitalize on rapidly shifting industry trends. Each of the business segments within PPS is described in detail below.

        Personal Systems provides commercial PCs, consumer PCs, workstations, thin clients, tablets, retail POS systems, calculators and other related accessories, software, support and services for the commercial and consumer markets. HP groups commercial notebooks, commercial desktops and workstations into commercial PC's and consumer notebooks and consumer desktops into consumer PC's when describing its performance in these markets. Described below are HP's global business capabilities within Personal Systems.

    Commercial PCs are optimized for commercial uses, including enterprise and SMB customers, and for connectivity, reliability and manageability in networked environments. Commercial PCs include the HP ProBook and HP EliteBook lines of notebooks; the HP Compaq Pro, HP Compaq Elite, HP Pro and HP Elite lines of business desktops and all-in-ones, retail POS systems, HP Thin Clients and HP ElitePad Tablet PCs.

    Consumer PCs include the HP Spectre, HP ENVY, HP Pavilion and Compaq Presario series of multi-media consumer notebooks, desktops, including the TouchSmart line of touch-enabled notebooks and all-in-one desktops.

    Workstations are designed and optimized to reliably operate in high performance and demanding application environments, such as computer animation, graphic design, video and audio production, software development, financial trading, engineering design and analysis, architectural engineering, image analysis and energy exploration. HP offers Z desktop workstations, Z all-in-ones and EliteBook mobile workstations.

        Printing provides consumer and commercial printer hardware, supplies, media, software and services, as well as scanning devices. Printing is also focused on imaging solutions in the commercial markets. HP groups laserjet, large format and Indigo printers into commercial hardware and inkjet printers into consumer hardware when describing our performance in these markets. Described below are HP's global business capabilities within Printing.

    Inkjet and Printing Solutions delivers HP's consumer and SMB inkjet solutions (hardware, supplies, media, and web-connected hardware and services). It includes single-function and all-in-one inkjet printers targeted toward consumers and SMBs, as well as 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. HP Managed Solutions include managed 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) and supplies, Indigo digital presses and supplies, inkjet high-speed production solutions and supplies, specialty printing systems and graphics services. Graphic Solutions targets print service providers, architects, engineers, designers, photofinishers and industrial solution providers.

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Note 16: Segment Information (Continued)

    Software and Web Services delivers a robust platform and a suite of offerings, including photo-storage and printing offerings, such as Snapfish, document storage, entertainment services, web-connected printing, and PC back-up and related services.

        The Enterprise Group provides servers, storage, networking, technology services and, when combined with HP's Cloud Service Automation software suite, the HP CloudSystem. The CloudSystem enables infrastructure, platform and software-as-a-service in private, public or hybrid environments. Described below are HP's business units and capabilities within EG.

    Industry Standard Servers offers ProLiant servers, running primarily Windows, Linux and virtualization platforms from software providers, such as Microsoft Corporation and VMware, Inc., and open sourced software from other major vendors while leveraging Intel Corporation and Advanced Micro Devices, Inc. x86 processors. The business spans a range of server product lines, including pedestal-tower, traditional rack, density-optimized rack, blades as well as solutions for large, distributed computing companies (Hyperscale class) who buy and deploy nodes at a massive scale. HP recently launched its new HP Moonshot servers that deliver reductions in cost, space, energy and complexity.

    Business Critical Systems offers HP Integrity servers based on the Intel Itanium-based processor, HP Integrity NonStop solutions and scale-up x86 ProLiant Servers.

    Storage offers traditional storage and converged storage solutions. Traditional storage includes tape, storage networking and legacy external disk products such as EVA and XP. Converged storage solutions include 3PAR, StoreOnce, StoreVirtual and StoreAll products.

    Networking offers switches and routers that span the data center, campus and branch environments and deliver network management and unified communications. HP's wireless networking offerings include wireless LAN access points and controllers/switches.

    Technology Services differentiates the HP product experience for customers with consulting and support services focused on the data center. Support services includes Datacenter Care, Foundation Care, Proactive Care and Lifecycle Event services that help align support service levels to business needs, as well as warranty support across EG's product lines. Consulting services, which are tightly aligned and optimized for HP's enterprise product portfolio, include data center, network and storage consulting, and education services, as well as converged cloud, mobility and big data consulting services.

        Enterprise Services provides technology consulting, outsourcing and support services across infrastructure, applications and business process domains. ES is divided into Infrastructure Technology Outsourcing and Application and Business Services.

    Infrastructure Technology Outsourcing delivers comprehensive services that encompass the data center, IT security, cloud-based computing, workplace technology, network, unified communications, and enterprise service management.

    Application and Business Services helps clients develop, revitalize and manage their applications and information assets. This full application life cycle approach encompasses application development, testing, modernization, system integration, maintenance and management for both

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      packaged and custom-built applications. The ABS portfolio also includes intellectual property-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.

        Software provides IT management, information management and security solutions for businesses and enterprises of all sizes. HP's IT management solutions help customers around the world deliver applications and services that perform to defined standards and automate and assure the underlying infrastructure, be it traditional, cloud or hybrid. HP's information management solutions include its Autonomy platform, which is designed to help customers get faster answers from all of their structured and unstructured information. HP's security solutions provide customers with security at all levels of the enterprise—from the infrastructure through applications and information. HP's Software offerings include licenses, support, professional services, and software-as-a-service in order to provide an end-to-end solution to customers.

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

        Corporate Investments includes HP Labs, the webOS business and certain business incubation projects.

    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 restructuring charges and any associated adjustments related to restructuring actions, amortization of purchased intangible assets, stock-based compensation expense related to HP-granted employee stock options, PRUs, restricted stock awards and the employee stock purchase plan, certain acquisition-related charges and charges for purchased IPR&D, as well as certain corporate governance costs.

        Segment revenue includes revenues from sales to external customers and intersegment revenues that reflect transactions between the segments that are carried out at an arm's-length transfer price. Intersegment revenues primarily consist of sales of hardware and software that are sourced internally and, in the majority of the cases, are classified as operating leases within HPFS. HP's Consolidated Net Revenue is derived and reported after elimination of intersegment revenues for such arrangements in accordance with U.S. GAAP.

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        To provide improved visibility and comparability, HP has reflected the 2013 changes to its reporting structure in prior financial reporting periods on an as-if basis, which has resulted in the transfer of revenue and operating profit among the Personal Systems, EG, ES and Corporate Investments segments. These changes had no impact on the previously reported financial results for the Printing, Software or HPFS segments. 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 for the three months ended July 31:

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

2013

                                                 

Net revenue

  $ 7,441   $ 5,752   $ 6,567   $ 5,714   $ 884   $ 863   $ 5   $ 27,226  

Intersegment net revenue and other

    263     51     219     129     98     16         776  
                                   

Total segment net revenue

  $ 7,704   $ 5,803   $ 6,786   $ 5,843   $ 982   $ 879   $ 5   $ 28,002  
                                   

Earnings (loss) from operations

  $ 228   $ 908   $ 1,033   $ 192   $ 201   $ 99   $ (58 ) $ 2,603  
                                   

2012

                                                 

Net revenue

  $ 8,388   $ 5,956   $ 7,222   $ 6,271   $ 893   $ 928   $ 11   $ 29,669  

Intersegment net revenue and other

    248     61     270     126     80     7         792  
                                   

Total segment net revenue

  $ 8,636   $ 6,017   $ 7,492   $ 6,397   $ 973   $ 935   $ 11   $ 30,461  
                                   

Earnings (loss) from operations

  $ 405   $ 949   $ 1,284   $ 240   $ 175   $ 97   $ (57 ) $ 3,093  
                                   

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        Selected operating results information for each business segment was as follows for the nine months ended July 31:

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

2013

                                                 

Net revenue

  $ 22,806   $ 17,669   $ 19,979   $ 17,395   $ 2,624   $ 2,675   $ 19   $ 83,167  

Intersegment net revenue and other

    686     141     610     366     225     42         2,070  
                                   

Total segment net revenue

  $ 23,492   $ 17,810   $ 20,589   $ 17,761   $ 2,849   $ 2,717   $ 19   $ 85,237  
                                   

Earnings (loss) from operations

  $ 690   $ 2,819   $ 3,199   $ 424   $ 538   $ 297   $ (179 ) $ 7,788  
                                   

2012

                                                 

Net revenue

  $ 26,271   $ 18,250   $ 21,423   $ 18,905   $ 2,672   $ 2,830   $ 47   $ 90,398  

Intersegment net revenue and other

    727     157     897     352     217     23     1     2,374  
                                   

Total segment net revenue

  $ 26,998   $