10-Q 1 a2204286z10-q.htm 10-Q
QuickLinks -- Click here to rapidly navigate through this document

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: April 30, 2011

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 May 31, 2011 was 2,074,155,738 shares.


HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
INDEX

 
   
   
  Page No.  

Part I.

  Financial Information  

  Item 1.  

Financial Statements

    3  

     

Consolidated Condensed Statements of Earnings for the three and six months ended April 30, 2011 and 2010 (Unaudited)

    3  

     

Consolidated Condensed Balance Sheets as of April 30, 2011 (Unaudited) and as of October 31, 2010 (Audited)

    4  

     

Consolidated Condensed Statements of Cash Flows for the six months ended April 30, 2011 and 2010 (Unaudited)

    5  

     

Notes to Consolidated Condensed Financial Statements (Unaudited)

    6  

  Item 2.  

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

    54  

  Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

    87  

  Item 4.  

Controls and Procedures

    88  

Part II.

  Other Information  

  Item 1.  

Legal Proceedings

    89  

  Item 1A.  

Risk Factors

    89  

  Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

    89  

  Item 6.  

Exhibits

    89  

Signature

    90  

Exhibit Index

    91  

Forward-Looking Statements

        This Quarterly Report on Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 2 of Part I of this report, contains forward-looking statements that involve risks, uncertainties and assumptions. If the risks or uncertainties ever materialize or the assumptions prove incorrect, the results of Hewlett-Packard Company and its consolidated subsidiaries ("HP") may differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including but not limited to any projections of revenue, margins, expenses, earnings, earnings per share, tax provisions, cash flows, benefit obligations, share repurchases, currency exchange rates, the impact of acquisitions, the impact of the earthquake and tsunami that struck Japan in March 2011 or other financial items; any statements of the plans, strategies and objectives of management for future operations, including execution of growth strategies, efficiency initiatives and restructuring plans; any statements concerning the expected development, performance or market share relating to products or services; any statements regarding current or future macroeconomic trends or events and the impact of those trends and events on HP and its financial performance; any statements regarding pending investigations, claims or disputes; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. Risks, uncertainties and assumptions include the impact of macroeconomic and geopolitical trends and events; the competitive pressures faced by HP's businesses; the development and transition of new products and services (and the enhancement of existing products and services) to meet customer needs and respond to emerging technological trends; the execution and performance of contracts by HP and its suppliers, customers and partners; the protection of HP's intellectual property assets, including intellectual property licensed from third parties; integration and other risks associated with business combination and investment transactions; the hiring and retention of key employees; assumptions related to pension and other post-retirement costs; expectations and assumptions relating to the execution and timing of growth strategies, efficiency initiatives and restructuring plans; the resolution of pending investigations, claims and disputes; and other risks that are described herein, including but not limited to the items discussed in "Factors that Could Affect Future Results" set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 2 of Part I of this report, and that are otherwise described from time to time in HP's Securities and Exchange Commission ("SEC") reports, including HP's Annual Report on Form 10-K for the fiscal year ended October 31, 2010. HP assumes no obligation and does not intend to update these forward-looking statements.

2



PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements.


HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Consolidated Condensed Statements of Earnings

(Unaudited)

 
  Three months ended
April 30
  Six months ended
April 30
 
 
  2011   2010   2011   2010  
 
  In millions, except per share amounts
 

Net revenue:

                         
 

Products

  $ 21,055   $ 20,570   $ 43,249   $ 41,573  
 

Services

    10,466     10,172     20,468     20,239  
 

Financing income

    111     107     217     214  
                   
   

Total net revenue

    31,632     30,849     63,934     62,026  
                   

Costs and expenses:

                         
 

Cost of products

    15,819     15,859     32,617     32,206  
 

Cost of services

    7,967     7,637     15,502     15,238  
 

Financing interest

    74     73     149     152  
 

Research and development

    815     722     1,613     1,403  
 

Selling, general and administrative

    3,397     3,096     6,487     6,063  
 

Amortization of purchased intangible assets

    413     347     838     677  
 

Restructuring charges

    158     180     316     311  
 

Acquisition-related charges

    21     77     50     115  
                   
   

Total operating expenses

    28,664     27,991     57,572     56,165  
                   

Earnings from operations

    2,968     2,858     6,362     5,861  
                   

Interest and other, net

    (76 )   (91 )   (173 )   (290 )
                   

Earnings before taxes

    2,892     2,767     6,189     5,571  

Provision for taxes

    588     567     1,280     1,121  
                   

Net earnings

  $ 2,304   $ 2,200   $ 4,909   $ 4,450  
                   

Net earnings per share:

                         
 

Basic

  $ 1.07   $ 0.94   $ 2.27   $ 1.89  
                   
 

Diluted

  $ 1.05   $ 0.91   $ 2.23   $ 1.84  
                   

Cash dividends declared per share

  $   $   $ 0.16   $ 0.16  

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

                         
 

Basic

    2,150     2,345     2,166     2,352  
                   
 

Diluted

    2,184     2,406     2,203     2,412  
                   

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

3



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Consolidated Condensed Balance Sheets

 
  April 30,
2011
  October 31,
2010
 
 
  In millions, except par value
 
 
  (Unaudited)
   
 

ASSETS

 

Current assets:

             
 

Cash and cash equivalents

  $ 12,738   $ 10,929  
 

Accounts receivable

    18,621     18,481  
 

Financing receivables

    3,179     2,986  
 

Inventory

    6,778     6,466  
 

Other current assets

    14,759     15,322  
           
   

Total current assets

    56,075     54,184  
           

Property, plant and equipment

    11,890     11,763  

Long-term financing receivables and other assets

    11,320     12,225  

Goodwill

    38,762     38,483  

Purchased intangible assets

    7,080     7,848  
           

Total assets

  $ 125,127   $ 124,503  
           


LIABILITIES AND STOCKHOLDERS' EQUITY


 

Current liabilities:

             
 

Notes payable and short-term borrowings

  $ 8,406   $ 7,046  
 

Accounts payable

    14,222     14,365  
 

Employee compensation and benefits

    3,563     4,256  
 

Taxes on earnings

    848     802  
 

Deferred revenue

    7,397     6,727  
 

Accrued restructuring

    881     911  
 

Other accrued liabilities

    16,053     15,296  
           
   

Total current liabilities

    51,370     49,403  
           

Long-term debt

    14,512     15,258  

Other liabilities

    17,450     19,061  

Commitments and contingencies

             

Stockholders' equity:

             

HP stockholders' equity

             
 

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

         
 

Common stock, $0.01 par value (9,600 shares authorized; 2,126 and 2,204 shares issued and outstanding, respectively)

    21     22  
 

Additional paid-in capital

    9,842     11,569  
 

Retained earnings

    35,152     32,695  
 

Accumulated other comprehensive loss

    (3,592 )   (3,837 )
           
   

Total HP stockholders' equity

    41,423     40,449  
   

Non-controlling interests

    372     332  
           
   

Total stockholders' equity

    41,795     40,781  
           

Total liabilities and stockholders' equity

  $ 125,127   $ 124,503  
           

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

4



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Consolidated Condensed Statements of Cash Flows

(Unaudited)

 
  Six months ended
April 30
 
 
  2011   2010  
 
  In millions
 

Cash flows from operating activities:

             
 

Net earnings

  $ 4,909   $ 4,450  
 

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

             
   

Depreciation and amortization

    2,497     2,346  
   

Stock-based compensation expense

    327     381  
   

Provision for doubtful accounts—accounts and financing receivables

    (7 )   111  
   

Provision for inventory

    103     82  
   

Restructuring charges

    316     311  
   

Deferred taxes on earnings

    641     (286 )
   

Excess tax benefit from stock-based compensation

    (154 )   (263 )
   

Other, net

    (139 )   149  
   

Changes in operating assets and liabilities:

             
     

Accounts and financing receivables

    (608 )   1,709  
     

Inventory

    (415 )   (190 )
     

Accounts payable

    (143 )   (1,548 )
     

Taxes on earnings

    93     726  
     

Restructuring

    (505 )   (783 )
     

Other assets and liabilities

    117     (1,697 )
           
       

Net cash provided by operating activities

    7,032     5,498  
           

Cash flows from investing activities:

             
 

Investment in property, plant and equipment

    (2,026 )   (1,771 )
 

Proceeds from sale of property, plant and equipment

    633     268  
 

Purchases of available-for-sale securities and other investments

        (28 )
 

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

    57     103  
 

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

    (246 )   (2,512 )
           
     

Net cash used in investing activities

    (1,582 )   (3,940 )
           

Cash flows from financing activities:

             
 

(Payments) issuance of commercial paper and notes payable, net

    (998 )   1,855  
 

Issuance of debt

    2,216     50  
 

Payment of debt

    (454 )   (244 )
 

Issuance of common stock under employee stock plans

    774     2,266  
 

Repurchase of common stock

    (4,976 )   (4,511 )
 

Excess tax benefit from stock-based compensation

    154     263  
 

Dividends

    (357 )   (385 )
           
     

Net cash used in financing activities

    (3,641 )   (706 )
           

Increase in cash and cash equivalents

    1,809     852  

Cash and cash equivalents at beginning of period

    10,929     13,279  
           

Cash and cash equivalents at end of period

  $ 12,738   $ 14,131  
           

Supplemental schedule of non-cash investing and financing activities:

             
 

Issuance of common stock and stock awards assumed in business acquisitions

  $ 2   $ 61  
 

Purchase of assets under capital lease

  $ 3   $ 92  

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

5



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements

(Unaudited)

Note 1: Basis of Presentation

        In the opinion of management, the accompanying Consolidated Condensed Financial Statements of Hewlett-Packard Company and its consolidated subsidiaries ("HP") contain all adjustments, including normal recurring adjustments, necessary to present fairly HP's financial position as of April 30, 2011, its results of operations for the three and six months ended April 30, 2011 and 2010 and its cash flows for the six months ended April 30, 2011 and 2010. The Consolidated Condensed Balance Sheet as of October 31, 2010 is derived from the October 31, 2010 audited consolidated financial statements.

        The results of operations for the three and six months ended April 30, 2011 are not necessarily indicative of the results to be expected for the full year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with "Risk Factors," "Legal Proceedings," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Quantitative and Qualitative Disclosures About Market Risk" and the Consolidated Financial Statements and notes thereto included in Items 1A, 3, 7, 7A and 8, respectively, of the Hewlett-Packard Company Annual Report on Form 10-K for the fiscal year ended October 31, 2010.

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

    Reclassifications and Segment Reorganization

        In connection with organizational realignments implemented in the first quarter of fiscal 2011, certain costs previously reported as Cost of services have been reclassified as Selling, general and administrative expenses to better align those costs with the functional areas that benefit from those expenditures. HP has made certain segment and business unit realignments in order to optimize its operating structure. Reclassifications of prior year financial information have been made to conform to the current year presentation. None of the changes impacts HP's previously reported consolidated net revenue, earnings from operations, net earnings or net earnings per share. See Note 16 for a further discussion of HP's segment reorganization.

Note 2: Stock-Based Compensation

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

        Total stock-based compensation expense before income taxes for the three and six months ended April 30, 2011 was $147 million and $327 million, respectively. The resulting income tax benefit for the three and six months ended April 30, 2011 was $61 million and $104 million, respectively. Total stock-based compensation expense before income taxes for the three and six months ended April 30, 2010 was $200 million and $381 million, respectively. The resulting income tax benefit for the three and six months ended April 30, 2010 was $64 million and $122 million, respectively.

6



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 2: Stock-Based Compensation (Continued)

    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 are based on HP's annual cash flow from operations as a percentage of revenue and total shareholder return ("TSR") relative to the S&P 500 over the three-year performance period.

        Recipients of PRU awards generally must remain employed by HP on a continuous basis through the end of the applicable three-year performance period in order to receive any portion of the shares subject to that award. Target Shares do not have dividend equivalent rights and do not have the voting rights of common stock until earned and issued following the end of the applicable performance period. The expense for these awards, net of estimated forfeitures, is recorded over the requisite service period based on the number of Target Shares that are expected to be earned and the achievement of the cash flow goals during the performance period.

        HP estimates the fair value of a Target Share using a Monte Carlo simulation model, as the TSR modifier contains a market condition. The following weighted-average assumptions were used to determine the weighted-average fair values of the PRU awards:

 
  Six months ended
April 30
 
 
  2011   2010  

Weighted-average fair value of grants per share

  $ 27.59 (1) $ 57.13 (2)

Expected volatility(3)

    30 %   38 %

Risk-free interest rate

    0.38 %   0.73 %

Dividend yield

    0.75 %   0.64 %

Expected life in months

    19     22  

(1)
Reflects the weighted-average fair value for the third year of the three-year performance period applicable to PRUs granted in fiscal 2009, for the second year of the three-year performance period applicable to PRUs granted in fiscal 2010 and for the first year of the three-year performance period applicable to PRUs granted in the six months ended April 30, 2011. The estimated fair value of a Target Share for the third year for PRUs granted in fiscal 2010 and for the second and third years for PRUs granted in the six months ended April 30, 2011 will be determined on the measurement date applicable to those PRUs, which will be the date that the annual cash flow goals are approved for those PRUs, and the expense will be amortized over the remainder of the applicable three-year performance period.

(2)
Reflects the weighted-average fair value for the third year of the three-year performance period applicable to PRUs granted in fiscal 2008, for the second year of the three-year performance period applicable to PRUs granted in fiscal 2009 and for the first year of the three-year performance period applicable to PRUs granted in the six months ended April 30, 2010.

7



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 2: Stock-Based Compensation (Continued)

(3)
HP uses historic volatility for PRU awards as implied volatility cannot be used when simulating multivariate prices for companies in the S&P 500.

        Non-vested PRUs as of April 30, 2011 and changes during the six months ended April 30, 2011 were as follows:

 
  Shares
(in thousands)
 

Outstanding Target Shares at October 31, 2010

    18,508  

Granted

    5,798  

Vested

     

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

     

Forfeited

    (786 )
       

Outstanding Target Shares at April 30, 2011

    23,520  
       

Outstanding Target Shares assigned a fair value at April 30, 2011

    17,608 (1)
       

(1)
Excludes Target Shares for the third year for PRUs granted in fiscal 2010 and for the second and third years for PRUs granted in the six months ended April 30, 2011 as the measurement date has not yet been established. The measurement date and related fair value for the excluded PRUs will be established when the annual cash flow goals are approved.

        At April 30, 2011, there was $286 million of unrecognized pre-tax stock-based compensation expense related to PRUs with an assigned fair value, which HP expects to recognize over the remaining weighted-average vesting period of 1.3 years.

    Special Incremental Performance-Based Restricted Units

        HP granted IPRUs representing hypothetical shares of HP common stock to certain executive officers. IPRU awards contain performance and market conditions and vest over three years.

        The amount of non-vested IPRUs granted and outstanding as of April 30, 2011 was 0.3 million units. At April 30, 2011, there was $3 million of unrecognized pre-tax stock-based compensation expense related to IPRUs, which HP expects to recognize over the remaining weighted-average vesting period of 2.5 years.

8



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 2: Stock-Based Compensation (Continued)

    Stock Options

        HP estimated the weighted-average fair value of stock options using the Black-Scholes option pricing model with the following weighted-average assumptions:

 
  Three months ended
April 30
  Six months ended
April 30
 
 
  2011   2010   2011   2010  

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

  $ 10.73   $ 14.12   $ 11.06   $ 14.19  

Implied volatility

    27 %   27 %   28 %   28 %

Risk-free interest rate

    2.16 %   2.45 %   1.97 %   2.42 %

Dividend yield

    0.77 %   0.61 %   0.76 %   0.61 %

Expected life in months

    60     61     60     61  

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

        Option activity as of April 30, 2011 and changes during the six months ended April 30, 2011 were as follows:

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

Outstanding at October 31, 2010

    142,916   $ 28              

Granted and assumed through acquisition

    1,026   $ 22              

Exercised

    (30,828 ) $ 24              

Forfeited/cancelled/expired

    (2,398 ) $ 41              
                         

Outstanding at April 30, 2011

    110,716   $ 29     2.8   $ 1,444  
                         

Vested and expected to vest at April 30, 2011

    109,586   $ 29     2.7   $ 1,428  
                         

Exercisable at April 30, 2011

    102,792   $ 29     2.3   $ 1,327  
                         

        The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value that option holders would have received had all option holders exercised their options on April 30, 2011. The aggregate intrinsic value is the difference between HP's closing stock price on the last trading day of the second quarter of fiscal 2011 and the exercise price, multiplied by the number of in-the-money options. Total intrinsic value of options exercised for the three and six months ended April 30, 2011 was $348 million and $606 million, respectively.

        At April 30, 2011, there was $218 million of unrecognized pre-tax stock-based compensation expense related to stock options, which HP expects to recognize over the remaining weighted-average vesting period of 1.9 years.

9



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 2: Stock-Based Compensation (Continued)

    Restricted Stock Awards

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

        Non-vested restricted stock awards as of April 30, 2011 and changes during the six months ended April 30, 2011 were as follows:

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

Outstanding at October 31, 2010

    5,848   $ 45  

Granted

    7,717   $ 43  

Vested

    (2,412 ) $ 46  

Forfeited

    (310 ) $ 44  
             

Outstanding at April 30, 2011

    10,843   $ 43  
             

        At April 30, 2011, there was $376 million of unrecognized pre-tax stock-based compensation expense related to non-vested restricted stock awards, which HP expects to recognize over the remaining weighted-average vesting period of 1.6 years.

10



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

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, IPRUs, restricted stock units and restricted stock.

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

 
  Three months ended
April 30
  Six months ended
April 30
 
 
  2011   2010   2011   2010  
 
  In millions, except per share amounts
 

Numerator:

                         
 

Net earnings(1)

  $ 2,304   $ 2,200   $ 4,909   $ 4,450  
                   

Denominator:

                         
 

Weighted-average shares used to compute basic EPS

    2,150     2,345     2,166     2,352  
 

Dilutive effect of employee stock plans

    34     61     37     60  
                   
 

Weighted-average shares used to compute diluted EPS

    2,184     2,406     2,203     2,412  
                   

Net earnings per share:

                         
 

Basic

  $ 1.07   $ 0.94   $ 2.27   $ 1.89  
 

Diluted

  $ 1.05   $ 0.91   $ 2.23   $ 1.84  

(1)
Net earnings available to participating securities were not significant for the three and six months ended April 30, 2011 and 2010. HP considers restricted stock that provides the holder with a non-forfeitable right to receive dividends to be a participating security.

        HP excludes options with exercise prices that are greater than the average market price for HP's common stock from the calculation of diluted EPS because their effect would be anti-dilutive. For the three and six months ended April 30, 2011, HP excluded from the calculation of diluted EPS options to purchase 6 million shares, compared to 17 million shares and 18 million shares for the three and six months ended April 30, 2010, respectively.

        In addition, HP also excludes options whose combined exercise price, unamortized fair value and excess tax benefits are greater than the average market price for HP's common stock because their effect would be anti-dilutive. For the three and six months ended April 30, 2011, HP excluded from the calculation of diluted EPS options to purchase an additional 1 million shares, compared to an additional 2 million shares and 3 million shares for the three and six months ended April 30, 2010, respectively.

11



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 4: Balance Sheet Details

        Balance sheet details were as follows:

    Accounts and Financing Receivables

 
  April 30,
2011
  October 31,
2010
 
 
  In millions
 

Accounts receivable

  $ 19,054   $ 19,006  

Allowance for doubtful accounts

    (433 )   (525 )
           

  $ 18,621   $ 18,481  
           

Financing receivables

  $ 3,237   $ 3,050  

Allowance for doubtful accounts

    (58 )   (64 )
           

  $ 3,179   $ 2,986  
           

        HP has revolving trade receivables-based facilities permitting it to sell certain trade receivables to third parties on a non-recourse basis. The aggregate maximum capacity under these programs was $602 million and $524 million as of April 30, 2011 and October 31, 2010, respectively. HP sold $897 million of trade receivables during the first six months of fiscal 2011. HP had $299 million as of April 30, 2011 and $175 million as of October 31, 2010 available under these programs.

        In April 2011, HP entered into an additional revolving trade receivables-based facility that became available in May 2011 permitting it to sell certain trade receivables to a third party on a five percent recourse basis. The maximum capacity of the program is approximately $1.1 billion.

    Inventory

 
  April 30,
2011
  October 31,
2010
 
 
  In millions
 

Finished goods

  $ 4,379   $ 4,431  

Purchased parts and fabricated assemblies

    2,399     2,035  
           

  $ 6,778   $ 6,466  
           

    Property, Plant and Equipment

 
  April 30,
2011
  October 31,
2010
 
 
  In millions
 

Land

  $ 652   $ 530  

Buildings and leasehold improvements

    8,447     8,523  

Machinery and equipment

    15,452     13,874  
           

    24,551     22,927  
           

Accumulated depreciation

    (12,661 )   (11,164 )
           

  $ 11,890   $ 11,763  
           

12



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 5: Goodwill and Purchased Intangible Assets

    Goodwill

        Goodwill allocated to HP's business segments as of April 30, 2011 and changes in the carrying amount of goodwill for the six months ended April 30, 2011 are as follows:

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

Balance at October 31, 2010

  $ 16,967   $ 6,610   $ 7,545   $ 2,500   $ 2,456   $ 144   $ 2,261   $ 38,483  

Goodwill acquired during the period

            189                       189  

Goodwill adjustments

    265     1,487     (254 )   (2 )   (1 )       (1,405 )   90  
                                   

Balance at April 30, 2011

  $ 17,232   $ 8,097   $ 7,480   $ 2,498   $ 2,455   $ 144   $ 856   $ 38,762  
                                   

        During the second quarter of fiscal 2011, HP recorded approximately $189 million of goodwill relating to the acquisition of Vertica Systems, Inc. ("Vertica") based on a preliminary allocation of the purchase price. In connection with certain fiscal 2011 organizational realignments, HP reclassified goodwill related to HP's networking business from Corporate Investments to Enterprise Servers, Storage and Networking ("ESSN") and goodwill related to the communications and media solutions business from HP Software to Services. Additionally, during the six months ended April 30, 2011, HP recorded an increase to goodwill as a result of currency translation related to an acquired subsidiary whose functional currency is not the U.S. dollar.

    Purchased Intangible Assets

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

 
  April 30, 2011   October 31, 2010  
 
  Gross   Accumulated
Amortization
  Net   Gross   Accumulated
Amortization
  Net  
 
  In millions
 

Customer contracts, customer lists and distribution agreements

  $ 7,521   $ (4,317 ) $ 3,204   $ 7,503   $ (3,864 ) $ 3,639  

Developed and core technology and patents

    5,938     (3,751 )   2,187     5,763     (3,384 )   2,379  

Product trademarks

    347     (257 )   90     346     (239 )   107  
                           

Total amortizable purchased intangible assets

    13,806     (8,325 )   5,481     13,612     (7,487 )   6,125  

In-process research and development

    177         177     301         301  

Compaq trade name

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

Total purchased intangible assets

  $ 15,405   $ (8,325 ) $ 7,080   $ 15,335   $ (7,487 ) $ 7,848  
                           

13



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 5: Goodwill and Purchased Intangible Assets (Continued)

        During the first six months of fiscal 2011, HP recorded approximately $53 million of purchased intangible assets related to the Vertica acquisition based on a preliminary allocation of the purchase price.

        Estimated future amortization expense related to finite-lived purchased intangible assets at April 30, 2011 was as follows:

Fiscal year:
  In millions  

2011 (remaining six months)

  $ 711  

2012

    1,320  

2013

    1,167  

2014

    842  

2015

    708  

2016

    550  

Thereafter

    183  
       

Total

  $ 5,481  
       

Note 6: Restructuring Charges

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

    Fiscal 2010 Acquisitions

        In connection with the acquisitions of Palm, Inc ("Palm") and 3Com Corporation ("3Com") in fiscal 2010, HP's management approved and initiated plans to restructure the operations of the acquired companies, including severance for employees, contract cancellation costs, costs to vacate duplicative facilities and other items. The total expected combined cost of the plans is $88 million. As of April 30, 2011, HP had recorded the majority of the remaining costs of the plans based upon the anticipated timing of planned terminations and facility closure costs. With respect to the Palm integration plan, no further restructuring charges are anticipated, and the majority of the remaining costs are expected to be paid out by the third quarter of fiscal 2011. The remaining costs pertaining to the 3Com plan are expected to be paid out through fiscal 2016 as fixed lease payments are made.

14



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 6: Restructuring Charges (Continued)

    Fiscal 2010 ES Restructuring Plan

        On June 1, 2010, HP's management announced a plan to restructure its Enterprise Services business, which includes its Infrastructure Technology Outsourcing, Business Process Outsourcing and Application Services business units. The multi-year restructuring program includes plans to consolidate commercial data centers, tools and applications. The total expected cost of the plan that will be recorded as restructuring charges is approximately $1 billion, including severance costs to eliminate approximately 9,000 positions and infrastructure charges. HP recorded net restructuring charges of $63 million and $160 million, for the three and six months ended April 30, 2011. As of April 30, 2011, HP had recorded the majority of the severance costs. HP expects to record the majority of the infrastructure charges through fiscal 2012. The timing of the charges is based upon planned termination dates and site closure and consolidation plans. The majority of the associated cash payments are expected to be paid out through the second quarter of fiscal 2012. As of April 30, 2011, approximately 4,400 positions had been eliminated.

    Fiscal 2009 Restructuring Plan

        In May 2009, HP's management approved and initiated a restructuring plan to structurally change and improve the effectiveness of the Imaging and Printing Group ("IPG"), Personal Systems Group ("PSG") and ESSN businesses. The total expected cost of the plan is $292 million in severance-related costs associated with the planned elimination of approximately 4,400 positions. As of April 30, 2011, all planned eliminations had occurred and the majority of the restructuring costs had been paid out.

    Fiscal 2008 HP/EDS Restructuring Plan

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

        The restructuring plan includes severance costs to eliminate approximately 25,000 positions. As of April 30, 2011, all planned eliminations had occurred and the vast majority of the associated severance costs had been paid out. The infrastructure charges in the restructuring plan include facility closure and consolidation costs and the costs associated with early termination of certain contractual obligations. HP expects to record the majority of these costs through fiscal 2011 based upon the execution of site closure and consolidation plans. The associated cash payments are expected to be paid out through fiscal 2016 as fixed lease payments are made.

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

15



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

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 six months ended April 30, 2011 were as follows:

 
   
  Three
months
ended
April 30,
2011
charges
  Six
months
ended
April 30,
2011
charges
   
   
   
  As of April 30, 2011  
 
  Balance,
October 31,
2010
  Cash
payments
  Non-cash
settlements
and other
adjustments
  Balance,
April 30,
2011
  Total costs
and
adjustments
to date
  Total
expected
costs and
adjustments
 
 
  In millions
 

Fiscal 2010 acquisitions

  $ 44   $ 16   $ 16   $ (23 ) $   $ 37   $ 80   $ 88  

Fiscal 2010 ES Plan:

                                                 
 

Severance

  $ 620   $ 33   $ 118   $ (135 ) $ 38   $ 641   $ 748   $ 761  
 

Infrastructure

    4     30     42     (42 )   (4 )       62     231  
                                   
 

Total ES Plan

  $ 624   $ 63   $ 160   $ (177 ) $ 34   $ 641   $ 810   $ 992  

Fiscal 2009 Plan

  $ 57   $   $   $ (43 ) $ (1 ) $ 13   $ 292   $ 292  

Fiscal 2008 HP/EDS Plan:

                                                 
 

Severance

  $ 75   $ 9   $ 23   $ (87 ) $ (11 ) $   $ 2,169   $ 2,169  
 

Infrastructure

    408     70     117     (174 )   14     365     810     1,225  
                                   
 

Total HP/EDS Plan

  $ 483   $ 79   $ 140   $ (261 ) $ 3   $ 365   $ 2,979   $ 3,394  
                                   

Total restructuring plans

  $ 1,208   $ 158   $ 316   $ (504 ) $ 36   $ 1,056   $ 4,161   $ 4,766  
                                   

        At April 30, 2011 and October 31, 2010, HP included the long-term portion of the restructuring liability of $175 million and $297 million, respectively, in Other liabilities, and the short-term portion in Accrued restructuring in the accompanying Consolidated Condensed Balance Sheets.

Note 7: Fair Value

        HP determines fair value based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants.

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

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

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

16



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 7: Fair Value (Continued)

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

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

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

        Derivative Instruments: As discussed in Note 8, HP mainly holds non-speculative forwards, swaps and options to hedge certain foreign currency and interest rate exposures. When active market quotes are not available, HP uses industry standard valuation models. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit risk, foreign exchange rates, and forward and spot prices for currencies. In certain cases, market-based observable inputs are not available and, in those cases, HP uses management judgment to develop assumptions which are used to determine fair value.

17



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 7: Fair Value (Continued)

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

 
  As of April 30, 2011   As of October 31, 2010  
 
  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

  $   $ 7,928   $   $ 7,928   $   $ 6,598   $   $ 6,598  

Commercial paper

        325         325                  

Money market funds

    807             807     971             971  

Marketable equity securities

    8     2         10     11     3         14  

Foreign bonds

    8     388         396     8     365         373  

Corporate bonds and other debt securities

    3     2     49     54     3     6     50     59  

Derivatives:

                                                 
 

Interest rate contracts

        507         507         735         735  
 

Foreign exchange contracts

        85     23     108         150     32     182  
 

Other derivatives

        8     13     21         5     6     11  
                                   
   

Total Assets

  $ 826   $ 9,245   $ 85   $ 10,156   $ 993   $ 7,862   $ 88   $ 8,943  
                                   

Liabilities

                                                 

Derivatives:

                                                 
 

Interest rate contracts

  $   $ 63   $   $ 63   $   $ 89   $   $ 89  
 

Foreign exchange contracts

        1,598     1     1,599         880     10     890  
                                   
   

Total Liabilities

  $   $ 1,661   $ 1   $ 1,662   $   $ 969   $ 10   $ 979  
                                   

18



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

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 April 30, 2011 and October 31, 2010 were as follows:

 
  April 30, 2011   October 31, 2010  
 
  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

  $ 7,920   $   $   $ 7,920   $ 6,590   $   $   $ 6,590  
 

Commercial paper

    325             325                  
 

Money market funds

    807             807     971             971  
                                   

Total cash equivalents

    9,052             9,052     7,561             7,561  
                                   

Available-for-Sale Investments

                                                 

Debt securities:

                                                 
 

Time deposits

    8             8     8             8  
 

Foreign bonds

    336     60         396     315     58         373  
 

Corporate bonds and other debt securities

    76         (22 )   54     89         (30 )   59  
                                   

Total debt securities

    420     60     (22 )   458     412     58     (30 )   440  
                                   

Equity securities in public companies

    3     2         5     5     4         9  
                                   

Total cash equivalents and available-for-sale investments

  $ 9,475   $ 62   $ (22 ) $ 9,515   $ 7,978   $ 62   $ (30 ) $ 8,010  
                                   

        Cash equivalents consist of investments in time deposits, commercial paper and money market funds with original maturities of ninety days or less. Time deposits were primarily issued by institutions outside the U.S. as of April 30, 2011 and October 31, 2010. Available-for-sale securities consist of short-term investments which mature within twelve months or less and long-term investments with maturities longer than twelve months. Investments include primarily time deposits, fixed-interest securities, and institutional bonds. HP estimates the fair values of its investments based on quoted market prices or pricing models using current market rates. These estimated fair values may not be representative of actual values that will be realized in the future.

        The gross unrealized loss as of April 30, 2011 was due primarily to declines in certain debt securities and included $22 million that has been in a continuous loss position for more than twelve months. The gross unrealized loss as of October 31, 2010 was due primarily to declines in the fair value of certain debt securities and included $28 million that has been in a continuous loss position for more than twelve months. HP does not intend to sell these debt securities, and it is not likely that HP will be required to sell these debt securities prior to the recovery of the amortized cost. In the three and six months ended April 30, 2011, HP did not recognize any impairment charge associated with debt securities. In the three and six months ended April 30, 2010, HP recognized an impairment charge of $2 million associated with debt securities.

19



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

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 securities at April 30, 2011 were as follows:

 
  Available-for-Sale
Securities
 
 
  April 30, 2011  
 
  Cost   Estimated
Fair Value
 
 
  In millions
 

Due in 1-5 years

  $ 11   $ 11  

Due in more than five years

    409     447  
           

  $ 420   $ 458  
           

        A summary of the carrying values and balance sheet classification of all short-term and long-term investments in debt and equity securities as of April 30, 2011 and October 31, 2010 was as follows:

 
  April 30,
2011
  October 31,
2010
 
 
  In millions
 

Available-for-sale debt securities

  $   $ 5  
           
 

Included in Other current assets

        5  
           

Available-for-sale debt securities

    458     435  

Available-for-sale equity securities

    5     9  

Equity securities in privately-held companies

    51     154  

Other investments

    9     9  
           
 

Included in long-term financing receivables and other assets

    523     607  
           

Total investments

  $ 523   $ 612  
           

        Equity securities in privately held companies include cost basis and equity method investments. Other investments include marketable trading securities. HP includes gains or losses from changes in fair value of these securities, offset by losses or gains on the related liabilities, in Interest and other, net, in HP's Consolidated Condensed Statements of Earnings. The net impact associated with these securities was not material for the three and six months ended April 30, 2011 and 2010.

    Derivative Financial Instruments

        HP is a global company that is exposed to foreign currency exchange rate fluctuations and interest rate changes in the normal course of its business. As part of its risk management strategy, HP uses derivative instruments, primarily forward contracts, option contracts, interest rate swaps, and total return swaps, to hedge certain foreign currency, interest rate and, to a lesser extent, equity exposures. HP's objective is to offset gains and losses resulting from these exposures with losses and gains on the derivative contracts used to hedge them, thereby reducing volatility of earnings or protecting fair values of assets and liabilities. HP does not have any leveraged derivatives and does not use derivative contracts for speculative purposes. HP designates its derivatives as fair value hedges, cash flow hedges or hedges of the foreign currency exposure of a net investment in a foreign operation ("net investment

20



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments (Continued)

hedges"). Additionally, for derivatives not designated as hedging instruments, HP categorizes those economic hedges as other derivatives. HP recognizes all derivatives, on a gross basis, in the Consolidated Condensed Balance Sheets at fair value and reports them in Other current assets, Long-term financing receivables and other assets, Other accrued liabilities, or Other liabilities. HP classifies cash flows from the derivative programs as operating activities in the Consolidated Condensed Statements of Cash Flows.

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

        To further mitigate credit exposure to counterparties, HP may enter into collateral security arrangements with its counterparties. These arrangements require HP to post collateral or to hold collateral from counterparties when the derivative fair values exceed contractually established thresholds. As of April 30, 2011, the fair value of all derivative instruments under these collateralized arrangements were in a net asset position of approximately $40 million for which approximately $30 million of U.S. Treasury securities have been deposited to a third-party custodian by the counterparties.

        Certain of HP's derivative instruments contain credit risk-related contingent features, such as provisions whereby HP and the counterparties to the derivative instruments could request collateralization on derivative instruments in net liability positions if HP's or the counterparties' credit ratings fall below certain thresholds. As of April 30, 2011 and 2010, HP was not required to post any collateral, and HP did not have any derivative instruments with credit risk-related contingent features that were in a significant net liability position.

    Fair Value Hedges

        HP enters into fair value hedges to reduce the exposure of its debt portfolio to interest rate risk. HP issues long-term debt in U.S. dollars based on market conditions at the time of financing. HP uses interest rate swaps to mitigate the market risk exposures in connection with the debt to achieve primarily U.S. dollar LIBOR-based floating interest expense. The swap transactions generally involve principal and interest obligations for U.S. dollar-denominated amounts. Alternatively, HP may choose not to swap fixed for floating interest payments or may terminate a previously executed swap if it believes a larger proportion of fixed-rate debt would be beneficial. When investing in fixed-rate instruments, HP may enter into interest rate swaps that convert the fixed interest returns into variable interest returns and would classify these swaps as fair value hedges. For derivative instruments that are designated and qualify as fair value hedges, HP recognizes the gain or loss on the derivative

21



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments (Continued)

instrument, as well as the offsetting loss or gain on the hedged item, in Interest and other, net in the Consolidated Condensed Statements of Earnings in the current period.

    Cash Flow Hedges

        HP uses a combination of forward contracts and options designated as cash flow hedges to protect against the foreign currency exchange rate risks inherent in its forecasted net revenue and, to a lesser extent, cost of sales, operating expense, and intercompany lease loan denominated in currencies other than the U.S. dollar. HP's foreign currency cash flow hedges mature generally within six to twelve months. However, certain leasing revenue-related forward contracts and intercompany lease loan forward contracts extend for the duration of the lease term, which can be up to five years. For derivative instruments that are designated and qualify as cash flow hedges, HP initially records the effective portion of the gain or loss on the derivative instrument in accumulated other comprehensive income or loss as a separate component of stockholders' equity and subsequently reclassifies these amounts into earnings in the period during which the hedged transaction is recognized in earnings. HP reports the effective portion of cash flow hedges in the same financial statement line item as the changes in value of the hedged item. During the three and six months ended April 30, 2011 and 2010, HP did not discontinue any cash flow hedge for which it was probable that a forecasted transaction would not occur.

    Net Investment Hedges

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

    Other Derivatives

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

    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

22



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments (Continued)

effectiveness by comparing the cumulative change in the hedge contract with the cumulative change in the hedged item, both of which are based on forward rates. HP recognizes any ineffective portion of the hedge, as well as amounts not included in the assessment of effectiveness, in the Consolidated Condensed Statements of Earnings. As of April 30, 2011 and 2010, the portion of hedging instruments' gain or loss excluded from the assessment of effectiveness was not material for fair value, cash flow or net investment hedges. Hedge ineffectiveness for fair value, cash flow and net investment hedges was not material in the three and six months ended April 30, 2011 and 2010.

    Fair Value of Derivative Instruments in the Consolidated Condensed Balance Sheets

        As discussed in Note 7, HP estimates the fair values of derivatives primarily based on pricing models using current market rates and records all derivatives on the balance sheet at fair value. The gross notional and fair value of derivative financial instruments in the Consolidated Condensed Balance Sheets were recorded as follows:

 
  As of April 30, 2011   As of October 31, 2010  
 
  Gross
Notional(1)
  Other
Current
Assets
  Long-term
Financing
Receivables and
Other Assets
  Other
Accrued
Liabilities
  Other
Liabilities
  Gross
Notional(1)
  Other
Current
Assets
  Long-term
Financing
Receivables and
Other Assets
  Other
Accrued
Liabilities
  Other
Liabilities
 
 
  In millions
 

Derivatives designated as hedging instruments

                                                             

Fair value hedges:

                                                             
 

Interest rate contracts

  $ 8,575   $   $ 453   $   $   $ 8,575   $   $ 656   $   $  

Cash flow hedges:

                                                             
 

Foreign exchange contracts

    17,689     62     3     898     199     16,862     98     20     503     83  

Net investment hedges:

                                                             
 

Foreign exchange contracts

    1,519     2     1     86     82     1,466     8     2     58     62  
                                           

Total derivatives designated as hedging instruments

    27,783     64     457     984     281     26,903     106     678     561     145  
                                           

Derivatives not designated as hedging instruments

                                                             

Foreign exchange contracts

    11,679     37     3     283     51     13,701     51     3     129     55  

Interest rate contracts(2)

    2,200         54         63     2,200         79         89  

Other derivatives

    427     8     13             397     5     6          
                                           

Total derivatives not designated as hedging instruments

    14,306     45     70     283     114     16,298     56     88     129     144  
                                           

Total derivatives

  $ 42,089   $ 109   $ 527   $ 1,267   $ 395   $ 43,201   $ 162   $ 766   $ 690   $ 289  
                                           

(1)
Represents the face amounts of contracts that were outstanding as of April 30, 2011 and October 31, 2010, respectively.

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

23



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

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 a derivative instrument and related hedged item in a fair value hedging relationship for the three and six months ended April 30, 2011 and 2010 were as follows:

 
  Gain (Loss) Recognized in Income on Derivative and Related Hedged Item  
Derivative Instrument
  Location   Three
months
ended
April 30,
2011
  Six
months
ended
April 30,
2011
  Hedged Item   Location   Three
months
ended
April 30,
2011
  Six
months
ended
April 30,
2011
 
 
   
  In millions
   
   
  In millions
 

Interest rate contracts

  Interest and other, net   $ (25 ) $ (203 )   Fixed-rate debt   Interest and other, net   $ 27   $ 201  

 

 
  Gain (Loss) Recognized in Income on Derivative and Related Hedged Item  
Derivative Instrument
  Location   Three
months
ended
April 30,
2010
  Six
months
ended
April 30,
2010
  Hedged Item   Location   Three
months
ended
April 30,
2010
  Six
months
ended
April 30,
2010
 
 
   
  In millions
   
   
  In millions
 

Interest rate contracts

  Interest and other, net   $ 18   $ 27     Fixed-rate debt   Interest and other, net   $ (15 ) $ (24 )

        The before-tax effect of derivative instruments in cash flow and net investment hedging relationships for the three and six months ended April 30, 2011 were as follows:

 
  Gain (Loss)
Recognized in
Other
Comprehensive
Income ("OCI")
on Derivative
(Effective
Portion)
  Gain (Loss) Reclassified from
Accumulated OCI Into Income
(Effective Portion)
  Gain Recognized in
Income on Derivative(1)
(Ineffective portion
and Amount Excluded
from Effectiveness Testing)
 
 
  Three
months
ended
April 30,
2011
  Six
months
ended
April 30,
2011
  Location   Three
months
ended
April 30,
2011
  Six
months
ended
April 30,
2011
  Location   Three
months
ended
April 30,
2011
  Six
months
ended
April 30,
2011
 
 
  In millions
   
  In millions
   
  In millions
 

Cash flow hedges:

                                             
 

Foreign exchange contracts

  $ (780 ) $ (680 )

Net revenue

  $ (296 ) $ (320 )

Net revenue

  $   $  
 

Foreign exchange contracts

    27     18  

Cost of products

    (4 )   22  

Cost of products

         
 

Foreign exchange contracts

    7     5  

Other operating expenses

    1     2  

Other operating expenses

         
 

Foreign exchange contracts

    (36 )   (20 )

Interest and other, net

    (39 )   (32 )

Interest and other, net

         
 

Foreign exchange contracts

    11     (2 )

Net revenue

    2     6  

Interest and other, net

    1     3  
                                   
   

Total cash flow hedges

  $ (771 ) $ (679 )     $ (336 ) $ (322 )     $ 1   $ 3  
                                   

Net investment hedges:

                                             
 

Foreign exchange contracts

  $ (92 ) $ (97 )

Interest and other, net

  $   $  

Interest and other, net

  $   $  
                                   

(1)
Amount of gain recognized in income on derivative represents a $1 million gain and $3 million gain related to the amount excluded from the assessment of hedge effectiveness in the three and six months ended April 30, 2011, respectively.

24



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

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 six months ended April 30, 2010 were as follows:

 
  Gain (Loss)
Recognized in
OCI on Derivative
(Effective Portion)
  Gain (Loss) Reclassified from
Accumulated OCI Into Income
(Effective Portion)
  Gain Recognized in
Income on Derivative(1)
(Ineffective portion
and Amount Excluded
from Effectiveness Testing)
 
 
  Three
months
ended
April 30,
2010
  Six
months
ended
April 30,
2010
  Location   Three
months
ended
April 30,
2010
  Six
months
ended
April 30,
2010
  Location   Three
months
ended
April 30,
2010
  Six
months
ended
April 30,
2010
 
 
  In millions
   
  In millions
   
  In millions
 

Cash flow hedges:

                                             
 

Foreign exchange contracts

  $ 230   $ 655  

Net revenue

  $ 188   $ 58  

Net revenue

  $   $  
 

Foreign exchange contracts

    (12 )   (7 )

Cost of products

    12     27  

Cost of products

         
 

Foreign exchange contracts

         

Other operating expenses

        1  

Other operating expenses

         
 

Foreign exchange contracts

    (5 )   1  

Interest and other, net

    (4 )    

Interest and other, net

         
 

Foreign exchange contracts

    25     36  

Net revenue

    7     15  

Interest and other, net

    2     6  
                                   
   

Total cash flow hedges

  $ 238   $ 685       $ 203   $ 101       $ 2   $ 6  
                                   

Net investment hedges:

                                             
 

Foreign exchange contracts

  $ (47 ) $ (44 )

Interest and other, net

  $   $  

Interest and other, net

  $   $  
                                   

(1)
Amount of gain recognized in income on derivative represents a $2 million gain and $6 million gain related to the amount excluded from the assessment of hedge effectiveness in the three and six months ended April 30, 2010, respectively.

        HP expects to reclassify a net accumulated other comprehensive loss of approximately $444 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 six months ended April 30, 2011 and 2010 were as follows:

 
  Gain (Loss) Recognized in Income on Derivative  
 
  Location   Three months
ended
April 30,
2011
  Six months
ended
April 30,
2011
 
 
   
  In millions
 

Foreign exchange contracts

  Interest and other, net   $ (621 ) $ (698 )

Other derivatives

  Interest and other, net     12     10  

Interest rate contracts

  Interest and other, net     1     3  
               

Total

      $ (608 ) $ (685 )
               

25



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments (Continued)

 

 
  Gain (Loss) Recognized in Income on Derivative  
 
  Location   Three months
ended
April 30,
2010
  Six months
ended
April 30,
2010
 
 
   
  In millions
 

Foreign exchange contracts

  Interest and other, net   $ (129 ) $ (63 )

Other derivatives

  Interest and other, net     13     2  

Interest rate contracts

  Interest and other, net     6     5  
               

Total

      $ (110 ) $ (56 )
               

    Other Financial Instruments

        For the balance of HP's financial instruments, accounts receivable, financing receivables, notes payable and short-term borrowings, accounts payable and other accrued liabilities, the carrying amounts approximate fair value due to their short maturities. The estimated fair value and carrying value of HP's short- and long-term debt was approximately $18.6 billion at April 30, 2011. The estimated fair value of HP's short- and long-term debt was approximately $22.5 billion at October 31, 2010, compared to a carrying value of $22.3 billion at that date. The estimated fair value of the debt is based primarily on quoted market prices, as well as borrowing rates currently available to HP for bank loans with similar terms and maturities.

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 net financing receivables, which are included in financing receivables and long-term financing receivables and other assets, were as follows:

 
  April 30,
2011
  October 31,
2010
 
 
  In millions
 

Minimum lease payments receivable

  $ 7,596   $ 7,094  

Allowance for doubtful accounts

    (130 )   (140 )

Unguaranteed residual value

    233     212  

Unearned income

    (651 )   (596 )
           

Financing receivables, net

    7,048     6,570  

Less current portion

    (3,179 )   (2,986 )
           

Amounts due after one year, net

  $ 3,869   $ 3,584  
           

        Equipment leased to customers under operating leases was $4.0 billion and $3.5 billion at April 30, 2011 and October 31, 2010, respectively, and is included in machinery and equipment. Accumulated depreciation on equipment under lease was $1.2 billion at April 30, 2011 and $1.0 billion at October 31, 2010, respectively.

26



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 9: Financing Receivables and Operating Leases (Continued)

        In July 2010, the Financial Accounting Standards Board issued amendments to the disclosure requirements pertaining to the credit quality of financing receivables and the allowance for credit losses. The amendments require disclosures related to the credit risk inherent in an entity's portfolio of financing receivables and how that risk is analyzed and assessed in arriving at the allowance for credit losses. The amendments also require enhanced disclosures related to changes in the allowance for credit losses and the reasons for those changes. HP adopted this new standard in the first quarter of fiscal 2011.

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

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

 
  April 30,
2011
  October 31,
2010
 
 
  In millions
 

Risk Rating

             

Low

  $ 4,166   $ 3,793  

Moderate

    2,927     2,829  

High

    85     88  
           

Total

  $ 7,178   $ 6,710  
           

        Accounts rated low risk typically have the equivalent of a Standard & Poor's rating of BBB- or higher, while accounts rated moderate risk would be the equivalent of BB+ or lower. Based upon impairment analyses, HP identifies and monitors accounts rated high risk and establishes specific reserves against a portion of these receivables.

        HP establishes an allowance for doubtful accounts to ensure financing receivables are not overstated due to uncollectability. The allowance balance is comprised of a general reserve, which is determined based on a percentage of the financing receivables balance, and a specific reserve, which is established for certain accounts with identified exposures, such as customer default, bankruptcy or other events, that make it unlikely that HP will recover its investment in the lease. The general reserve percentages are maintained on a regional basis and are based on several factors, which include consideration of historical credit losses and portfolio delinquencies, trends in the overall weighted-average risk rating of the portfolio, and information derived from competitive benchmarking.

27



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

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:

 
  Six months ended
April 30, 2011
 
 
  In millions
 

Allowance for doubtful accounts

       

Balance, beginning of period

  $ 140  

Additions to allowance

    22  

Deductions, net of recoveries

    (32 )
       

Balance, end of period

  $ 130  
       

 

 
  April 30,
2011
  October 31,
2010
 
 
  In millions
 

Allowance for financing receivables individually evaluated for loss

  $ 43   $ 53  

Allowance for financing receivables collectively evaluated for loss

    87     87  
           
 

Total

  $ 130   $ 140  
           

Gross financing receivables individually evaluated for loss

 
$

73
 
$

75
 

Gross financing receivables collectively evaluated for loss

    7,105     6,635  
           
 

Total

  $ 7,178   $ 6,710  
           

        Accounts are generally put on non-accrual status (cessation of interest accrual) when they reach 90 days past due. In certain circumstances, such as when the delinquency is deemed to be of an administrative nature, accounts may still accrue interest when they reach 90 days past due. A write-off or specific reserve is generally recorded when an account reaches 180 days past due. As of April 30, 2011, total financing receivables on non-accrual status were $164 million, and total financing receivables greater than 90 days past due and still accruing interest were $113 million.

Note 10: Guarantees

    Guarantees and Indemnifications

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

        HP has certain service contracts supported by client financing or securitization arrangements. Under specific circumstances involving nonperformance resulting in service contract termination or failure to comply with terms under the financing arrangement, HP would be required to acquire certain

28



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 10: Guarantees (Continued)


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 six months ended April 30, 2011 were as follows:

 
  In millions  

Product warranty liability at October 31, 2010

  $ 2,447  

Accruals for warranties issued

    1,334  

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

    (38 )

Settlements made (in cash or in kind)

    (1,313 )
       

Product warranty liability at April 30, 2011

  $ 2,430  
       

29



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:

 
  April 30, 2011   October 31, 2010  
 
  Amount
Outstanding
  Weighted-
Average
Interest
Rate
  Amount
Outstanding
  Weighted-
Average
Interest
Rate
 
 
  In millions
 

Current portion of long-term debt

  $ 4,502     2.1 % $ 2,216     2.2 %

Commercial paper

    3,405     0.3 %   4,432     0.3 %

Notes payable to banks, lines of credit and other

    499     2.9 %   398     1.5 %
                       

  $ 8,406         $ 7,046        
                       

        Notes payable to banks, lines of credit and other includes deposits associated with HP's banking-related activities of approximately $388 million and $348 million at April 30, 2011 and October 31, 2010, respectively.

30



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 11: Borrowings (Continued)

    Long-Term Debt

        Long-term debt was as follows:

 
  April 30,
2011
  October 31,
2010
 
 
  In millions
 

U.S. Dollar Global Notes

             
 

2002 Shelf Registration Statement:

             
   

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

  $ 500   $ 500  
 

2006 Shelf Registration Statement:

             
   

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

    600     600  
   

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

    900     900  
   

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

    499     499  
   

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

    1,499     1,499  
   

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

    750     750  
   

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

    1,995     1,994  
   

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

        275  
   

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

    1,000     1,000  
   

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

    1,500     1,500  
 

2009 Shelf Registration Statement:

             
   

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

    750     750  
   

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

    1,000     1,000  
   

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

    250     250  
   

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

    800     800  
   

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

    1,099     1,099  
   

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

    1,099     1,099  
   

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

    649      
   

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

    1,347      
           

    16,237     14,515  
           

EDS Senior Notes

             
 

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

    1,125     1,130  
 

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

    315     315  
           

    1,440     1,445  
           

Other, including capital lease obligations, at 0.60%-8.63%, due in calendar years 2011-2024

    867     845  

Fair value adjustment related to hedged debt

    470     669  

Less: current portion

    (4,502 )   (2,216 )
           

Total long-term debt

  $ 14,512   $ 15,258  
           

31



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 11: Borrowings (Continued)

        As disclosed in Note 8 to the Consolidated Financial Statements, HP uses interest rate swaps to mitigate the market risk exposures in connection with certain fixed interest global notes to achieve primarily U.S. dollar LIBOR-based floating interest expense. The table above does not reflect the interest rate swap impact on the interest rate.

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

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

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

        HP has a $3.0 billion five-year credit facility expiring in May 2012. In February 2010, HP entered into a $3.5 billion 364-day credit facility. The February credit facility expired in February 2011, at which time HP entered into a new $4.5 billion four-year credit facility, increasing the total amount available under its credit facilities to $7.5 billion. Commitment fees, interest rates and other terms of borrowing under the credit facilities vary based on HP's external credit ratings. The credit facilities are senior unsecured committed borrowing arrangements primarily to support the issuance of U.S. commercial paper. HP's ability to have a U.S. commercial paper outstanding balance that exceeds the $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 April 30, 2011, the carrying value of the assets approximated the carrying value of the borrowings of $250 million.

        As of April 30, 2011, HP had the capacity to issue an unspecified amount of additional debt securities, common stock, preferred stock, depositary shares and warrants under the 2009 Shelf Registration Statement. As of that date, HP also had up to approximately $14.4 billion of available borrowing resources, including $13.0 billion under its commercial paper programs and approximately $1.4 billion relating to uncommitted lines of credit.

    Subsequent Event

        On May 31, 2011, HP issued $5.0 billion of U.S. Dollar Global Notes under the 2009 Shelf Registration Statement. The Global Notes consisted of floating rate notes with maturities of two and three years from the date of issuance and fixed rate notes at market rates with maturities of three, five and ten years from the date of issuance.

32



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 12: Income Taxes

    Provision for Taxes

        HP's effective tax rate was 20.3% and 20.5% for the three months ended April 30, 2011 and April 30, 2010, respectively, and 20.7% and 20.1% for the six months ended April 30, 2011 and April 30, 2010, respectively. 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. The jurisdictions with favorable tax rates with the most significant effective tax rate impact in the periods presented include Singapore, the Netherlands, China, Ireland and Puerto Rico. HP has not provided U.S. taxes for all of such earnings because HP plans to reinvest some of those earnings indefinitely outside the United States.

        In the three and six months ended April 30, 2011, HP recorded discrete items with a net tax benefit of $56 million and $157 million, respectively. These amounts included net tax benefits of $53 million and $112 million, respectively, from restructuring and acquisition charges. In addition, in December 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was signed into law. HP recorded a tax benefit of $43 million arising from the retroactive research and development credit provided by that legislation in the first quarter of fiscal 2011.

        In the three and six months ended April 30, 2010, HP recorded discrete items with a net tax benefit of $47 million and $139 million, respectively. These amounts included net tax benefits of $80 million and $134 million, respectively, from restructuring and acquisition charges; and net tax expense of $33 million and net tax benefits of $5 million, respectively, associated with adjustments to prior year foreign income tax accruals and credits, settlement of tax audit matters, a valuation allowance release, and other miscellaneous discrete items.

        As of April 30, 2011, the amount of gross unrecognized tax benefits was $1.9 billion, of which up to $1.2 billion would affect HP's effective tax rate if realized. HP recognizes interest income and interest expense and penalties on tax overpayments and underpayments within income tax expense. As of April 30, 2011, HP had accrued a net $182 million payable for interest and penalties. In the three and six months ended April 30, 2011, HP recognized $22 million and $1 million, respectively, of net interest expense on net tax underpayments, net of tax.

        HP engages in continuous discussion and negotiation with taxing authorities regarding tax matters in various jurisdictions. HP does not expect complete resolution of any Internal Revenue Service ("IRS") audit cycle within the next 12 months. However, it is reasonably possible that certain federal, foreign and state tax issues may be concluded in the next 12 months, including issues involving transfer pricing and other matters. Accordingly, HP believes it is reasonably possible that its existing unrecognized tax benefits may be reduced by an amount up to $246 million within the next 12 months.

        HP is subject to income tax in the United States and approximately 80 foreign countries and is subject to routine corporate income tax audits in many of these jurisdictions. In addition, HP is subject to numerous ongoing audits by state and foreign tax authorities. HP has received from the IRS Notices of Deficiency for its fiscal 1999, 2000, 2003, 2004 and 2005 tax years, and Revenue Agent's Reports ("RAR") for its fiscal 2001, 2002 and 2006 tax years. The IRS began an audit of HP's 2007 income tax returns in 2009, and began its audit of HP's 2008 and 2009 income tax returns during 2010 and 2011, respectively. With respect to major foreign and state tax jurisdictions, HP is no longer subject to tax

33



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 12: Income Taxes (Continued)


authority examinations for years prior to 1999. HP believes that adequate accruals have been provided for all open tax years.

        The IRS has completed its examination of EDS tax years through 2002 and no unresolved issues remain outstanding. EDS has received RARs for its 2003 through 2006 tax years, proposing tax deficiencies of $110 million. These deficiencies include a $29 million effect on carrybacks to 2000 though 2002. The IRS is currently auditing EDS's tax years 2007 and the short period ended August 26, 2008. HP is appealing certain issues and believes adequate reserves have been provided for all years.

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

 
  April 30,
2011
  October 31,
2010
 
 
  In millions
 

Current deferred tax assets

  $ 5,102   $ 5,833  

Current deferred tax liabilities

    (54 )   (53 )

Long-term deferred tax assets

    2,241     2,070  

Long-term deferred tax liabilities

    (5,225 )   (5,239 )
           

Total deferred tax assets net of deferred tax liabilities

  $ 2,064   $ 2,611  
           

Note 13: Stockholders' Equity

    Share Repurchase Program

        HP's share repurchase program authorizes both open market and private repurchase transactions. In the three and six months ended April 30, 2011, HP executed share repurchases of 65 million shares and 116 million shares, respectively. For the three months ended April 30, 2011, repurchases of 63 million shares were settled for $2.7 billion. For the six months ended April 30, 2011, repurchases of 117 million shares were settled for $5.0 billion, which included 4 million shares repurchased in transactions that were executed in fiscal 2010 but settled in the first half of fiscal 2011. HP had approximately 2 million shares repurchased in the second quarter of fiscal 2011 that will be settled in the third quarter of fiscal 2011. HP paid approximately $1.8 billion in connection with repurchases of approximately 35 million shares during the three months ended April 30, 2010 and paid approximately $4.5 billion in connection with repurchases of approximately 89 million shares in the first six months of fiscal 2010. As of April 30, 2011, HP had remaining authorization of $5.9 billion for future share repurchases.

34



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 13: Stockholders' Equity (Continued)

    Comprehensive Income

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

 
  Three months ended
April 30
 
 
  2011   2010  
 
  In millions
 

Net earnings

  $ 2,304   $ 2,200  

Net change in unrealized gains on available-for-sale securities, net of tax benefit of $7 million in 2011, and net of tax of $4 million in 2010

        7  

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

             
 

Unrealized (losses) gains recognized in OCI, net of tax benefit of $273 million in 2011 and net of tax of $81 million in 2010

    (498 )   157  
 

Losses (gains) reclassified into income, net of tax benefit of $110 million in 2011 and net of tax of $73 million in 2010

    226     (130 )
           

    (272 )   27  
           

Net change in cumulative translation adjustment, net of tax of $1 million in 2011 and $12 million in 2010

    81     71  

Net change in unrealized components of defined benefit plans, net of tax benefit of $108 million in 2011 and net of tax of $60 million in 2010

    297     83  
           

Comprehensive income

  $ 2,410   $ 2,388  
           

 

 
  Six months ended
April 30
 
 
  2011   2010  
 
  In millions
 

Net earnings

  $ 4,909   $ 4,450  

Net change in unrealized gains on available-for-sale securities, net of tax benefit of $2 million in 2011 and net of tax of $5 million in 2010

    10     9  

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

             
 

Unrealized (losses) gains recognized in OCI, net of tax benefit of $241 million in 2011 and net of tax of $238 million in 2010

    (438 )   447  
 

Losses (gains) reclassified into income, net of tax benefit of $109 million in 2011 and net of tax of $31 million in 2010

    213     (70 )
           

    (225 )   377  
           

Net change in cumulative translation adjustment, net of tax of $18 million in 2011 and net of tax benefit of $2 million in 2010

    132     11  

Net change in unrealized components of defined benefit plans, net of tax benefit of $98 million in 2011 and net of tax of $69 million in 2010

    328     94  
           

Comprehensive income

  $ 5,154   $ 4,941  
           

35



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 13: Stockholders' Equity (Continued)

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

 
  April 30,
2011
  October 31,
2010
 
 
  In millions
 

Net unrealized gain on available-for-sale securities

  $ 30   $ 20  

Net unrealized loss on cash flow hedges

    (426 )   (201 )

Cumulative translation adjustment

    (299 )   (431 )

Unrealized components of defined benefit plans

    (2,897 )   (3,225 )
           

Accumulated other comprehensive loss

  $ (3,592 ) $ (3,837 )
           

Note 14: Retirement and Post-Retirement Benefit Plans

    Modifications to Defined Contribution Plans

        HP offers various defined contribution plans for U.S. and non-U.S. employees. As disclosed in our Consolidated Financial Statements for the fiscal year ended October 31, 2010, HP matching contributions under both the HP 401(k) Plan and the EDS 401(k) Plan in fiscal 2010 were on a quarterly, discretionary, performance-based match of up to a maximum of 4% of eligible compensation for all U.S. employees to be determined each fiscal quarter based on business results. HP's matching contributions for each of the quarters in fiscal 2010 were 100% of the maximum 4% match. Effective in fiscal year 2011, the quarterly employer matching contributions in the HP 401(k) Plan and the EDS 401(k) Plan are no longer discretionary and are equal to 100% of an employee's contributions, up to a maximum of 4% of eligible compensation. In addition, effective December 31, 2010, the EDS 401(k) Plan was merged into the HP 401(k) Plan.

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

 
  Three months ended April 30  
 
  U.S.
Defined
Benefit Plans
  Non-U.S.
Defined
Benefit Plans
  Post-
Retirement
Benefit Plans
 
 
  2011   2010   2011   2010   2011   2010  
 
  In millions
 

Service cost

  $   $   $ 89   $ 82   $ 2   $ 3  

Interest cost

    149     144     177     165     9     12  

Expected return on plan assets

    (186 )   (165 )   (225 )   (188 )   (9 )   (8 )

Amortization and deferrals:

                                     
 

Actuarial loss

    8     7     60     53         5  
 

Prior service benefit

              (4 )   (3 )   (20 )   (22 )
                           

Net periodic benefit (gain) cost

    (29 )   (14 )   97     109     (18 )   (10 )

Curtailment gain

                        (13 )

Settlements

            2              

Special termination benefits

            6     11          
                           

Net benefit (gain) cost

  $ (29 ) $ (14 ) $ 105   $ 120   $ (18 ) $ (23 )
                           

36



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

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

 

 
  Six months ended April 30  
 
  U.S.
Defined
Benefit Plans
  Non-U.S.
Defined
Benefit Plans
  Post-
Retirement
Benefit Plans
 
 
  2011   2010   2011   2010   2011   2010  
 
  In millions
 

Service cost

  $   $   $ 174   $ 168   $ 4   $ 6  

Interest cost

    297     289     346     337     17     24  

Expected return on plan assets

    (372 )   (331 )   (438 )   (386 )   (18 )   (15 )

Amortization and deferrals:

                                     
 

Actuarial loss

    17     14     122     109     1     10  
 

Prior service benefit

            (7 )   (5 )   (41 )   (43 )
                           

Net periodic benefit (gain) cost

    (58 )   (28 )   197     223     (37 )   (18 )

Curtailment gain

                        (13 )

Settlements

            2              

Special termination benefits

            8     11          
                           

Net benefit (gain) cost

  $ (58 ) $ (28 ) $ 207   $ 234   $ (37 ) $ (31 )
                           

    Employer Contributions and Funding Policy

        HP previously disclosed in its Consolidated Financial Statements for the fiscal year ended October 31, 2010 that in fiscal year 2011 it expected to contribute approximately $747 million to its pension plans and approximately $30 million to cover benefit payments to U.S. non-qualified plan participants. In addition, HP disclosed that it expected to pay approximately $40 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 authorities.

        During the six months ended April 30, 2011, HP made $262 million of contributions to its pension plans, paid $14 million to cover benefit payments to U.S. non-qualified plan participants, and paid $14 million to cover benefit claims under post-retirement benefit plans. During the remainder of fiscal 2011, HP anticipates making additional contributions of approximately $485 million to its pension plans and approximately $16 million to its U.S. non-qualified plan participants and expects to pay up to $26 million to cover benefit claims under post-retirement benefit plans. HP's pension and other post-retirement benefit costs and obligations are dependent on various assumptions. In addition, during the second quarter of fiscal 2011, pension plans in the United Kingdom were re-measured primarily due to legislative changes. As a result of these legislative changes and higher discount rates at remeasurement, the pension obligation was reduced by approximately $355 million. Differences between expected and actual returns on investments will be reflected as unrecognized gains or losses, and such gains or losses will be amortized and recorded in future periods. Poor financial performance of invested assets in any year could lead to increased contributions in certain countries and increased future pension plan expense. Asset gains or losses are determined at the measurement date and amortized over the remaining service life or life expectancy of plan participants. HP's next measurement date is October 31, 2011.

37



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 15: Litigation and Contingencies

        HP is involved in lawsuits, claims, investigations and proceedings, including those identified below, consisting of intellectual property, commercial, securities, employment, employee benefits and environmental matters that arise in the ordinary course of business. HP records a provision for a liability when management believes that it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. HP believes it has adequate provisions for any such matters, and, as of April 30, 2011, it was not reasonably possible that an additional material loss had been incurred in an amount in excess of the amounts already recognized on HP's financial statements. HP reviews these provisions at least quarterly and adjusts these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. Based on its experience, HP believes that any damage amounts claimed in the specific matters discussed below are not a meaningful indicator of HP's potential liability. Litigation is inherently unpredictable. However, HP believes that it has valid defenses with respect to legal matters pending against it. Nevertheless, cash flows or results of operations could be materially affected in any particular period by the unfavorable resolution of one or more of these contingencies.

Litigation, Proceedings and Investigations

        Copyright levies.    As described below, proceedings are ongoing or have been concluded involving HP in certain European Union ("EU") member countries, including litigation in Germany, Belgium and Austria, seeking to impose or modify levies upon equipment (such as multifunction devices ("MFDs"), personal computers ("PCs") and printers) and alleging that these devices enable producing private copies of copyrighted materials. Descriptions of some of the ongoing proceedings are included below. The levies are generally based upon the number of products sold and the per-product amounts of the levies, which vary. Some EU member countries that do not yet have levies on digital devices are expected to implement similar legislation to enable them to extend existing levy schemes, while some other EU member countries are expected to limit the scope of levy schemes and applicability in the digital hardware environment. HP, other companies and various industry associations have opposed the extension of levies to the digital environment and have advocated alternative models of compensation to rights holders.

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

38



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 15: Litigation and Contingencies (Continued)


the Court of Justice of the European Union and therefore revoked the German Federal Supreme Court decision and remitted the matter to it. The German Federal Supreme Court held a hearing on March 24, 2011, and judgment is expected on July 21, 2011.

        In September 2003, VG Wort filed a lawsuit against Fujitsu Siemens Computer GmbH ("FSC") in the Munich Civil Court in Munich, Germany seeking levies on PCs. This is an industry test case in Germany, and HP has agreed not to object to the delay if VG Wort sues HP for such levies on PCs following a final decision against FSC. On December 23, 2004, the Munich Civil Court held that PCs are subject to a levy and that FSC must pay €12 plus compound interest for each PC sold in Germany since March 2001. FSC appealed this decision in January 2005 to the Munich Court of Appeals. On December 15, 2005, the Munich Court of Appeals affirmed the Munich Civil Court decision. FSC filed an appeal with the German Federal Supreme Court in February 2006. On October 2, 2008, the German Federal Supreme Court issued a judgment that PCs were not photocopiers within the meaning of the German copyright law that was in effect until December 31, 2007 and, therefore, not subject to the levies on photocopiers established by that law. VG Wort subsequently filed a claim with the German Federal Constitutional Court challenging that ruling. In January 2011, the Constitutional Court published a decision holding that the German Federal Supreme Court decision was inconsistent with the German Constitution and revoking the German Federal Supreme Court decision. The Constitutional Court remitted the matter to the German Federal Supreme Court for further action. The German Federal Supreme Court held a hearing on April 7, 2011, and judgment is expected on July 21, 2011.

        Reprobel, a cooperative society with the authority to collect and distribute the remuneration for reprography to Belgian copyright holders, requested HP by extra-judicial means to amend certain copyright levy declarations submitted for inkjet MFDs sold in Belgium from January 2005 to December 2009 to enable it to collect copyright levies calculated based on the generally higher copying speed when the MFDs are operated in draft print mode rather than when operated in normal print mode. In March 2010, HP filed a lawsuit against Reprobel in the French-speaking chambers of the Court of First Instance of Brussels seeking a declaratory judgment that no copyright levies are payable on sales of MFDs in Belgium or, alternatively, that copyright levies payable on such MFDs must be assessed based on the copying speed when operated in the normal print mode set by default in the device. The schedule for the court proceedings has been determined, and no decision from the court is expected before September 2012.

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

        Skold, et al. v. Intel Corporation and Hewlett-Packard Company is a lawsuit in which HP was joined on June 14, 2004 that is pending in state court in Santa Clara County, California. The lawsuit alleges that HP (along with Intel) misled the public by suppressing and concealing the alleged material fact that systems that use the Intel Pentium 4 processor are less powerful and slower than systems using the Intel Pentium III processor and processors made by a competitor of Intel. The plaintiffs seek

39



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 15: Litigation and Contingencies (Continued)


unspecified damages, restitution, attorneys' fees and costs, and certification of a nationwide class. On February 27, 2009, the court denied with prejudice plaintiffs' motion for nationwide class certification for a third time. The plaintiffs have appealed the court's decision, and a hearing on that appeal is scheduled for June 14, 2011.

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

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

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

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

    Four class actions against HP and its subsidiary, Hewlett-Packard (Canada) Co., were filed in Canada, one commenced in British Columbia in February 2006, two commenced in Quebec in April 2006 and May 2006, respectively, and one commenced in Ontario in June 2006, where the plaintiffs are seeking class certification, restitution, declaratory relief, injunctive relief and unspecified statutory, compensatory and punitive damages. In March 2010, one of the Quebec cases was voluntarily dismissed by the plaintiff. In February 2011, the other Quebec case was voluntarily dismissed by the plaintiff.

        On August 25, 2010, HP and the plaintiffs in In re HP Inkjet Printer Litigation, Blennis v. HP and Rich v. HP entered into an agreement to settle those lawsuits on behalf of the proposed classes, which agreement is subject to approval of the court before it becomes final. Under the terms of the proposed

40



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 15: Litigation and Contingencies (Continued)


settlement, the lawsuits will be consolidated, and eligible class members will each have the right to obtain e-credits not to exceed $5 million in the aggregate for use in purchasing printers or printer supplies through HP's website. As part of the proposed settlement, HP also agreed to provide class members with additional information regarding HP inkjet printer functionality and to change the content of certain software and user guide messaging provided to users regarding the life of inkjet printer cartridges. In addition, class counsel and the class representatives will be paid attorneys' fees and expenses and stipends. On March 29, 2011, the court granted final approval to the settlement. On April 27, 2011, certain class members who objected to the settlement filed an appeal of the court's order granting final approval to the settlement.

        Baggett v. HP is a consumer class action filed against HP on June 6, 2007 in the United States District Court for the Central District of California alleging that HP employs a technology in its LaserJet color printers whereby the printing process shuts down prematurely, thus preventing customers from using the toner that is allegedly left in the cartridge. The plaintiffs also allege that HP fails to disclose to consumers that they will be unable to utilize the toner remaining in the cartridge after the printer shuts down. The complaint seeks certification of a nationwide class of purchasers of all HP LaserJet color printers and seeks unspecified damages, restitution, disgorgement, injunctive relief, attorneys' fees and costs. On September 29, 2009, the court granted HP's motion for summary judgment against the named plaintiff and denied plaintiff's motion for class certification as moot. On November 3, 2009, the court entered judgment against the named plaintiff. On November 17, 2009, plaintiff filed an appeal of the court's summary judgment ruling with the United States Court of Appeals for the Ninth Circuit. On August 25, 2010, HP and the plaintiff entered into an agreement to settle the lawsuit on behalf of the proposed class, which agreement is subject to approval of the court before it becomes final. Under the terms of the proposed settlement, eligible class members will each have the right to obtain e-credits not to exceed $5 million in the aggregate for use in purchasing printers or printer supplies through HP's website. In addition, class counsel and the class representative will be paid attorneys' fees and expenses and stipends in an amount that is yet to be approved by the court. On October 13, 2010, the court granted preliminary approval of the proposed settlement. The court held a fairness hearing on February 14, 2011 to determine whether to grant final approval of the proposed settlement. The court has not yet issued a decision.

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

    Cunningham and Cunningham, et al. v. Electronic Data Systems Corporation is a purported collective action filed on May 10, 2006 in the U.S. District Court for the Southern District of New York claiming that current and former EDS employees involved in installing and/or maintaining computer software and hardware were misclassified as exempt employees. Another purported collective action, Steavens, et al. v. Electronic Data Systems Corporation, which was filed on October 23, 2007, is also now pending in the same court alleging similar facts. The Steavens case has been consolidated for pretrial purposes with the Cunningham case. On December 15, 2010, the court granted conditional certification of the class in the consolidated Cunningham and Steavens matter.

41



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 15: Litigation and Contingencies (Continued)

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

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

    On April 30 and May 10, 2010, the DRI issued show cause notices to HPI, seven current HP employees and one former HP employee alleging that HP has underpaid customs duties while importing products and spare parts into India and seeking to recover an aggregate of approximately $370 million, plus penalties. On June 2, 2010, the DRI issued an additional show cause notice to HPI and three current HPI employees alleging that HP failed to pay customs duties on the appropriate value of recovery CDs containing Microsoft operating systems and seeking to recover approximately $5.3 million, plus penalties. HP has deposited a total of approximately $16.7 million with the DRI and agreed to post a provisional bond in exchange for the DRI's agreement not to seize HP products and spare parts and not to interrupt the transaction of business by HP in India.

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

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

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

42



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 15: Litigation and Contingencies (Continued)

        Russia GPO and Related Investigations.    The German Public Prosecutor's Office ("German PPO") has been conducting an investigation into allegations that current and former employees of HP engaged in bribery, embezzlement and tax evasion relating to a transaction between Hewlett-Packard ISE GmbH in Germany, a former subsidiary of HP, and the General Prosecutor's Office of the Russian Federation. The approximately €35 million transaction, which was referred to as the Russia GPO deal, spanned the years 2001 to 2006 and was for the delivery and installation of an IT network.

        The U.S. Department of Justice and the SEC have also been conducting an investigation into the Russia GPO deal and potential violations of the Foreign Corrupt Practices Act ("FCPA"). Under the FCPA, a person or an entity could be subject to fines, civil penalties of up to $500,000 per violation and equitable remedies, including disgorgement and other injunctive relief. In addition, criminal penalties could range from the greater of $2 million per violation or twice the gross pecuniary gain or loss from the violation.

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

        HP is cooperating with these investigating agencies.

        In addition, as described below, HP is involved in stockholder derivative litigation arising from the Russia GPO deal, the related investigations and other matters commenced against current and former members of the HP Board of Directors in which the plaintiffs are seeking to recover certain compensation paid by HP to the defendants and other damages:

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

    Saginaw Police & Fire Pension Fund v. Marc L. Andreessen, et al., is a lawsuit filed on October 19, 2010 in United States District Court for the Northern District of California alleging, among other things, that the defendants breached their fiduciary duties and were unjustly enriched by consciously disregarding HP's alleged violations of the FCPA.

    A.J. Copeland v. Raymond J. Lane, et al., is a lawsuit filed on March 7, 2011 in the United States District Court for the Northern District of California alleging, among other things, that the defendants breached their fiduciary duties and wasted corporate assets in connection with HP's alleged violations of the FCPA, severance payments made to former Chairman and Chief Executive Officer Mark Hurd, and HP's acquisition of 3PAR Inc. The lawsuit also alleges violations of Section 14(a) of the Exchange Act in connection with HP's 2010 and 2011 proxy statements.

43



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 15: Litigation and Contingencies (Continued)

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

    In August 2006, HP was informally contacted by the Attorney General of the State of California requesting information concerning the processes employed in the leak investigation. On December 7, 2006, HP announced that it entered into an agreement with the California Attorney General to resolve civil claims arising from the leak investigation, including a claim made by the California Attorney General in a Santa Clara County Superior Court action filed on December 7, 2006, that HP committed unfair business practices under California law in connection with the leak investigation. As a result of this agreement, which includes an injunction, the California Attorney General will not pursue civil claims against HP or its current and former directors, officers and employees. Under the terms of the agreement, HP paid a total of $14.5 million and agreed to implement and maintain for five years a series of measures designed to ensure that HP's corporate investigations are conducted in accordance with California law and the company's high ethical standards. Of the $14.5 million, $13.5 million has been used to create a Privacy and Piracy Fund to assist California prosecutors in investigating and prosecuting consumer privacy and information piracy violations, $650,000 was used to pay statutory damages and $350,000 reimbursed the California Attorney General's office for its investigation costs. There was no finding of liability against HP as part of the settlement.

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

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

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

44



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 15: Litigation and Contingencies (Continued)

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

        In addition, four stockholder derivative lawsuits have been filed in California purportedly on behalf of HP stockholders seeking to recover damages for alleged breach of fiduciary duty and to require HP to improve its corporate governance and internal control procedures as a result of the activities of the leak investigation: Staehr v. Dunn, et al. was filed in Santa Clara County Superior Court on September 18, 2006; Worsham v. Dunn, et al. was filed in Santa Clara County Superior Court on September 14, 2006; Tansey v. Dunn, et al. was filed in Santa Clara County Superior Court on September 20, 2006; and Hall v. Dunn, et al. was filed in Santa Clara County Superior Court on September 25, 2006. On October 19, 2006, the Santa Clara County Superior Court consolidated the four California cases under the caption In re Hewlett-Packard Company Derivative Litigation. The consolidated complaint filed on November 19, 2006, also seeks to recover damages in connection with sales of HP stock alleged to have been made by certain current and former HP officers and directors while in possession of material non-public information. Two additional stockholder derivative lawsuits, Pifko v. Babbio, et al., filed on September 19, 2006, and Gross v. Babbio, et al., filed on November 21, 2006, were filed in Chancery Court, County of New Castle, Delaware; both seek to recover damages for alleged breaches of fiduciary duty and to obtain an order instructing the defendants to refrain from further breaches of fiduciary duty and to implement corrective measures that will prevent future occurrences of the alleged breaches of fiduciary duty. On January 24, 2007, the Delaware court consolidated the two cases under the caption In re Hewlett-Packard Company Derivative Litigation and subsequently stayed the proceedings, as the parties had reached a tentative settlement. The HP Board of Directors appointed a Special Litigation Committee consisting of independent Board members authorized to investigate, review and evaluate the facts and circumstances asserted in these derivative matters and to determine how HP should proceed in these matters. On December 14, 2007, HP and the plaintiffs in the California and Delaware derivative actions entered into an agreement to settle those lawsuits. Under the terms of the settlement, HP agreed to continue certain corporate governance changes until December 31, 2012 and to pay the plaintiffs' attorneys' fees. The California court granted final approval to the settlement on March 11, 2008 and subsequently granted plaintiffs' counsel's fee application and dismissed the action. On June 12, 2008, the Delaware court granted final approval to the settlement and the plaintiffs' application for attorneys' fees and also dismissed the action. Because neither the dismissal of the California nor the Delaware derivative action was thereafter appealed, both cases are now concluded.

Environmental

        Our operations and our products are subject to various federal, state, local and foreign laws and regulations concerning environmental protection, including laws addressing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, the cleanup of contaminated sites, the content of its products and the recycling, treatment and disposal of its products. In particular, HP faces increasing complexity in its product design and procurement operations as it adjusts to new and future requirements relating to the chemical and materials composition of its products, their safe use, the energy consumption associated with those products, including requirements relating to climate change. We also are subject to legislation in an increasing

45



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 15: Litigation and Contingencies (Continued)


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

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

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, and large enterprises, including customers in the government, health and education sectors. HP's offerings span multi-vendor customer services, including infrastructure technology and business process outsourcing, technology support and maintenance, application development and support services, and consulting and integration services; enterprise information technology infrastructure, including enterprise server and storage technology, networking products and solutions, information management software and software that optimizes business technology investments; personal computing and other access devices; and imaging and printing-related products and services.

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

        HP has reclassified segment operating results for fiscal 2010 to conform to certain fiscal 2011 organizational realignments. None of the changes impacts HP's previously reported consolidated net revenue, earnings from operations, net earnings or net earnings per share. Future changes to this organizational structure may result in changes to the business segments disclosed.

46



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 16: Segment Information (Continued)

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

    HP Enterprise Business.

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

    Services provides consulting, outsourcing and technology services across infrastructure, applications and business process domains. Services is divided into four main business units: Infrastructure Technology Outsourcing, Applications Services, Business Process Outsourcing and Technology Services. Infrastructure Technology Outsourcing delivers comprehensive services that encompass the data center; networking; security, compliance, and business continuity; workplace (desktop); and enterprise service management. Applications Services help clients revitalize and manage their applications assets through flexible, project-based consulting services and longer-term outsourcing contracts. These full life cycle services encompass application development, testing, modernization, system integration, maintenance and management. Business Process Outsourcing solutions include a broad array of enterprise shared services, customer relationship management services, financial process management services, and administrative services. Technology Services include consulting and support services. Consulting services include strategic IT advisory services, cloud consulting services, energy efficiency services, converged infrastructure services, networking services, data center transformation services and critical facilities services. Support services include mission critical services, technical and deployment services, support services for servers, storage, networks and imaging and printing, and warranty support across HP's product lines.

    Enterprise Servers, Storage and Networking provides server, storage and network infrastructure products. The various server offerings range from entry-level servers to high-end scalable servers, including Superdome servers. Industry Standard Servers include primarily entry-level and mid-range ProLiant servers, which run primarily Windows, Linux and Novell operating systems and leverage Intel Corporation ("Intel") and Advanced Micro Devices ("AMD") processors. The business spans a range of product lines, including pedestal-tower servers, density-optimized rack servers and HP's BladeSystem family of server blades. Business Critical Systems include HP Integrity servers based on the Intel Itanium-based processor that run HP-UX, Microsoft Windows and OpenVMS operating systems, as well as fault-tolerant HP Integrity NonStop solutions. Business Critical Systems' portfolio of server solutions includes Scale-up x86 ProLiant Servers, the BladeSystem architecture-based Integrity blade servers and the Superdome 2 server solution. HP's StorageWorks offerings include entry-level, mid-range and high-end arrays, storage area networks ("SANs"), network attached storage ("NAS"), storage management software, and virtualization technologies, as well as StoreOnce data deduplication solutions, tape drives, tape libraries and optical archival storage. HP's networking offerings include the network infrastructure product portfolios sold under the ProCurve, 3Com, H3C and Tipping Point brands.

    HP Software provides enterprise IT management software, information management solutions, and security intelligence/risk management solutions. Solutions are delivered in the form of traditional software licenses or as software as a service. Augmented by support and professional services, the HP Software solutions allow large IT organizations to manage infrastructure,

47



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 16: Segment Information (Continued)

      operations, application life cycles, application quality and security, IT services, and business processes. In addition, the solutions help businesses proactively safeguard digital assets, comply with corporate and regulatory policies, and control internal and external security risks.

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

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

    Imaging and Printing Group provides consumer and commercial printer hardware, supplies, media and scanning devices. IPG is also focused on imaging solutions in the commercial markets. These solutions range from managed print services and capturing high-value pages in areas such as industrial applications, outdoor signage, and the graphic arts business. Inkjet and Web Solutions delivers HP's consumer and SMB inkjet solutions (hardware, supplies, media, web-connected hardware and services) and develops HP's retail publishing and web businesses. It includes single function and all-in-one inkjet printers targeted toward consumers and SMBs, as well as retail publishing solutions, Snapfish, and ePrintCenter. LaserJet and Enterprise Solutions deliver products, services and solutions to the medium-business and enterprise segments, including LaserJet printers and supplies, multi-function devices, scanners, web-connected hardware and services and enterprise software solutions such as Exstream Software and Web Jetadmin. Managed enterprise solutions include managed print services products and solutions delivered to enterprise customers partnering with third-party software providers to offer workflow solutions in the enterprise environment. Graphics solutions include large format printing (Designjet and Scitex), large format supplies, WebPress supplies, Indigo printing, specialty printing systems and inkjet high-speed production solutions. The graphic solutions business targets Print Service Providers, architects, engineers, designers and industrial solution providers. Printer supplies include LaserJet toner and inkjet printer cartridges and other printing-related media.

    HP Financial Services supports and enhances HP's global product and services solutions, providing a broad range of value-added financial life cycle management services. HPFS enables HP's worldwide customers to acquire complete IT solutions, including hardware, software and services. HPFS offers leasing, financing, utility programs, and asset recovery services, as well as financial asset management services, for large global and enterprise customers. HPFS also

48



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 16: Segment Information (Continued)

      provides an array of specialized financial services to SMBs and educational and governmental entities. HPFS offers innovative, customized and flexible alternatives to balance unique customer cash flow, technology obsolescence and capacity needs.

    Corporate Investments includes business intelligence solutions, HP Labs, mobile devices associated with the Palm acquisition, and certain business incubation projects. Business intelligence solutions enable businesses to standardize on consistent data management schemes, connect and share data across the enterprise and apply analytics. The segment also includes certain video collaboration products sold under the brand "Halo," and Palm smartphones, which are targeted at the consumer segment and include the Pixi and Pre models running on the WebOS operating system. This segment also derives revenue from licensing specific HP technology to third parties.

    Segment Data

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

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

 
  Three months ended April 30  
 
  Net Revenue   Earnings (Loss)
from Operations
 
 
  2011   2010(1)   2011   2010(1)  
 
  In millions
 

Services

  $ 8,977   $ 8,842   $ 1,361   $ 1,401  

Enterprise Servers, Storage and Networking(2)

    5,556     4,837     766     624  

HP Software(3)

    764     653     154     167  
                   

HP Enterprise Business

    15,297     14,332     2,281     2,192  
                   

Personal Systems Group

    9,415     9,956     533     465  

Imaging and Printing Group

    6,745     6,396     1,144     1,098  

HP Financial Services

    885     755     83     69  

Corporate Investments(4)

    72     66     (198 )   (65 )
                   

Segment total

  $ 32,414   $ 31,505   $ 3,843   $ 3,759  
                   

49



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 16: Segment Information (Continued)

 

 
  Six months ended April 30  
 
  Net Revenue   Earnings (Loss)
from Operations
 
 
  2011   2010(1)   2011   2010(1)  
 
  In millions
 

Services

  $ 17,584   $ 17,632   $ 2,736   $ 2,780  

Enterprise Servers, Storage and Networking(2)

    11,190     9,447     1,594     1,231  

HP Software(3)

    1,461     1,316     277     339  
                   

HP Enterprise Business

    30,235     28,395     4,607     4,350  
                   

Personal Systems Group

    19,864     20,540     1,205     995  

Imaging and Printing Group

    13,375     12,602     2,273     2,152  

HP Financial Services

    1,712     1,474     162     136  

Corporate Investments(4)

    150     126     (381 )   (121 )
                   

Segment total

  $ 65,336   $ 63,137   $ 7,866   $ 7,512  
                   

(1)
Certain fiscal 2011 organizational reclassifications have been reflected retroactively to provide improved visibility and comparability. The reclassifications resulted in the transfer of revenue and operating profit among ESSN, HP Software and Corporate Investments. Reclassifications between segments included the transfer of the networking business from Corporate Investments to ESSN, the transfer of the communications and media solutions business from HP Software to Services, and the transfer of the business intelligence business from HP Software to Corporate Investments. There was no impact on the previously reported financial results for PSG, HPFS or IPG.

(2)
Includes the results of 3Com and 3PAR Inc. ("3PAR") from the dates of acquisition in April 2010 and September 2010, respectively.

(3)
Includes the results of ArcSight, Inc. ("ArcSight") from the date of acquisition in October 2010.

(4)
Includes the results of Palm from the date of acquisition in July 2010.

50



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 16: Segment Information (Continued)

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

 
  Three months ended
April 30
  Six months ended
April 30
 
 
  2011   2010   2011   2010  
 
  In millions
 

Net revenue:

                         

Segment total

  $ 32,414   $ 31,505   $ 65,336   $ 63,137  

Elimination of inter-segment net revenue and other

    (782 )   (656 )   (1,402 )   (1,111 )
                   

Total HP consolidated net revenue

  $ 31,632   $ 30,849   $ 63,934   $ 62,026  
                   

Earnings before taxes:

                         

Total segment earnings from operations

  $ 3,843   $ 3,759   $ 7,866   $ 7,512  

Corporate and unallocated costs and eliminations

    (153 )   (112 )   (4 )   (200 )

Unallocated costs related to stock-based compensation expense

    (130 )   (185 )   (296 )   (348 )

Amortization of purchased intangible assets

    (413 )   (347 )   (838 )   (677 )

Restructuring charges

    (158 )   (180 )   (316 )   (311 )

Acquisition-related charges

    (21 )   (77 )   (50 )   (115 )

Interest and other, net

    (76 )   (91 )   (173 )   (290 )
                   

Total HP consolidated earnings before taxes

  $ 2,892   $ 2,767   $ 6,189   $ 5,571  
                   

        In connection with certain fiscal 2011 organizational realignments, HP reclassified total assets of its networking business from Corporate Investments to ESSN and total assets of the communications and media solutions business from HP Software to Services. There have been no other material changes to the total assets of HP's segments since October 31, 2010.

51



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 16: Segment Information (Continued)

    Net revenue by segment and business unit

 
  Three months
ended April 30
  Six months
ended April 30
 
 
  2011   2010(1)   2011   2010(1)  
 
  In millions
 

Net revenue:

                         
   

Infrastructure Technology Outsourcing

  $ 3,783   $ 3,724   $ 7,419   $ 7,399  
   

Technology Services

    2,713     2,652     5,315     5,283  
   

Application Services

    1,724     1,684     3,356     3,365  
   

Business Process Outsourcing

    673     716     1,331     1,450  
   

Other

    84     66     163     135  
                   
 

Services

    8,977     8,842     17,584     17,632  
                   
   

Industry Standard Servers

    3,387     3,056     6,835     6,002  
   

Storage(2)

    980     948     1,992     1,837  
   

HP Networking(3)

    643     295     1,262     514  
   

Business Critical Systems

    546     538     1,101     1,094  
                   
 

Enterprise Servers, Storage and Networking

    5,556     4,837     11,190     9,447  
                   
 

HP Software(4)

    764     653     1,461     1,316  
                   

HP Enterprise Business

    15,297     14,332     30,235     28,395  
                   
   

Notebooks

    5,039     5,527     10,847     11,665  
   

Desktops

    3,641     3,797     7,537     7,650  
   

Workstations

    541     423     1,076     798  
   

Other(5)

    194     209     404     427  
                   

Personal Systems Group

    9,415     9,956     19,864     20,540  
                   
   

Supplies

    4,612     4,331     8,970     8,412  
   

Commercial Hardware

    1,438     1,348     2,902     2,639  
   

Consumer Hardware

    695     717     1,503     1,551  
                   

Imaging and Printing Group

    6,745     6,396     13,375     12,602  
                   

HP Financial Services

    885     755     1,712     1,474  

Corporate Investments(6)

    72     66     150     126  
                   
   

Total segments

    32,414     31,505     65,336     63,137  
                   

Eliminations of inter-segment net revenue and other

    (782 )   (656 )   (1,402 )   (1,111 )
                   
   

Total HP consolidated net revenue

  $ 31,632   $ 30,849   $ 63,934   $ 62,026  
                   

(1)
Certain fiscal 2011 organizational reclassifications have been reflected retroactively to provide improved visibility and comparability. The reclassifications resulted in the transfer of revenue among ESSN, Services, HP Software and Corporate Investments. Reclassifications between segments included the transfer of the networking business from Corporate Investments to ESSN,

52



HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 16: Segment Information (Continued)

    the transfer of the communications and media solutions business from HP Software to Services, and the transfer of the business intelligence business from HP Software to Corporate Investments. Revenue was also transferred among the business units within Services and within PSG. In addition, net revenue reported for the Infrastructure Technology Outsourcing business unit and eliminations of inter-segment net revenue have both been reduced to reflect a change in our inter-segment reporting model. There was no impact on the previously reported financial results for HPFS and IPG or for the business units within IPG.

(2)
Includes the results of 3PAR from the date of acquisition in September 2010.

(3)
The networking business was added to ESSN in fiscal 2011. Also includes the results of 3Com from the date of acquisition in April 2010.

(4)
The Business Technology Optimization and Other Software business units were consolidated into a single business unit within the HP Software segment in fiscal 2011. Also includes the results of ArcSight from the date of acquisition in October 2010.

(5)
The Handhelds business unit, which includes devices that run on Windows Mobile software, was realigned into the Other business unit within PSG in fiscal 2011.

(6)
Includes the results of Palm from the date of acquisition in July 2010.

53


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

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

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

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

OVERVIEW

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

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

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

    personal computing and other access devices; and

    imaging and printing-related products and services.

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

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

    Competitive Positioning

        We are positioning our businesses to take advantage of important trends in the markets for our products and services. Our primary areas of strategic focus are cloud computing, connectivity, the software to enable and join them together, and the services to implement and manage them. On-premise, proprietary computing resources are gradually being complemented and in some cases even replaced by cloud computing. In addition, cloud computing is combining with mobility to create ubiquitous connectivity. Our converged infrastructure products integrate storage, networking, servers and management software and our core data center capabilities form the backbone of a set of cloud offerings that will help customers transition their computing environments from a traditional structure to a hybrid environment and, in many cases, ultimately to a cloud-based environment. We are building an innovative ensemble of connected devices based on our WebOS operating system that will facilitate information creation, digitization, transformation and consumption anytime, anywhere. In addition, our enterprise services offerings give us a platform to be more solution-oriented and a better strategic partner with our customers, provide opportunities to drive usage of HP products and solutions, and give us the opportunity to implement and manage all the technologies upon which our customers rely. We are also aligning our printing business to capitalize on key market trends such as the shift from analog to digital printing and the growth in printable content by developing innovative products, including ePrint solutions and web-connected printers, which enable web and mobile printing,

54


expanding our presence in high-usage annuity businesses including graphics and retail publishing printing, and growing our managed print services business.

    Investing for Growth

        We are investing for growth by strengthening our position in our core markets and accelerating growth in adjacent markets in anticipation of market trends, such as cloud computing and virtualization, mobility and connectivity, data center consolidation and automation, digitization and IT security. In addition, in May 2011, we announced that we are going to make changes to our services business, including accelerating portfolio investments in higher value services, enhancing our sales and delivery capabilities, and better aligning our services strategy with HP's overall strategy to better enable us to meet the needs of our customers. We are also creating innovative new products and developing new channels to connect with our customers. In addition, we have been making focused investments in innovation to strengthen our portfolio of products and services that we can offer to our customers, both through acquisitions and through organic investments. These investments have enabled us to expand in higher margin and higher growth industry segments and have further strengthened our portfolio of hardware, software and services.

    Leveraging our Portfolio and Scale

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

    Driving Operational Excellence

        We are continuing to work to optimize operational excellence across the company. Operational excellence remains critical to the success of HP, and we are implementing effectiveness, productivity and quality initiatives throughout the company. For example, we are continuing to execute our ongoing initiatives to transform our supply chain and leverage our corporate infrastructure and to maximize the efficiency of our research and development efforts. We are also continuing to execute on our multi-year program to consolidate real estate locations worldwide to fewer core sites in order to optimize our IT spending and real estate costs. In addition, we are continuing to implement the restructuring plan announced in June 2010 relating to our enterprise services business. See Note 6 to the Consolidated Condensed Financial Statements in Item 1 for further discussion of this restructuring plan and the associated restructuring charges.

55


        The following provides an overview of our key financial metrics in the second quarter and first half of fiscal 2011 and demonstrates how our execution of these initiatives has translated into financial performance:

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

Three Months Ended April 30

                                                 

Net revenue

  $ 31,632   $ 8,977   $ 5,556   $ 764   $ 15,297   $ 9,415   $ 6,745   $ 885  

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

    2.5 %   1.5 %   14.9 %   17.0 %   6.7 %   (5.4 )%   5.5 %   17.2 %

Earnings from operations

  $ 2,968   $ 1,361   $ 766   $ 154   $ 2,281   $ 533   $ 1,144   $ 83  

Earnings from operations as a % of net revenue

    9.4 %   15.2 %   13.8 %   20.2 %   14.9 %   5.7 %   17.0 %   9.4 %

Net earnings

  $ 2,304                                            

Net earnings per share

                                                 
 

Basic

  $ 1.07                                            
 

Diluted

  $ 1.05                                            

Six Months Ended April 30

                                                 

Net revenue

  $ 63,934   $ 17,584   $ 11,190   $ 1,461   $ 30,235   $ 19,864   $ 13,375   $ 1,712  

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

    3.1 %   (0.3 )%   18.5 %   11.0 %   6.5 %   (3.3 )%   6.1 %   16.1 %

Earnings from operations

  $ 6,362   $