Annual Report 2007
Forward-looking Statements
This document contains forward-looking statements that involve risks,
uncertainties and assumptions. If such risks or uncertainties materialize or
such assumptions prove incorrect, the results of HP and its consolidated
subsidiaries could 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 statements of
the plans, strategies and objectives of management for future operations;
any statements concerning expected development, performance, market
share or demand relating to HP’s products and services; any statements
regarding anticipated operational and financial results, including the
execution of cost reduction programs; any statements including estimates
regarding market size or growth; any statements regarding future
economic conditions or performance; any statements of expectation or
belief; and any statements of assumptions underlying any of the
foregoing. Risks, uncertainties and assumptions include the execution and
performance of contracts by HP and its customers, suppliers and partners;
the achievement of expected results; expectations and assumptions
relating to the execution and timing of cost reduction programs; and other
risks that are described in HP’s filings with the Securities and Exchange
Commission, including but not limited to HP’s Annual Report on Form 10
K for the fiscal year ended October 31, 2007, which is included as part
of this document. HP assumes no obligation and does not intend to update
these forward-looking statements.
CEO Letter
Dear Fellow Stockholders:
If one word can best describe HP’s
performance in fiscal 2007, it is growth.
For the year, we added more than
$12 billion of new revenue, grew
non-GAAP operating profit dollars
30 percent¹ and returned more than
$12 billion to stockholders through
share repurchases and dividends.
We grew revenues across all of our
each of our
business segments and in
regions. Overall, it was an impressive
performance by HP’s employees and
partners around the world.
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CEO Letter
Many factors contributed to that growth, but three
stand out because of the major impact we expect them to
have in the years ahead: the explosion of digital informa
tion and content; the growing need for technology that
enables people to create, store, share and print that
content; and the rapidly growing demand for information
technology (IT) in emerging markets around the world.
Customers will need systems, software and services to
create, store and analyze content; PCs and handheld
devices to access and share it; and monitors, TVs and
printers to view and print it. Many companies can do
some of these things, but we believe that HP is the only
company with the portfolio and partnerships to do
them all.
The volume of data today is growing faster than our
ability to capture and use it. According to Forrester
Research, the world’s data doubles approximately every
three years ,² which is expected to lead to a more than
sixfold increase in data between 2003 and 2010.
It adds up to an enormous addressable market for
HP—a $1.2 trillion global market . ³ Today HP has about
9 percent of this market, so we have a lot of room to
grow. We are working hard to expand our market
coverage and to profitably increase our market share.
Feeding the worldwide demand for information and
rich digital content is the enormous expansion of search
engines, blogs, social networks, e-mail, text messages
and online video and images.
To capitalize on these opportunities, we continue to
align the company around an operating framework
with three key elements: targeted growth, efficiency
and capital strategy.
To complicate matters, this content often lacks authenti
cation and proper security, and it is increasingly global
and mobile. Potentially hundreds of millions of new
users in emerging markets are coming online—from
small business owners in China to farmers in Brazil to
consumers in Eastern Europe.
At the same time, the expectations of consumers have
changed. People want instantaneous access to content.
They expect this accessibility regardless of what kind
of device they are using or where they happen to be.
And their tolerance for complexity is low.
Opportunities
Dealing with all this data—and rising consumer expec
tations—is a huge and disruptive challenge for our
customers and their IT environments and a major opportu
nity for HP. It puts pressure on businesses to rebuild,
retool and deploy a flexible infrastructure so they can get
the right information to the right people at the right time.
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Targeted Growth
HP’s businesses are targeting the most promising,
high-growth markets and positioning themselves to
take advantage of the explosion of digital content.
In our Technology Solutions Group, we are helping
customers manage and transform their IT environments.
We had a particularly strong performance in blade
servers during fiscal 2007. Our innovative c-Class
blade systems helped drive year-over-year blade
revenue growth of 67 percent, and we increased our
industry-leading market share.
In our Personal Systems Group, we continue to benefit
as demand shifts toward mobility, consumers and
emerging markets. For example, our sales of notebook
computers increased 47 percent during fiscal 2007.
And our PC business in China nearly doubled, making
it our third largest market for personal systems.
FY07 Revenue by Segment
• HP Financial Services and Other
2%
• HP Software
2%
HP Services
16%
Imaging &
Printing Group
27%
Enterprise Storage
& Servers
18%
Personal Systems
Group
35%
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CEO Letter
In our Imaging and Printing Group, we are extending
our leadership in our core printing business while also
taking advantage of new, high-growth opportunities
in supplies, graphic arts and enterprise printing. We
are expanding our sales coverage to accelerate growth
in the enterprise business, which we expect to be a
$121 billion market by 2010.
In each of these businesses, we are using our scale to
become even more competitive. We have more than
double the scale of each of our printer competitors
and all but one of our PC and server competitors. We
are leveraging this scale to consolidate share and
improve profits while continuing to reinvest to maintain
our technology leadership.
We expect continued growth in developed countries
but much higher growth in what are commonly
known as the BRIC countries—Brazil, Russia, India
and China—and in other emerging economies. Our
revenue in the BRIC countries grew 33 percent in
fiscal 2007 and now represents 8 percent of HP’s
total revenue.
Between acquisitions and organic growth, revenue in
our software business nearly doubled in fiscal 2007—
making HP the sixth largest software company in the
world. Software is a critical differentiator for HP—not
only in our standalone software business but in each
of our businesses as well.
Efficiency
We have made great progress in reducing costs,
which allows us to compete more aggressively and win
in the market. But we have an opportunity to further
improve our efficiency.
We look at everything between revenue and non-GAAP
operating profit as a cost. From that perspective, HP
had almost $95 billion in costs in fiscal 2007. That is
too much. Even with all the work we have done, we
must become more efficient, further reduce costs and
invest the savings to create more stockholder value.
We assess our costs in three areas.
As we reduce costs, we are shifting our investments to
capitalize on these market opportunities. While it
is important that we grow, it’s also important that we
grow the right way with the right mix. For example,
HP hired 1,000 sales professionals in fiscal 2007 to
expand our coverage in key accounts and markets,
and the company added more than 1,000 salespeople
through acquisitions.
The first is corporate overhead, including IT, real estate
and other corporate expenses. We are reducing our IT
costs by consolidating and modernizing our data
centers and operations. We also are becoming more
efficient in our use of real estate, which is a significant
expense for a company of HP’s size. During the next
two years, we plan to reduce our number of sites
worldwide by almost 25 percent.
We also are investing in higher-margin categories such
as software and services. We spent more than $6 billion
across our businesses in fiscal 2007 to acquire 10
software, technology and service companies. We
expect that each one will add significant capabilities
and technology to our portfolio, as well as new oppor
tunities for growth.
Second are our product costs. HP is the largest customer
for most of our suppliers, and we are continually
working with them to make sure we get the best terms,
including the best price.
Third are the costs owned by each of HP’s businesses.
The businesses have detailed plans to reduce their costs,
and we have launched new efforts to identify more savings.
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We continue to align the company
around an operating framework with
three key elements: targeted growth,
efficiency and capital strategy.
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CEO Letter
Capital Strategy
We align our capital strategy with our operations to
maximize stockholder value.
The first priority is to continue to invest in our businesses.
We do that in two ways. One is to invest to grow, which
shows up in research and development, demand
generation and mergers and acquisitions. The other is
to invest to save. We have made significant investments
in our IT and real estate infrastructure so we can reduce
costs in the future.
Our second priority is to return cash to stockholders,
predominantly with share repurchases and to a lesser
extent with dividends. Last year HP returned more than
$12 billion to stockholders. We will continue to balance
repurchase and dividend levels with other capital
allocation priorities.
Global Citizenship
As HP has grown to become one of the world’s largest
IT companies, our commitment to global citizenship
has remained integral to our business strategy. It is an
important part of our heritage and the values engrained
in HP by Bill Hewlett and Dave Packard. Today, our
citizenship efforts are built on a foundation of strong
corporate accountability and governance, a commitment
to environmental responsibility and active investment
and involvement in the communities in which we
do business.
We are focused primarily on three global citizenship
priorities: climate and energy, product reuse and
recycling, and supply chain responsibility.
HP is committed to reducing our own environmental
impact as well as that of our customers, partners and
suppliers. We launched our Design for Environment
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program in 1992, and we have been investing in
energy-efficiency programs for more than a decade.
Innovations such as our Dynamic Smart Cooling and
Thermal Logic technologies offer advanced, energy-
efficient solutions for customers. We expect these
technologies to contribute to a 60 percent reduction in
energy consumption in our new data centers. We also
are expanding our use of renewable energy, including
solar power for our San Diego facility and wind power
for several of our facilities in Ireland.
We believe we have reached a tipping point where the
price and performance of IT are no longer compromised
by being green; they are enhanced by it. Our goal
is to reduce the combined energy consumption of our
operations and products by 20 percent in 2010
compared to 2005 levels.
During 2007, we met our goal of recycling 1 billion
pounds of electronic products—including 500 million
pounds between 2004 and 2007. We plan to recycle
another 1 billion pounds of electronic products and
print cartridges by the end of 2010.
At the same time, we are working to ensure that our
suppliers and vendors meet HP’s high standards for
social and environmental responsibility. HP was the first
IT company to formally launch a supplier code of
conduct. We continually work with our suppliers and
with companies inside and outside the technology
industry to raise standards for labor and human rights,
health and safety, environmental responsibility and
ethics. We do extensive onsite auditing to engage our
suppliers, identify performance gaps and help them to
build their capabilities to meet our expectations.
We believe that HP has an unparalleled ability to drive
simplicity, innovate and influence industry actions in a
way that is good for customers, good for business and
good for the planet.
FY07 Revenue by Region
EMEA
41%
(up 15.7% Y/Y)
Asia Pacific
17%
(up 18.2% Y/Y)
Americas
42%
(Canada/Latin America 9%, U.S. 33%)
(up 10.3% Y/Y)
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CEO Letter
We believe that HP has an unparalleled
ability to drive simplicity, innovate
and influence industry actions in a way
that is good for customers, good for
business and good for the planet.
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Revenue
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$30
$29
$28
$27
$26
$25
$24
$23
$22
$21
$20
$19
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
$21.5
$21.6
$20.8
$22.9
$22.7
$22.6
$21.9
$24.6
$25.1
$25.5
$25.4
$28.3
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CEO Letter
Conclusion
We made solid progress in 2007—demonstrating that
HP can cut costs and increase revenue at the same
time. However, we are not complacent about our
success, nor do we underestimate the strength of our
competitors.
We see significant opportunities to take advantage of
the explosion of digital content and address our $1.2
trillion market opportunity. We believe that we have a
portfolio and a set of capabilities unmatched in the
industry. We are investing in the right people and
infrastructure, and we are continuing to leverage our
scale and reduce our costs to improve our operating
performance.
Our goal is simple: to make HP the partner of choice for
our customers, the investment of choice for our stock
holders and the employer of choice for our employees.
Executive Team
Mark V. Hurd
Chairman, Chief Executive Officer and President
R. Todd Bradley
Executive Vice President, Personal Systems Group
Jon E. Flaxman
Executive Vice President and Chief Administrative Officer
Michael J. Holston
Executive Vice President, General Counsel and Secretary
Vyomesh I. Joshi
Executive Vice President, Imaging and Printing Group
Catherine A. Lesjak
Executive Vice President and Chief Financial Officer
Ann M. Livermore
Executive Vice President, Technology Solutions Group
Randall D. Mott
Executive Vice President and Chief Information Officer
Marcela Perez de Alonso
Executive Vice President, Human Resources
Thank you for your investment in HP.
Shane V. Robison
Executive Vice President and Chief Strategy and Technology Officer
Sincerely,
Mark V. Hurd
Chairman, Chief Executive Officer and President
¹ Fiscal year 2007 non-GAAP operating profit was $9.6 billion compared to $7.4 billion in fiscal
year 2006. Fiscal year 2007 non-GAAP operating profit of $9.6 billion equals GAAP operating
profit of $8.7 billion plus the sum of $783 million relating to charges associated with the
amortization of purchased intangible assets, $190 million relating to in-process research and
development charges and $387 million in restructuring charges less a $517 million net pension
curtailment gain. Fiscal year 2006 non-GAAP operating profit of $7.4 billion equals GAAP
operating profit of $6.6 billion plus the sum of $604 million relating to charges associated with the
amortization of purchased intangible assets, $52 million relating to in-process research and
development charges and $158 million in restructuring charges. HP’s management uses non-
GAAP operating profit to evaluate and forecast HP’
s performance before gains, losses or other
charges that are considered by HP’s management to be outside of HP’s core business segment
operating results. HP believes that presenting non-GAAP operating profit in addition to GAAP
operating profit provides investors with greater transparency to the information used by HP’s
management in its financial and operational decision making. HP further believes that providing
this additional non-GAAP information helps investors understand HP’s operating performance and
evaluate the efficacy of the methodology and information used by management to evaluate and
measure such performance. This additional non-GAAP information is not intended to be considered
in isolation or as a substitute for GAAP operating profit.
² Forrester Research, “Data, Data Everywhere!”, Boris Evelson, July 23, 2007.
³ HP internal analysis.
10
Gross and Net Cash
$20
$15
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$10
$5
$0
Gross cash¹
Net cash²
FY05
$13.9
$8.7
FY06
$16.4
$11.2
FY07
$11.6
$3.4
¹ Includes cash and cash equivalents, short-term investments and certain liquid long-term investments.
² Net cash is defined as gross cash less total debt.
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Members of the Board
Lawrence T. Babbio, Jr.
Director since 2002
at the Stanford University Graduate School of Business. Previously,
Mr. Hyatt was the founder and Chief Executive Officer of Hyatt Legal
Mr. Babbio has served as a Senior Advisor to Warburg Pincus, a private
Plans, Inc., a provider of employer-sponsored group legal plans.
equity firm, since June 2007. Previously, Mr. Babbio served as Vice
Chairman and President of Verizon Communications, Inc. (formerly Bell
John R. Joyce
Atlantic Corporation), a telecommunications company, from 2000 until his
Director since 2007
retirement in April 2007. He was a director of Compaq Computer
Mr. Joyce has served as a Managing Director at Silver Lake, a private
Corporation from 1995 until HP’s acquisition of Compaq in May 2002.
equity firm, since July 2005. Prior to joining Silver Lake, Mr. Joyce spent
Sari M. Baldauf
Director since 2006
30 years with IBM, a global technology firm, serving most recently as
Senior Vice President and Group Executive of the IBM Global Services
division from May 2004 until July 2005 and Chief Financial Officer of
Ms. Baldauf served as Executive Vice President and General Manager of
IBM from 1999 until May 2004. Prior to that, Mr. Joyce served in a
the Networks business group of Nokia Corporation, a communications
variety of roles, including President, IBM Asia Pacific, and Vice President
company, from July 1998 until February 2005. She previously held various
positions at Nokia since 1983. Ms. Baldauf also serves as a director of
and Controller for IBM’s global operations. Mr. Joyce is a member of the
Bertelsmann AG Supervisory Board and a director of Gartner, Inc., Avago
SanomaWSOY, F-Secure Corporation, VIT Corporation, and CapMan Plc,
Technologies Limited and Serena Software, Inc.
and a s t he n on-executive c hairman o f t he S avonlinna O pera F estival a nd
as a member of the Global Board of the International Youth Foundation.
Robert L. Ryan
Richard A. Hackborn
Director since 1992
Director since 2004
Mr. Ryan served as Senior Vice President and Chief Financial Officer of
Medtronic, Inc., a medical technology company, from 1993 until his
Mr. Hackborn has served as HP’s Lead Independent Director since
retirement in May 2005. He also is a director of UnitedHealth Group
September 2006. Previously, Mr. Hackborn served as HP’s Chairman from
Incorporated, General Mills, Inc., The Black and Decker Corporation and
January 2000 to September 2000. He was HP’s Vice President, Computer
Citigroup, Inc.
Products Organization from 1990 until his retirement in 1993 after a
33-year career with HP.
John H. Hammergren
Director since 2005
Lucille S. Salhany
Director since 2002
Ms. Salhany has served as President and Chief Executive Officer of
JHMedia, a consulting company, since 1997. Since 2003, she has been a
Mr. Hammergren has served as Chairman of McKesson Corporation, a
partner and director of Echo Bridge Entertainment, an independent film
healthcare services and information technology company, since July 2002
distribution company. From 1999 to March 2002, she was President and
and as President and Chief Executive Officer of McKesson since April
Chief Executive Officer of LifeFX Networks, Inc., which filed for federal
2001. From July 1999 to April 2001, Mr. Hammergren served as
bankruptcy protection in May 2002. From 1994 to 1997, Ms. Salhany
Co-President and Co-Chief Executive Officer of McKesson. Mr. Hammergren
was the Chief Executive Officer and President of UPN (United Paramount
is also a director of Nadro, S.A. de C.V. (Mexico) and Verispan LLC.
Network), a broadcasting company. From 1993 to 1994, she was
Mark V. Hurd
Director since 2005
Chairman of Fox Broadcasting Company, a national television network,
and from 1991 to 1993 she was Chairman of Twentieth Television, a
division of Fox Broadcasting Company. Ms. Salhany was a director of
Mr. Hurd has served as Chairman of HP since September 2006 and
Compaq from 1997 until HP’s acquisition of Compaq in May 2002.
as Chief Executive Officer, President and a member of the board since
Ms. Salhany also is a director of Ion Media Networks, Inc.
April 2005. Prior to that, he served as Chief Executive Officer of NCR
Corporation, a technology company, from March 2003 to March 2005
G. Kennedy Thompson
and as President from July 2001 to March 2005. From September 2002
Director since 2006
to March 2003, Mr. Hurd was the Chief Operating Officer of NCR, and
Mr. Thompson has served as Chairman of Wachovia Corporation, a
from July 2000 until March 2003 he was Chief Operating Officer of
financial services company, since February 2003 and as a director since
NCR’s Teradata data-warehousing division.
1999. He has also served as Chief Executive Officer of Wachovia since
2000 and as President since 1999. Mr. Thompson also is a director of
Wachovia Preferred Funding Corp.
Joel Z. Hyatt
Director since 2007
Mr. Hyatt has served as the Chief Executive Officer of Current Media, LLC,
a cable and satellite television company, since September 2002. From
September 1998 to June 2003, Mr. Hyatt was a Lecturer in Entrepreneurship
12
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
⌧
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: October 31, 2007
Or
(cid:134)
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
(State or other jurisdiction of
incorporation or organization)
3000 Hanover Street, Palo Alto, California
(Address of principal executive offices)
94-1081436
(I.R.S. employer
identification no.)
94304
(Zip code)
Registrant’s telephone number, including area code: (650) 857-1501
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common stock, par value $0.01 per share
Liquid Yield Option™ Notes due 2017
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes ⌧ No (cid:134)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:134) No ⌧
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 ⌧ No (cid:134)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (cid:134)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ⌧
Accelerated filer (cid:134)
Non-accelerated filer (cid:134)
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act) Yes (cid:134) No ⌧
The aggregate market value of the registrant’s common stock held by non-affiliates was $109,938,540,000 based on the last sale price of common
stock on April 30, 2007.
The number of shares of HP common stock outstanding as of November 30, 2007 was 2,573,868,626 shares.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT DESCRIPTION
Portions of the Registrant’s notice of annual meeting of stockholders and proxy statement to be filed pursuant to Regulation 14A within
120 days after Registrant’s fiscal year end of October 31, 2007 are incorporated by reference into Part III of this Report.
10-K PART
III
Hewlett-Packard Company
Form 10-K
For the Fiscal Year Ended October 31, 2007
Table of Contents
Page
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
PART I
Business ........................................................................................................................................................
Risk Factors ..................................................................................................................................................
Unresolved Staff Comments .........................................................................................................................
Properties ......................................................................................................................................................
Legal Proceedings.........................................................................................................................................
Submission of Matters to a Vote of Security Holders...................................................................................
PART II
Market for Registrant’s Common Equity and Related Stockholder Matters ................................................
Selected Financial Data ................................................................................................................................
Management’s Discussion and Analysis of Financial Condition and Results of Operations........................
Quantitative and Qualitative Disclosures about Market Risk .......................................................................
Financial Statements and Supplementary Data.............................................................................................
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures......................
Controls and Procedures ...............................................................................................................................
Other Information .........................................................................................................................................
PART III
Directors, Executive Officers and Corporate Governance of the Registrant ................................................
Executive Compensation ..............................................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .....
Certain Relationships and Related Transactions, and Director Independence..............................................152
Principal Accountant Fees and Services .......................................................................................................
PART IV
Exhibits and Financial Statement Schedules ................................................................................................
3
15
30
30
31
31
32
34
35
69
71
151
151
151
152
152
152
153
154
Forward-Looking Statements
This Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” in Item 7, contains forward-looking statements that involve risks, uncertainties and assumptions. If
the risks or uncertainties ever materialize or the assumptions prove incorrect, the results of Hewlett-Packard Company and
its consolidated subsidiaries (“HP”) may differ materially from those expressed or implied by such forward-looking
statements and assumptions. All statements other than statements of historical fact are statements that could be deemed
forward-looking statements, including but not limited to any projections of revenue, margins, expenses, tax provisions,
earnings, cash flows, benefit obligations, share repurchases or other financial items; any statements of the plans, strategies
and objectives of management for future operations, including the execution of cost reduction programs and restructuring
plans; any statements concerning expected development, performance or market share relating to products or services; any
statements regarding future economic conditions or performance; any statements regarding pending investigations, claims or
disputes; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. Risks,
uncertainties and assumptions include macroeconomic and geopolitical trends and events; the execution and performance of
contracts by HP and its customers, suppliers and partners; the challenge of managing asset levels, including inventory; the
difficulty of aligning expense levels with revenue changes; assumptions related to pension and other post-retirement costs;
expectations and assumptions relating to the execution and timing of cost reduction programs and restructuring plans; the
outcome of pending legislation and accounting pronouncements; the resolution of pending investigations, claims and
disputes; and other risks that are described herein, including but not limited to the items discussed in “Risk Factors” in Item
1A of this report, and that are otherwise described or updated from time to time in HP’s Securities and Exchange
Commission reports. HP assumes no obligation and does not intend to update these forward-looking statements.
ITEM 1. Business.
PART I
HP is a leading global provider of products, technologies, software, solutions and services to individual consumers,
small- and medium-sized businesses (“SMBs”) and large enterprises, including in the public and education sectors. Our
offerings span:
•
•
•
personal computing and other access devices,
imaging and printing-related products and services,
enterprise information technology infrastructure, including enterprise storage and server technology and software
that optimizes business technology investments, and
• multi-vendor customer services, including technology support and maintenance, consulting and integration and
outsourcing services.
HP was incorporated in 1947 under the laws of the State of California as the successor to a partnership founded in 1939
by William R. Hewlett and David Packard. Effective in May 1998, we changed our state of incorporation from California to
Delaware.
HP Products and Services; Segment Information
During fiscal 2007, our operations were organized into seven business segments: Enterprise Storage and Servers
(“ESS”), HP Services (“HPS”), HP Software, the Personal Systems Group (“PSG”), the Imaging and Printing Group (“IPG”),
HP Financial Services (“HPFS”) and Corporate Investments. Given the solution sale approach across our enterprise offerings,
and in order to capitalize on up-selling and cross-selling opportunities, ESS, HPS and HP Software are structured beneath a
broader
3
Technology Solutions Group (“TSG”). While TSG is not a business segment, this aggregation provides a supplementary view
of our business. In each of the past three fiscal years, industry standard servers, desktops, notebooks and printing supplies
each accounted for more than 10% of our consolidated net revenue.
A summary of our net revenue, earnings from operations and assets for our segments and business units is found in
Note 18 to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference. A discussion of
factors potentially affecting our operations is set forth in “Risk Factors” in Item 1A, which is incorporated herein by
reference.
Technology Solutions Group
TSG provides servers, storage, software and information technology (“IT”) services that enable enterprise and
midmarket business customers to better manage their current IT environments and transform IT into a business enabler. TSG
products help accelerate growth, minimize risk and reduce costs to optimize the business outcomes of customers’ IT
investments. Companies around the globe leverage HP’s infrastructure solutions to deploy next generation data centers and
address business challenges ranging from compliance to business continuity. TSG’s modular IT systems and services are
primarily standards-based and feature differentiated technologies in areas including power and cooling, unified management,
security, virtualization and automation. Each of the three business segments within TSG is described in detail below.
Enterprise Storage and Servers
The server market continues to shift towards standards-based architectures as proprietary hardware and operating
systems are replaced by industry standard server platforms that typically offer compelling price and performance advantages
by leveraging standards-based operating systems and microprocessor designs. At the same time, critical business functions
continue to demand scalability and reliability. By providing a broad portfolio of storage and server solutions, ESS aims to
optimize the combined product solutions required by different customers and provide solutions for a wide range of operating
environments, spanning both the enterprise and the SMB markets. ESS provides storage and server products in a number of
categories.
Industry Standard Servers. Industry standard servers include primarily entry-level and mid-range ProLiant servers,
which run primarily Windows®,(1) Linux and Novell operating systems and leverage Intel Corporation (“Intel”) and
Advanced Micro Devices (“AMD”) processors. The business spans a range of product lines that include pedestal-tower
servers, density-optimized rack servers and HP’s BladeSystem family of server blades. In fiscal 2007, HP’s industry standard
server business continued to lead the industry in terms of units shipped and factory revenue. HP also has a leadership position
in server blades, the fastest-growing segment of the market.
Business Critical Systems. Business Critical Systems include Itanium®(2)-based Integrity servers running on the HP-UX,
Windows®, Linux and OpenVMS operating systems, including the high-end Superdome servers and fault-tolerant Integrity
NonStop servers. Business Critical Systems also include the Reduced Instruction Set Computing (“RISC”)-based servers
with the HP 9000 line running on the HP-UX operating system, HP AlphaServers running on both Tru64 UNIX®(3) and
OpenVMS, and MIPs-based NonStop servers.
(1) Windows® is a registered trademark of Microsoft Corporation.
(2)
Itanium® is a registered trademark of Intel Corporation.
(3) UNIX® is a registered trademark of The Open Group.
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Storage. HP’s StorageWorks offerings include entry-level, mid-range and high-end arrays, storage area networks,
network attached storage, storage management software and virtualization technologies, as well as tape drives, tape libraries
and optical archival storage.
HP Services
HPS provides a portfolio of multi-vendor IT services, including technology services, consulting and integration and
outsourcing services. HPS also offers a variety of services tailored to particular industries such as communications, media
and entertainment, manufacturing and distribution, financial services, health and life sciences and the public sector, including
government services. HPS collaborates with the Enterprise Storage and Servers and HP Software groups, as well as with
third-party system integrators and software and networking companies to bring solutions to HP customers. HPS also works
with HP’s Imaging and Printing Group and Personal Systems Group to provide managed print services, end user workplace
services, and mobile workforce productivity solutions to enterprise customers.
Technology Services. HPS provides a range of technology services from standalone product support to high availability
services for complex, global, networked, multi-vendor environments. This business also manages the delivery of product
warranty support through its own service organization, as well as through authorized partners.
Consulting and Integration. HPS provides consulting and integration services to architect, design and implement
technology and industry-specific solutions for customers. Consulting and integration also provides cross-industry solutions in
the areas of architecture and governance, infrastructure, applications and packaged applications, security, IT service
management, information management and enterprise Microsoft solutions.
Outsourcing Services. HPS offers a variety of IT management and outsourcing services that support customers’
infrastructure, applications, business processes, end user workplace, print environment and business continuity and recovery
requirements.
HP Software
HP Software provides a suite of Business Technology Optimization (“BTO”) software solutions, including support, that
allow customers to manage and automate their IT infrastructure, operations, applications, IT services and business processes
under the OpenView brand. In addition, this segment delivers a suite of comprehensive, carrier-grade software platforms for
developing and deploying next-generation voice, data and converged services to network and service providers under the HP
OpenCall brand.
We are focused on extending our enterprise systems management leadership position into application, service
management and business process management market segments. During fiscal 2007, we completed the acquisitions of
Mercury Interactive Corporation, Bristol Technologies, Inc., SPI Dynamics, Inc. and Opsware Inc., which added transaction
monitoring, applications security testing and data center automation capabilities to the BTO portfolio. We expect to continue
to make strategic acquisitions as well as undertake internal realignments as we deem appropriate. The portfolio of BTO
solutions is designed to enable our customers to reduce their IT costs, and gain better insight to their business and IT
operations. This helps our customers align IT resources with their business goals and automate data center operations and IT
processes, enabling IT to deliver more value to the business.
Personal Systems Group
PSG is the leading provider of personal computers (“PCs”) in the world based on unit volume shipped and annual
revenue. PSG provides commercial PCs, consumer PCs, workstations, handheld
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computing devices, digital entertainment systems, calculators and other related accessories, software and services for the
commercial and consumer markets. We group commercial desktops, commercial notebooks and workstations into
commercial clients and consumer desktop and consumer notebooks into consumer clients when describing our performance
in these markets. Like the broader PC market, PSG continues to experience a shift toward mobile products such as notebooks.
Both commercial and consumer PCs are based predominately on the Windows® operating system and use Intel and AMD
processors.
Commercial PCs. PSG offers a variety of personal computers optimized for commercial uses, including enterprise and
SMB customers, and for connectivity and manageability in networked environments. These commercial PCs include
primarily the HP Compaq business desktops, business notebooks, and Tablet PCs.
Consumer PCs. Consumer PCs include the HP Pavilion and Compaq Presario series of multi-media consumer desktops
and notebooks, as well as HP Media Center and Voodoo Gaming PCs, which are targeted at the home user.
Workstations. Workstations are individual computing products designed for users demanding enhanced performance,
such as computer animation, engineering design and other programs requiring high-resolution graphics. HP provides
workstations that run on UNIX®, Windows® and Linux-based operating systems.
Handheld Computing. HP provides a series of HP iPAQ Pocket PC handheld computing devices that run on Windows®
Mobile software. These products range from value devices such as music or Global Positioning System receivers to advanced
devices with voice and data capability.
Digital Entertainment. PSG’s digital entertainment products are targeted at the intersection of the personal computing
and consumer electronics markets and span a range of products and product categories that allow customers to enjoy a broad
range of digital entertainment experiences. PSG’s digital entertainment products include HD DVD and RW drives and DVD
writers; plasma and LCD flat-panel televisions; and the HP Digital Entertainment Center, which allows consumers to access
their music, movies, home videos and photos from a single device via remote control.
Imaging and Printing Group
IPG is the leading imaging and printing systems provider in the world for consumer and commercial printer hardware,
printing supplies, printing media and scanning devices. IPG is also focused on imaging solutions in the commercial markets,
from managed print services solutions to addressing new growth opportunities in commercial printing in areas such as
industrial applications, outdoor signage, and the graphic arts business. When describing our performance in this segment, we
group inkjet printer units and digital photography and entertainment products and services into consumer hardware, LaserJet
printers and graphics and imaging products into commercial hardware and break out printer supplies separately.
Inkjet Printers. Inkjet systems include desktop single function and inkjet all-in-one printers, including photo,
productivity and business inkjet printers and scanners.
Digital Photography and Entertainment. Digital imaging products and services include photo specialty printers, photo
kiosks, digital cameras, accessories and online photo services through Snapfish. An important part of IPG’s strategy is to
provide digital imaging solutions that rival traditional imaging for quality, cost and ease of use so that consumers can manage
their digital imaging throughout the home and outside the home. On November 7, 2007, we announced that we were seeking
an alternative business model for our HP-branded cameras.
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LaserJet Printers. LaserJet systems include monochrome and color laser printers, printer-based multi-function devices
and Total Print Management Solutions for enterprise customers. A key initiative in this area of IPG’s business has been and
continues to be driving color printing penetration in the office.
Graphics and Imaging. Graphics and Imaging products include large format (DesignJet) printers, Indigo and Scitex
digital presses, digital publishing solutions and graphics printing solutions. A key initiative for IPG is to capture high-value
pages by developing compelling solutions for the industrial, commercial printing and graphics segments.
Printer Supplies. Printer supplies include LaserJet toner and inkjet cartridges and other printing-related media. These
supplies include HP-branded Vivera and ColorSphere ink and HP Premium and Premium Plus photo papers, which are
designed to work together as a system to produce faster prints with improved resistance to fading, increased print quality and
better affordability.
HP Financial Services
HPFS supports and enhances HP’s global product and service solutions, providing a broad range of value-added
financial life-cycle management services. HPFS enables our worldwide customers to acquire complete IT solutions, including
hardware, software and services. The group offers leasing, financing, utility programs and asset recovery services, as well as
financial asset management services for large global and enterprise customers. HPFS also provides an array of specialized
financial services to SMBs and educational and governmental entities. HPFS offers innovative, customized and flexible
alternatives to balance unique customer cash flow, technology obsolescence and capacity needs.
Corporate Investments
Corporate Investments is managed by the Office of Strategy and Technology and includes Hewlett-Packard Laboratories,
also known as HP Labs, and certain business incubation projects. Revenue in this segment is attributable to the sale of certain
network infrastructure products, including Ethernet switch products that enhance computing and enterprise solutions under
the brand ProCurve Networking. Corporate Investments also derives revenue from licensing specific HP technology to third
parties.
Sales, Marketing and Distribution
We manage our business and report our financial results based on the principal business segments described above. Our
customers are organized by consumer and commercial customer groups, and distribution is organized by direct and channel.
Within the channel, we have various types of partners that we utilize for various customer groups. The partners include:
•
•
•
•
•
retailers that sell our products to the public through their own physical or Internet stores;
resellers that sell our products and services, frequently with their own value-added products or services, to targeted
customer groups;
distribution partners that supply our solutions to smaller resellers with which we do not have direct relationships;
independent distributors that sell our products into geographies or customer segments in which we have little or no
presence;
original equipment manufacturers (“OEMs”) that integrate our products with their own hardware or software and
sell the integrated products;
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•
•
independent software vendors (“ISVs”) that provide their clients with specialized software products, frequently
driving sales of additional non-HP products and services, and often assist us in selling our products and services to
clients purchasing their products; and
systems integrators that provide various levels and kinds of expertise in designing and implementing custom IT
solutions and often partner with HPS to extend their expertise or influence the sale of our products and services.
The mix of HP’s business by channel or direct sales differs substantially by business and region. We believe that
customer buying patterns and different regional market conditions necessitate sales, marketing and distribution to be tailored
accordingly. HP is focused on driving efficiencies and productivity gains in both the direct and indirect business.
TSG manages enterprise and public sector customer relationships and also is charged with simplifying sales processes
across our segments to improve speed and effectiveness of customer delivery. In this capacity, TSG manages our direct sales
for both volume and value products including industry standard servers products, UNIX®, enterprise storage and software and
pre-sales technical consultants, as well as our direct distribution activities for commercial products and go-to-market
activities with systems integrators and ISVs. TSG also drives HP’s vertical sales and marketing approach in the
communication, media and entertainment, financial services, manufacturing and distribution and public sector industries.
PSG manages SMB customer relationships and commercial reseller channels, due largely to the significant volume of
commercial PCs that HP sells through these channels. In addition to commercial channel relationships, the volume direct
organization, which is charged with the management of direct sales for volume products, is hosted within PSG.
IPG manages HP’s overall consumer-related sales and marketing activities, including our annual consumer product
launch for the back-to-school and holiday seasons. IPG also manages consumer channel relationships with third-party retail
locations for imaging and printing products, as well as other consumer products, including consumer PCs, which provides for
a bundled sale opportunity between PCs and IPG products. In addition, IPG manages direct consumer sales online through
HP Home & Home Office.
Manufacturing and Materials
We utilize a number of contract manufacturers (“CMs”) and original design manufacturers (“ODMs”) around the world
to manufacture HP-designed products. The use of CMs and ODMs is intended to generate cost efficiencies and reduce time to
market for certain HP-designed products. Third-party OEMs manufacture some products that we purchase and resell under
the HP brand. In addition to our use of CMs and ODMs, we currently manufacture finished products from components and
sub-assemblies that we acquire from a wide range of vendors.
We utilize two primary methods of fulfilling demand for products: building products to order and configuring products
to order. We employ building products to order capabilities to maximize manufacturing efficiencies by producing high
volumes of basic product configurations. Configuring products to order permits configuration of units to the particular
hardware and software customization requirements of certain customers. Our inventory management and distribution
practices in both building products to order and configuring products to order seek to minimize inventory holding periods by
taking delivery of the inventory and manufacturing immediately prior to the sale or distribution of products to our customers.
We purchase materials, supplies and product subassemblies from a substantial number of vendors. For many of our
products, we have existing alternate sources of supply, or such sources are readily available. However, we do rely on sole
sources for laser printer engines, LaserJet supplies and parts for
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products with short life cycles (although some of these sources have operations in multiple locations). We are dependent
upon Intel as a supplier of processors and Microsoft for various software products. However, we believe that disruptions with
these suppliers would result in industry-wide dislocations and therefore would not disproportionately disadvantage us relative
to our competitors. We also have a valued relationship with AMD, and we have continued to see solid acceptance of AMD
processors in the market during fiscal 2007.
Like other participants in the high technology industry, we ordinarily acquire materials and components through a
combination of blanket and scheduled purchase orders to support our requirements for periods averaging 90 to 120 days.
From time to time, we experience significant price volatility and supply constraints of certain components that are not
available from multiple sources. Frequently, we are able to obtain scarce components for somewhat higher prices on the open
market, which may have an impact on gross margin but does not disrupt production. On occasion, we acquire component
inventory in anticipation of supply constraints or enter into longer-term pricing commitments with vendors to improve the
priority, price and availability of supply. See “Risk Factors—We depend on third-party suppliers, and our revenue and gross
margin could suffer if we fail to manage supplier issues properly,” in Item 1A, which is incorporated herein by reference.
International
Our products and services are available worldwide. We believe this geographic diversity allows us to meet demand on a
worldwide basis for both consumer and enterprise customers, draws on business and technical expertise from a worldwide
workforce, provides stability to our operations, allows us to drive economies of scale, provides revenue streams to offset
geographic economic trends and offers us an opportunity to access new markets for maturing products. In addition, we
believe that future growth is dependent in part on our ability to develop products and sales models that target developing
countries. In this regard, we believe that our broad geographic presence gives us a solid base upon which to build such future
growth.
A summary of our domestic and international net revenue and net property, plant and equipment is set forth in Note 18 to
the Consolidated Financial Statements in Item 8, which is incorporated herein by reference. Approximately 67% of our
overall net revenue in fiscal 2007 came from outside the United States. The substantial majority of our net revenue
originating outside the United States was from customers other than foreign governments.
For a discussion of risks attendant to HP’s foreign operations, see “Risk Factors—Due to the international nature of our
business, political or economic changes or other factors could harm our future revenue, costs and expenses and financial
condition,” in Item 1A, “Quantitative and Qualitative Disclosure about Market Risk” in Item 7A and Note 9 to the
Consolidated Financial Statements in Item 8, which are incorporated herein by reference.
Research and Development
We remain committed to innovation as a key element of HP’s culture. Our development efforts are focused on designing
and developing products, services and solutions that anticipate customers’ changing needs and desires and emerging
technological trends. Our efforts also are focused on identifying the areas where we believe we can make a unique
contribution and the areas where partnering with other leading technology companies will leverage our cost structure and
maximize our customers’ experiences.
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HP Labs, together with the various research and development groups within the five principal business segments, are
responsible for our research and development efforts. HP Labs is part of our Corporate Investments segment.
Expenditures for research and development were $3.6 billion in each of fiscal years 2007 and 2006 and $3.5 billion in
fiscal 2005. We anticipate that we will continue to have significant research and development expenditures in the future to
provide a continuing flow of innovative, high-quality products and services to maintain and enhance our competitive
position.
For a discussion of risks attendant to our research and development activities, see “Risk Factors—If we cannot continue
to develop, manufacture and market products and services that meet customer requirements for innovation and quality, our
revenue and gross margin may suffer,” in Item 1A, which is incorporated herein by reference.
Patents
Our general policy has been to seek patent protection for those inventions and improvements likely to be incorporated
into our products and services or where proprietary rights will improve our competitive position. At October 31, 2007, our
worldwide patent portfolio included over 31,000 patents, which was slightly above the number of patents in our patent
portfolio at the end of both fiscal 2006 and fiscal 2005.
Patents generally have a term of twenty years from the time they are filed. As our patent portfolio has been built over
time, the remaining terms on the individual patents vary. While we believe that our patents and applications are important for
maintaining the competitive differentiation of our products and maximizing our return on research and development
investments, no single patent is in itself essential to us as a whole or any of our principal business segments.
In addition to developing our patents, we license intellectual property from third parties as we deem appropriate. We
have also granted and continue to grant to others licenses under patents owned by us when we consider these arrangements to
be in our interests. These license arrangements include a number of cross-licenses with third parties.
For a discussion of risks attendant to intellectual property rights, see “Risk Factors—Our revenue, cost of sales, and
expenses may suffer if we cannot continue to license or enforce the intellectual property rights on which our business
depends or if third parties assert that we violate their intellectual property rights,” in Item 1A, which is incorporated herein by
reference.
Backlog
We believe that backlog is not a meaningful indicator of future business prospects due to the large volume of products
delivered from shelf or channel partner inventories, the shortening of product life cycles and the relative portion of net
revenue related to our service and support businesses. Therefore, we believe that backlog information is not material to an
understanding of our overall business.
Seasonality
General economic conditions have an impact on our business and financial results. From time to time, the markets in
which we sell our products experience weak economic conditions that may negatively affect sales. We experience some
seasonal trends in the sale of our products and services. For example, European sales often are weaker in the summer months
and consumer sales often are stronger in the fourth calendar quarter. Demand during the spring and early summer months
also may be adversely impacted by market anticipation of seasonal trends. See “Risk Factors—Our sales cycle makes
planning and inventory management difficult and future financial results less predictable,” in Item 1A, which is incorporated
herein by reference.
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Competition
We encounter aggressive competition in all areas of our business activity. We compete primarily on the basis of
technology, performance, price, quality, reliability, brand, reputation, distribution, range of products and services, ease of use
of our products, account relationships, customer training, service and support, security and availability of application
software and our Internet infrastructure offerings.
The markets for each of our business segments are characterized by vigorous competition among major corporations
with long-established positions and a large number of new and rapidly growing firms. Product life cycles are short, and to
remain competitive we must develop new products and services, periodically enhance our existing products and services and
compete effectively on the basis of the factors listed above. In addition, we compete with many of our current and potential
partners, including OEMs that design, manufacture and often market their products under their own brand names. Our
successful management of these competitive partner relationships will continue to be critical to our future success. Moreover,
we anticipate that we will have to continue to adjust prices on many of our products and services to stay competitive.
On an overall basis we are among the largest U.S.-based companies offering our range of general purpose computers and
personal information, imaging and printing products for industrial, scientific, business and consumer applications, and IT
services. We are the leader or among the leaders in each of our principal business segments.
The competitive environments in which each segment operates are described below:
Enterprise Storage and Servers. The areas in which ESS operates are intensely competitive and are characterized by
rapid and ongoing technological innovation and price reductions. Our competitors range from broad solutions providers such
as International Business Machines Corporation (“IBM”) to more focused competitors such as EMC Corporation and
Network Appliance, Inc. in storage, Dell, Inc. (“Dell”) in industry standard servers, and Sun Microsystems, Inc. in both
industry standard and UNIX®-based servers. We believe that our important competitive advantages in this segment include
the six technology components of our adaptive infrastructure initiatives: IT systems, power and cooling, security,
management, virtualization and automation. We believe that our competitive advantages also include our global reach and
our significant intellectual property portfolio and research and development capabilities, which will contribute to further
enhancements of our product offerings and our ability to cross sell our portfolio and leverage scale advantages in everything
from brand to procurement leverage.
HP Services. HPS competes in IT support services, consulting and integration and outsourcing services. The IT support
services and consulting and integration markets have been under significant pressure as our customers have reduced their IT
budgets. However, this trend has benefited the outsourcing services business as customers look at reducing IT management
costs to enable more strategic investments. Our competitors include IBM Global Services, systems integration firms such as
Accenture Ltd., outsourcing firms such as Electronic Data Systems Corporation, and offshore companies. We also compete
with other traditional hardware providers, such as Dell, which are increasingly offering services to support their products.
Many of our competitors are able to offer a wide range of global services, and some of our competitors enjoy significant
brand recognition. HPS teams with many companies to offer services, and those arrangements allow us to extend our reach
and augment our capabilities. Our competitive advantages are evident in our deep technology expertise, which includes
multi-vendor environments, virtualization and automation, our strong track record of collaboration with clients and partners,
and the combination of our expertise in infrastructure management with skilled global resources in SAP, Oracle and
Microsoft platforms.
HP Software. Our software competitors include companies focused on providing software solutions for IT management,
such as BMC Software Inc, CA Inc., and IBM Tivoli Software.
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Personal Systems Group. The areas in which PSG operates are intensely competitive and are characterized by rapid
price reductions and inventory depreciation. Our primary competitors for the branded personal computers are Dell, Acer Inc,
Apple Inc., Lenovo Group Limited and Toshiba Corporation. In particular regions, we also experience competition from local
companies and from generically-branded or “white box” manufacturers. Our competitive advantages include our broad
product portfolio, our innovation and research and development capabilities, our brand and procurement leverage, our ability
to cross sell our portfolio of offerings, our extensive service and support offerings and the availability of our broad-based
distribution of products from retail and commercial channels to direct sales.
Imaging and Printing Group. We are the leading imaging and printing systems provider in the world for printer
hardware, printing supplies and scanning devices. We believe that our brand recognition, reputation for quality, breadth of
product offerings and large customer base are important competitive advantages. However, the markets for printer hardware
and associated supplies are highly competitive, especially with respect to pricing and the introduction of new products and
features. IPG’s key competitors include Canon USA, Inc., Lexmark International, Inc., Xerox Corporation (“Xerox”), Seiko
Epson Corporation, Samsung Electronics Co. Ltd. and Dell. In addition, independent suppliers offer refill and
remanufactured alternatives for our supplies which, although generally offering lower print quality and reliability, may be
offered at lower prices and put pressure on our supplies sales and margins. Other companies also have developed and
marketed new compatible cartridges for HP’s laser and inkjet products, particularly in jurisdictions outside of the United
States where adequate intellectual property protection may not exist. In recent years, we and our competitors have regularly
lowered prices on printer hardware both to reach new customers and in response to the competitive environment. Important
areas for future growth include digital photography in the home and outside the home, printer-based multi-function devices in
the office space, digital presses in our imaging and graphics space and driving color printing expansion in the office. While
we encounter competitors in some product categories whose current market share is greater than ours, such as Xerox in
copiers and Heidelberger Druckmaschinen Aktiengesellschaft in publishing, we believe we will provide important new
contributions in the home, the office and publishing environments by providing comprehensive solutions.
HP Financial Services. In our financing business, our competitors are captive financing companies, mainly IBM Global
Financing, as well as banks and financial institutions. We believe our competitive advantage in this business over banks and
financial institutions is our ability to finance products, services and total solutions.
For a discussion of risks attendant to these competitive factors, see “Risk Factors—The competitive pressures we face
could harm our revenue, gross margin and prospects,” in Item 1A, which is incorporated herein by reference.
Environment
Some of our operations use substances regulated under various federal, state, local and international laws governing the
environment, including laws governing the discharge of pollutants into the air and water, the management and disposal of
hazardous substances and wastes and the cleanup of contaminated sites. Many of our products are subject to various federal,
state, local and international laws governing chemical substances in products, including laws regulating the manufacture and
distribution of chemical substances and laws restricting the presence of certain substances in electronics products. We could
incur substantial costs, including cleanup costs, fines and civil or criminal sanctions, third-party damage or personal injury
claims, if we were to violate or become liable under environmental laws or if our products become non-compliant with
environmental laws. We also face increasing complexity in our product design and procurement operations as we adjust to
new and future requirements relating to the materials composition of our products, including the restrictions on
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lead, cadmium and certain other substances that apply to specified electronics products put on the market in the European
Union (the “EU”) as of July 1, 2006 (Restriction of Hazardous Substances Directive) and similar legislation in China, the
labeling provisions of which went into effect March 1, 2007. We also could face significant costs and liabilities in connection
with product take-back legislation. The EU has enacted the Waste Electrical and Electronic Equipment Directive, which
makes producers of electrical goods, including computers and printers, financially responsible for specified collection,
recycling, treatment and disposal of past and future covered products. The deadline for the individual member states of the
EU to enact the directive in their respective countries was August 13, 2004 (such legislation, together with the directive, the
“WEEE Legislation”). Producers participating in the market became financially responsible for implementing their
responsibilities under the WEEE Legislation beginning in August 2005. Implementation in certain EU member states was
delayed into 2006 and 2007. Similar legislation has been or may be enacted in other jurisdictions, including in the United
States, Canada, Mexico, China and Japan. It is our policy to apply strict standards for environmental protection to sites inside
and outside the United States, even if we are not subject to regulations imposed by local governments. The liability for
environmental remediation and other environmental costs is accrued when HP considers it probable and can reasonably
estimate the costs. Environmental costs and accruals are presently not material to our operations or financial position, and we
do not currently anticipate material capital expenditures for environmental control facilities.
Executive Officers:
Mark V. Hurd; age 50; Chairman, Chief Executive Officer and President
Mr. Hurd has served as Chairman of HP since September 2006 and as Chief Executive Officer, President and a member
of the Board since April 2005. Prior to that, he served as Chief Executive Officer of NCR Corporation, a technology
company, from March 2003 to March 2005 and as President from July 2001 to March 2005. From September 2002 to
March 2003, Mr. Hurd was the Chief Operating Officer of NCR, and from July 2000 until March 2003 he was Chief
Operating Officer of NCR’s Teradata data-warehousing division.
R. Todd Bradley; age 49; Executive Vice President, Personal Systems Group
Mr. Bradley was elected Executive Vice President in June 2005. From October 2003 to June 2005, he served as the Chief
Executive Officer of palmOne Inc., a mobile computing company. Mr. Bradley also served as President and Chief Operating
Officer of palmOne from May 2002 until October 2003 and as Executive Vice President and Chief Operating Officer from
June 2001 to May 2002.
Charles N. Charnas; age 49; Vice President, Deputy General Counsel and Assistant Secretary
Mr. Charnas was elected Assistant Secretary in 1999. He was appointed a Vice President and Deputy General Counsel in
2002. Since 1999, he has headed the Corporate, Securities and Mergers and Acquisitions Section of HP’s worldwide legal
department. From September 2006 until February 2007, Mr. Charnas also served as Acting General Counsel of HP.
Mr. Charnas is not an executive officer for purposes of Section 16 of the Securities Exchange Act of 1934.
Jon E. Flaxman; age 50; Executive Vice President and Chief Administrative Officer
Mr. Flaxman has served as Executive Vice President and Chief Administrative Officer of HP since March 2007.
Mr. Flaxman served as Senior Vice President and Controller from 2002 until March 2007, and as Principal Accounting
Officer from February 2005 until March 2007.
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Michael J. Holston; age 45; Executive Vice President, General Counsel and Secretary
Mr. Holston has served as Executive Vice President and General Counsel since February 2007 and as Secretary since
March 2007. Prior to that, he was a partner in the litigation practice at Morgan, Lewis & Bockius LLP, where, among other
clients, he supported HP as external counsel on a variety of litigation and regulatory matters for more than ten years.
Vyomesh Joshi; age 53; Executive Vice President, Imaging and Printing Group
Mr. Joshi was elected Executive Vice President in 2002 after serving as Vice President since January 2001. He became
President of the Imaging and Printing Group in February 2001. Mr. Joshi also served as Chairman of Phogenix Imaging LLC,
a joint venture between HP and Kodak, from 2000 until May 2003, when Phogenix was dissolved. Mr. Joshi also is a director
of Yahoo! Inc.
Catherine A. Lesjak; age 48; Executive Vice President and Chief Financial Officer
Ms. Lesjak has served as Executive Vice President and Chief Financial Officer since January 2007. She served as Senior
Vice President from 2003 until December 2006 and as Treasurer from 2003 until March 2007. From May 2002 to July 2003,
she was Vice President of Finance for Enterprise Marketing and Solutions and Vice President of Finance for the Software
Global Business Unit.
Ann M. Livermore; age 49; Executive Vice President, Technology Solutions Group
Ms. Livermore was elected Executive Vice President in 2002 after serving as Vice President since 1995. Since
May 2004, she has led the Technology Solutions Group. In April 2001, she became President of HP Services. Ms. Livermore
also is a director of United Parcel Service, Inc.
John N. McMullen; age 49; Senior Vice President and Treasurer
Mr. McMullen has served as Senior Vice President and Treasurer since March 2007. Previously, he served as Vice
President of Finance for HP’s Imaging and Printing Group since May 2002.
Randall D. Mott; age 51; Executive Vice President and Chief Information Officer
Mr. Mott was elected Executive Vice President and Chief Information Officer in July 2005. From 2000 to June 2005,
Mr. Mott was Senior Vice President and Chief Information Officer of Dell, Inc., a technology company.
James T. Murrin; age 47; Senior Vice President, Controller and Principal Accounting Officer
Mr. Murrin has served as Senior Vice President, Controller and Principal Accounting Officer since March 2007.
Previously, he served as Vice President of Finance for the Technology Solutions Group since 2004. Prior to that, Mr. Murrin
was Vice President of Finance for HP Services and held various other finance positions at HP since joining the company in
1989.
Marcela Perez de Alonso; age 53; Executive Vice President, Human Resources
Ms. Perez de Alonso was elected Executive Vice President, Human Resources in January 2004. From 1999 until she
joined HP in January 2004, Ms. Perez de Alonso was Division Head of Citigroup North Latin America Consumer Bank, in
charge of the retail business operations of Citigroup in Puerto Rico, Venezuela, Colombia, Peru, Panama, the Bahamas and
the Dominican Republic and also in charge of deposit products for the international retail bank until 2002.
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Shane V. Robison; age 54; Executive Vice President and Chief Strategy and Technology Officer
Mr. Robison has served as Executive Vice President and Chief Strategy and Technology Officer since May 2002. He
was elected Senior Vice President in 2002 in connection with the Compaq acquisition. Prior to joining HP, Mr. Robison
served as Senior Vice President, Technology and Chief Technology Officer at Compaq from 2000 to May 2002.
Employees
We had approximately 172,000 employees worldwide as of October 31, 2007.
Available Information and Exchange Certifications
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to
reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are
available on our website at http://www.hp.com/investor/home, as soon as reasonably practicable after HP electronically files
such reports with, or furnishes those reports to, the Securities and Exchange Commission. HP’s Corporate Governance
Guidelines, Board of Directors committee charters (including the charters of the Audit Committee, HR and Compensation
Committee, and Nominating and Governance Committee) and code of ethics entitled “Standards of Business Conduct” also
are available at that same location on our website. Stockholders may request free copies of these documents from:
Hewlett-Packard Company
Attention: Investor Relations
3000 Hanover Street
Palo Alto, CA 94304
(866) GET-HPQ1 or (866) 438-4771
http://www.hp.com/investor/informationrequest
We submitted the certification of the CEO of HP required by Section 303A.12(a) of the New York Stock Exchange
“NYSE” Listed Company Manual, relating to HP’s compliance with the NYSE’s corporate governance listing standards, to
the NYSE on March 19, 2007 with no qualifications.
We included the certifications of the CEO and the CFO of HP required by Section 302 of the Sarbanes-Oxley Act of
2002 and related rules, relating to the quality of HP’s public disclosure, in this Annual Report on Form 10-K as Exhibits 31.1
and 31.2.
ITEM 1A. Risk Factors.
Because of the following factors, as well as other variables affecting our operating results, past financial performance
may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in
future periods.
The competitive pressures we face could harm our revenue, gross margin and prospects.
We encounter aggressive competition from numerous and varied competitors in all areas of our business, and our
competitors may target our key market segments. We compete primarily on the basis of technology, performance, price,
quality, reliability, brand, reputation, distribution, range of products and services, ease of use of our products, account
relationships, customer training, service and support, security, availability of application software, and Internet infrastructure
offerings. If our products, services, support and cost structure do not enable us to compete successfully based on any of those
criteria, our operations, results and prospects could be harmed.
15
Unlike many of our competitors, we have a portfolio of businesses and must allocate resources across these businesses
while competing with companies that specialize in one or more of these product lines. As a result, we may invest less in
certain areas of our businesses than our competitors do, and these competitors may have greater financial, technical and
marketing resources available to them than our businesses that compete against them. Industry consolidation also may affect
competition by creating larger, more homogeneous and potentially stronger competitors in the markets in which we compete,
and our competitors also may affect our business by entering into exclusive arrangements with existing or potential
customers or suppliers.
We may have to continue to lower the prices of many of our products and services to stay competitive, while at the same
time trying to maintain or improve revenue and gross margin. The markets in which we do business, particularly the personal
computer and printing markets, are highly competitive, and we encounter aggressive price competition for all of our products
and services from numerous companies globally. Over the past several years, price competition in the market for personal
computers, printers and related products has been particularly intense as competitors have aggressively cut prices and
lowered their product margins for these products. Our results of operations and financial condition may be adversely affected
by these and other industry-wide pricing pressures.
Because our business model is based on providing innovative and high quality products, we may spend a proportionately
greater amount on research and development than some of our competitors. If we cannot proportionately decrease our cost
structure on a timely basis in response to competitive price pressures, our gross margin and therefore our profitability could
be adversely affected. In addition, if our pricing and other factors are not sufficiently competitive, or if there is an adverse
reaction to our product decisions, we may lose market share in certain areas, which could adversely affect our revenue and
prospects.
Even if we are able to maintain or increase market share for a particular product, revenue could decline because the
product is in a maturing industry. Revenue and margins also could decline due to increased competition from other types of
products. For example, refill and remanufactured alternatives for some of HP’s LaserJet toner and inkjet cartridges compete
with HP’s supplies business. In addition, other companies have developed and marketed new compatible cartridges for HP’s
LaserJet and inkjet products, particularly in jurisdictions outside of the United States where adequate intellectual property
protection may not exist. HP expects competitive refill and remanufacturing and cloned cartridge activity to continue to
pressure margins in IPG, which in turn has a significant impact on HP margins and profitability overall.
If we cannot continue to develop, manufacture and market products and services that meet customer requirements for
innovation and quality, our revenue and gross margin may suffer.
The process of developing new high technology products and services and enhancing existing products and services is
complex, costly and uncertain, and any failure by us to anticipate customers’ changing needs and emerging technological
trends accurately could significantly harm our market share and results of operations. We must make long-term investments,
develop or obtain appropriate intellectual property and commit significant resources before knowing whether our predictions
will accurately reflect customer demand for our products and services. After we develop a product, we must be able to
manufacture appropriate volumes quickly and at low costs. To accomplish this, we must accurately forecast volumes, mixes
of products and configurations that meet customer requirements, and we may not succeed at all or within a given product’s
life cycle. Any delay in the development, production or marketing of a new product could result in our not being among the
first to market, which could further harm our competitive position.
In the course of conducting our business, we must adequately address quality issues associated with our products and
services, including defects in our engineering, design and manufacturing processes, as
16
well as defects in third-party components included in our products. In order to address quality issues, we work extensively
with our customers and suppliers and engage in product testing to determine the cause of the problem and to determine
appropriate solutions. However, we may have limited ability to control quality issues, particularly with respect to faulty
components manufactured by third parties. If we are unable to determine the cause, find an appropriate solution or offer a
temporary fix (or “patch”), we may delay shipment to customers, which would delay revenue recognition and could adversely
affect our revenue and reported results. Finding solutions to quality issues can be expensive and may result in additional
warranty, replacement and other costs, adversely affecting our profits. If new or existing customers have difficulty operating
our products, our operating margins could be adversely affected, and we could face possible claims if we fail to meet our
customers’ expectations. In addition, quality issues can impair our relationships with new or existing customers and adversely
affect our reputation, which could have a material adverse effect on our operating results.
If we do not effectively manage our product and services transitions, our revenue may suffer.
Many of the industries in which we compete are characterized by rapid technological advances in hardware performance
and software features and functionality; frequent introduction of new products; short product life cycles; and continual
improvement in product price characteristics relative to product performance. Among the risks associated with the
introduction of new products and services are delays in development or manufacturing, variations in costs, delays in customer
purchases or reductions in price of existing products in anticipation of new introductions, difficulty in predicting customer
demand for the new offerings and effectively managing inventory levels so that they are in line with anticipated demand,
risks associated with customer qualification and evaluation of new products and the risk that new products may have quality
or other defects or may not be supported adequately by application software. If we do not make an effective transition from
existing products and services to future offerings, our revenue may decline.
Our revenue and gross margin also may suffer due to the timing of product or service introductions by our suppliers and
competitors. This is especially challenging when a product has a short life cycle or a competitor introduces a new product just
before our own product introduction. Furthermore, sales of our new products and services may replace sales, or result in
discounting of some of our current offerings, offsetting the benefit of even a successful introduction. There also may be
overlaps in the current products and services of HP and portfolios acquired through mergers and acquisitions that we must
manage. In addition, it may be difficult to ensure performance of new customer contracts in accordance with our revenue,
margin and cost estimates and to achieve operational efficiencies embedded in our estimates. Given the competitive nature of
our industry, if any of these risks materializes, future demand for our products and services and our results of operations may
suffer.
Our revenue, cost of sales, and expenses may suffer if we cannot continue to license or enforce the intellectual property
rights on which our business depends or if third parties assert that we violate their intellectual property rights.
We rely upon patent, copyright, trademark and trade secret laws in the United States and similar laws in other countries,
and agreements with our employees, customers, suppliers and other parties, to establish and maintain our intellectual property
rights in technology and products used in our operations. However, any of our direct or indirect intellectual property rights
could be challenged, invalidated or circumvented, or such intellectual property rights may not be sufficient to permit us to
take advantage of current market trends or otherwise to provide competitive advantages, which could result in costly product
redesign efforts, discontinuance of certain product offerings or other competitive harm. Further, the laws of certain countries
do not protect our proprietary rights to the same extent as the laws of the United States. Therefore, in certain jurisdictions we
may be unable to
17
protect our proprietary technology adequately against unauthorized third-party copying or use, which could adversely affect
our competitive position.
Because of the rapid pace of technological change in the information technology industry, much of our business and
many of our products rely on key technologies developed or licensed by third parties. We may not be able to obtain or to
continue to obtain licenses and technologies from these third parties at all or on reasonable terms, or such third parties may
demand cross-licenses to our intellectual property. In addition, it is possible that as a consequence of a merger or acquisition
transaction third parties may obtain licenses to some of our intellectual property rights or our business may be subject to
certain restrictions that were not in place prior to the transaction. Consequently, we may lose a competitive advantage with
respect to these intellectual property rights or we may be required to enter into costly arrangements in order to terminate or
limit these rights.
Third parties also may claim that we or customers indemnified by us are infringing upon their intellectual property
rights. For example, in recent years, individuals and groups have begun purchasing intellectual property assets for the sole
purpose of making claims of infringement and attempting to extract settlements from large companies such as HP. If we
cannot or do not license the infringed technology at all or on reasonable terms or substitute similar technology from another
source, our operations could suffer. Even if we believe that the claims are without merit, the claims can be time-consuming
and costly to defend and divert management’s attention and resources away from our business. Claims of intellectual
property infringement also might require us to redesign affected products, enter into costly settlement or license agreements
or pay costly damage awards, or face a temporary or permanent injunction prohibiting us from marketing or selling certain of
our products. Even if we have an agreement to indemnify us against such costs, the indemnifying party may be unable to
uphold its contractual agreements to us.
Finally, our results of operations and cash flows could be affected in certain periods and on an ongoing basis by the
imposition, accrual and payment of copyright levies or similar fees. In certain countries (primarily in Europe), proceedings
are ongoing against HP seeking to impose levies upon equipment (such as PCs, multifunction devices and printers) and
alleging that the copyright owners are entitled to compensation because these devices enable reproducing copyrighted
content. Other countries that do not yet have levies on these types of devices are expected to extend existing levy schemes,
and countries that do not currently have levy schemes may decide to impose copyright levies on these types of devices. If
imposed, the amount of copyright levies would depend on the types of products determined to be subject to the levy, the
number of units of those products sold during the period covered by the levy and the per unit fee for each type of product, all
of which may be affected by several factors, including the outcome of ongoing litigation involving HP and other industry
participants and possible action by the legislative bodies in the applicable countries, but could be substantial. Consequently,
the ultimate impact of these potential copyright levies or similar fees and the ability of HP to recover such amounts through
increased prices, remains uncertain.
Economic uncertainty could adversely affect our revenue, gross margin and expenses.
Our revenue and gross margin depend significantly on general economic conditions and the demand for computing and
imaging products and services in the markets in which we compete. Economic weakness and constrained IT spending has
previously resulted, and may result in the future, in decreased revenue, gross margin, earnings or growth rates and problems
with our ability to manage inventory levels and collect customer receivables. We could experience such economic weakness
and reduced spending, particularly in our consumer and financial services businesses, due to increases in fuel and other
energy costs, conditions in the residential real estate and mortgage markets, access to credit and other macroeconomic factors
affecting spending behavior. In addition, customer financial difficulties have previously resulted, and could result in the
future, in increases in bad debt write-offs and additions to reserves in our receivables portfolio, inability by our lessees to
make required lease
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payments and reduction in the value of leased equipment upon its return to us compared to the value estimated at lease
inception. We also have experienced, and may experience in the future, gross margin declines in certain businesses, reflecting
the effect of items such as competitive pricing pressures, inventory write-downs, charges associated with the cancellation of
planned production line expansion, and increases in pension and post-retirement benefit expenses. Economic downturns also
may lead to restructuring actions and associated expenses. Uncertainty about future economic conditions makes it difficult
for us to forecast operating results and to make decisions about future investments. Delays or reductions in information
technology spending could have a material adverse effect on demand for our products and services, and consequently our
results of operations, prospects and stock price.
Due to the international nature of our business, political or economic changes or other factors could harm our future
revenue, costs and expenses and financial condition.
Sales outside the United States make up approximately 67% of our net revenue. Our future revenue, gross margin,
expenses and financial condition also could suffer due to a variety of international factors, including:
•
•
•
•
ongoing instability or changes in a country’s or region’s economic or political conditions, including inflation,
recession, interest rate fluctuations and actual or anticipated military or political conflicts;
longer accounts receivable cycles and financial instability among customers;
trade regulations and procedures and actions affecting production, pricing and marketing of products;
local labor conditions and regulations;
• managing a geographically dispersed workforce;
•
•
•
•
•
changes in the regulatory or legal environment;
differing technology standards or customer requirements;
import, export or other business licensing requirements or requirements relating to making foreign direct
investments, which could affect our ability to obtain favorable terms for components or lead to penalties or
restrictions;
difficulties associated with repatriating cash generated or held abroad in a tax-efficient manner and changes in tax
laws; and
fluctuations in freight costs and disruptions in the transportation and shipping infrastructure at important geographic
points of exit and entry for our products and shipments.
The factors described above also could disrupt our product and component manufacturing and key suppliers located
outside of the United States. For example, we rely on manufacturers in Taiwan for the production of notebook computers and
other suppliers in Asia for product assembly and manufacture.
As approximately 67% of our sales are from countries outside of the United States, other currencies, particularly the euro
and the Japanese yen, can have an impact on HP’s results (expressed in U.S. dollars). Currency variations also contribute to
variations in sales of products and services in impacted jurisdictions. In addition, currency variations can adversely affect
margins on sales of our products in countries outside of the United States and margins on sales of products that include
components obtained from suppliers located outside of the United States. We use a combination of forward contracts and
options designated as cash flow hedges to protect against foreign currency exchange rate risks. Such hedging activities may
be ineffective or may not offset more than a portion of
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the adverse financial impact resulting from currency variations. Gains or losses associated with hedging activities also may
impact our revenue and to a lesser extent our cost of sales and financial condition.
In many foreign countries, particularly in those with developing economies, it is common to engage in business practices
that are prohibited by laws and regulations applicable to us, such as the Foreign Corrupt Practices Act. Although we
implement policies and procedures designed to facilitate compliance with these laws, our employees, contractors and agents,
as well as those companies to which we outsource certain of our business operations, may take actions in violation of our
policies. Any such violation, even if prohibited by our policies, could have a material adverse effect on our business.
Terrorist acts, conflicts and wars may seriously harm our business and revenue, costs and expenses and financial condition
and stock price.
Terrorist acts, conflicts or wars (wherever located around the world) may cause damage or disruption to HP, our
employees, facilities, partners, suppliers, distributors, resellers or customers. The potential for future attacks, the national and
international responses to attacks or perceived threats to national security, and other actual or potential conflicts or wars,
including the ongoing military operations in Iraq, have created many economic and political uncertainties. In addition, as a
major multi-national company with headquarters and significant operations located in the United States, actions against or by
the United States may impact our business or employees. Although it is impossible to predict the occurrences or
consequences of any such events, they could result in a decrease in demand for our products, make it difficult or impossible
to deliver products to our customers or to receive components from our suppliers, create delays and inefficiencies in our
supply chain and result in the need to impose employee travel restrictions. We are predominantly uninsured for losses and
interruptions caused by terrorist acts, conflicts and wars.
Business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses.
Our worldwide operations could be subject to earthquakes, power shortages, telecommunications failures, water
shortages, tsunamis, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics and other natural or
manmade disasters or business interruptions, for which we are predominantly self-insured. The occurrence of any of these
business disruptions could seriously harm our revenue and financial condition and increase our costs and expenses. Our
corporate headquarters, and a portion of our research and development activities, are located in California, and other critical
business operations and some of our suppliers are located in California and Asia, near major earthquake faults. The ultimate
impact on us, our significant suppliers and our general infrastructure of being located near major earthquake faults is
unknown, but our revenue, profitability and financial condition could suffer in the event of a major earthquake or other
natural disaster. In addition, some areas, including California and parts of the East Coast, Southwest and Midwest of the
United States, have previously experienced, and may experience in the future, major power shortages and blackouts. These
blackouts could cause disruptions to our operations or the operations of our suppliers, distributors and resellers, or customers.
Moreover, the consolidation of all of our worldwide IT data centers into six centers located in the southern United States,
when completed, could increase the impact on us of a natural disaster or other business disruption occurring in that
geographic area.
If we fail to manage the distribution of our products and services properly, our revenue, gross margin and profitability could
suffer.
We use a variety of different distribution methods to sell our products and services, including third-party resellers and
distributors and both direct and indirect sales to both enterprise accounts and consumers. Successfully managing the
interaction of our direct and indirect channel efforts to reach various potential customer segments for our products and
services is a complex process. Moreover, since each distribution method has distinct risks and gross margins, our failure to
implement the most
20
advantageous balance in the delivery model for our products and services could adversely affect our revenue and gross
margins and therefore our profitability. Other distribution risks are described below.
• Our financial results could be materially adversely affected due to channel conflicts or if the financial conditions of
our channel partners were to weaken.
Our future operating results may be adversely affected by any conflicts that might arise between our various
sales channels, the loss or deterioration of any alliance or distribution arrangement or the loss of retail shelf
space. Moreover, some of our wholesale and retail distributors may have insufficient financial resources and
may not be able to withstand changes in business conditions, including economic weakness and industry
consolidation. Many of our significant distributors operate on narrow product margins and have been negatively
affected by business pressures. Considerable trade receivables that are not covered by collateral or credit
insurance are outstanding with our distribution and retail channel partners. Revenue from indirect sales could
suffer, and we could experience disruptions in distribution if our distributors’ financial conditions, abilities to
borrow funds in the credit markets or operations weaken.
• Our inventory management is complex as we continue to sell a significant mix of products through distributors.
We must manage inventory effectively, particularly with respect to sales to distributors, which involves
forecasting demand and pricing issues. Distributors may increase orders during periods of product shortages,
cancel orders if their inventory is too high or delay orders in anticipation of new products. Distributors also may
adjust their orders in response to the supply of our products and the products of our competitors and seasonal
fluctuations in end-user demand. Our reliance upon indirect distribution methods may reduce visibility to
demand and pricing issues, and therefore make forecasting more difficult. If we have excess or obsolete
inventory, we may have to reduce our prices and write down inventory. Moreover, our use of indirect
distribution channels may limit our willingness or ability to adjust prices quickly and otherwise to respond to
pricing changes by competitors. We also may have limited ability to estimate future product rebate redemptions
in order to price our products effectively.
We depend on third-party suppliers, and our revenue and gross margin could suffer if we fail to manage suppliers properly.
Our operations depend on our ability to anticipate our needs for components, products and services and our suppliers’
ability to deliver sufficient quantities of quality components, products and services at reasonable prices in time for us to meet
critical schedules. Given the wide variety of systems, products and services that we offer, the large number of our suppliers
and contract manufacturers that are dispersed across the globe, and the long lead times that are required to manufacture,
assemble and deliver certain components and products, problems could arise in planning production and managing inventory
levels that could seriously harm us. Other supplier problems that we could face include component shortages, excess supply,
risks related to the terms of our contracts with suppliers, risks associated with contingent workers, and risks related to our
relationships with single source suppliers, as described below.
•
Shortages. Occasionally we may experience a shortage of, or a delay in receiving, certain supplies as a result of
strong demand, capacity constraints, supplier financial weaknesses, inability of suppliers to borrow funds in the
credit markets, disputes with suppliers (some of which are also customers), other problems experienced by suppliers
or problems faced during the transition to new suppliers. In particular, our PC business relies heavily upon Contract
Manufacturers (“CMs”) and Original Design Manufacturers (“ODMs”) to manufacture its products and is
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therefore dependent upon the continuing operations of those CMs and ODMs to fulfill demand for our PC products.
HP represents a substantial portion of the business of some of these CMs and ODMs, and any changes to the nature
or volume of business transacted by HP with a particular CM or ODM could adversely affect the operations and
financial condition of the CM or ODM and lead to shortages or delays in receiving products from that CM or ODM.
If shortages or delays persist, the price of these supplies may increase, we may be exposed to quality issues or the
supplies may not be available at all. We may not be able to secure enough supplies at reasonable prices or of
acceptable quality to build products or provide services in a timely manner in the quantities or according to the
specifications needed. Accordingly, our revenue and gross margin could suffer as we could lose time-sensitive sales,
incur additional freight costs or be unable to pass on price increases to our customers. If we cannot adequately
address supply issues, we might have to reengineer some products or service offerings, resulting in further costs and
delays.
• Oversupply. In order to secure supplies for the provision of products or services, at times we may make advance
payments to suppliers or enter into non-cancelable commitments with vendors. In addition, we may purchase
supplies strategically in advance of demand to take advantage of favorable pricing or to address concerns about the
availability of future supplies. If we fail to anticipate customer demand properly, a temporary oversupply could
result in excess or obsolete components, which could adversely affect our gross margin.
• Contractual terms. As a result of binding price or purchase commitments with vendors, we may be obligated to
purchase supplies or services at prices that are higher than those available in the current market and be limited in our
ability to respond to changing market conditions. In the event that we become committed to purchase supplies or
services for prices in excess of the current market price, we may be at a disadvantage to competitors who have
access to components or services at lower prices, and our gross margin could suffer. In addition, many of our
competitors obtain products or components from the same CMs, ODMs and suppliers that we utilize. Our
competitors may obtain better pricing and other terms and more favorable allocations of products and components
during periods of limited supply, and our ability to engage in relationships with certain CMs, ODMs and suppliers
could be limited. The practice employed by our PC business of purchasing product components and transferring
those components to its CMs and ODMs may create large supplier receivables with the CMs and ODMs that,
depending on the financial condition of the CMs and ODMs, may have a risk of uncollectibility. In addition, certain
of our CMs, ODMs and suppliers may decide in the future to discontinue conducting business with us. Any of these
actions by our competitors, CMs, ODMs or suppliers could adversely affect our future operating results and
financial condition.
• Contingent workers. We also rely on third-party suppliers for the provision of contingent workers, and our failure to
manage our use of such workers effectively could adversely affect our results of operations. We have been exposed
to various legal claims relating to the status of contingent workers in the past and could face similar claims in the
future. We may be subject to shortages, oversupply or fixed contractual terms relating to contingent workers, as
described above. Our ability to manage the size of, and costs associated with, the contingent workforce may be
subject to additional constraints imposed by local laws.
•
Single source suppliers. Our use of single source suppliers for certain components could exacerbate our supplier
issues. We obtain a significant number of components from single sources due to technology, availability, price,
quality or other considerations. For example, we rely on Intel to provide us with a sufficient supply of processors for
many of our PCs, workstations, handheld computing devices and servers, and some of those processors are
customized for our products. New products that we introduce may utilize custom components obtained from only
one source initially until we have evaluated whether there is a need for
22
additional suppliers. Replacing a single source supplier could delay production of some products as replacement
suppliers initially may be subject to capacity constraints or other output limitations. For some components, such as
customized components and some of the processors that we obtain from Intel, alternative sources may not exist or
those alternative sources may be unable to produce the quantities of those components necessary to satisfy our
production requirements. In addition, we sometimes purchase components from single source suppliers under short-
term agreements that contain favorable pricing and other terms but that may be unilaterally modified or terminated
by the supplier with limited notice and with little or no penalty. The performance of such single source suppliers
under those agreements (and the renewal or extension of those agreements upon similar terms) may affect the
quality, quantity and price of supplies to HP. The loss of a single source supplier, the deterioration of our
relationship with a single source supplier, or any unilateral modification to the contractual terms under which we are
supplied components by a single source supplier could adversely effect our revenue and gross margins.
If we fail to comply with our customer contracts or government contracting regulations, our revenue could suffer.
Our contracts with our customers may include unique and specialized performance requirements. In particular, our
contracts with federal, state, provincial and local governmental customers are subject to various procurement regulations,
contract provisions and other requirements relating to their formation, administration and performance. Any failure by us to
comply with the specific provisions in our customer contracts or any violation of government contracting regulations could
result in the imposition of various civil and criminal penalties, which may include termination of contracts, forfeiture of
profits, suspension of payments and, in the case of our government contracts, fines and suspension from future government
contracting. In addition, we are currently, and in the future may be, subject to qui tam litigation brought by private
individuals on behalf of the government relating to our government contracts, which could include claims for up to treble
damages. Further, any negative publicity related to our customer contracts or any proceedings surrounding them, regardless
of its accuracy, may damage our business by affecting our ability to compete for new contracts. If our customer contracts are
terminated, if we are suspended from government work, or if our ability to compete for new contracts is adversely affected,
we could suffer a material reduction in expected revenue.
The revenue and profitability of our operations have historically varied, which makes our future financial results less
predictable.
Our revenue, gross margin and profit vary among our products and services, customer groups and geographic markets
and therefore will likely be different in future periods than our current results. Overall gross margins and profitability in any
given period are dependent partially on the product, customer and geographic mix reflected in that period’s net revenue. In
particular, IPG and certain of its business units such as printer supplies contribute significantly to our gross margin and
profitability. Competition, lawsuits, investigations and other risks affecting IPG, therefore may have a significant impact on
our overall gross margin and profitability. Certain segments, and ESS in particular, have a higher fixed cost structure and
more variation in gross margins across their business units and product portfolios than others and may therefore experience
significant operating profit volatility on a quarterly basis. In addition, newer geographic markets may be relatively less
profitable due to investments associated with entering those markets and local pricing pressures, and we may have difficulty
establishing and maintaining the operating infrastructure necessary to support the high growth rate associated with some of
those markets. Market trends, competitive pressures, commoditization of products, seasonal rebates, increased component or
shipping costs, regulatory impacts and other factors may result in reductions in revenue or pressure on gross margins of
certain segments in a given period, which may necessitate adjustments to our operations.
23
We make estimates and assumptions in connection with the preparation of HP’s Consolidated Financial Statements, and any
changes to those estimates and assumptions could have a material adverse effect on our results of operations.
In connection with the preparation of HP’s Consolidated Financial Statements, we use certain estimates and assumptions
based on historical experience and other factors. Our most critical accounting estimates are described in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” in this report. In addition, as discussed in Note 17
to the Consolidated Financial Statements, we make certain estimates under the provisions of SFAS No. 5 “Accounting for
Contingencies,” including decisions related to provisions for legal proceedings and other contingencies. While we believe
that these estimates and assumptions are reasonable under the circumstances, they are subject to significant uncertainties,
some of which are beyond our control. Should any of these estimates and assumptions change or prove to have been
incorrect, it could have a material adverse effect on our results of operations.
Unanticipated changes in HP’s tax provisions or exposure to additional income tax liabilities could affect our profitability.
We are subject to income taxes in the United States and numerous foreign jurisdictions. Our tax liabilities are affected by
the amounts we charge for inventory, services, licenses, funding and other items in intercompany transactions. We are subject
to ongoing tax audits in various jurisdictions. Tax authorities may disagree with our intercompany charges or other matters
and assess additional taxes. We regularly assess the likely outcomes of these audits in order to determine the appropriateness
of our tax provision. However, there can be no assurance that we will accurately predict the outcomes of these audits, and the
actual outcomes of these audits could have a material impact on our net income or financial condition. In addition, our
effective tax rate in the future could be adversely affected by changes in the mix of earnings in countries with differing
statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws and the discovery of new
information in the course of our tax return preparation process. In particular, the carrying value of deferred tax assets, which
are predominantly in the United States, is dependent on our ability to generate future taxable income in the United States.
Any of these changes could affect our profitability.
Our sales cycle makes planning and inventory management difficult and future financial results less predictable.
In some of our segments, our quarterly sales often have reflected a pattern in which a disproportionate percentage of each
quarter’s total sales occur towards the end of such quarter. This uneven sales pattern makes prediction of revenue, earnings,
cash flow from operations and working capital for each financial period difficult, increases the risk of unanticipated
variations in quarterly results and financial condition and places pressure on our inventory management and logistics
systems. If predicted demand is substantially greater than orders, there will be excess inventory. Alternatively, if orders
substantially exceed predicted demand, we may not be able to fulfill all of the orders received in the last few weeks of each
quarter. Other developments late in a quarter, such as a systems failure, component pricing movements, component shortages
or global logistics disruptions, could adversely impact inventory levels and results of operations in a manner that is
disproportionate to the number of days in the quarter affected.
We experience some seasonal trends in the sale of our products that also may produce variations in quarterly results and
financial condition. For example, sales to governments (particularly sales to the United States government) are often stronger
in the third calendar quarter, consumer sales are often stronger in the fourth calendar quarter, and many customers whose
fiscal and calendar years are the same spend their remaining capital budget authorizations in the fourth calendar quarter prior
to new budget constraints in the first calendar quarter of the following year. European sales are often weaker during the
summer months. Demand during the spring and early summer also may be adversely
24
impacted by market anticipation of seasonal trends. Moreover, to the extent that we introduce new products in anticipation of
seasonal demand trends, our discounting of existing products may adversely affect our gross margin prior to or shortly after
such product launches. Typically, our third fiscal quarter is our weakest and our fourth fiscal quarter is our strongest. Many
of the factors that create and affect seasonal trends are beyond our control.
Any failure by us to execute planned cost reductions successfully could result in total costs and expenses that are greater
than expected.
We have adopted restructuring and other cost reduction plans to bring operational expenses to appropriate levels for each
of our businesses, while simultaneously implementing extensive new company-wide expense control programs. These
initiatives include:
• A workforce restructuring program and a related U.S. early retirement program announced in July 2005 that we
expect to result in the elimination of approximately 14,985 positions by the end of fiscal 2008;
• A multi-year plan announced in the third fiscal quarter of 2006 to reduce IT spending by consolidating HP’s 85 data
centers worldwide into six larger centers located in three U.S. cities;
• A multi-year program announced in the third fiscal quarter of 2006 to reduce real estate costs by consolidating
several hundred HP real estate locations worldwide to fewer core sites;
• Modifications to our defined benefit pension plan, our subsidized retiree medical program and our 401(k) plan
announced in February 2007 pursuant to which affected employees will cease accruing pension benefits and will,
instead, receive an increased 401(k) match effective January 1, 2008; and
• A U.S. early retirement program announced in February 2007 under which 3,080 employees left the company as of
May 31, 2007, all of whom have been or we expect will be replaced.
Our ability to achieve the anticipated cost savings and other benefits from these initiatives within the expected time
frame is subject to many estimates and assumptions, including estimates and assumptions regarding the cost of consolidating
the data centers and real estate locations, the amount of accelerated depreciation or asset impairment to be incurred when we
vacate facilities or cease using equipment before the end of their respective lease term or asset life, the savings associated
with the benefit plan changes announced in February 2007, the costs associated with the replacement of employees who
retired under the February 2007 early retirement program and the costs and timing of other activities in connection with these
initiatives. These estimates and assumptions are subject to significant economic, competitive and other uncertainties, some of
which are beyond our control. If these estimates and assumptions are incorrect, if we experience delays, or if other
unforeseen events occur, our business and results of operations could be adversely affected.
In order to be successful, we must attract, retain and motivate key employees, and failure to do so could seriously harm us.
In order to be successful, we must attract, retain and motivate executives and other key employees, including those in
managerial, technical, sales, marketing and IT support positions. Hiring and retaining qualified executives, engineers, skilled
solutions providers in the IT support business and qualified sales representatives are critical to our future, and competition for
experienced employees in the IT industry can be intense. The failure to hire executives and key employees or the loss of
executives and key employees could have a significant impact on our operations.
25
Changes to our compensation and benefit programs could adversely affect our ability to attract and retain employees.
We have historically used stock options and other forms of share-based payment awards as key components of our total
rewards employee compensation program in order to align employees’ interests with the interests of our stockholders,
encourage employee retention and provide competitive compensation and benefit packages. HP began recording charges to
earnings for stock-based compensation expense in the first quarter of fiscal 2006 in accordance with Statement of Financial
Accounting Standards No. 123 (revised 2004), “Share-Based Payment.” As a result, we began to incur increased
compensation costs associated with our stock-based compensation programs. Moreover, difficulties relating to obtaining
stockholder approval of equity compensation plans could make it harder or more expensive for us to grant share-based
payment awards to employees in the future. Like other companies, HP has reviewed its equity compensation strategy in light
of the current regulatory and competitive environment and has reduced the total number of share-based payment awards
granted to employees and the number of employees who receive share-based payment awards. Due to this change in our
stock-based compensation strategy, combined with the pension and other benefit plan changes undertaken to reduce costs and
our increasing reliance on variable pay, we may find it difficult to attract, retain and motivate employees, and any such
difficulty could materially adversely affect our business.
HP’s stock price has historically fluctuated and may continue to fluctuate, which may make future prices of HP’s stock
difficult to predict.
HP’s stock price, like that of other technology companies, can be volatile. Some of the factors that could affect our stock
price are:
•
•
•
speculation in the press or investment community about, or actual changes in, our business, strategic position,
market share, organizational structure, operations, financial condition, financial reporting and results, effectiveness
of cost cutting efforts, value or liquidity of our investments, exposure to market volatility, prospects, business
combination or investment transactions, or executive team;
the announcement of new products, services, technological innovations or acquisitions by HP or its competitors; and
quarterly increases or decreases in revenue, gross margin, earnings or cash flow from operations, changes in
estimates by the investment community or guidance provided by HP, and variations between actual and estimated
financial results.
General or industry-specific market conditions or stock market performance or domestic or international macroeconomic
and geopolitical factors unrelated to HP’s performance also may affect the price of HP common stock. For these reasons,
investors should not rely on recent trends to predict future stock prices, financial condition, results of operations or cash
flows. In addition, following periods of volatility in a company’s securities, securities class action litigation against a
company is sometimes instituted. If instituted against HP, this type of litigation could result in substantial costs and the
diversion of management time and resources.
System security risks and systems integration issues could disrupt our internal operations or information technology services
provided to customers, and any such disruption could harm our revenue, increase our expenses and harm our reputation and
stock price.
Experienced computer programmers and hackers may be able to penetrate our network security and misappropriate our
confidential information or that of third parties, create system disruptions or cause shutdowns. In addition, computer
programmers and hackers may be able to develop and deploy viruses, worms, and other malicious software programs that
attack our products or otherwise exploit
26
any security vulnerabilities of our products. As a result, we could incur significant expenses in addressing problems created
by security breaches of our network and any security vulnerabilities of our products. Moreover, we could lose existing or
potential customers for information technology outsourcing services or other information technology solutions or incur
significant expenses in connection with our customers’ system failures or any actual or perceived security vulnerabilities in
our products. In addition, sophisticated hardware and operating system software and applications that we produce or procure
from third parties may contain defects in design or manufacture, including “bugs” and other problems that could
unexpectedly interfere with the operation of the system. The costs to us to eliminate or alleviate security problems, bugs,
viruses, worms, malicious software programs and security vulnerabilities could be significant, and the efforts to address these
problems could result in interruptions, delays, cessation of service and loss of existing or potential customers that may
impede our sales, manufacturing, distribution or other critical functions.
Portions of our IT infrastructure also may experience interruptions, delays or cessations of service or produce errors in
connection with systems integration or migration work that takes place from time to time. We may not be successful in
implementing new systems and transitioning data, including our current project to consolidate all of our worldwide IT data
centers into six centers, which could cause business disruptions and be more expensive, time consuming, disruptive and
resource-intensive. Such disruptions could adversely impact our ability to fulfill orders and interrupt other processes. Delayed
sales, lower margins or lost customers resulting from these disruptions have adversely affected in the past, and in the future
could adversely affect, our financial results, stock price and reputation.
Any failure by us to manage, complete and integrate acquisitions, divestitures and other significant transactions successfully
could harm our financial results, business and prospects and may result in financial results that are different than expected.
As part of our business strategy, we frequently acquire complementary companies or businesses, divest non-core
businesses or assets, enter into strategic alliances and joint ventures and make investments to further our business
(collectively, “business combination and investment transactions”). In order to pursue this strategy successfully, we must
identify suitable candidates for and successfully complete business combination and investment transactions, some of which
may be large and complex, and manage post-closing issues such as the integration of acquired companies or employees.
Integration and other risks associated with business combination and investment transactions can be more pronounced for
larger and more complicated transactions or if multiple transactions are integrated simultaneously. If we fail to identify and
complete successfully business combination and investment transactions that further our strategic objectives, we may be
required to expend resources to develop products and technology internally, we may be at a competitive disadvantage or we
may be adversely affected by negative market perceptions, any of which may have a material adverse effect on our revenue,
gross margin and profitability.
Integration issues are complex, time-consuming and expensive and, without proper planning and implementation, could
significantly disrupt our business. The challenges involved in integration include:
•
•
•
combining product offerings and entering into new markets in which we are not experienced;
convincing customers and distributors that the transaction will not diminish client service standards or business
focus, preventing customers and distributors from deferring purchasing decisions or switching to other suppliers
(which could result in our incurring additional obligations in order to address customer uncertainty), minimizing
sales force attrition and coordinating sales, marketing and distribution efforts;
consolidating and rationalizing corporate IT infrastructure, which may include multiple legacy systems from various
acquisitions and integrating software code;
27
• minimizing the diversion of management attention from ongoing business concerns;
•
•
•
persuading employees that business cultures are compatible, maintaining employee morale and retaining key
employees, engaging with employee works councils representing an acquired company’s non-U.S. employees,
integrating employees into HP, correctly estimating employee benefit costs and implementing restructuring
programs;
coordinating and combining administrative, manufacturing, research and development and other operations,
subsidiaries, facilities and relationships with third parties in accordance with local laws and other obligations while
maintaining adequate standards, controls and procedures;
achieving savings from supply chain integration; and
• managing integration issues shortly after or pending the completion of other independent transactions.
We evaluate and enter into significant business combination and investment transactions on an ongoing basis. We may
not fully realize all of the anticipated benefits of any business combination and investment transaction, and the timeframe for
achieving benefits of a business combination and investment transaction may depend partially upon the actions of employees,
suppliers or other third parties. In addition, the pricing and other terms of our contracts for business combination and
investment transactions require us to make estimates and assumptions at the time we enter into these contracts, and, during
the course of our due diligence, we may not identify all of the factors necessary to estimate our costs accurately. Any
increased or unexpected costs, unanticipated delays or failure to achieve contractual obligations could make these agreements
less profitable or unprofitable.
Managing business combination and investment transactions requires varying levels of management resources, which
may divert our attention from other business operations. These business combination and investment transactions also have
resulted and in the future may result in significant costs and expenses and charges to earnings, including those related to
severance pay, early retirement costs, employee benefit costs, asset impairment charges, charges from the elimination of
duplicative facilities and contracts, in-process research and development charges, inventory adjustments, assumed litigation
and other liabilities, legal, accounting and financial advisory fees, and required payments to executive officers and key
employees under retention plans. Moreover, HP has incurred and will incur additional depreciation and amortization expense
over the useful lives of certain assets acquired in connection with business combination and investment transactions, and, to
the extent that the value of goodwill or intangible assets with indefinite lives acquired in connection with a business
combination and investment transaction becomes impaired, we may be required to incur additional material charges relating
to the impairment of those assets. In order to complete an acquisition, we may issue common stock, potentially creating
dilution for existing stockholders, or borrow, affecting our financial condition and potentially our credit ratings. Any prior or
future downgrades in our credit rating associated with an acquisition could adversely affect our ability to borrow and result in
more restrictive borrowing terms. In addition, HP’s effective tax rate on an ongoing basis is uncertain, and business
combination and investment transactions could impact our effective tax rate. We also may experience risks relating to the
challenges and costs of closing a business combination and investment transaction and the risk that an announced business
combination and investment transaction may not close. As a result, any completed, pending or future transactions may
contribute to financial results that differ from the investment community’s expectations in a given quarter.
28
We cannot predict the outcome of various regulatory inquiries and stockholder derivative action lawsuits arising out of the
processes employed in the investigation into leaks of HP confidential information to members of the media, and we may be
named in additional regulatory inquiries and stockholder litigation, all of which could result in significant legal and other
expenses.
The Attorney General of the State of California, the Committee on Energy and Commerce of the U.S. House of
Representatives, the U.S. Attorney for the Northern District of California, the Division of Enforcement of the SEC and the
U.S. Federal Communications Commission all have conducted inquiries or investigations relating to the processes employed
in an investigation into leaks of HP confidential information to members of the media that concluded in May 2006. We have
entered into an agreement with the California Attorney General to resolve civil claims relating to the leak investigation.
Under the terms of the agreement, which includes an injunction, we have 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. We also have 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. If we fail to implement and maintain the measures
required under the agreement with the California Attorney General or if we fail to comply with the SEC cease and desist
order, we could be subject to civil or criminal penalties.
Four stockholder derivative lawsuits also have been filed in California (all of which have been consolidated into a single
lawsuit) and two in Delaware (both of which have been consolidated into a single lawsuit) purportedly on behalf of HP
stockholders seeking to recover damages and to obtain specified injunctive relief stemming from the activities of the leak
investigations. We may in the future also be subject to additional litigation or other proceedings arising in relation to these
matters. The period of time necessary to resolve the stockholder lawsuits is uncertain, and the expense of defending and
concluding such litigation may be significant. In addition, we may be obligated to indemnify (and advance legal expenses to)
former or current directors, officers or employees in accordance with the terms of our certificate of incorporation, bylaws,
other applicable agreements, and Delaware law.
Unforeseen environmental costs could impact our future net earnings.
We are subject to various federal, state, local and foreign laws and regulations concerning environmental protection,
such as laws governing the conduct of our facilities and operations with respect to the discharge of pollutants into the air and
water, the management and disposal of hazardous substances and wastes and the cleanup of contaminated sites. It is our
policy to apply strict standards for environmental clean-up to sites outside the United States, even where we are not required
to do so under applicable local laws and regulations. Many of our products are subject to various federal, state and
international laws governing chemical substances, including laws regulating the manufacture and distribution of chemical
substances and laws restricting the presence of certain substances in electronics products. We could incur substantial costs,
including cleanup costs, fines and civil or criminal sanctions, third-party property damage or personal injury claims, or our
products could be enjoined from entering certain jurisdictions, if we were to violate or become liable under environmental
laws or if our products become non-compliant with environmental laws. The ultimate costs under environmental laws and the
timing of these costs are difficult to predict, and liability under some environmental laws relating to contaminated sites can be
imposed retroactively and on a joint and several basis. We record a liability for environmental remediation and other
environmental costs when we consider the costs to be probable and the amount of the costs can be reasonably estimated. We
face increasing complexity in our product design and procurement operations as we adjust to new and future requirements
relating to the materials composition of our products, including the restrictions on lead, cadmium and certain other substances
that apply to specified electronics products put on the market in the European Union as of July 1, 2006 (Restriction of
Hazardous Substances Directive) and
29
similar legislation in other countries including China, Japan and Korea. We also could face significant costs and liabilities in
connection with product take-back legislation. The EU has enacted the Waste Electrical and Electronic Equipment Directive
(the “WEEE Legislation”), which makes producers of electrical goods, including computers and printers, financially
responsible for specified collection, recycling, treatment and disposal of past and future covered products. Similar legislation
has been or may be enacted in other jurisdictions, including in the United States, Canada, Mexico, China and Japan. We are
continuing to evaluate the cumulative impact of, and are taking steps to comply with, the WEEE Legislation and similar
legislation in other jurisdictions as individual countries issue their implementation legislation and guidance.
Some anti-takeover provisions contained in our certificate of incorporation and bylaws, as well as provisions of Delaware
law, could impair a takeover attempt.
We have provisions in our certificate of incorporation and bylaws, each of which could have the effect of rendering more
difficult or discouraging an acquisition of HP deemed undesirable by our Board of Directors. These include provisions:
•
•
•
•
•
•
authorizing blank check preferred stock, which HP could issue with voting, liquidation, dividend and other rights
superior to our common stock;
limiting the liability of, and providing indemnification to, HP’s directors and officers;
specifying that HP stockholders may take action only at a duly called annual or special meeting of stockholders and
otherwise in accordance with our bylaws and limiting the ability of our stockholders to call special meetings;
requiring advance notice of proposals by HP stockholders for business to be conducted at stockholder meetings and
for nominations of candidates for election to our Board of Directors;
requiring a vote by the holders of two-thirds of HP’s outstanding shares to amend certain bylaws relating to HP
stockholder meetings, the Board of Directors and indemnification; and
controlling the procedures for conduct of HP Board and stockholder meetings and election, appointment and
removal of HP directors.
These provisions, alone or together, could deter or delay hostile takeovers, proxy contests and changes in control or
management of HP. As a Delaware corporation, HP also is subject to provisions of Delaware law, including Section 203 of
the Delaware General Corporation Law, which prevents some stockholders from engaging in certain business combinations
without approval of the holders of substantially all of HP’s outstanding common stock.
Any provision of our certificate of incorporation or bylaws or Delaware law that has the effect of delaying or deterring a
change in control of HP could limit the opportunity for our stockholders to receive a premium for their shares of HP common
stock and also could affect the price that some investors are willing to pay for HP common stock.
ITEM 1B. Unresolved Staff Comments.
Not applicable.
ITEM 2. Properties.
As of October 31, 2007, we owned or leased a total of approximately 62 million square feet of space worldwide. We
believe that our existing properties are in good condition and are suitable for the conduct of our business.
30
As of October 31, 2007, our sales and support operations occupied approximately 12 million square feet. We own 42%
of the space used for sales and support activities and lease the remaining 58%.
Our manufacturing plants, research and development facilities and warehouse and administrative facilities occupied
approximately 50 million square feet. We own 57% of our manufacturing, research and development, warehouse and
administrative space and lease the remaining 43%. Our plants are equipped with machinery, most of which we own and
which, in part, we developed to meet the special requirements of our manufacturing processes. At the end of fiscal 2007, we
were productively utilizing the majority of the space in our facilities, while executing our previously announced plans to
consolidate our 85 data centers into six larger centers and to reduce our real estate costs and increase our productive
utilization by consolidating several hundred real estate locations worldwide to fewer core sites over the next three years.
As indicated above, we have seven business segments: ESS, HPS, HP Software, PSG, IPG, HPFS, and Corporate
Investments. Because of the interrelation of these segments, a majority of these segments use substantially all of the
properties at least in part, and we retain the flexibility to use each of the properties in whole or in part for each of the
segments.
Principal Executive Offices
Our principal executive offices, including our global headquarters, are located at 3000 Hanover Street, Palo Alto,
California, United States of America.
Headquarters of Geographic Operations
The locations of our headquarters of geographic operations at October 31, 2007 were as follows:
Americas
Houston, Texas
Europe, Middle East, Africa
Geneva, Switzerland
Asia Pacific, including Japan
Singapore
Product Development and Manufacturing
The locations of our major product development and manufacturing facilities and HP Labs at October 31, 2007 were as
follows:
Americas
Cupertino, Fremont, Palo Alto, Roseville, San Diego and
Woodland, California
Fort Collins and Colorado Springs, Colorado
Boise, Idaho
Indianapolis, Indiana
Andover and Marlboro, Massachusetts
Nashua, New Hampshire
Corvallis, Oregon
Memphis, Tennessee
Houston, Texas
Sandston, Virginia
Vancouver, Washington
Aguadilla, Puerto Rico
ITEM 3. Legal Proceedings.
Europe, Middle East, Africa
Hewlett-Packard Laboratories
Palo Alto, California
Beijing, China
Bangalore, India
Haifa, Israel
Tokyo, Japan
Bristol, United Kingdom
Herrenberg, Germany
Dublin, Ireland
Rehovot and Netanya, Israel
Amersfoort, The Netherlands
Barcelona, Spain
Erskine, United Kingdom
Asia Pacific, including Japan
Shanghai, China
Bangalore, India
Pantangar, India
Akishima, Japan
Singapore
Information with respect to this item may be found in Note 17 to the Consolidated Financial Statements in Item 8, which
is incorporated herein by reference.
ITEM 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
31
PART II
ITEM 5. Market for the Registrant’s Common Equity and Related Stockholder Matters.
Information regarding the market prices of HP common stock and the markets for that stock may be found in the
“Quarterly Summary” in Item 8 and on the cover page of this Annual Report on Form 10-K, respectively, which are
incorporated herein by reference. We have paid cash dividends each fiscal year since 1965. The current rate is $0.08 per share
per quarter. As of November 30, 2007, there were approximately 142,000 stockholders of record. Additional information
concerning dividends may be found in “Selected Financial Data” in Item 6 and in Item 8, which are incorporated herein by
reference.
Recent Sales of Unregistered Securities
There were no unregistered sales of equity securities during fiscal 2007.
Issuer Purchases of Equity Securities
Period
Month #1
(August 2007) .........................
Month #2
(September 2007)....................
Month #3
(October 2007)........................
Total........................................
Total Number
of Shares
Purchased
Average
Price Paid
per Share
24,543,000
12,945,679
4,600,000
42,088,679
$47.40
$49.49
$51.39
$48.48
Total Number of
Shares Purchased
as Part of Publicly
Announced
Plans or Programs
Approximate
Dollar Value of Shares
that May Yet Be
Purchased under the
Plans or Programs
24,543,000
12,945,679
4,600,000
42,088,679
$3,591,773,284
$2,951,106,386
$2,714,725,466
HP repurchased shares in the fourth quarter of fiscal 2007 under an ongoing program to manage the dilution created by
shares issued under employee stock plans as well as to repurchase shares opportunistically. This program, which does not
have a specific expiration date, authorizes repurchases in the open market or in private transactions. All shares repurchased in
the fourth quarter of fiscal 2007 were purchased in open market transactions.
As of October 31, 2007, HP had remaining authorization of approximately $2.7 billion for future share repurchases under
the $8.0 billion repurchase authorization approved by HP’s Board of Directors on March 15, 2007.
On November 19, 2007, HP’s Board of Directors authorized an additional $8.0 billion for future repurchases of HP’s
outstanding shares of common stock.
32
Stock Performance Graph and Cumulative Total Return
The graph below shows the cumulative total stockholder return assuming the investment of $100 on the date specified
(and the reinvestment of dividends thereafter) in each of HP common stock, the S&P 500 Index, and the S&P Information
Technology Index.(1) The comparisons in the graph below are based upon historical data and are not indicative of, or intended
to forecast, future performance of our common stock.
Hewlett-Packard Company ........................................................
S&P 500.....................................................................................
S&P Information Technology....................................................
10/02
100.00
100.00
100.00
10/03
143.60
120.80
141.21
10/04
121.96
132.18
140.00
10/05
185.85
143.71
147.59
10/06
259.34
167.19
162.26
10/07
348.52
191.54
205.90
(1) The stock performance graph does not include HP’s peer group because peer group information is represented and
included in the S&P Information Technology Index.
33
ITEM 6. Selected Financial Data.
The information set forth below is not necessarily indicative of results of future operations and should be read in
conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the
Consolidated Financial Statements and notes thereto included in Item 8, “Financial Statements and Supplementary Data,” of
this Form 10-K, which are incorporated herein by reference, in order to understand further the factors that may affect the
comparability of the financial data presented below.
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Selected Financial Data
Net revenue....................................................................................
Earnings from operations(1)............................................................
Net earnings...................................................................................
Net earnings per share
Basic ...........................................................................................
Diluted ........................................................................................
Cash dividends declared per share.................................................
At year-end:
2007
$104,286
$8,719
$7,264
2006
For the fiscal years ended October 31,
2005
In millions, except per share amounts
$79,905
$4,227
$3,497
$86,696
$3,473
$2,398
$91,658
$6,560
$6,198
2004
$2.76
$2.68
$0.32
$2.23
$2.18
$0.32
$0.83
$0.82
$0.32
$1.16
$1.15
$0.32
2003
$73,061
$2,896
$2,539
$0.83
$0.83
$0.32
Total assets..................................................................................
Long-term debt ...........................................................................
$88,699
$4,997
$81,981
$2,490
$77,317
$3,392
$76,138
$4,623
$74,716
$6,494
(1)
Earnings from operations include the following items:
2007
2006
2005
2004
2003
In millions
104
1,684
2
$622 $603
$604
48
536
114
158
52
37
— (199) —
54
—
—
$1,350
$970
$563
45
800
1
—
280
$2,213 $856 $1,689
$1,583 $604 $1,157
Amortization of purchased intangible assets .........................
Stock-based compensation expense.......................................
Restructuring charges ............................................................
In-process research and development charges.......................
Pension curtailments and pension settlements, net ................
Acquisition-related charges ...................................................
Total charges before taxes .....................................................
Total charges, net of taxes .....................................................
$783
629
387
190
(517)
—
$1,472
$1,137
34
ITEM 7. 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 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 (“SMBs”), and large enterprises, including in the public and education sectors. Our
offerings span:
•
•
•
personal computing and other access devices;
imaging and printing-related products and services;
enterprise information technology infrastructure, including enterprise storage and server technology, and software
that optimizes business technology investments; and
• multi-vendor customer services, including technology support and maintenance, consulting and integration and
outsourcing services.
We have seven business segments: Enterprise Storage and Servers (“ESS”), HP Services (“HPS”), HP Software, the
Personal Systems Group (“PSG”), the Imaging and Printing Group (“IPG”), HP Financial Services (“HPFS”), and Corporate
Investments. ESS, HPS and HP Software are structured beneath a broader Technology Solutions Group (“TSG”). While TSG
is not an operating segment, we sometimes provide financial data aggregating the segments within TSG in order to provide a
supplementary view of our business.
The operating framework in which we manage our businesses and guide our strategies is based on the disciplined
management of three business levers: targeted growth, operational efficiency and capital strategy. Although we have made
progress towards our goals in recent periods, there are still many areas in which we believe that we can improve. To
implement this operating framework, we are focused on the following initiatives:
• We are engaged in a process of examining every function and every business in the company in order to optimize
efficiency and reduce cost;
• We are in the process of consolidating 85 data centers worldwide into six state-of-the-art centers in three U.S. cities
and consolidating several hundred real estate locations worldwide to fewer core sites in order to reduce our IT
spending and real estate costs;
• We are reinvesting a portion of the cost savings from these initiatives by expanding our sales force and aligning our
resources in order to build our market share in emerging markets while expanding our coverage to drive growth in
mature markets;
• We are developing training programs for our sales forces designed to enhance our ability to provide solutions to our
customers and build customer loyalty;
• We are building and expanding our services organization to support our technology businesses and provide
comprehensive solutions to our customers;
• We are developing a global delivery structure to take advantage of regions where advanced technical expertise is
available at lower costs;
35
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
• We are expanding our ethics and compliance programs and enhancing our corporate governance to ensure that all of
our actions are consistent with HP’s values; and
• We are repurchasing shares of our common stock under an ongoing program to manage the dilution created by
shares issued under employee stock plans as well as to repurchase shares opportunistically.
We continue to grow our business organically and through strategic acquisitions. During fiscal 2007, we acquired ten
companies, among which the two largest were Mercury Interactive Corporation (“Mercury”) and Opsware Inc., and we
expect to continue to make strategic acquisitions periodically in the future.
In February 2007, we announced our decision to modify our U.S. defined benefit pension plan for the remaining number
of U.S. employees still accruing benefits under the program. Effective January 1, 2008, these employees will cease accruing
pension benefits and will, instead, receive an increased 401(k) match to 6 percent from 4 percent of eligible earnings. The
final pension benefit amount will be calculated based on pay and service through December 31, 2007. In addition, future
eligibility for the Pre-2003 HP Retiree Medical Program was limited to those employees who were within five years of
satisfying the program’s eligibility criteria on June 30, 2007. These actions reduced our U.S. defined benefit and post-
retirement plan obligations, and, as a result, we recorded a one-time curtailment gain of $542 million in fiscal 2007. In
conjunction with this announcement, we provided eligible affected employees with the opportunity to participate in a 2007
U.S. Enhanced Early Retirement program (the “2007 EER”) and recorded a restructuring charge of $354 million during fiscal
2007. A total of 3,080 employees participated in the 2007 EER, including 595 persons who had been included in previous
restructuring programs or who voluntarily left the company since November 30, 2006. All employees who participated in the
2007 EER left the company by May 31, 2007. For more information, see Notes 8 and 15 to the Consolidated Financial
Statements in Item 8, which are incorporated herein by reference.
In terms of how our execution has translated into financial performance, the following provides an overview of our key
fiscal 2007 financial metrics:
Net revenue..........................................
Year-over-year net revenue %
increase ............................................
Earnings from operations.....................
Earnings from operations as a % of
net revenue...........................................
Net earnings .........................................
Net earnings per share
Basic ....................................................
Diluted .................................................
HP
Consolidated
ESS
HPS
TSG
HP
Software
Total
PSG
IPG
HPFS
$104,286 $18,769 $16,646
$2,325 $37,740 $36,409 $28,465 $2,336
In millions, except per share amounts
13.8%
$8,719
8.4%
$1,980
6.6%
$1,829
78.7% 10.3%
$4,156
$347
24.8%
$1,939
6.3% 12.4%
$155
$4,315
8.4% 10.5% 11.0%
14.9% 11.0%
5.3%
15.2% 6.6%
$7,264
$2.76
$2.68
Cash and cash equivalents at October 31, 2007 totaled $11.3 billion, a decrease of $5.1 billion from the October 31, 2006
balance of $16.4 billion. The decrease for fiscal 2007 was related primarily to $10.9 billion paid to repurchase our common
stock, $6.8 billion of net cash paid for business acquisitions and $2.5 billion net investments in property, plant and
equipment, all of which were
36
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
partially offset by $9.6 billion in cash provided from operations, $3.1 billion in proceeds from the issuance of our common
stock under employee stock plans and a $2.6 billion net increase in our debt and commercial paper.
We intend the discussion of our financial condition and results of operations that follows to provide information that will
assist in understanding our Consolidated Financial Statements, the changes in certain key items in those financial statements
from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles,
policies and estimates affect our Consolidated Financial Statements.
The discussion of results of operations at the consolidated level is followed by a more detailed discussion of results of
operations by segment.
For a further discussion of factors that could impact operating results, see the section entitled “Risk Factors” in Item 1A,
which is incorporated herein by reference.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
General
The Consolidated Financial Statements of HP are prepared in accordance with U.S. generally accepted accounting
principles, which require management to make estimates, judgments and assumptions that affect the reported amounts of
assets, liabilities, net revenue and expenses, and the disclosure of contingent assets and liabilities. Management bases its
estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Senior management has discussed the development, selection and disclosure of these estimates
with the Audit Committee of HP’s Board of Directors. Management believes that the accounting estimates employed and the
resulting balances are reasonable; however, actual results may differ from these estimates under different assumptions or
conditions.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions
about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been
used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements.
Management believes the following critical accounting policies reflect the significant estimates and assumptions used in the
preparation of the Consolidated Financial Statements.
Revenue Recognition
We enter into contracts to sell our products and services, and, while the majority of our sales agreements contain
standard terms and conditions, there are agreements that contain multiple elements or non-standard terms and conditions. As
a result, significant contract interpretation is sometimes required to determine the appropriate accounting, including whether
the deliverables specified in a multiple element arrangement should be treated as separate units of accounting for revenue
recognition purposes, and, if so, how the price should be allocated among the elements and when to recognize revenue for
each element. We recognize revenue for delivered elements only when the delivered elements have standalone value, fair
values of undelivered elements are known, uncertainties regarding customer acceptance are resolved and there are no
customer-negotiated refund or return rights affecting the revenue recognized for delivered elements. Changes in the
allocation of the sales price
37
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
between elements might impact the timing of revenue recognition but would not change the total revenue recognized on the
contract.
We recognize revenue as work progresses on certain fixed-price contracts, such as consulting arrangements. Using a
proportional performance method, we estimate the total expected labor costs in order to determine the amount of revenue
earned to date. We follow this basis because reasonably dependable estimates of the labor costs applicable to various stages
of a contract can be made. Total contract profit is subject to revisions throughout the life of the contract. We record changes
in revenue as a result of revisions to cost estimates to income in the period in which the facts that give rise to the revision
become known.
We record estimated reductions to revenue for customer and distributor programs and incentive offerings, including price
protection, promotions, other volume-based incentives and expected returns. Future market conditions and product transitions
may require us to take actions to increase customer incentive offerings, possibly resulting in an incremental reduction of
revenue at the time the incentive is offered. Additionally, certain incentive programs require us to estimate, based on
historical experience, the number of customers who will actually redeem the incentive.
Restructuring
We have engaged, and may continue to engage, in restructuring actions, which require management to utilize significant
estimates related to expenses for severance and other employee separation costs, realizable values of assets made redundant
or obsolete, lease cancellation and other exit costs. If the actual amounts differ from our estimates, the amount of the
restructuring charges could be materially impacted. For a full description of our restructuring actions, refer to our discussions
of restructuring in the Results of Operations section and Note 8 to the Consolidated Financial Statements in Item 8, which are
incorporated herein by reference.
Stock-Based Compensation Expense
Effective November 1, 2005, we adopted the fair value recognition provisions of Statement of Financial Accounting
Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), using the modified prospective
transition method, and therefore have not restated prior periods’ results. Under this method, we recognize stock-based
compensation expense for all share-based payment awards granted after November 1, 2005 and granted prior to but not yet
vested as of November 1, 2005, in accordance with SFAS 123R. Under the fair value recognition provisions of SFAS 123R,
we recognize stock-based compensation expense net of an estimated forfeiture rate and recognize compensation cost for only
those shares expected to vest on a straight-line basis over the requisite service period of the award. Prior to SFAS 123R
adoption, we accounted for share-based payment awards under Accounting Principles Board Opinion No. 25, “Accounting
for Stock Issued to Employees” (“APB 25”) and, accordingly, generally recognized compensation expense only when we
granted options with a discounted exercise price.
Determining the appropriate fair value model and calculating the fair value of share-based payment awards require
subjective assumptions, including the expected life of the share-based payment awards and stock price volatility.
Management determined that implied volatility calculated based on actively traded options on HP common stock is a better
indicator of expected volatility and future stock price trends than historical volatility. Therefore, expected volatility in fiscal
years 2007, 2006 and 2005 was based on a market-based implied volatility. The assumptions used in calculating the fair
value of
38
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and
the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based
compensation expense could be materially different in the future. In addition, we are required to estimate the expected
forfeiture rate and recognize expense only for those shares expected to vest. If our actual forfeiture rate is materially different
from our estimate, the stock-based compensation expense could be significantly different from what we have recorded in the
current period. See Note 2 to the Consolidated Financial Statements in Item 8 for a further discussion on stock-based
compensation.
Taxes on Earnings
We calculate our current and deferred tax provisions based on estimates and assumptions that could differ from the
actual results reflected in our income tax returns filed during the subsequent year. We record adjustments based on filed
returns when we have identified and finalized them, which is generally in the third and fourth quarters of the subsequent year
for U.S. federal and state provisions, respectively.
We recognize deferred tax assets and liabilities for the expected tax consequences of temporary differences between the
tax bases of assets and liabilities and their reported amounts using enacted tax rates in effect for the year in which we expect
the differences to reverse. We record a valuation allowance to reduce the deferred tax assets to the amount that we are more
likely than not to realize. We have considered future market growth, forecasted earnings, future taxable income, the mix of
earnings in the jurisdictions in which we operate and prudent and feasible tax planning strategies in determining the need for
a valuation allowance. In the event we were to determine that we would not be able to realize all or part of our net deferred
tax assets in the future, we would increase the valuation allowance and make a corresponding charge to earnings in the period
in which we make such determination. Likewise, if we later determine that we are more likely than not to realize the net
deferred tax assets, we would reverse the applicable portion of the previously provided valuation allowance. In order for us to
realize our deferred tax assets we must be able to generate sufficient taxable income in the tax jurisdictions in which the
deferred tax assets are located.
Our effective tax rate includes the impact of certain undistributed foreign earnings for which we have not provided U.S.
taxes because we plan to reinvest such earnings indefinitely outside the United States. We plan foreign earnings remittance
amounts based on projected cash flow needs as well as the working capital and long-term investment requirements of our
foreign subsidiaries and our domestic operations. Based on these assumptions, we estimate the amount we will distribute to
the United States and provide the U.S. federal taxes due on these amounts. Further, as a result of certain employment actions
and capital investments HP has undertaken, income from manufacturing activities in certain countries is subject to reduced
tax rates, and in some cases is wholly exempt from taxes, for fiscal years through 2019. Material changes in our estimates of
cash, working capital and long-term investment requirements in the various jurisdictions in which we do business could
impact our effective tax rate.
We are subject to income taxes in the United States and over sixty foreign countries, and we are subject to routine
corporate income tax audits in many of these jurisdictions. We believe that our tax return positions are fully supported, but
tax authorities are likely to challenge certain positions, which may not be fully sustained. However, our income tax expense
includes amounts intended to satisfy income tax assessments that result from these challenges. Determining the income tax
expense for these potential assessments and recording the related assets and liabilities requires significant management
judgments and estimates. We evaluate our income tax contingencies in accordance with SFAS No. 5,
39
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
“Accounting for Contingencies.” We believe that our reserve for income tax liabilities, including related interest, is adequate
in relation to the potential for additional tax assessments. The amounts ultimately paid upon resolution of audits could be
materially different from the amounts previously included in our income tax expense and therefore could have a material
impact on our tax provision, net income and cash flows. Our reserve for income tax liabilities is attributable primarily to
uncertainties concerning the tax treatment of our international operations, including the allocation of income among different
jurisdictions, and related interest. We review our reserves quarterly, and we may adjust such reserves because of proposed
assessments by tax authorities, changes in facts and circumstances, issuance of new regulations or new case law, previously
unavailable information obtained during the course of an examination, negotiations between tax authorities of different
countries concerning our transfer prices, execution of Advanced Pricing Agreements, resolution with respect to individual
audit issues, the resolution of entire audits, or the expiration of statutes of limitations. Material adjustments are most likely to
occur in the fiscal years in which major ongoing audits, such as audits by the Internal Revenue Service (“IRS”), are closed. In
addition, our tax contingency reserve includes certain amounts for potential tax assessments for pre-acquisition tax years of
acquired companies which, if released, will impact the carrying value of goodwill attributable to the acquired company.
Allowance for Doubtful Accounts
We determine our allowance for doubtful accounts using a combination of factors to ensure that we have not overstated
our trade and financing receivables balances due to uncollectibility. We maintain an allowance for doubtful accounts for all
customers based on a variety of factors, including the length of time receivables are past due, trends in overall
weighted-average risk rating of the total portfolio, macroeconomic conditions, significant one-time events, historical
experience and the use of third-party credit risk models that generate quantitative measures of default probabilities based on
market factors, and the financial condition of customers. Also, we record specific provisions for individual accounts when we
become aware of a customer’s inability to meet its financial obligations to us, such as in the case of bankruptcy filings or
deterioration in the customer’s operating results or financial position. If circumstances related to customers change, we would
further adjust our estimates of the recoverability of receivables either upward or downward. The annual provision for
doubtful accounts has averaged approximately 0.01% of net revenue over the last three fiscal years. Using our third-party
credit risk model at October 31, 2007, a 50-basis-point deterioration in the weighted-average default probabilities of our
significant customers would have resulted in an approximately $84 million increase to our trade allowance at the end of fiscal
year 2007.
Inventory
We state our inventory at the lower of cost or market. We make adjustments to reduce the cost of inventory to its net
realizable value, if required, at the product group level for estimated excess, obsolescence or impaired balances. Factors
influencing these adjustments include changes in demand, rapid technological changes, product life cycle and development
plans, component cost trends, product pricing, physical deterioration and quality issues. Revisions to these adjustments would
be required if these factors differ from our estimates.
Valuation of Goodwill and Indefinite-Lived Purchased Intangible Assets
We review goodwill and purchased intangible assets with indefinite lives for impairment annually and whenever events
or changes in circumstances indicate the carrying value of an asset may not be
40
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
recoverable in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” The provisions of SFAS No. 142
require that we perform a two-step impairment test on goodwill. In the first step, we compare the fair value of each reporting
unit to its carrying value. Our reporting units are consistent with the reportable segments identified in Note 18 to the
Consolidated Financial Statements in Item 8. We determine the fair value of our reporting units based on a weighting of
income and market approaches. Under the income approach, we calculate the fair value of a reporting unit based on the
present value of estimated future cash flows. Under the market approach, we estimate the fair value based on market
multiples of revenue or earnings for comparable companies. If the fair value of the reporting unit exceeds the carrying value
of the net assets assigned to that unit, goodwill is not impaired and we are not required to perform further testing. If the
carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must
perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If
the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then we record an impairment loss equal to
the difference. SFAS No. 142 also requires that the fair value of the purchased intangible assets with indefinite lives be
estimated and compared to the carrying value. We estimate the fair value of these intangible assets using an income approach.
We recognize an impairment loss when the estimated fair value of the intangible asset is less than the carrying value.
Determining the fair value of a reporting unit or an indefinite-lived purchased intangible asset is judgmental in nature
and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates
and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, assumed royalty rates,
future economic and market conditions and determination of appropriate market comparables. We base our fair value
estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future
results may differ from those estimates. In addition, we make certain judgments and assumptions in allocating shared assets
and liabilities to determine the carrying values for each of our reporting units.
Our annual goodwill impairment analysis, which we performed during the fourth quarter of fiscal 2007, did not result in
an impairment charge. The excess of fair value over carrying value for each of HP’s reporting units as of August 1, 2007, the
annual testing date, ranged from approximately $520 million to approximately $46 billion. In order to evaluate the sensitivity
of the fair value calculations on the goodwill impairment test, we applied a hypothetical 10% decrease to the fair values of
each reporting unit. This hypothetical 10% decrease would result in excess fair value over carrying value ranging from
approximately $360 million to approximately $41 billion for each of HP’s reporting units.
Warranty Provision
We provide for the estimated cost of product warranties at the time we recognize revenue. We evaluate our warranty
obligations on a product group basis. Our standard product warranty terms generally include post-sales support and repairs or
replacement of a product at no additional charge for a specified period of time. While we engage in extensive product quality
programs and processes, including actively monitoring and evaluating the quality of our component suppliers, we base our
estimated warranty obligation upon warranty terms, ongoing product failure rates, repair costs, product call rates, average
cost per call, and current period product shipments. If actual product failure rates, repair rates, service delivery costs or post-
sales support costs differ from our estimates, we would be required to make revisions to the estimated warranty liability.
Warranty terms generally range from
41
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
90 days to three years parts and labor, depending upon the product. Over the last three fiscal years, the annual warranty
provision has averaged approximately 3.4% of annual net product revenue, while actual annual warranty costs have averaged
approximately 3.2% of annual net product revenue.
Retirement Benefits
Our pension and other post-retirement benefit costs and obligations are dependent on various assumptions. Our major
assumptions relate primarily to discount rates, salary growth, long-term return on plan assets and medical cost trend rates. We
base the discount rate assumption on current investment yields of high quality fixed income investments during the
retirement benefits maturity period. The salary growth assumptions reflect our long-term actual experience and future and
near-term outlook. Long-term return on plan assets is determined based on historical portfolio results and management’s
expectation of the future economic environment, as well as target asset allocations. In the beginning of fiscal 2008, we
implemented a liability-driven investment strategy for the U.S. defined benefit pension plan, which will be frozen by
December 31, 2007 and is currently overfunded. As part of the strategy, we have transitioned our equity allocation to
predominantly fixed income assets. The expected return on the plan assets, used in calculating the net benefit cost, has been
reduced from 8.3% to 6.3% for fiscal 2008 to reflect the changes in our asset allocation policy. Our medical cost trend
assumptions are developed based on historical cost data, the near-term outlook and an assessment of likely long-term trends.
Actual results that differ from our assumptions are accumulated and are amortized generally over the estimated future
working life of the plan participants.
Our major assumptions vary by plan and the weighted-average rates used are set forth in Note 15 to the Consolidated
Financial Statements in Item 8, which is incorporated herein by reference. Each assumption has different sensitivity
characteristics, and, in general, changes, if any, have moved in the same direction over the last several years. For fiscal 2007,
changes in the weighted-average rates would have had the following impact on our net periodic benefit cost:
• A decrease of 25 basis points in the long-term rate of return would have increased our net benefit cost by
approximately $33 million;
• A decrease of 25 basis points in the discount rate would have increased our net benefit cost by approximately
$51 million; and
• An increase of 25 basis points in the future compensation rate would have increased our net benefit cost by
approximately $21 million.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for
uncertainty in income taxes by prescribing the recognition threshold a tax position is required to meet before being
recognized in the financial statements. It also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15,
2006 and is required to be adopted by us in the first quarter of fiscal 2008. The cumulative effects of applying FIN 48 will be
recorded as an adjustment to retained earnings as of the beginning of the period of adoption. Additionally, in May 2007, the
FASB published FASB Staff Position No. FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48” (“FSP
FIN 48-1”).
42
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
FSP FIN 48-1 is an amendment to FIN 48. It clarifies how an enterprise should determine whether a tax position is
effectively settled for the purpose of recognizing previously unrecognized tax benefits. FSP FIN 48-1 is effective upon the
initial adoption of FIN 48, and therefore will be adopted by us in the first quarter of fiscal 2008. While we are still evaluating
the impact of adoption of FIN 48 and FSP FIN 48-1 on our consolidated financial statements, we estimate that the adoption
of FIN 48 and FSP FIN 48-1 will result in a net increase to retained earnings in the range of $500 million to $900 million.
This estimate is subject to revision as management completes its analysis.
In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value
Measurements” (“SFAS 157”). SFAS 157 provides guidance for using fair value to measure assets and liabilities. It also
responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities
at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS 157
applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, and does not expand the
use of fair value in any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007 and is required to be adopted by us in the first quarter of fiscal 2009. We are currently evaluating
the effect that the adoption of SFAS 157 will have on our consolidated results of operations and financial condition and are
not yet in a position to determine such effects.
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans—An Amendment of FASB No. 87, 88, 106 and 132(R)” (“SFAS 158”). SFAS 158 requires that the
funded status of defined benefit postretirement plans be recognized on the company’s balance sheet and changes in the
funded status be reflected in comprehensive income, effective for fiscal years ending after December 15, 2006, which we
adopted during fiscal 2007. See Note 15 to the Consolidated Financial Statements in Item 8 for the effect of applying this
provision on the consolidated financial statements. SFAS 158 also requires companies to measure the funded status of the
plan as of the date of their fiscal year end, effective for fiscal years ending after December 15, 2008. We expect to adopt the
measurement provisions of SFAS 158 effective October 31, 2009.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities—Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 expands the use of fair value
accounting but does not affect existing standards that require assets or liabilities to be carried at fair value. Under SFAS 159,
a company may elect to use fair value to measure accounts and loans receivable, available-for-sale and held-to-maturity
securities, equity method investments, accounts payable, guarantees and issued debt. Other eligible items include firm
commitments for financial instruments that otherwise would not be recognized at inception and non-cash warranty
obligations where a warrantor is permitted to pay a third party to provide the warranty goods or services. If the use of fair
value is elected, any upfront costs and fees related to the item must be recognized in earnings and cannotbe deferred, such as
debt issuance costs. The fair value election is irrevocable and generally made on an instrument-by-instrument basis, even if a
company has similar instruments that it elects not to measure based on fair value. At the adoption date, unrealized gains and
losses on existing items for which fair value has been elected are reported as a cumulative adjustment to beginning retained
earnings. Subsequent to the adoption of SFAS 159, changes in fair value are recognized in earnings. SFAS 159 is effective
for fiscal years beginning after November 15, 2007 and is required to be adopted by us in the first quarter of fiscal 2009. We
currently are determining whether fair value accounting is appropriate for any of our eligible items and cannot
43
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
estimate the impact, if any, that SFAS 159 will have on our consolidated results of operations and financial condition.
In June 2007, the FASB also ratified EITF 07-3, “Accounting for Nonrefundable Advance Payments for Goods or
Services Received for Use in Future Research and Development Activities” (“EITF 07-3”). EITF 07-3 requires that
nonrefundable advance payments for goods or services that will be used or rendered for future research and development
activities be deferred and capitalized and recognized as an expense as the goods are delivered or the related services are
performed. EITF 07-3 is effective, on a prospective basis, for fiscal years beginning after December 15, 2007 and will be
adopted by us in the first quarter of fiscal 2009. We do not expect the adoption of EITF 07-3 to have a material effect on our
consolidated results of operations and financial condition.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”).
SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired.
SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the
business combination. SFAS 141R is effective as of the beginning of an entity’s fiscal year that begins after December 15,
2008, and will be adopted by us in the first quarter of fiscal 2010. We are currently evaluating the potential impact, if any, of
the adoption of SFAS 141R on our consolidated results of operations and financial condition.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an
amendment of Accounting Research Bulletin No. 51” (“SFAS 160”). SFAS 160 establishes accounting and reporting
standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income
attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of
retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure
requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling
owners. SFAS 160 is effective as of the beginning of an entity’s fiscal year that begins after December 15, 2008, and will be
adopted by us in the first quarter of fiscal 2010. We are currently evaluating the potential impact, if any, of the adoption of
SFAS 160 on our consolidated results of operations and financial condition.
In addition to the SFAS 158 adoption mentioned above, we adopted the following accounting standards in fiscal 2007,
none of which had a material effect on our consolidated results of operations during such period or financial condition at the
end of such period:
•
•
SFAS No. 154, “Accounting for Changes and Error Corrections”;
Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements”;
• EITF 05-5, “Accounting for Early Retirement or Postemployment Programs with Specific Features (Such as Terms
Specified in Altersteilzeit Early Retirement Arrangements)”; and
• EITF 06-9, “Reporting a Change in (or the Elimination of) a Previously Existing Difference between the Fiscal Year
End of a Parent Company and That of a Consolidated Entity or between the Reporting Period of an Investor and
That of an Equity Method Investee.”
44
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
RESULTS OF OPERATIONS
Results of operations in dollars and as a percentage of net revenue were as follows for the following fiscal years ended
October 31:
Net revenue.............................................................................
Cost of sales(1).........................................................................
Gross profit .............................................................................
Research and development .....................................................
Selling, general and administrative.........................................
Amortization of purchased intangible assets ..........................
In-process research and development charges ........................
Restructuring charges .............................................................
Pension curtailments and pension settlements, net .................
Earnings from operations........................................................
Interest and other, net .............................................................
Gains (losses) on investments.................................................
Earnings before taxes..............................................................
Provision for taxes ..................................................................
Net earnings............................................................................
(1) Cost of products, cost of services and financing interest.
2007
2006(2)
In millions
$104,286 100.0% $91,658 100.0%
69,427 75.7%
22,231 24.3%
3.9%
3,591
11,266 12.3%
0.7%
—
0.2%
—
7.2%
0.6%
—
7.8%
1.0%
6.8%
78,887
25,399
3,611
12,226
783
190
387
(517)
8,719
444
14
9,177
1,913
$7,264
75.6%
24.4%
3.5%
11.7%
0.7%
0.2%
0.4%
(0.5)%
8.4%
0.4%
—
8.8%
1.8%
7.0%
604
52
158
—
6,560
606
25
7,191
993
$6,198
2005(2)
$86,696 100.0%
76.6%
23.4%
4.0%
13.0%
0.7%
—
1.9%
(0.2)%
4.0%
0.1%
—
4.1%
1.3%
2.8%
66,440
20,256
3,490
11,184
622
2
1,684
(199)
3,473
83
(13)
3,543
1,145
$2,398
(2) Certain reclassifications have been made to prior year amounts in order to conform to the current year presentation.
45
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Net Revenue
The components of weighted-average net revenue growth as compared to prior-year periods were as follows for the
following fiscal years ended October 31:
2007
2006
Percentage points
Personal Systems Group .....................................................................................................................
Imaging and Printing Group ...............................................................................................................
Enterprise Storage and Servers ...........................................................................................................
HP Software........................................................................................................................................
HP Services.........................................................................................................................................
HP Financial Services.........................................................................................................................
Corporate Investments/Other..............................................................................................................
Total HP..............................................................................................................................................
7.9
1.8
1.6
1.1
1.1
0.3
—
13.8
2.8
1.9
0.7
0.3
0.1
(0.1)
—
5.7
In fiscal 2007, HP net revenue increased approximately 14% from the prior year period (10% on a constant currency
basis). The favorable currency impact for fiscal 2007 was due primarily to the movement of the dollar against the euro. U.S.
net revenue was $34.8 billion for fiscal 2007, an increase of 8% from the prior year, while international net revenue increased
17% to $69.5 billion.
PSG had double-digit net revenue growth across all regions as a result of overall unit volume increases of 28%. The unit
volume increases resulted from strong growth in notebooks with significant improvements in emerging markets. The impact
of these increases was partially offset by declines in average selling prices (“ASPs”) in commercial and consumer clients of
5% and 1%, respectively. IPG net revenue growth in fiscal 2007 was due mainly to increased unit volumes of printer supplies
resulting from the continued expansion of printer hardware placements and the strong performance of supplies for
color-related products. ESS net revenue growth during fiscal 2007 was the result primarily of strong blade revenue and unit
growth in our industry standard servers business, increased option attach rates in our ProLiant server line, continued strong
performance in mid-range EVA products, growth in commercial storage area networks and revenue increases from our
Integrity servers. The ESS growth was partially moderated by the revenue declines in our tape business, high-end arrays and
our PA-RISC and Alpha server product lines during fiscal 2007. The net revenue growth in HP Software during fiscal 2007
was due primarily to growth in our OpenView business as a result of the Mercury acquisition and increases in revenue from
license and support contracts. HPS net revenue during fiscal 2007 increased due primarily to favorable currency impacts,
revenue increases in outsourcing services driven by existing accounts growth and new business, and revenue increases in
consulting and integration associated with acquisitions made in fiscal 2007. The HPFS net revenue increase during fiscal
2007 was due primarily to operating lease growth and higher end-of-lease activity.
In fiscal 2006, HP net revenue increased approximately 6% from the prior year period (7% on a constant currency basis).
The unfavorable currency impact for fiscal 2006 was due primarily to the movement of the dollar against the euro and the
yen. U.S. net revenue was $32.2 billion for fiscal 2006, an increase of 6% from the prior year, while international net revenue
increased 6% to $59.4 billion.
PSG net revenue increased across all regions as a result of a 15% volume increase. The volume increase resulted from
strong growth in consumer and commercial markets and significant improvement in emerging markets, which was partially
offset by 6% and 7% declines in ASPs in consumer and
46
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
commercial clients, respectively. IPG net revenue growth in fiscal 2006 was due mainly to increased shipment volumes of
printer supplies resulting from the continued expansion of printer hardware placements and the strong performance of
color-related products. ESS net revenue growth was the result primarily of strong unit growth in our industry standard servers
business, blade revenue growth, increased option attach rates in our ProLiant server line, continued strong performance in
mid-range EVA products within our Storage business and revenue increases from our Integrity servers. The ESS growth was
moderated by revenue declines in our tape business and PA-RISC and Alpha Server product lines. The net revenue growth in
HP Software for fiscal 2006 was due primarily to growth in our OpenView business as a result of the Peregrine acquisition
and an increase in support and service contracts. HPS net revenue increased in fiscal 2006 due primarily to revenue increases
in management services driven by new business and existing account growth, which were offset by declines in the
technology services business resulting from competitive pricing pressures and changes in the mix of platforms being
serviced. The HPFS net revenue decline in fiscal 2006 was due primarily to lower used equipment sales.
Stock-Based Compensation Expense
See Note 2 to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference.
Gross Margin
The weighted-average components of the change in gross margin as compared to prior-year periods were as follows for
the following fiscal years ended October 31:
2006
2007
Percentage points
HP Software..........................................................................................................................................
HP Services...........................................................................................................................................
Enterprise Storage and Servers .............................................................................................................
HP Financial Services...........................................................................................................................
Personal Systems Group .......................................................................................................................
Imaging and Printing Group .................................................................................................................
Corporate Investments/Other................................................................................................................
Total HP................................................................................................................................................
0.6
0.1
(0.1)
(0.1)
(0.2)
(0.2)
—
0.1
0.2
0.2
0.4
(0.1)
0.1
0.2
(0.1)
0.9
Total company gross margin increased slightly in fiscal 2007 from fiscal 2006. The improvement in HP Software gross
margin in fiscal 2007 was due primarily to a favorable change in revenue mix driven by the inclusion of revenue from
Mercury licenses and support, which typically have a higher gross margin than the other offerings within the segment. HPS
gross margin increased during fiscal 2007 from fiscal 2006 due primarily to continued focus on cost structure improvements
from delivery efficiencies and cost controls. This gross margin increase was partially offset by the impact from the continued
competitive pricing environment. During fiscal 2007, ESS contributed unfavorably to our total company’s weighted-average
change in gross margin while the ESS gross margin remained stable. This stability was due primarily to improved cost
management, which was offset by an ongoing mix shift to lower-margin Integrity products within business critical systems
and a continued mix shift towards industry standard servers. HPFS gross margin decline during fiscal 2007 was caused
primarily by increased bad debt expenses and lower bad debt recoveries, as well as lower margins on leases and
47
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
used equipment sales. During fiscal 2007, PSG contributed unfavorably to our total company’s weighted-average change in
gross margin as a result of higher growth than the other segments. However, PSG gross margin increased primarily as a result
of component cost declines and improvements in supply chain costs per unit, which were partially offset by ASP declines.
During fiscal 2007, IPG gross margin decreased due primarily to unfavorable hardware margins, increased costs associated
with new product introductions and a change in product mix.
Total company gross margin increased in fiscal 2006 as compared to fiscal 2005. The improvement in ESS gross margin
in fiscal 2006 was due primarily to a favorable unit mix, improved discount management, and lower component costs. HPS
gross margin increase was driven mainly by the continued focus on cost structure improvement from delivery efficiencies
and cost controls, the impact of which was partially offset by the continued competitive environment in the solutions and
services business and higher fiscal 2006 bonus accruals. For IPG, gross margin increased in fiscal 2006 due primarily to
improved supplies margins and a favorable portfolio mix shift from hardware to supplies, which were partially offset by
unfavorable consumer hardware margins. The improvement in HP Software gross margin in fiscal 2006 was due primarily to
an increase in revenue and more effective management of the support and services costs for OpenView and OpenCall. The
gross margin improvement in PSG resulted primarily from reduced warranty expense and supply chain costs as a percentage
of revenue and component cost declines. HPFS gross margin was impacted unfavorably in fiscal 2006 due primarily to
competitor pricing pressures, a higher mix of lower margin operating lease assets and lower recoveries for bad debts, which
were partially offset by lower credit losses in fiscal 2006.
Operating Expenses
Research and Development
Total research and development (“R&D”) expense increased in fiscal 2007 due primarily to additional R&D expense as a
result of the Mercury acquisition in the first quarter of fiscal 2007. As a percentage of net revenue, each of our major
segments experienced a year-over-year decrease in R&D expense in fiscal 2007.
Total R&D expense increased in fiscal 2006 due primarily to higher bonus accruals and stock-based compensation
expense, the impact of which was partially offset by expense controls and cost savings from restructuring actions. As a
percentage of net revenue, each of our major segments experienced a year-over-year decrease in R&D expense in fiscal 2006.
Selling, General and Administrative
Total SG&A expense increased during fiscal 2007 due primarily to additional expense as a result of the acquisition of
Mercury in the first quarter of fiscal 2007, unfavorable currency impacts related to the movement of the dollar against the
euro and additional investments in our sales forces. As a percentage of net revenue, the ESS, HPS, PSG and IPG segments
experienced a year-over-year decrease in SG&A expense during fiscal 2007, while HP Software experienced a year-over-
year increase in SG&A expense.
Total SG&A expense increased slightly during fiscal 2006 as higher bonus accruals and stock-based compensation
expenses as well as increased marketing spending were offset in part by savings from expense controls and restructuring
actions and favorable currency impacts due to movement of the
48
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
dollar against the euro and the yen. As a percentage of net revenue, each of our segments experienced a year-over-year
decrease or no change in fiscal 2006.
Amortization of Purchased Intangible Assets
The increase in amortization expense in fiscal 2007 as compared to fiscal 2006 was due primarily to amortization
expense related to the acquisition of Mercury in the first quarter of fiscal 2007. This increase was partially offset by a
decrease in amortization expense related to certain intangible assets associated with prior acquisitions, including the Compaq
Computer Corporation (“Compaq”) acquisition, that had reached the end of their amortization period.
The decrease in amortization expense in fiscal 2006 as compared to fiscal 2005 was due primarily to a decrease in
amortization expense related to certain intangible assets associated with prior acquisitions including the Compaq acquisition
that had reached the end of their amortization period, which decrease was partially offset by an increase in amortization
expense related primarily to the acquisitions of Scitex Vision Ltd. (“Scitex”), Peregrine Systems, Inc. (“Peregrine”), and
OuterBay Technologies, Inc. (“OuterBay”) in fiscal year 2006.
For more information on our amortization of purchased intangibles assets, see Note 7 to the Consolidated Financial
Statements in Item 8, which is incorporated herein by reference.
In-Process Research and Development Charges
We record in-process research and development (“IPR&D”) charges in connection with acquisitions accounted for as
business combinations, as more fully described in Note 6 to the Consolidated Financial Statements in Item 8. In fiscal 2007,
2006 and 2005 we recorded IPR&D charges of $190 million, $52 million, and $2 million, respectively, related to acquisitions
during those years. The increase in IPR&D in fiscal 2007 was due primarily to our acquisition of Mercury in the first quarter
of fiscal 2007.
Restructuring Charges
Restructuring charges for fiscal 2007 were $387 million, which included $354 million of expenses related to severance
and other benefit costs associated with those employees who elected to participate in the 2007 EER and a net charge of
$33 million relating to adjustments to our fiscal 2005, 2003, 2002 and 2001 restructuring programs.
Restructuring charges in fiscal year 2006 were $158 million. This included a net charge of $233 million related to true-
ups of severance and other related restructuring charges for all restructuring plans, a $6 million termination benefits expense
and a $3 million settlement and curtailment loss from our non-U.S. pension plans related to the fiscal 2005 restructuring plan,
which was approved by our Board of Directors in the fourth quarter of fiscal 2005. These charges were partially offset by a
$46 million settlement gain from the U.S. pension plans, a $24 million curtailment gain from the U.S. retiree medical
program and a $14 million adjustment to reduce our non-cash stock-based compensation expense, all related to our fiscal
2005 restructuring plan approved in the fourth quarter of fiscal 2005.
Restructuring charges in fiscal 2005 were $1.7 billion, which included a $1.6 billion charge for the fiscal 2005
restructuring plan approved in the fourth quarter of fiscal 2005. The fiscal 2005 restructuring plan was designed to simplify
our structure, reduce costs and place greater focus on our customers. We initially estimated that 15,300 positions would be
eliminated in the fiscal 2005 restructuring plan.
49
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Subsequent to the initial estimate, we reduced the number of total positions to be eliminated to 14,985. We had substantially
completed eliminating these positions as of October 31, 2007. The remaining charge for fiscal 2005 of $109 million was
related to severance and related costs associated with the termination of approximately 1,450 employees in connection with a
restructuring plan approved by our management in the third quarter of fiscal 2005. All employees under this restructuring
plan were terminated as of October 31, 2005. We paid all of the costs associated with the fiscal 2005 third quarter
restructuring plan as of January 31, 2007.
For more information on our restructuring charges, see Note 8 to the Consolidated Financial Statements in Item 8, which
is incorporated herein by reference.
Workforce Rebalancing
As part of our ongoing business operations, we incur workforce rebalancing charges for severance and related costs
within certain business segments. Workforce rebalancing activities are considered part of normal operations as we continue to
optimize our cost structure and are included in our business segment results. We expect to incur additional workforce
rebalancing costs in the future.
Pension Curtailments and Pension Settlements, Net
In fiscal 2007, we recognized a net gain on pension curtailments and settlements of $517 million, relating primarily to a
$542 million curtailment gain associated with a modification to our U.S. defined benefit pension plan and post-retirement
benefit plan. This curtailment gain was offset partially by net settlement losses related to our other pension plan design
changes.
In conjunction with management’s plan to restructure certain of our operations, we modified our U.S. retirement
programs to align them more closely to industry practice. Effective January 1, 2006, we ceased pension accruals and
eliminated eligibility for the subsidized retiree medical program for employees who did not meet defined criteria based on
age and years of service. As a result, we recognized a curtailment gain of $199 million in fiscal 2005 stemming from the
elimination of future benefit accruals for the affected employee group.
For more information on our plan design changes, see Note 15 to the Consolidated Financial Statements in Item 8, which
is incorporated herein by reference.
Interest and Other, Net
Interest and other, net decreased by $162 million in fiscal 2007 from fiscal 2006. The decrease was due primarily to
higher interest expense resulting from higher average debt balances.
Interest and other, net increased by $523 million in fiscal 2006 from fiscal 2005. The increase in fiscal 2006 resulted
primarily from higher net interest income over the prior year related to higher short-term interest rates in fiscal 2006, net
gains from sales of certain real estate properties, and lower interest expense due to our lower average debt balances. The
increase in fiscal 2006 also was attributable to a net $106 million of dispute settlement charge and its related interest charge
recorded in fiscal 2005. In fiscal 2005, we reached a legal settlement of $141 million in our patent infringement case with
Intergraph Hardware Technologies Company (“Intergraph”) and recorded a charge of $116 million related to a cross-license
agreement with Intergraph for products shipped in prior years. Partially offsetting this amount was a $10 million recovery
from an individual related to a prior period settlement with the Government of Canada.
50
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Gains (Losses) on Investments
Net gains on investment in fiscal 2007 and fiscal 2006 resulted primarily from gains on the sale of equity investments,
which were offset in part by impairment charges on our investment portfolio. Net losses in fiscal 2005 resulted primarily
from impairment charges on equity investments in our publicly-traded and privately-held investment portfolios. Partially
offsetting these losses were gains attributable to the sale of investments.
Provision for Taxes
Our effective tax rates were 20.8%, 13.8%, and 32.3% in fiscal 2007, 2006 and 2005, respectively.
The increase in the overall tax rate in fiscal 2007 from fiscal 2006 was related in part to favorable income tax
adjustments of $599 million recorded in fiscal 2006, which included net favorable tax adjustments of $565 million to income
tax accruals as a result of the settlement of IRS examinations of our U.S. income tax returns for fiscal years 1993 to 1998.
The reductions to the net income tax accruals for these years related primarily to the resolution of issues with respect to
Puerto Rico manufacturing tax incentives and export tax incentives, and other issues involving our non-U.S. operations.
In addition, the decrease in the overall tax rate in 2006 from fiscal 2005 was attributable in part to $697 million of
income tax expense related to items unique to fiscal 2005. The tax expense was the result primarily of $792 million
associated with the repatriation of $14.5 billion under the American Jobs Creation Act of 2004 (“Jobs Act”) and $76 million
related to additional distributions received from foreign subsidiaries. These tax expenses were offset in part by tax benefits
of $177 million resulting from agreements with the IRS and other governmental authorities. The Jobs Act, enacted on
October 22, 2004, provided for a temporary 85% dividend received deduction on certain foreign earnings repatriated during a
one-year period. The deduction resulted in an approximate 5.25% federal tax rate on the repatriated earnings.
For a full reconciliation of our effective tax rate to the U.S. federal statutory rate of 35% and further explanation of our
provision for taxes, see Note 13 to the Consolidated Financial Statements in Item 8, which is incorporated herein by
reference.
Segment Information
A description of the products and services, as well as financial data, for each segment can be found in Note 18 to the
Consolidated Financial Statements in Item 8, which is incorporated herein by reference. We have realigned segment financial
data for the fiscal years ended October 31, 2006 and 2005 to reflect changes in HP’s organizational structure that occurred at
the beginning of the first quarter of fiscal 2007. We describe these changes more fully in Note 18 to the Consolidated
Financial Statements in Item 8. We have presented the business segments in this Annual Report on Form 10-K based on our
management organizational structure as of October 31, 2007 and the distinct nature of various businesses. Future changes to
this organizational structure may result in changes to the reportable segments disclosed. The discussions below include the
results of each of our segments.
Technology Solutions Group
ESS, HPS and HP Software are structured beneath a broader Technology Solutions Group (“TSG”). We describe the
results of the business segments of TSG in more detail below.
51
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Enterprise Storage and Servers
Net revenue...........................................................................................................................
Earnings from operations......................................................................................................
Earnings from operations as a % of net revenue...................................................................
2005
2007
For the fiscal years ended October 31
2006
In millions
$17,308
$1,446
8.4%
$18,769
$1,980
10.5%
$16,717
$800
4.8%
The components of weighted-average net revenue growth as compared to prior-year periods by business unit were as
follows for the following fiscal years ended October 31:
Industry standard servers ......................................................................................................
Storage ..................................................................................................................................
Business critical systems ......................................................................................................
Total ESS..............................................................................................................................
2007
2006
Percentage points
8.0
0.9
(0.5)
8.4
3.5
0.9
(0.9)
3.5
On a constant currency basis, ESS net revenue increased 5% in fiscal 2007 from fiscal 2006. The favorable currency
impact in fiscal 2007 was due primarily to the movement of the dollar against the euro. Industry standard servers revenue
grew 14% in fiscal 2007 compared to fiscal 2006 as a result of strong growth in blade revenue and units, as well as increased
option attach rates in the ProLiant server line. Storage net revenue increased 4% in fiscal 2007 compared to fiscal 2006, with
the increase driven primarily by mid-range EVA products and commercial products within the storage area networks
offerings, as well as improved revenue growth in storage software. This increase was partially moderated by the revenue
declines in our tape business and high-end arrays. Business critical systems net revenue decreased 3% in fiscal 2007
compared to fiscal 2006. The decrease was due primarily to revenue declines in the PA-RISC product line and the planned
phase out of our Alpha server product line. The declines were partially offset by strong net revenue growth in our Integrity
servers, which represented 64% of the business critical systems revenue mix in fiscal 2007, up from 37% in fiscal 2006. We
expect revenue mix from Integrity servers to continue to grow as customers migrate from PA-RISC and Alpha products.
In fiscal 2007, ESS earnings from operations as a percentage of net revenue increased by 2.1 percentage points compared
to fiscal 2006, due primarily to a decrease in operating expenses as a percentage of net revenue. Gross margin remained
stable in fiscal 2007 compared to fiscal 2006 due primarily to improved cost management. The improved cost management
was offset by an ongoing mix shift to lower-margin integrity products within business critical systems and a continued mix
shift towards industry standard servers. The decrease in operating expense as a percentage of net revenue in fiscal 2007 was
due primarily to cost structure improvements.
On a constant currency basis, ESS net revenue increased 5% in fiscal 2006 from fiscal 2005. The unfavorable currency
impact for fiscal 2006 was due primarily to the movement of the dollar against the euro and the yen. The net revenue growth
in industry standard servers of 6% in fiscal 2006 compared to fiscal 2005 was driven by strong unit growth and the growth in
blade revenue as well as increased option attach rates in the ProLiant server line. Storage net revenue increased 4% in fiscal
2006 compared to fiscal 2005 due to continued strong performance in mid-range EVA products within
52
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
the storage area networks offerings while the tape business decline moderated the overall storage growth. Business critical
systems net revenue decreased 4% in fiscal 2006 compared to fiscal 2005. This decrease was due primarily to revenue
declines in the PA-RISC product line and to the planned phase out of our Alpha server product line. The declines were
partially offset by net revenue growth in our Integrity servers which posted strong net revenue growth, reaching 37% of the
business critical systems revenue mix in fiscal 2006 up from 20% in the prior fiscal year. Revenue mix from Integrity servers
continued to grow as customers migrated from PA-RISC and Alpha products. Integrity server revenue in fiscal 2006 also
included revenue from Montecito-based Integrity servers that were first shipped in the fourth quarter of fiscal 2006. NonStop
server net revenue decreased 2% in fiscal 2006 from the prior year due primarily to the revenue decrease on the discontinued
product line, which was partially offset by NonStop Integrity product revenue growth.
In fiscal 2006, ESS earnings from operations as a percentage of net revenue increased by 3.6 percentage points compared
to fiscal 2005, due primarily to an increase in gross margin combined with a decrease in operating expenses as a percentage
of net revenue. The improvement in gross margin was due primarily to a favorable unit mix, improved discount management,
and lower component costs. The increase was partially offset by a continued mix shift towards industry standard servers
within the segment and the ongoing mix shift to lower-margin Integrity products within business critical systems. The
decrease in operating expense as a percentage of net revenue in fiscal 2006 was due primarily to efficient expense
management.
HP Services
Net revenue...........................................................................................................................
Earnings from operations......................................................................................................
Earnings from operations as a % of net revenue...................................................................
2007
For the fiscal years ended October 31
2006
In millions
$15,617
$1,507
9.6%
$16,646
$1,829
11.0%
$15,536
$1,151
7.4%
2005
The components of weighted-average net revenue growth as compared to prior-year periods by business unit were as
follows for the following fiscal years ended October 31:
Technology services .............................................................................................................2
Outsourcing services ‘(1) ........................................................................................................
Consulting and integration....................................................................................................
Total HPS .............................................................................................................................
2007
2006
Percentage points
.1 (
2.8
1.7
6.6
1.6)
1.8
0.3
0.5
‘(1)
Reflects the name change from managed services to outsourcing services effective in fiscal 2007.
On a constant currency basis, HPS net revenue increased 3% in fiscal 2007 from fiscal 2006. In fiscal 2007, the
favorable currency impact was due primarily to the movement of the dollar against the euro. Net revenue in technology
services increased 4% in fiscal 2007 from the prior year due primarily to favorable currency impacts, growth in the IT
solution support services and extended warranty revenue, the impact of which was partially offset by competitive pricing
pressures and revenue erosion from installed base contracts. Net revenue in outsourcing services increased 10% in fiscal 2007
from the prior year. The increase was driven mainly by favorable currency impacts, existing account growth and
53
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
new business, which were partially offset by installed base revenue erosion and pricing pressures. Net revenue in consulting
and integration increased 9% in fiscal 2007 from the prior year due mainly to acquisitions made in fiscal 2007 and favorable
currency impacts.
HPS earnings from operations as a percentage of net revenue in fiscal 2007 increased by 1.4 percentage points. The
operating margin increase was the result of an increase in gross margin and a decrease in operating expenses as a percentage
of net revenue. The gross margin increase in fiscal 2007 was due primarily to the continued focus on cost structure
improvements generated by delivery efficiencies and cost controls, the impact of which was partially offset by the impact
from the continued competitive pricing environment. In fiscal 2007, continued efficiency improvements in our operating
expense structure contributed to the decline in operating expenses as a percentage of net revenue compared to the prior year.
Technology services operating margin in fiscal 2007 continued to benefit from improved delivery efficiencies and cost
controls, the impact of which was offset in part by the impact of the ongoing portfolio mix shift from higher margin
proprietary support to lower margin areas such as IT solution services. Outsourcing services operating margin increased in
fiscal 2007 due primarily to improved delivery efficiencies and reduced operating expenses partially offset by contractual
pricing pressure. Consulting and integration operating margin decreased in fiscal 2007 due mainly to increased customer
project losses and acquisition related costs, the impact of which was partially offset by more efficient utilization of our
consultants and operating expense improvement.
On a constant currency basis, HPS net revenue increased 2% in fiscal 2006 from fiscal 2005. In fiscal 2006, the
unfavorable currency impact was due primarily to the movement of the dollar against the euro and the yen. Net revenue in
technology services decreased 3% in fiscal 2006 from the prior year due primarily to declines related to competitive pricing
pressures and changes in the mix of platforms being serviced. In fiscal 2006, the 7% growth in outsourcing services net
revenue from the prior year was driven mainly by new business and existing account growth, with continued focus on making
more strategic portfolio decisions to improve profitability. Net revenue in consulting and integration increased 2% in fiscal
2006 from the prior year due primarily to improved performance in Asia Pacific and Europe, Middle East and Africa.
HPS earnings from operations as a percentage of net revenue in fiscal 2006 increased by 2.2 percentage points. The
operating margin increase was the result of a combination of an increase in gross margin and a decrease in operating
expenses as a percentage of net revenue. The gross margin increase in HPS was due primarily to the continued focus on cost
structure improvement from delivery efficiencies and cost controls, the impact of which was partially offset by the continued
competitive environment in solutions and services business and higher fiscal 2006 bonus accruals. In fiscal 2006, improved
efficiencies in our operating expense structure contributed to the decline in operating expenses as a percentage of net revenue
compared to fiscal year 2005 despite the impact of higher bonus accruals in fiscal 2006. Technology services operating
margin in fiscal 2006 continued to benefit from improved delivery efficiencies and cost controls as well as portfolio decisions
made to improve profitability, all of which benefit was offset in part by the impact of the ongoing portfolio mix shift from
higher margin proprietary support to lower margin areas such as solution services. Outsourcing services operating margin
increased in fiscal 2006 due to delivery efficiencies, reduced operating expenses and more strategic portfolio decisions made
to improve profitability. Consulting and integration operating margin improved in fiscal 2006 due to more efficient utilization
of our consultants and reduced operating expenses.
54
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
HP Software
Net revenue...........................................................................................................................
Earnings (loss) from operations ............................................................................................
Earnings (loss) from operations as a % of net revenue .........................................................
2007
For the fiscal years ended October 31
2006
In millions
$1,301
$85
6.5%
$2,325
$347
14.9%
$1,061
$(49)
(4.6)%
2005
On a constant currency basis, HP Software revenue increased 74% in fiscal 2007 as compared to fiscal 2006. The
favorable currency impact was due primarily to the movement of the dollar against the euro. Excluding the results of
Mercury, HP Software’s revenue grew 5% in fiscal 2007. Net revenue associated with the acquisition of Mercury was
included in the results of OpenView, which increased 121% in fiscal 2007 and 15% in the same respective period without
Mercury. OpenView net revenue growth also was the result of increases in revenue from license and support contracts. Net
revenue for OpenCall, our telecommunications solutions product line, decreased 16% in fiscal 2007. The decrease in
OpenCall net revenue was due primarily to a platform shift that resulted in a transfer of the hardware revenue to ESS.
The operating margin improvement of 8.4 percentage points in fiscal 2007 as compared to fiscal 2006 was the result
primarily of an increase in gross margin and to a lesser degree a decrease in operating expense as a percentage of net revenue.
In fiscal 2007, the improvement in gross margin was a result of a favorable change in revenue mix driven by the inclusion of
revenue from Mercury licenses and support, which typically have a higher gross margin than the other offerings in the
segment, and to a lesser degree by more effective management of the support costs for OpenView and OpenCall. Operating
expense as a percentage of net revenue in fiscal 2007 decreased due primarily to cost controls and synergy savings from the
Mercury acquisition.
In fiscal 2006, Software net revenue increased 23% (8% excluding the impact of acquisitions and 24% on a constant
currency basis) from fiscal 2005. The unfavorable currency impact was due primarily to the movement of the dollar against
the euro and the yen for fiscal 2006. Peregrine, which HP acquired in December 2005, represented 14.7 percentage points of
HP Software’s net revenue growth for fiscal 2006. Net revenue associated with the Peregrine acquisition is included in the
results of OpenView, our management solutions software product line, which represented 20 percentage points of growth on
a weighted-average net revenue basis for fiscal 2006. OpenCall contributed the remaining 3 percentage points of the
weighted-average net revenue increase for fiscal 2006. OpenView net revenue growth was the result of acquisitions and
increases in support and services contracts. OpenCall net revenue growth was the result of increased product sales and
licenses as well as larger contracts.
The operating margin improvement of 11.1 percentage points for fiscal 2006 from fiscal 2005 was the result primarily of
a decrease in operating expense as a percentage of net revenue and an increase in gross margin. The decrease in operating
expense as a percentage of net revenue was attributable to growth in field selling costs, research and development and
marketing expenses attributable to cost management efforts that was slower than revenue growth. These cost reductions were
partially offset by high integration costs associated with the acquisition of Peregrine as well as higher bonus accruals. The
improvement in gross margin was driven by an increase in revenue, more effective management of the support and services
costs for OpenView and OpenCall and from improved margins of our OpenCall product line resulting from a favorable
product mix shift towards higher margin products.
55
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Personal Systems Group
Net revenue...........................................................................................................................
Earnings from operations......................................................................................................
Earnings from operations as a % of net revenue...................................................................
2005
2007
For the fiscal years ended October 31
2006
In millions
$29,166
$1,152
3.9%
$36,409
$1,939
5.3%
$26,741
$657
2.5%
The components of weighted-average net revenue growth as compared to prior-year periods by business unit were as
follows for the following fiscal years ended October 31:
2006
2007
Percentage points
Notebook PCs .............................................................................................................................................
Desktop PCs ...............................................................................................................................................
Workstations...............................................................................................................................................
Handhelds ...................................................................................................................................................
Other ...........................................................................................................................................................
Total PSG ...................................................................................................................................................
19.3
4.2
1.2
(0.4)
0.5
24.8
8.4
0.8
0.6
(0.8)
0.1
9.1
On a constant currency basis, PSG’s net revenue increased 21% in fiscal 2007 from fiscal 2006. The favorable currency
impact was due primarily to the movement of the dollar against the euro. Unit volumes increased by 28% in fiscal 2007,
driving double-digit net revenue growth across all regions. The unit volume increase was the result of strong growth in
notebooks, with significant improvements in emerging markets. In fiscal 2007, net revenue for notebook PCs increased 47%
while net revenue for desktop PCs increased 8% from the prior-year period. In fiscal 2007, net revenue for consumer clients
increased 39%, while net revenue for commercial clients increased 16% from the prior-year period. The net revenue increase
in Other PSG in fiscal 2007 was related primarily to improvements in extended warranty sales. The revenue increase was
partially offset by decreases in handhelds revenue due to declines in the Personal Digital Assistant (“PDA”) product market,
which were partially offset by our new converged device and travel companion products. In fiscal 2007, the positive revenue
impact from the PSG unit volume increase compared to fiscal 2006 was also moderated by a 5% decline in commercial client
ASPs and a 1% decline in consumer client ASPs. ASPs declined from the prior year was a result of price erosion related to
component cost reductions, the impact of which was partially offset by increased notebook mix and monitor attach rates.
PSG earnings from operations as a percentage of net revenue increased by 1.4 percentage points in fiscal 2007 from
fiscal 2006 as a result of decreases in operating expenses as a percentage of net revenue coupled with an increase in gross
margin. The increased gross margin was primarily a result of component cost declines and improvements in supply chain
costs per unit, the impact of which was partially offset by ASP declines. The operating expense decline as a percentage of net
revenue in fiscal 2007 was the result primarily of the increased net revenue and continued efforts to improve our cost
structure through efficiency measures.
56
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
On a constant currency basis, PSG’s net revenue increased 10% in fiscal 2006. The unfavorable currency impact was due
primarily to the movement of the dollar against the euro and the yen. In fiscal 2006, net revenue increased across all regions
and each business unit with the exception of handhelds, due primarily to an overall volume increase of 15%. The volume
increase in fiscal 2006 was the result of strong growth in the consumer and commercial markets, with significant
improvement in emerging markets. Net revenue for notebook PCs increased 23% while net revenue for desktop PCs
increased slightly in fiscal 2006 from the prior year. Net revenue for consumer clients and commercial clients increased 19%
and 4%, respectively, from the prior year. The revenue increases in consumer and commercial clients were partially offset by
a decrease in handhelds revenue due to a decline in the PDA product market coupled with our product transition to converged
devices. The PSG volume increase in fiscal 2006 was moderated by a decline of 6% in consumer client ASPs and 7% in
commercial client ASPs. The ASP declines were due to pricing decisions resulting from lower component costs as well as
competitive pricing pressures, the impact of which was partially offset by a strong monitor attach rate in commercial
desktops PCs.
PSG earnings from operations as a percentage of net revenue increased by 1.4 percentage points in fiscal 2006 from
fiscal 2005 as a result of gross margin improvement and a decrease in operating expenses as a percentage of revenue. The
gross margin improvement was due primarily to reduced supply chain costs and warranty expense as a percentage of net
revenue, combined with component cost declines. The operating expense decline as a percentage of net revenue was the
result primarily of the increased net revenue and continued efforts on improving cost structure through efficiency measures.
Operating expenses decreased slightly in fiscal 2006 due primarily to savings from our expense controls, which savings were
partially offset by higher bonus accruals in fiscal 2006.
Imaging and Printing Group
Net revenue.............................................................................................................................
Earnings from operations......................................................................................................
Earnings from operations as a % of net revenue...................................................................
2007
For the fiscal years ended October 31
2006
In millions
$26,786
$3,978
14.9%
$28,465
$4,315
15.2%
$25,155
$3,413
13.6%
2005
The components of weighted-average net revenue growth as compared to prior-year periods by business unit were as
follows for the following fiscal years ended October 31:
Supplies ..............................................................................................................................................................
Commercial hardware.........................................................................................................................................
Consumer hardware ............................................................................................................................................
Total IPG ............................................................................................................................................................
2006
2007
Percentage points
5.4
1.4
(0.3)
6.5
5.2
1.0
0.1
6.3
On a constant currency basis, net revenue increased 4% in fiscal 2007 from fiscal 2006. The favorable currency impact
was due primarily to the movement of the dollar against the euro in fiscal 2007. The growth in printer supplies net revenue in
fiscal 2007 from fiscal 2006 reflected higher unit volumes of supplies as a result of the continued expansion of printer
hardware placements and the strong performance of supplies for color-related products. The growth in commercial hardware
net
57
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
revenue in fiscal 2007 was attributable mainly to unit volume growth in multifunction printers and revenue from our digital
press and large format printing products. The slight increase in consumer hardware net revenue in fiscal 2007 was attributable
to increased unit volumes, improved average revenue per unit performance and a mix shift from single function products to
All-in-Ones, the impact of which was partially offset by the continued shift in demand to lower priced products and strategic
pricing decisions.
IPG earnings from operations as a percentage of net revenue increased by 0.3 percentage points in fiscal 2007 from fiscal
2006, driven by a decrease in operating expenses as a percentage of net revenue that was partially offset by a decrease in
gross margin. Gross margin decreased due primarily to unfavorable hardware margins, increased costs associated with new
product introductions and a change in product mix. Operating expenses as a percentage of net revenue decreased due
primarily to higher prior-year research and development expenses associated with product introduction costs, coupled with
higher revenue and more effective spending controls.
On a constant currency basis, net revenue increased 7% in fiscal 2006 from fiscal 2005. The unfavorable currency impact
was due primarily to the movement of the dollar against the euro and the yen in fiscal 2006. In fiscal 2006, the growth in
printer supplies net revenue reflected higher unit volumes as a result of the continued expansion of printer hardware
placements and the strong performance of color-related products. The growth in commercial hardware net revenue in fiscal
2006 was attributable mainly to unit volume growth in color laser printers and multifunction printers and, to a lesser extent,
revenue from our large format printing products with the acquisition of Scitex in November 2005. Commercial and consumer
hardware revenue was unfavorably impacted by the continued shift in demand to lower-priced products and strategic pricing
decisions, which caused average revenue per unit to decline.
IPG earnings from operations as a percentage of net revenue increased 1.3 percentage points in fiscal 2006 from fiscal
2005, which was the result primarily of an increase in gross margin and a decrease in operating expense as a percentage of
net revenue. The gross margin increase was due primarily to improved margins for supplies due to product mix and a
favorable portfolio mix shift from hardware to supplies, the impact of which was partially offset by unfavorable consumer
hardware margins. Operating expense as a percentage of net revenue for fiscal 2006 declined, due mainly to realized savings
from our cost structure initiatives coupled with increased revenue and partially offset by higher bonus accruals.
HP Financial Services
Net revenue..........................................................................................................................
Earnings from operations.....................................................................................................
Earnings from operations as a % of net revenue..................................................................
2007
For the fiscal years ended October 31
2006
In millions
$2,078
$147
7.1%
$2,336
$155
6.6%
$2,102
$213
10.1%
2005
HPFS net revenue increased by 12% in fiscal 2007 from fiscal 2006. The net revenue increase was due primarily to
operating lease growth and higher end-of-lease activity. The financing lease growth and increased used equipment sales, to a
lesser extent, also contributed to the revenue growth.
HPFS earnings from operations as a percentage of net revenue decreased by 0.5 percentage point in fiscal 2007 from
fiscal 2006 due primarily to a decrease in gross margin, which was partially offset by
58
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
a decrease in operating expense as a percentage of net revenue. The gross margin decrease was driven primarily by increased
bad debt expenses and lower bad debt recoveries, as well as lower margins on leases and used equipment sales. The decline
in operating expenses as a percentage of net revenue was due to continued cost controls.
HPFS net revenue decreased by 1% in fiscal 2006 from fiscal 2005. The net revenue decrease was due primarily to lower
used equipment sales and other end-of-lease revenue, which were largely offset by a higher mix of leases classified as
operating leases.
In fiscal 2006, the 3.0 percentage point decrease in earnings from operations as a percentage of net revenue consisted of
a decrease in gross margin, which was partially offset by a decrease in operating expense as a percentage of net revenue. The
gross margin decline was due primarily to competitor pricing pressures, a higher mix of lower margin operating lease assets
and lower recoveries for bad debts, the impact of which was partially offset by lower credit losses. The decrease in operating
expenses as a percentage of net revenue was the result of cost savings achieved through continued cost controls.
Financing Originations
Total financing originations................................................................................................
2007
For the fiscal years ended October 31
2006
In millions
$3,994
$4,441
2005
$4,136
New financing originations, which represent the amounts of financing provided to customers for equipment and related
software and services, and include intercompany activity, increased 11% in fiscal 2007 from fiscal 2006. The increase
reflects higher financing associated with HP product sales resulting from improved integration and engagement with HP’s
sales efforts and a favorable currency impact. Financing originations decreased 3% in fiscal 2006 from fiscal 2005 with the
decrease reflecting lower financing associated with HP product sales.
Portfolio Assets and Ratios
HPFS maintains a strategy to generate a competitive return on equity by effectively leveraging its portfolio against the
risks associated with interest rates and credit. The HPFS business model is asset-intensive and uses certain internal metrics to
measure its performance against other financial services companies, including a segment balance sheet that is derived from
our internal management reporting system. The accounting policies used to derive these amounts are substantially the same
as those used by the consolidated company. However, certain intercompany loans and accounts that are reflected in the
segment balances are eliminated in our Consolidated Financial Statements.
59
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
The portfolio assets and ratios derived from the segment balance sheet for HPFS were as follows for the following fiscal
years ended October 31:
Portfolio assets ‘(1) .........................................................................................................................................
Allowance for doubtful accounts ..................................................................................................................
Operating lease equipment reserve ...............................................................................................................
Total reserves................................................................................................................................................
Net portfolio assets .......................................................................................................................................
Reserve coverage ..........................................................................................................................................
Debt to equity ratio ‘(2)...................................................................................................................................
2007
2006
In millions
$8,415
84
49
133
$8,282
1.6%
6.0x
$7,345
80
42
122
$7,223
1.7%
6.0x
‘(1) Portfolio assets include gross financing receivables of approximately $5.4 billion at October 31, 2007 and $4.9 billion at
October 31, 2006 and net equipment under operating leases of $1.8 billion at October 31, 2007 and $1.5 billion at
October 31, 2006, as disclosed in Note 10 to the Consolidated Financial Statements in Item 8, which is incorporated
herein by reference. Portfolio assets also include capitalized profit on intercompany equipment transactions of
approximately $500 million at October 31, 2007 and $400 million at October 31, 2006, and intercompany leases of
approximately $700 million at October 31, 2007 and $500 million at October 31, 2006, both of which are eliminated in
consolidation.
‘(2) HPFS debt consists of intercompany equity that is treated as debt for segment reporting purposes, intercompany debt and
debt issued directly by HPFS.
Portfolio assets at October 31, 2007 increased 15% from October 31, 2006. The increase resulted from a favorable
currency impact and a high level of financing originations in fiscal 2007. The overall percentage of portfolio assets reserved
decreased due primarily to the write-off of assets covered by specific reserves. HPFS funds its operations mainly through a
combination of intercompany debt and equity.
Corporate Investments
Net revenue..............................................................................................................................
Loss from operations ...............................................................................................................
Loss from operations as a % of net revenue ............................................................................
2005
2007
For the fiscal years ended October 31
2006
In millions
$566
$(151)
$523
$(174)
(26.7)% (33.3)%
$762
$(57)
(7.5)%
The majority of the net revenue in Corporate Investments relates to network infrastructure products sold under the brand
“ProCurve Networking.” In fiscal 2007, revenue from network infrastructure products increased 33% compared to the same
period in fiscal 2006 as new product introductions continued to drive increased sales of enterprise class gigabit Ethernet
switch products.
Corporate Investments’ loss from operations in fiscal 2007 was due primarily to expenses associated with corporate
development, global alliances and HP Labs that are carried in the segment.
60
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
The year-over-year decrease in operating losses was driven primarily by higher earnings from operations generated by
network infrastructure products.
In fiscal 2006, the majority of the net revenue in Corporate Investments related to network infrastructure products, which
grew 8% from fiscal 2005 as a result of increased sales of gigabit Ethernet switch products.
Corporate Investments’ loss from operations in fiscal 2006 decreased compared to fiscal 2005 due primarily to lower
operating expenses related to global alliances and HP Labs and higher gross profits from network infrastructure products. The
decrease in operating expenses was due primarily to savings resulting from restructuring actions and lower program
spending. Expenses related to global alliances and HP Labs contributed to the majority of the loss from operations.
LIQUIDITY AND CAPITAL RESOURCES
Our cash balances are held in numerous locations throughout the world, including substantial amounts held outside of
the United States. Most of the amounts held outside of the United States could be repatriated to the United States but under
current law would be subject to United States federal income taxes, less applicable foreign tax credits. Repatriation of some
foreign balances is restricted by local laws. We have provided for the United States federal tax liability on these amounts for
financial statement purposes, except for foreign earnings that are considered indefinitely reinvested outside of the United
States. Repatriation could result in additional United States federal income tax payments in future years. Our intent is that
most of the non-U.S. cash balances would remain outside of the United States and we would meet United States liquidity
needs through ongoing cash flows, external borrowings, or both. We utilize a variety of tax planning and financing strategies
in an effort to ensure that our worldwide cash or debt is available in the locations in which it is needed.
FINANCIAL CONDITION (Sources and Uses of Cash)
Our total cash and cash equivalents declined approximately 31% to $11.3 billion at October 31, 2007 from $16.4 billion
at October 31, 2006 due primarily to increased spending for repurchases of our common stock and investment spending on
acquisitions, which spending was partially offset by positive operating cash flows and increased borrowings. The net
$14.7 billion used for investing and financing activities during fiscal 2007 included $10.9 billion for share repurchases,
$6.8 billion for cash payments in connection with acquisitions and $2.5 billion for net investments in property, plant and
equipment. Partially offsetting these cash expenditures were $3.1 billion of proceeds relating to the issuance of stock under
employee stock plans and a $2.6 billion net increase in our debt and commercial paper from increased borrowings. Our cash
position remains strong, and we believe our cash balances are sufficient to cover cash outlays expected in fiscal 2008
associated with additional stock repurchases, acquisitions, company bonus payments, and other operating cash requirements.
2005
2007
For the fiscal years ended October 31
2006
In millions
$11,353
(2,787)
(6,077)
$2,489
$9,615
(9,123)
(5,599)
$(5,107)
$8,028
(1,757)
(5,023)
$1,248
Net cash provided by operating activities .........................................................................
Net cash used in investing activities .................................................................................
Net cash used in financing activities.................................................................................
Net (decrease) increase in cash and cash equivalents .......................................................
61
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Key Performance Metrics
Days of sales outstanding in accounts receivable ....................................................................................
Days of supply in inventory.....................................................................................................................
Days of purchases outstanding in accounts payable ................................................................................
Cash conversion cycle .............................................................................................................................
October 31
2006
40
38
(59)
19
2007
43
34
(50)
27
2005
39
35
(52)
22
Days of sales outstanding in accounts receivable (“DSO”) measures the average number of days our receivables are
outstanding. DSO is calculated by dividing accounts receivable, net of allowance for doubtful accounts, by a 90-day average
net revenue.
Days of supply in inventory (“DOS”) measures the average number of days from procurement to sale of our product.
DOS is calculated by dividing inventory by a 90-day average cost of goods sold.
Days of purchases outstanding in accounts payable (“DPO”) measures the average number of days our accounts payable
balances are outstanding. DPO is calculated by dividing accounts payable by a 90-day average cost of goods sold.
Our working capital requirements depend upon our effective management of the cash conversion cycle, which represents
effectively the number of days that elapse from the day we pay for the purchase of raw materials to the collection of cash
from our customers. The cash conversion cycle is the sum of DSO and DOS less DPO.
The increase in DSO was due primarily to selectively extending payment terms and reducing cash discount rates for
early payments for certain customers. The decrease in DOS was due primarily to more efficient inventory management and
higher cost of goods sold during the fourth quarter as a result of increased revenues. The decrease in DPO was due primarily
to purchasing linearity and reduced payment terms and cash discounts from our major contract manufacturers. These changes
contributed to the increase in our current year cash conversion cycle compared to the prior year.
2007 Compared to 2006
Operating Activities
Net cash provided by operating activities decreased by $1.7 billion during fiscal 2007 from fiscal 2006. The decrease
was due primarily to an increase in accounts receivable, a decrease in accounts payable and higher payments for bonuses
earned in fiscal 2006 and paid in the first quarter of fiscal 2007. The decease in our cash flow from operations was partially
offset by higher earnings in fiscal 2007.
Investing Activities
Net cash used in investing activities increased by $6.3 billion in fiscal 2007 from fiscal 2006, due primarily to higher
cash payments made in connection with acquisitions.
62
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Financing Activities
Net cash used in financing activities decreased by $0.5 billion during fiscal 2007 from fiscal 2006. The decrease was due
primarily to higher net issuance of commercial paper and debt, the impact of which was partially offset by increased
repurchases of our common stock.
Common Stock Repurchases
We repurchase shares of our common stock under an ongoing program to manage the dilution created by shares issued
under employee benefit plans as well as to repurchase shares opportunistically. This program authorizes repurchases in the
open market or in private transactions. In fiscal 2007, we completed share repurchases of approximately 209 million shares.
Repurchases of approximately 210 million shares were settled for $9.1 billion, which included approximately 1 million
shares repurchased in transactions that were executed in fiscal 2006 but settled in fiscal 2007. In fiscal 2006, we completed
share repurchases of approximately 188 million shares. Repurchases of approximately 190 million shares were settled for
$6.1 billion in fiscal 2006, including 2 million shares repurchased in transactions that were executed in fiscal 2005 but settled
in fiscal 2006.
In addition to the above transactions, we entered into an Accelerated Share Repurchase program (the “ASR Program”)
with a third-party investment bank during the second quarter of fiscal 2007. Pursuant to the terms of the ASR Program, we
purchased 40 million shares of our common stock from the investment bank for $1.8 billion (the “Purchase Price”) on
March 30, 2007 (the “Purchase Date”). We decreased our shares outstanding and reduced the outstanding shares used to
calculate the weighted-average common shares outstanding for both basic and diluted EPS on the Purchase Date. The shares
delivered to us included shares that the investment bank borrowed from third parties. The investment bank purchased an
equivalent number of shares in the open market to cover its position with respect to the borrowed shares during a
contractually specified averaging period that began on the Purchase Date and ended on June 6, 2007. At the end of the
averaging period, the investment bank’s total purchase cost based on the volume weighted-average purchase price of our
shares during the averaging period was approximately $90 million less than the Purchase Price. Accordingly, we had the
option to receive either additional shares of our common stock or a cash payment in the amount of the difference from the
investment bank. In June 2007, we received approximately 2 million additional shares purchased by the investment bank in
the open market with a value approximately equal to that amount. We reduced our shares outstanding upon receipt of those
shares.
Also, we entered into a prepaid variable share purchase program (“PVSPP”) with a third-party investment bank during
the first quarter of 2006 and prepaid $1.7 billion in exchange for the right to receive a variable number of shares of our
common stock weekly over a one-year period beginning in the second quarter of fiscal 2006 and ending during the second
quarter of fiscal 2007. We completed all repurchases under the PVSPP on March 9, 2007. As of that date, we had
cumulatively received a total of 53 million shares. We retired all shares repurchased and no longer deem those shares
outstanding.
We intend to continue to repurchase shares as a means to manage dilution from the issuance of shares under employee
benefit plans and to purchase shares opportunistically. On March 15, 2007, our Board of Directors authorized an additional
$8.0 billion for future share repurchases. As of October 31, 2007, we had remaining authorization of approximately
$2.7 billion for future share repurchases. On November 19, 2007, our Board of Directors authorized an additional $8.0 billion
for future share repurchases. For more information on our share repurchases, see Item 5 and Note 14 to the Consolidated
Financial Statements in Item 8, which are incorporated herein by reference.
63
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
2006 Compared to 2005
Operating Activities
Net cash provided by operating activities increased by $3.3 billion during fiscal 2006. The increase in our cash flow from
operations was due primarily to higher earnings and lower payments for pension and taxes, with the increase partially offset
by higher payments for restructuring costs.
Investing Activities
Net cash used in investing activities increased by $1.0 billion during fiscal 2006 due primarily to higher capital
expenditures for property, plant and equipment, lower net proceeds from maturities and sales of investments and higher
amounts of cash paid for acquisitions.
Financing Activities
Net cash used in financing activities increased by $1.1 billion during fiscal 2006 from fiscal 2005. The increase was due
primarily to a $2.5 billion increase in repurchases of common stock and a $1.7 billion prepayment for common stock to be
repurchased in future periods. These expenditures were partially offset by a $1.6 billion net increase to financing activities
resulting from higher borrowings and lower debt payments and $1.4 billion increased proceeds from the issuance of common
stock related to our employee stock plans due mainly to increased exercises of employee stock options as a result of higher
market prices for our common stock during fiscal 2006.
Common Stock Repurchases
In fiscal 2006, we completed share repurchases of approximately 188 million shares. Repurchases of approximately
190 million shares were settled for $6.1 billion, which included 2 million shares repurchased in transactions that were
executed in fiscal 2005 but settled in fiscal 2006, as compared to approximately 150 million shares repurchased, of which
148 million shares were settled for $3.5 billion in fiscal 2005.
In addition to the shares we repurchased, we received approximately 34 million shares for an aggregate price of
$1.1 billion under PVSPP as described above. Under the PVSPP, we prepaid $1.7 billion in the first quarter of fiscal 2006 in
exchange for the right to receive a variable number of shares of our common stock weekly over a one-year period beginning
in the second quarter of fiscal 2006 and ending during the second quarter of fiscal 2007. We recorded the payment as a
prepaid stock repurchase in the stockholders’ equity section of our Consolidated Balance Sheet and included the payment in
the cash flows from financing activities in the Consolidated Statement of Cash Flows. In connection with this program, the
investment bank purchased shares of our common stock in the open market over time. The prepaid funds were expended
ratably over the term of the program.
During fiscal 2006, our Board of Directors authorized an additional $10.0 billion for future repurchases of our
outstanding shares of common stock. As of October 31, 2006, we had remaining authorization of approximately $5.6 billion
for future share repurchases.
LIQUIDITY
As previously discussed, we use cash generated by operations as our primary source of liquidity; we believe that
internally generated cash flows are sufficient to support business operations, capital expenditures and the payment of
stockholder dividends, in addition to a level of discretionary
64
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
investments and share repurchases. We are able to supplement this near-term liquidity, if necessary, with broad access to
capital markets and credit line facilities made available by various foreign and domestic financial institutions.
We maintain debt levels that we establish through consideration of a number of factors, including cash flow
expectations, cash requirements for operations, investment plans (including acquisitions), share repurchase activities, and the
overall cost of capital. Outstanding debt increased to $8.2 billion as of October 31, 2007 as compared to $5.2 billion at
October 31, 2006, bearing weighted-average interest rates of 5.2% and 5.1%, respectively. Short-term borrowings increased
to $3.2 billion at October 31, 2007 from $2.7 billion at October 31, 2006. The increase in short-term borrowings was due
primarily to the net issuance of approximately $1.9 billion of our commercial paper and notes payable and the reclassification
from long-term to short-term debt, including $500 million U.S. Dollar Global Notes that will mature in March 2008 and
$50 million Series A Medium-Term Notes that matured and we repaid in December 2007. The increase was offset partially
by our repayment of $1.0 billion Global Notes in December 2006 and $1.0 billion Global Notes in July 2007. During fiscal
2007, we issued $32 billion and repaid $30 billion of commercial paper. As of October 31, 2007, we had $5 million in total
borrowings collateralized by certain financing receivable assets.
The majority of our outstanding debt relates to HPFS. We issue debt in order to finance HPFS and as needed for other
purposes. HPFS has a business model that is asset-intensive in nature and therefore we fund HPFS more by debt than we fund
our other business segments. At October 31, 2007, HPFS had approximately $8.3 billion in net portfolio assets, which
included short- and long-term financing receivables and operating lease assets.
We have the following resources available to obtain short-term or long-term financings, if we need additional liquidity:
2002 Shelf Registration Statement
Debt, U.S. global securities and up to $1,500 of Series B
Medium-Term Notes...........................................................................
Euro Medium-Term Notes........................................................................
Uncommitted lines of credit .....................................................................
Commercial paper programs
U.S. ........................................................................................................
Euro........................................................................................................
Original amount
available
At October 31, 2007
Used
In millions
Available
$3,000
3,000
2,455
6,000
500
$14,955
$2,000
$1,000
—
645(1)
1,821
244
$4,710
3,000
1,810
4,179
256
$10,245
(1) Approximately $151 million of this amount was recorded as debt as of October 31, 2007; the remaining amount was
used to satisfy business operational requirements.
In addition to the financing resources listed above, we had additional borrowing activities as described below.
In November 2006, in connection with the Mercury acquisition, we assumed notes issued by Mercury with a face value
of $300 million, maturing on July 1, 2007 and bearing interest at a rate of
65
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
4.75% per annum (the “Mercury Notes”). As of July 31, 2007, we had repurchased or repaid at maturity all of the Mercury
Notes.
In May 2006, we filed a shelf registration statement (the “2006 Shelf Registration Statement”) with the Securities and
Exchange Commission (the “SEC”) to enable us to offer and sell from time to time, in one or more offerings, debt securities,
common stock, preferred stock, depositary shares and warrants. On May 23, 2006, we issued $1.0 billion in floating rate
global notes due May 22, 2009 under the 2006 Shelf Registration Statement that we redeemed in June 2007.
On February 22, 2007, we issued an additional $2.0 billion of global notes under the 2006 Shelf Registration Statement.
The global notes included $600 million of notes due March 2012 with a floating interest rate equal to the three-month USD
LIBOR plus 0.11% per annum, $900 million of notes due March 2012 with a fixed interest rate of 5.25% per annum and
$500 million of notes due March 2017 with a fixed interest rate of 5.40% per annum. We issued the $600 million notes at par
and the $900 million notes and $500 million notes at discounts to par at 99.938% and 99.694%, respectively. We used the net
proceeds from these note offerings for general corporate purposes, including funding the repurchase of the Mercury Notes as
described above and repaying short-term commercial paper.
On June 12, 2007, we issued an additional $2.0 billion of global notes under the 2006 Shelf Registration Statement. The
global notes included $1.0 billion of notes due June 2009 with a floating interest rate equal to the three-month USD LIBOR
plus 0.01% per annum, and $1.0 billion of notes due June 2010 with a floating interest rate equal to the three-month USD
LIBOR plus 0.06% per annum. We issued these global notes at par. We used the net proceeds from these offerings for
general corporate purposes, including the redemption of the floating rate global notes due May 22, 2009 as described above
in June 2007 and the repayment of short-term commercial paper.
On December 17, 2007, we repaid $50 million Series A Medium-Term Notes due December 2007 at maturity.
We have a $3.0 billion U.S. credit facility expiring in May 2012. This credit facility is a senior unsecured committed
borrowing arrangement that we put in place primarily to support our U.S. commercial paper program. Our ability to have a
U.S. commercial paper outstanding balance that exceeds the $3.0 billion committed credit facility is subject to a number of
factors, including liquidity conditions and business performance.
Our credit risk is evaluated by three independent rating agencies based upon publicly available information as well as
information obtained in our ongoing discussions with them. Standard & Poor’s Ratings Services, Moody’s Investors Service
and Fitch Ratings currently rate our senior unsecured long-term debt A, A2 and A+ and our short-term debt A-1, Prime-1 and
F1, respectively. We do not have any rating downgrade triggers that would accelerate the maturity of a material amount of
our debt. However, a downgrade in our credit rating would increase the cost of borrowings under our credit facilities. Also, a
downgrade in our credit rating could limit our ability to issue commercial paper under our current programs. If this occurs,
we would seek alternative sources of funding, including through drawdowns under our credit facility or the issuance of notes
under our existing shelf registration statements and our Euro Medium-Term Note Programme.
We have revolving trade receivables-based facilities permitting us to sell certain trade receivables to third parties on a
non-recourse basis. The aggregate maximum capacity under these programs was approximately $525 million as of
October 31, 2007. We sold approximately $2.2 billion of trade
66
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
receivables during fiscal 2007. As of October 31, 2007, we had approximately $117 million available under these programs.
Contractual Obligations
The impact that we expect our contractual obligations as of October 31, 2007 to have on our liquidity and cash flow in
future periods is as follows:
Long-term debt, including capital lease obligations ‘(1)...........
Operating lease obligations.....................................................
Purchase obligations(2) ............................................................
Total........................................................................................
Payments Due by Period
Total
$5,827
2,193
2,029
$10,049
Less than
1 Year
$683
595
1,826
$3,104
1-3 Years
In millions
$2,059
761
164
$2,984
3-5 Years
More than
5 Years
$2,012
409
24
$2,445
$1,073
428
15
$1,516
‘(1) Amounts represent the expected cash payments of our long-term debt and do not include any fair value adjustments or
discounts. Included in our long-term debt are approximately $48 million of capital lease obligations that are secured by
certain equipment.
‘(2) Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on us and
that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable
price provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are
cancelable without penalty. These purchase obligations are related principally to inventory and other items.
Funding Commitments
During fiscal 2007, we made approximately $133 million of contributions to non-U.S. pension plans, paid $16 million to
cover benefit payments to U.S. non-qualified plan participants, and paid $58 million to cover benefit claims under post-
retirement benefit plans. In addition, we used $108 million of cash to fund the distribution and subsequent transfer of accrued
pension benefits from the U.S. Excess Benefit Plan to the U.S. Executive Deferred Compensation Plan for the terminated
vested plan participants. In fiscal 2008, we expect to contribute approximately $145 million to our pension plans and
approximately $15 million to cover benefit payments to U.S. non-qualified plan participants. We also expect to pay
approximately $80 million to cover benefit claims for our post-retirement benefit plans in fiscal 2008. Our funding policy is
to contribute cash to our pension plans so that we meet at least the minimum contribution requirements, as established by
local government and funding and taxing authorities. We expect to use contributions made to the post-retirement benefit
plans primarily for the payment of retiree health claims incurred during the fiscal year.
In conjunction with our February 2007 announcement to modify our U.S. defined benefit pension plan and our Pre-2003
Retiree Medical Program, we offered eligible affected employees an option to participate in the 2007 EER. We funded the
cash expenditures associated with the 2007 EER primarily by using available U.S. pension plan assets. We made no
incremental pension contributions to the pension plan stemming from the 2007 EER.
67
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
We have implemented bonus programs that are designed to reward our employees upon achievement of annual
performance objectives. We calculate bonuses based on a formula, with targets that are set at the beginning of each fiscal
year. Our Board of Directors approves both the formula and the targets.
In fiscal 2007, we outperformed against our targets, which will result in a significant bonus payout during the first
quarter of fiscal 2008 and a corresponding reduction of cash flow from operations in that quarter. We accrued and expensed
this bonus, as it was earned, throughout fiscal 2007.
As a result of our approved restructuring plans, we expect future cash expenditures of $173 million, which we recorded
on our Consolidated Balance Sheet at October 31, 2007. We expect to make cash payments of approximately $123 million in
fiscal 2008 and the majority of the remaining $50 million through 2014.
Pending and Subsequent Acquisitions
For pending acquisitions, see Note 6 to the Consolidated Financial Statements in Item 8, which is incorporated herein by
reference.
Off-Balance Sheet Arrangements
As part of our ongoing business, we do not participate in transactions that generate material relationships with
unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose
entities (“SPEs”), which would have been established for the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. As of October 31, 2007, we are not involved in any material unconsolidated SPEs.
Indemnifications
In the ordinary course of business, we enter into contractual arrangements under which we may agree to indemnify the
third-party to such arrangement from any losses incurred relating to the services they perform on behalf of us 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 we have made related to these indemnifications have been immaterial.
68
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
In the normal course of business, we are exposed to foreign currency exchange rate, interest rate and equity price risks
that could impact our financial position and results of operations. Our risk management strategy with respect to these three
market risks may include the use of derivative financial instruments. We use derivative contracts only to manage existing
underlying exposures of HP. Accordingly, we do not use derivative contracts for speculative purposes. Our risks, risk
management strategy and a sensitivity analysis estimating the effects of changes in fair values for each of these exposures are
outlined below.
Actual gains and losses in the future may differ materially from the sensitivity analyses based on changes in the timing
and amount of interest rate, foreign currency exchange rate and equity price movements and our actual exposures and hedges.
Foreign currency exchange rate risk
We are exposed to foreign currency exchange rate risk inherent in our sales commitments, anticipated sales, anticipated
purchases and assets, liabilities and debt denominated in currencies other than the U.S. dollar. We transact business in
approximately 40 currencies worldwide, of which the most significant to our operations for fiscal 2007 were the euro, the
Japanese yen and the British pound. For most currencies, we are a net receiver of the foreign currency and therefore benefit
from a weaker U.S. dollar and are adversely affected by a stronger U.S. dollar relative to the foreign currency. Even where
we are a net receiver, a weaker U.S. dollar may adversely affect certain expense figures taken alone. We use a combination of
forward contracts and options designated as cash flow hedges to protect against the foreign currency exchange rate risks
inherent in our forecasted net revenue and, to a lesser extent, cost of sales denominated in currencies other than the U.S.
dollar. In addition, when debt is denominated in a foreign currency, we may use swaps to exchange the foreign currency
principal and interest obligations for U.S. dollar-denominated amounts to manage the exposure to changes in foreign
currency exchange rates. We also use other derivatives not designated as hedging instruments under SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities,” consisting primarily of forward contracts to hedge foreign
currency balance sheet exposures. We recognize the gains and losses on foreign currency forward contracts in the same
period as the remeasurement losses and gains of the related foreign currency-denominated exposures. Alternatively, we may
choose not to hedge the foreign currency risk associated with our foreign currency exposures if such exposure acts as a
natural foreign currency hedge for other offsetting amounts denominated in the same currency or the currency is difficult or
too expensive to hedge.
We have performed sensitivity analyses as of October 31, 2007 and 2006, using a modeling technique that measures the
change in the fair values arising from a hypothetical 10% adverse movement in the levels of foreign currency exchange rates
relative to the U.S. dollar, with all other variables held constant. The analyses cover all of our foreign currency contracts
offset by the underlying exposures. The foreign currency exchange rates we used were based on market rates in effect at
October 31, 2007 and 2006. The sensitivity analyses indicated that a hypothetical 10% adverse movement in foreign currency
exchange rates would result in a foreign exchange loss of $104 million at both October 31, 2007 and October 31, 2006.
Interest rate risk
We also are exposed to interest rate risk related to our debt and investment portfolios and financing receivables. We issue
long-term debt in either U.S. dollars or foreign currencies based on market conditions at the time of financing. We then
typically use interest rate and/or currency swaps to modify 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 the exchange of fixed
for
69
floating interest payments. However, we may choose not to swap fixed for floating interest payments or may terminate a
previously executed swap if we believe a larger proportion of fixed-rate debt would be beneficial. In order to hedge the fair
value of certain fixed-rate investments, we may enter into interest rate swaps that convert fixed interest returns into variable
interest returns. We may use cash flow hedges to hedge the variability of LIBOR-based interest income received on certain
variable-rate investments. We may also enter into interest rate swaps that convert variable rate interest returns into fixed-rate
interest returns.
We have performed sensitivity analyses as of October 31, 2007 and 2006, using a modeling technique that measures the
change in the fair values arising from a hypothetical 10% adverse movement in the levels of interest rates across the entire
yield curve, with all other variables held constant. The analyses cover our debt, investment instruments, financing receivables
and interest rate swaps. The analyses use actual maturities for the debt, investments and interest rate swaps and approximate
maturities for financing receivables. The discount rates we used were based on the market interest rates in effect at
October 31, 2007 and 2006. The sensitivity analyses indicated that a hypothetical 10% adverse movement in interest rates
would result in a loss in the fair values of our debt and investment instruments and financing receivables, net of interest rate
swap positions, of $17 million at October 31, 2007 and $19 million at October 31, 2006.
Equity price risk
We are also exposed to equity price risk inherent in our portfolio of publicly-traded equity securities, which had an
estimated fair value of $9 million at October 31, 2007 and $36 million at October 31, 2006. We monitor our equity
investments for impairment on a periodic basis. In the event that the carrying value of the equity investment exceeds its fair
value, and we determine the decline in value to be other than temporary, we reduce the carrying value to its current fair value.
Generally, we do not attempt to reduce or eliminate our market exposure on these equity securities. However, we may use
derivative transactions to hedge certain positions from time to time. We do not purchase our equity securities with the intent
to use them for speculative purposes. A hypothetical 30% adverse change in the stock prices of our publicly-traded equity
securities would result in a loss in the fair values of our marketable equity securities of $3 million at October 31, 2007 and
$11 million at October 31, 2006. The aggregate cost of privately-held companies and other investments was $533 million at
October 31, 2007 and $362 million at October 31, 2006.
70
ITEM 8. Financial Statements and Supplementary Data.
Table of Contents
Reports of Independent Registered Public Accounting Firm..............................................................................................
Management’s Report on Internal Control Over Financial Reporting................................................................................
Consolidated Statements of Earnings .................................................................................................................................
Consolidated Balance Sheets ..............................................................................................................................................
Consolidated Statements of Cash Flows.............................................................................................................................
Consolidated Statements of Stockholders’ Equity..............................................................................................................
Notes to Consolidated Financial Statements.......................................................................................................................
Note 1: Summary of Significant Accounting Policies .....................................................................................................
Note 2: Stock-Based Compensation ................................................................................................................................
Note 3: Net Earnings Per Share .......................................................................................................................................
Note 4: Balance Sheet Details..........................................................................................................................................
Note 5: Supplemental Cash Flow Information.................................................................................................................
Note 6: Acquisitions ........................................................................................................................................................
Note 7: Goodwill and Purchased Intangible Assets .........................................................................................................
Note 8: Restructuring Charges.........................................................................................................................................
Note 9: Financial Instruments ..........................................................................................................................................
Note 10: Financing Receivables and Operating Leases ...................................................................................................
Note 11: Guarantees.........................................................................................................................................................
Note 12: Borrowings........................................................................................................................................................
Note 13: Taxes on Earnings .............................................................................................................................................
Note 14: Stockholders’ Equity.........................................................................................................................................
Note 15: Retirement and Post-Retirement Benefit Plans .................................................................................................
Note 16: Commitments ....................................................................................................................................................
Note 17: Litigation and Contingencies ............................................................................................................................
Note 18: Segment Information.........................................................................................................................................
Quarterly Summary..........................................................................................................................................................
72
74
75
76
77
78
79
79
88
95
96
98
98
101
103
105
110
111
112
115
120
122
132
133
142
150
71
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Hewlett-Packard Company
We have audited the accompanying consolidated balance sheets of Hewlett-Packard Company and subsidiaries as of
October 31, 2007 and 2006, and the related consolidated statements of earnings, stockholders’ equity and cash flows for each
of the three years in the period ended October 31, 2007. Our audits also included the financial statement schedule listed in the
Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial
position of Hewlett-Packard Company and subsidiaries at October 31, 2007 and 2006, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended October 31, 2007, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth
therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the effectiveness of Hewlett-Packard Company’s internal control over financial reporting as of October 31, 2007,
based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated December 14, 2007 expressed an unqualified opinion
thereon.
As discussed in Note 1 to the consolidated financial statements, in fiscal year 2007, Hewlett-Packard Company changed
its method of accounting for defined benefit postretirement plans in accordance with the guidance provided in Statement of
Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans—An Amendment of FASB No. 87, 88, 106 and 132(R)” and, in fiscal year 2006, changed its method of accounting for
stock-based compensation in accordance with guidance provided in Statement of Financial Accounting Standards
No. 123(R), “Share-Based Payment”.
/s/ ERNST & YOUNG LLP
San Jose, California
December 14, 2007
72
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Hewlett-Packard Company
We have audited Hewlett-Packard Company’s internal control over financial reporting as of October 31, 2007, based on
criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). Hewlett-Packard Company’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the effectiveness of the company’s internal control over financial reporting based on
our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, Hewlett-Packard Company maintained, in all material respects, effective internal control over financial
reporting as of October 31, 2007 based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the accompanying consolidated balance sheets of Hewlett-Packard Company and subsidiaries as of October 31, 2007
and 2006, and the related consolidated statements of earnings, stockholders’ equity and cash flows for each of the three years
in the period ended October 31, 2007 and our report dated December 14, 2007 expressed an unqualified opinion thereon.
/s/ERNST & YOUNG LLP
San Jose, California
December 14, 2007
73
Management’s Report on Internal Control Over Financial Reporting
HP’s management is responsible for establishing and maintaining adequate internal control over financial reporting for
HP. HP’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S.
generally accepted accounting principles. HP’s internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of HP; (ii) provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts
and expenditures of HP are being made only in accordance with authorizations of management and directors of HP; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of
HP’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
HP’s management assessed the effectiveness of HP’s internal control over financial reporting as of October 31, 2007,
utilizing the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework. Based on the assessment by HP’s management, we determined that HP’s internal
control over financial reporting was effective as of October 31, 2007. The effectiveness of HP’s internal control over
financial reporting as of October 31, 2007 has been audited by Ernst & Young LLP, HP’s independent registered public
accounting firm, as stated in their report which appears on page 73 of this Annual Report on Form 10-K.
/s/ MARK V. HURD
Mark V. Hurd
Chairman, Chief Executive Officer and President
December 14, 2007
/s/ CATHERINE A. LESJAK
Catherine A. Lesjak
Executive Vice President and Chief Financial Officer
December 14, 2007
74
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Consolidated Statements of Earnings
For the fiscal years ended October 31
2006
In millions, except per share amounts
2007
2005
Net revenue:
Products ...........................................................................................................................
Services............................................................................................................................
Financing income.............................................................................................................
Total net revenue...........................................................................................................
$84,229
19,699
358
104,286
$73,557
17,773
328
91,658
$68,945
17,380
371
86,696
Costs and expenses:
Cost of products ...............................................................................................................
Cost of services................................................................................................................
Financing interest.............................................................................................................
Research and development ..............................................................................................
Selling, general and administrative..................................................................................
Amortization of purchased intangible assets....................................................................
In-process research and development charges .................................................................
Restructuring charges.......................................................................................................
Pension curtailments and pension settlements, net ..........................................................
Total operating expenses...............................................................................................
Earnings from operations....................................................................................................
Interest and other, net .........................................................................................................444 606
Gains (losses) on investments.............................................................................................
Earnings before taxes..........................................................................................................
Provision for taxes ..............................................................................................................
Net earnings........................................................................................................................
Net earnings per share:
Basic ................................................................................................................................
Diluted .............................................................................................................................
Weighted-average shares used to compute net earnings per share:
Basic ................................................................................................................................
Diluted .............................................................................................................................
63,435
15,163
289
3,611
12,226
783
190
387
(517)
95,567
8,719
14
9,177
1,913
$7,264
$2.76
$2.68
2,630
2,716
55,248
13,930
249
3,591
11,266
604
52
158
—
85,098
6,560
25
7,191
993
$6,198
$2.23
$2.18
2,782
2,852
52,550
13,674
216
3,490
11,184
622
2
1,684
(199)
83,223
3,473
83
(13)
3,543
1,145
$2,398
$0.83
$0.82
2,879
2,909
The accompanying notes are an integral part of these Consolidated Financial Statements.
75
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
Current assets:
ASSETS
Cash and cash equivalents ....................................................................................................................
Short-term investments .........................................................................................................................
Accounts receivable ..............................................................................................................................
Financing receivables............................................................................................................................
Inventory...............................................................................................................................................
Other current assets...............................................................................................................................
Total current assets.............................................................................................................................
Property, plant and equipment .................................................................................................................
Long-term financing receivables and other assets ...................................................................................
Goodwill ..................................................................................................................................................
Purchased intangible assets......................................................................................................................
Total assets ..............................................................................................................................................
Current liabilities:
LIABILITIES AND STOCKHOLDERS’ EQUITY
Notes payable and short-term borrowings ............................................................................................
Accounts payable..................................................................................................................................
Employee compensation and benefits...................................................................................................
Taxes on earnings .................................................................................................................................
Deferred revenue...................................................................................................................................
Accrued restructuring............................................................................................................................
Other accrued liabilities ........................................................................................................................
Total current liabilities .......................................................................................................................
Long-term debt ........................................................................................................................................
Other liabilities ........................................................................................................................................
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.01 par value (300 shares authorized; none issued).................................................
Common stock, $0.01 par value (9,600 shares authorized; 2,580 and 2,732 shares issued and
outstanding, respectively) ..................................................................................................................
Additional paid-in capital .....................................................................................................................
Prepaid stock repurchase.......................................................................................................................
Retained earnings..................................................................................................................................
Accumulated other comprehensive income ..........................................................................................
Total stockholders’ equity..................................................................................................................
Total liabilities and stockholders’ equity .................................................................................................
October 31
2006
2007
In millions, except
par value
$11,293
152
13,420
2,507
8,033
11,997
47,402
7,798
7,647
21,773
4,079
$88,699
$3,186
11,787
3,465
1,891
5,025
123
13,783
39,260
4,997
5,916
$16,400
22
10,873
2,440
7,750
10,779
48,264
6,863
6,649
16,853
3,352
$81,981
$2,705
12,102
3,148
1,905
4,309
547
11,134
35,850
2,490
5,497
—
26
—
27
16,381
—
21,560
559
38,526
$88,699
17,966
(596)
20,729
18
38,144
$81,981
The accompanying notes are an integral part of these Consolidated Financial Statements.
76
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
2007
For the fiscal years ended October 31
2006
In millions
2005
Cash flows from operating activities:
Net earnings ..................................................................................................................................
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization..................................................................................................
Stock-based compensation expense..........................................................................................
Provision (benefit) for doubtful accounts — accounts and financing receivables...................
Provision for inventory .............................................................................................................
Restructuring charges................................................................................................................
Pension curtailments and pension settlements, net...................................................................
In-process research and development charges..........................................................................
Deferred taxes on earnings........................................................................................................
Excess tax benefit from stock-based compensation .................................................................
(Gains) losses on investments...................................................................................................
Other, net...................................................................................................................................
Changes in assets and liabilities:
Accounts and financing receivables......................................................................................
Inventory................................................................................................................................
Accounts payable...................................................................................................................
Taxes on earnings ..................................................................................................................
Restructuring .........................................................................................................................
Other assets and liabilities.....................................................................................................
Net cash provided by operating activities .........................................................................
Cash flows from investing activities:
Investment in property, plant and equipment...............................................................................
Proceeds from sale of property, plant and equipment..................................................................
Purchases of available-for-sale securities and other investments ................................................
Maturities and sales of available-for-sale securities and other investments ................................
Payments made in connection with business acquisitions, net ....................................................
Net cash used in investing activities..................................................................................
Cash flows from financing activities:
Issuance (repayment) of commercial paper and notes payable, net.............................................
Issuance of debt ............................................................................................................................
Payment of debt ............................................................................................................................
Issuance of common stock under employee stock plans..............................................................
Repurchase of common stock.......................................................................................................
Prepayment of common stock repurchase....................................................................................
Excess tax benefit from stock-based compensation.....................................................................
Dividends ......................................................................................................................................
Net cash used in financing activities .................................................................................
(Decrease) increase in cash and cash equivalents............................................................................
Cash and cash equivalents at beginning of period...........................................................................
Cash and cash equivalents at end of period .....................................................................................
$7,264
$6,198
$2,398
2,705
629
47
362
387
(517)
190
415
(481)
(14)
(86)
(2,808)
(633)
(346)
502
(606)
2,605
9,615
(3,040)
568
(283)
425
(6,793)
(9,123)
1,863
4,106
(3,419)
3,103
(10,887)
—
481
(846)
(5,599)
(5,107)
16,400
$11,293
2,353
536
4
267
158
—
52
693
(251)
(25)
18
(882)
(1,109)
1,879
(513)
(810)
2,785
11,353
(2,536)
556
(46)
94
(855)
(2,787)
(55)
1,121
(1,259)
2,538
(6,057)
(1,722)
251
(894)
(6,077)
2,489
13,911
$16,400
2,344
104
(22)
398
1,684
(199)
2
(162)
—
13
(82)
666
(208)
846
748
(247)
(255)
8,028
(1,995)
542
(1,729)
2,066
(641)
(1,757)
(1)
84
(1,827)
1,161
(3,514)
—
—
(926)
(5,023)
1,248
12,663
$13,911
The accompanying notes are an integral part of these Consolidated Financial Statements.
77
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
Common Stock
Number of
Shares
Par Value
Additional
Paid-in
Capital
Prepaid
stock
repurchase
Retained
Earnings
Accumulated
Other
Comprehensive
(Loss) income
Total
In millions, except number of shares in thousands
Balance October 31, 2004 .......................................
Net earnings.........................................................
Net unrealized loss on available-for-sale
securities......................................................
Net unrealized gains on cash flow hedges ......
Minimum pension liability ..............................
Cumulative translation adjustment..................
Comprehensive income .......................................
Issuance of common stock in connection with
employee stock plans and other.......................
Repurchases of common stock ............................
Tax benefit from employee stock plans ..............
Dividends.............................................................
Balance October 31, 2005 .......................................
Net earnings.........................................................
Net unrealized loss on available-for-sale
securities......................................................
Minimum pension liability ..............................
Cumulative translation adjustment..................
Comprehensive income .......................................
Issuance of common stock in connection with
employee stock plans and other.......................
Prepaid stock repurchase .....................................
Repurchases of common stock ............................
Tax benefit from employee stock plans ..............
Dividends.............................................................
Stock-based compensation expense under SFAS
123R ................................................................
Balance October 31, 2006 .......................................
Net earnings.........................................................
Net unrealized loss on available-for-sale
securities......................................................
Net unrealized loss on cash flow hedges.........
Minimum pension liability ..............................
Cumulative translation adjustment..................
Comprehensive income .......................................
Issuance of common stock in connection with
employee stock plans and other.......................
Repurchases of common stock ............................
Tax benefit from employee stock plans ..............
Dividends.............................................................
Stock-based compensation expense under SFAS
123R ................................................................
Adjustment to accumulated other
comprehensive income upon adoption of
SFAS 158.........................................................
Balance October 31, 2007 .......................................
2,910,760
$29
$22,129
$—
76,884
(150,448)
(1)
1,452
(3,121)
30
2,837,196
$28
$20,490
$—
117,720
(222,882)
1
(2)
2,487
(5,903)
356
536
(1,722)
1,126
2,732,034
$27
$17,966
$(596)
$15,649
2,398
(442)
(926)
$16,679
6,198
(1,254)
(894)
$20,729
7,264
116,661
(268,981)
1
(2)
3,134
(5,878)
530
629
596
(5,587)
(846)
$(243)
(1)
69
171
(17)
$(21)
(6)
(9)
54
$18
(12)
(18)
(3)
106
$37,564
2,398
(1)
69
171
(17)
2,620
1,452
(3,564)
30
(926)
$37,176
6,198
(6)
(9)
54
6,237
2,488
(1,722)
(6,033)
356
(894)
536
$38,144
7,264
(12)
(18)
(3)
106
7,337
3,135
(10,871)
530
(846)
629
2,579,714
$26
$16,381
$—
$21,560
$559
$38,526
468
468
The accompanying notes are an integral part of these Consolidated Financial Statements.
78
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1: Summary of Significant Accounting Policies
Principles of Consolidation
The Consolidated Financial Statements include the accounts of Hewlett-Packard Company, its wholly-owned
subsidiaries and its controlled majority-owned subsidiaries (collectively, “HP”). HP accounts for equity investments in
companies over which HP has the ability to exercise significant influence, but does not hold a controlling interest, under the
equity method, and HP records its proportionate share of income or losses in interest and other, net in the Consolidated
Statements of Earnings. HP has eliminated all significant intercompany accounts and transactions.
Reclassifications and Segment Reorganization
HP has made certain organizational realignments in order to more closely align its financial reporting with its business
structure. These realignments are immaterial in size and reflect primarily revenue shifts among business units within the same
business segment. None of the changes impacts HP’s previously reported consolidated net revenue, earnings from operations,
net earnings or net earnings per share.
HP has revised the presentation of its Consolidated Statements of Earnings and Consolidated Statements of Cash Flows
for the fiscal years ended October 31, 2006 and 2005 to provide improved visibility and comparability with the current year
presentation. This change does not affect previously reported results of operations for any period presented, or previously
reported subtotals within the Consolidated Statements of Cash Flows.
Use of Estimates
The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in HP’s Consolidated Financial Statements
and accompanying notes. Actual results could differ materially from those estimates.
Revenue Recognition
Net revenue is derived primarily from the sale of products and services. The following revenue recognition policies
define the manner in which HP accounts for sales transactions.
HP recognizes revenue when persuasive evidence of a sales arrangement exists, delivery has occurred or services are
rendered, the sales price or fee is fixed or determinable and collectibility is reasonably assured. Additionally when HP
recognizes revenue on sales to channel partners, including resellers, distributors or value-added solution providers we do so
when the channel partners have economic substance apart from HP and we have completed our obligations related to the sale.
When a sales arrangement contains multiple elements, such as hardware and software products, licenses and/or services,
HP allocates revenue to each element based on its relative fair value, or for software, based on vendor specific objective
evidence (“VSOE”) of fair value. In the absence of fair value for a delivered element, HP first allocates revenue to the fair
value of the undelivered elements and the residual revenue to the delivered elements. Where the fair value for an undelivered
element cannot be determined, HP defers revenue for the delivered elements until the undelivered elements are delivered or
the fair value is determinable for the remaining undelivered elements. HP limits the
79
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of products
or services or subject to customer-specified return or refund privileges.
Products
Hardware
Under HP’s standard terms and conditions of sale, HP transfers title and risk of loss to the customer at the time product is
delivered to the customer and revenue is recognized accordingly, unless customer acceptance is uncertain or significant
obligations remain. HP reduces revenue for estimated customer returns, price protection, rebates and other programs offered
under sales agreements established by HP with its distributors and resellers. HP records revenue from the sale of equipment
under sales-type leases as product revenue at the inception of the lease. HP accrues the estimated cost of post-sale
obligations, including basic product warranties, based on historical experience at the time HP recognizes revenue.
Software
In accordance with the specific guidance of the American Institute of Certified Public Accountants Statement of
Position 97-2, “Software Revenue Recognition” where applicable, the company recognizes revenue from perpetual software
licenses at the inception of the license term assuming all revenue recognition criteria have been met. Term based software
license revenue is recognized on a subscription basis over the term of the license entitlement. HP uses the residual method to
allocate revenue to software licenses at the inception of the license term when VSOE of fair value for all undelivered
elements exists, such as post-contract support, and all other revenue recognition criteria have been satisfied. Revenue
generated from maintenance and unspecified upgrades or updates on a when-and-if-available basis is recognized over the
period such items are delivered.
Services
HP recognizes revenue from fixed-price support or maintenance contracts, including extended warranty contracts and
software post-customer support contracts, ratably over the contract period and recognizes the costs associated with these
contracts as incurred. For time and material contracts, HP recognizes revenue and costs as services are rendered. HP
recognizes revenue from fixed-price consulting arrangements over the contract period on a proportional performance basis, as
determined by the relationship of actual labor costs incurred to date to the estimated total contract labor costs, with estimates
regularly revised during the life of the contract. While HP uses the proportional performance basis as its basic accounting
policy, the company uses the completed performance method if reasonable and reliable cost estimates for a project cannot be
made. For outsourcing contracts, HP recognizes revenue ratably over the contractual service period for fixed price contracts
and on the output or consumption basis for all other outsourcing contracts. HP recognizes costs associated with outsourcing
contracts as incurred, unless such costs relate to the transition phase of the outsourcing contract, in which case HP generally
amortizes those costs over the contractual service period. HP recognizes revenue from operating leases on a straight-line
basis as service revenue over the rental period.
In addition, under the provisions of Emerging Issues Task Force No. 00-21, “Revenue Arrangements with Multiple
Deliverables,” if the revenue for a delivered item is not recognized
80
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
because it is not separable from the outsourcing arrangement, then HP also defers the cost of the delivered item. HP
recognizes both the revenue and associated cost for the delivered item ratably over the remaining contractual service period.
HP recognizes losses on consulting and outsourcing arrangements in the period that the contractual loss becomes probable
and estimable. HP records amounts invoiced to customers in excess of revenue recognized as deferred revenue until the
revenue recognition criteria are met. HP records revenue that is earned and recognized in excess of amounts invoiced on
fixed-price contracts as trade receivables.
Financing Income
Sales-type and direct-financing leases produce financing income, which HP recognizes at consistent rates of return over
the lease term.
Shipping and Handling
HP includes costs related to shipping and handling in cost of sales for all periods presented.
Advertising
HP expenses advertising costs as incurred or when the advertising is first run. Such costs totaled approximately $1.1 billion
in each of fiscal 2007, fiscal 2006 and fiscal 2005.
Taxes on Earnings
HP recognizes deferred tax assets and liabilities for the expected tax consequences of temporary differences between the
tax bases of assets and liabilities and their reported amounts using enacted tax rates in effect for the year the differences are
expected to reverse. HP records a valuation allowance to reduce the deferred tax assets to the amount that is more likely than
not to be realized.
Cash and Cash Equivalents
HP classifies investments as cash equivalents if the original maturity of an investment is three months or less. Cash and
cash equivalents consists primarily of highly liquid investments in time deposits held in major banks and commercial paper.
As of October 31, 2007 and 2006, the carrying value of cash and cash equivalents approximates fair value due to the short
period of time to maturity. Interest income was approximately $598 million in fiscal 2007, $623 million in fiscal 2006 and
$424 million in fiscal 2005.
Allowance for Doubtful Accounts
HP establishes an allowance for doubtful accounts to ensure trade and financing receivables are not overstated due to
uncollectibility. HP maintains bad debt reserves based on a variety of factors, including the length of time receivables are
past due, trends in overall weighted-average risk rating of the total portfolio, macroeconomic conditions, significant one-time
events, historical experience and the use of third-party credit risk models that generate quantitative measures of default
probabilities based on market factors and the financial condition of customers. HP records a specific reserve for individual
accounts when HP becomes aware of a customer’s inability to meet its financial obligations, such as in the case of
bankruptcy filings or deterioration in the customer’s operating results or financial position.
81
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
If circumstances related to customers change, HP would further adjust estimates of the recoverability of receivables.
Inventory
HP values inventory at the lower of cost or market, with cost computed on a first-in, first-out basis.
Fixed Assets
HP states property, plant and equipment at cost less accumulated depreciation. HP capitalizes additions and
improvements. HP expenses maintenance and repairs as incurred. HP provides depreciation using straight-line or accelerated
methods over the estimated useful lives of the assets. Estimated useful lives are 5 to 40 years for buildings and improvements
and 3 to 15 years for machinery and equipment. HP depreciates leasehold improvements over the life of the lease or the asset,
whichever is shorter. HP depreciates equipment held for lease over the initial term of the lease to the equipment’s estimated
residual value.
HP capitalizes certain internal and external costs incurred to acquire or create internal use software, principally related to
software coding, designing system interfaces and installation and testing of the software. HP amortizes capitalized costs using
the straight-line method over the estimated useful lives of the software, generally from three to five years.
Goodwill and Indefinite-Lived Purchased Intangible Assets
Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”),
prohibits the amortization of goodwill and purchased intangible assets with indefinite useful lives. HP reviews goodwill and
purchased intangible assets with indefinite lives for impairment annually at the beginning of its fourth fiscal quarter and
whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable in accordance
with SFAS 142. For goodwill, HP performs a two-step impairment test. In the first step, HP compares the fair value of each
reporting unit to its carrying value. HP determines the fair value of its reporting units based on a weighting of income and
market approaches. Under the income approach, HP calculates the fair value of a reporting unit based on the present value of
estimated future cash flows. Under the market approach, HP estimates the fair value based on market multiples of revenue or
earnings for comparable companies. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned
to that unit, goodwill is not impaired and no further testing is performed. If the carrying value of the net assets assigned to the
reporting unit exceeds the fair value of the reporting unit, then HP must perform the second step of the impairment test in
order to determine the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill
exceeds its implied fair value, HP records an impairment loss equal to the difference.
SFAS 142 also requires that the fair value of the indefinite-lived purchased intangible assets be estimated and compared
to the carrying value. HP estimates the fair value of these intangible assets using an income approach. HP recognizes an
impairment loss when the estimated fair value of the indefinite-lived purchased intangible assets is less than the carrying
value.
82
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
Long-Lived Assets Including Finite-Lived Purchased Intangible Assets
HP amortizes purchased intangible assets with finite lives using the straight-line method over the estimated economic
lives of the assets, ranging from one to ten years.
HP evaluates long-lived assets, such as property, plant and equipment and purchased intangible assets with finite lives,
for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable
in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” HP assesses the fair
value of the assets based on the undiscounted future cash flow the assets are expected to generate and recognizes an
impairment loss when estimated undiscounted future cash flow expected to result from the use of the asset plus net proceeds
expected from disposition of the asset, if any, are less than the carrying value of the asset. When HP identifies an impairment,
HP reduces the carrying amount of the asset to its estimated fair value based on a discounted cash flow approach or, when
available and appropriate, to comparable market values.
Derivative Financial Instruments
HP uses derivative financial instruments, primarily forwards, swaps, and options, to hedge certain foreign currency and
interest rate exposures. HP also may use other derivative instruments not designated as hedges such as forwards used to
hedge foreign currency balance sheet exposures. HP does not use derivative financial instruments for speculative purposes.
See Note 9 for a full description of HP’s derivative financial instrument activities and related accounting policies, which is
incorporated herein by reference.
Investments
HP’s investments consist principally of time deposits, commercial paper, corporate debt, other debt securities, and equity
securities of publicly-traded and privately-held companies. HP classifies investments with maturities of less than one year as
short-term investments.
HP classifies its investments in debt securities and its equity investments in public companies as available-for-sale
securities and carries them at fair value. HP determines fair values for investments in public companies using quoted market
prices. HP records the unrealized gains and losses on available-for-sale securities, net of taxes, in accumulated other
comprehensive income (loss).
HP carries equity investments in privately-held companies at the lower of cost or fair value. HP may estimate fair values
for investments in privately-held companies based upon one or more of the following: pricing models using historical and
forecasted financial information and current market rates; liquidation values; the values of recent rounds of financing; and
quoted market prices of comparable public companies.
Losses on Investments
HP monitors its investment portfolio for impairment on a periodic basis. In the event that the carrying value of an
investment exceeds its fair value and the decline in value is determined to be other than temporary, HP records an impairment
charge and establishes a new cost basis for the investment at its current fair value. In order to determine whether a decline in
value is other than temporary, HP evaluates, among other factors: the duration and extent to which the fair value has been
less than the
83
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
carrying value; the financial condition of and business outlook for the company or financial institution, including key
operational and cash flow metrics, current market conditions and future trends in the issuer’s industry; the company’s relative
competitive position within the industry; and HP’s intent and ability to retain the investment for a period of time sufficient to
allow for any anticipated recovery in fair value.
HP determined the declines in value of certain investments to be other than temporary. Accordingly, HP recorded
impairments of approximately $28 million in fiscal 2007, $8 million in fiscal 2006 and $43 million in fiscal 2005. HP
includes these impairments in gains (losses) on investments in the Consolidated Statements of Earnings. Depending on
market conditions, HP may record additional impairments on its investment portfolio in the future.
Concentrations of Credit Risk
Financial instruments that potentially subject HP to significant concentrations of credit risk consist principally of cash
and cash equivalents, investments, accounts receivable from trade customers and from contract manufacturers, financing
receivables and derivatives.
HP maintains cash and cash equivalents, short and long-term investments, derivatives and certain other financial
instruments with various financial institutions. These financial institutions are located in many different geographical regions
and HP’s policy is designed to limit exposure with any one institution. As part of its cash and risk management processes, HP
performs periodic evaluations of the relative credit standing of the financial institutions. HP has not sustained material credit
losses from instruments held at financial institutions. HP utilizes forward contracts and other derivative contracts to protect
against the effects of foreign currency fluctuations. Such contracts involve the risk of non-performance by the counterparty,
which could result in a material loss.
HP sells a significant portion of its products through third-party distributors and resellers and, as a result, maintains
individually significant receivable balances with these parties. If the financial condition or operations of these distributors
and resellers deteriorate substantially, HP’s operating results could be adversely affected. The ten largest distributor and
reseller receivable balances collectively, which were concentrated primarily in North America, represented approximately
23% of gross accounts receivable at October 31, 2007 and 21% at October 31, 2006. No single customer accounts for more
than 10% of accounts receivable. Credit risk with respect to other accounts receivable and financing receivables 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. HP performs ongoing credit evaluations of the financial condition of its third-party
distributors, resellers and other customers and requires collateral, such as letters of credit and bank guarantees, in certain
circumstances. To ensure a receivable balance is not overstated due to uncollectibility, an allowance for doubtful accounts is
maintained as required under U.S. generally accepted accounting principles. The past due or delinquency status of a
receivable is based on the contractual payment terms of the receivable. The need to write off a receivable balance depends on
the age, size and a determination of collectibility of the receivable. HP generally has experienced longer accounts receivable
collection cycles in its emerging markets, in particular Asia Pacific and Latin America, compared to its United States and
European markets. In the event that accounts receivable collection cycles in emerging markets significantly deteriorate or one
or more of HP’s larger resellers in these regions fail, HP’s operating results could be adversely affected.
84
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
Other Concentration
HP obtains a significant number of components from single source suppliers due to technology, availability, price,
quality or other considerations. The loss of a single source supplier, the deterioration of its relationship with a single source
supplier, or any unilateral modification to the contractual terms under which HP is supplied components by a single source
supplier could adversely effect HP’s revenue and gross margins.
Stock-Based Compensation
Effective November 1, 2005, HP adopted the fair value recognition provisions of SFAS No. 123 (revised 2004),
“Share-Based Payment” (“SFAS 123R”), using the modified prospective transition method and therefore has not restated
results for prior periods. Under this transition method, stock-based compensation expense in fiscal 2006 included stock-based
compensation expense for all share-based payment awards granted prior to, but not yet vested as of November 1, 2005, based
on the grant-date fair value estimated in accordance with the original provision of SFAS No. 123, “Accounting for
Stock-Based Compensation” (“SFAS 123”). Stock-based compensation expense for all share-based payment awards granted
after November 1, 2005 is based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. HP
recognizes these compensation costs on a straight-line basis over the requisite service period of the award, which is generally
the option vesting term of four years. Prior to the adoption of SFAS 123R, HP recognized stock-based compensation expense
in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”
(“APB 25”). In March 2005, the Securities and Exchange Commission (the “SEC”) issued Staff Accounting Bulletin No. 107
(“SAB 107”) regarding the SEC’s interpretation of SFAS 123R and the valuation of share-based payments for public
companies. HP has applied the provisions of SAB 107 in its adoption of SFAS 123R.
In November 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No.
FAS 123(R)-3, “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards” (“FSP 123R-
3”). HP has elected to adopt the alternative transition method provided in the FSP 123R-3 for calculating the tax effects of
stock-based compensation pursuant to SFAS 123R. The alternative transition method includes simplified methods to
establish the beginning balance of the additional paid-in capital pool (“APIC pool”) related to the tax effects of employee
stock-based compensation, and to determine the subsequent impact on the APIC pool and Consolidated Statements of Cash
Flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS 123R.
See Note 2 to the Consolidated Financial Statements for a further discussion on stock-based compensation.
Foreign Currency Transactions
HP uses the U.S. dollar predominately as its functional currency. Assets and liabilities denominated in non-U.S. dollars
are remeasured into U.S. dollars at current exchange rates for monetary assets and liabilities, and historical exchange rates for
nonmonetary assets and liabilities. Net revenue, cost of sales and expenses are remeasured at average exchange rates in effect
during each period, except for those net revenue, cost of sales and expenses related to the previously noted balance sheet
amounts, which HP remeasures at historical exchange rates. HP includes gains or losses from foreign currency
remeasurement in net earnings. Certain foreign subsidiaries designate the local
85
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
currency as their functional currency, and HP records the translation of their assets and liabilities into U.S. dollars at the
balance sheet dates as translation adjustments and includes them as a component of accumulated other comprehensive
income (loss).
Retirement and Post-Retirement Plans
HP has various defined benefit, other contributory and noncontributory retirement and post-retirement plans. HP
generally amortizes unrecognized actuarial gains and losses on a straight-line basis over the remaining estimated service life
of participants. The measurement date for all plans is September 30 for fiscal 2007 and fiscal 2006. See Note 15 for a full
description of these plans and the accounting and funding policies, which is incorporated herein by reference.
Recent Pronouncements
In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for
uncertainty in income taxes by prescribing the recognition threshold a tax position is required to meet before being
recognized in the financial statements. It also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15,
2006 and is required to be adopted by HP in the first quarter of fiscal 2008. The cumulative effects of applying FIN 48 will
be recorded as an adjustment to retained earnings as of the beginning of the period of adoption. Additionally, in May 2007,
the FASB published FASB Staff Position No. FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48” (“FSP
FIN 48-1”). FSP FIN 48-1 is an amendment to FIN 48. It clarifies how an enterprise should determine whether a tax position
is effectively settled for the purpose of recognizing previously unrecognized tax benefits. FSP FIN 48-1 is effective upon the
initial adoption of FIN 48, and therefore will be adopted by HP in the first quarter of fiscal 2008. While HP is still evaluating
the impact of adoption of FIN 48 and FSP FIN 48-1 on its consolidated financial statements, it is estimated that the adoption
of FIN 48 and FSP FIN 48-1 will result in a net increase to retained earnings in the range of $500 million to $900 million.
This estimate is subject to revision as management completes its analysis.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 provides
guidance for using fair value to measure assets and liabilities. It also responds to investors’ requests for expanded information
about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value,
and the effect of fair value measurements on earnings. SFAS 157 applies whenever other standards require (or permit) assets
or liabilities to be measured at fair value, and does not expand the use of fair value in any new circumstances. SFAS 157 is
effective for financial statements issued for fiscal years beginning after November 15, 2007 and is required to be adopted by
HP in the first quarter of fiscal 2009. HP is currently evaluating the effect that the adoption of SFAS 157 will have on its
consolidated results of operations and financial condition and is not yet in a position to determine such effects.
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans—An Amendment of FASB No. 87, 88, 106 and 132(R)” (“SFAS 158”). SFAS 158 requires that the
funded status of defined benefit postretirement plans be recognized on the company’s balance sheet and changes in the
funded status be reflected in
86
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
comprehensive income, effective for fiscal years ending after December 15, 2006, which HP adopted during fiscal 2007. See
Note 15 for the effect of applying this provision on the consolidated financial statements. SFAS 158 also requires companies
to measure the funded status of the plan as of the date of their fiscal year end, effective for fiscal years ending after
December 15, 2008. HP expects to adopt the measurement provisions of SFAS 158 effective October 31, 2009.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities—Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 expands the use of fair value
accounting but does not affect existing standards that require assets or liabilities to be carried at fair value. Under SFAS 159,
a company may elect to use fair value to measure accounts and loans receivable, available-for-sale and held-to-maturity
securities, equity method investments, accounts payable, guarantees and issued debt. Other eligible items include firm
commitments for financial instruments that otherwise would not be recognized at inception and non-cash warranty
obligations where a warrantor is permitted to pay a third party to provide the warranty goods or services. If the use of fair
value is elected, any upfront costs and fees related to the item must be recognized in earnings and cannot be deferred, such as
debt issuance costs. The fair value election is irrevocable and generally made on an instrument-by-instrument basis, even if a
company has similar instruments that it elects not to measure based on fair value. At the adoption date, unrealized gains and
losses on existing items for which fair value has been elected are reported as a cumulative adjustment to beginning retained
earnings. Subsequent to the adoption of SFAS 159, changes in fair value are recognized in earnings. SFAS 159 is effective
for fiscal years beginning after November 15, 2007 and is required to be adopted by HP in the first quarter of fiscal 2009. HP
currently is determining whether fair value accounting is appropriate for any of its eligible items and cannot estimate the
impact, if any, that SFAS 159 will have on its consolidated results of operations and financial condition.
In June 2007, the FASB also ratified EITF 07-3, “Accounting for Nonrefundable Advance Payments for Goods or
Services Received for Use in Future Research and Development Activities” (“EITF 07-3”). EITF 07-3 requires that
nonrefundable advance payments for goods or services that will be used or rendered for future research and development
activities be deferred and capitalized and recognized as an expense as the goods are delivered or the related services are
performed. EITF 07-3 is effective, on a prospective basis, for fiscal years beginning after December 15, 2007 and will be
adopted by HP in the first quarter of fiscal 2009. HP does not expect the adoption of EITF 07-3 to have a material effect on
HP’s consolidated results of operations and financial condition.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”).
SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired.
SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the
business combination. SFAS 141R is effective for fiscal years beginning after December 15, 2008, and will be adopted by HP
in the first quarter of fiscal 2010. HP is currently evaluating the potential impact, if any, of the adoption of SFAS 141R on its
consolidated results of operations and financial condition.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an
amendment of Accounting Research Bulletin No. 51” (“SFAS 160”). SFAS 160 establishes accounting and reporting
standards for ownership interests in subsidiaries held by
87
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling
interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between
the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning
after December 15, 2008, and will be adopted by HP in the first quarter of fiscal 2010. HP is currently evaluating the
potential impact, if any, of the adoption of SFAS 160 on its consolidated results of operations and financial condition.
In addition to the SFAS 158 adoption mentioned above, HP adopted the following accounting standards in fiscal 2007,
none of which had a material effect on HP’s consolidated results of operations during such period or financial condition at the
end of such period:
•
•
SFAS No. 154, “Accounting for Changes and Error Corrections”;
Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements”;
• EITF 05-5, “Accounting for Early Retirement or Postemployment Programs with Specific Features (Such as Terms
Specified in Altersteilzeit Early Retirement Arrangements)”; and
• EITF 06-9, “Reporting a Change in (or the Elimination of) a Previously Existing Difference between the Fiscal Year
End of a Parent Company and That of a Consolidated Entity or between the Reporting Period of an Investor and
That of an Equity Method Investee.”
Note 2: Stock-Based Compensation
At October 31, 2007, HP has the stock-based employee compensation plans described below. The total compensation
expense before taxes related to these plans was $629 million and $536 million for fiscal 2007 and 2006, respectively.
Prior to November 1, 2005, HP accounted for those plans under the recognition and measurement provisions of APB 25.
Accordingly, HP generally recognized stock-based compensation expense only when it granted options with a discounted
exercise price. Any resulting compensation expense was recognized ratably over the associated service period, which was
generally the option vesting term. Prior to November 1, 2005, HP also provided pro forma disclosure amounts in accordance
with SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure” (“SFAS 148”), as if the fair
value method defined by SFAS 123 had been applied to its stock-based compensation.
Effective November 1, 2005, HP adopted the fair value recognition provisions of SFAS 123R, using the modified
prospective transition method and therefore has not restated prior periods’ results. Under this transition method, stock-based
compensation expense in fiscal 2006 included compensation expense for all share-based payment awards granted prior to, but
not yet vested as of, November 1, 2005, based on the grant-date fair value estimated in accordance with the original
provisions of SFAS 123. Stock-based compensation expense for all share-based payment awards granted after November 1,
2005 is based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. HP recognizes these
compensation costs net of an estimated forfeiture rate and recognizes the compensation costs for only those shares expected
to vest on a straight-line basis over the requisite service period of the award, which is generally the option vesting term of
four years. HP estimated the
88
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 2: Stock-Based Compensation (Continued)
forfeiture rates in fiscal 2007 and 2006 based on its historical experience for fiscal grant years where the majority of the
vesting terms have been satisfied.
As a result of adopting SFAS 123R, earnings before income taxes and net earnings in fiscal 2007 were lower by
$494 million and $353 million, respectively, than if we had continued to account for stock-based compensation under
APB 25. The unfavorable impact on both basic and diluted earnings per share in fiscal 2007 was $0.13 per share. Earnings
before income taxes and net earnings in fiscal 2006 were lower by $448 million and $318 million, respectively, as a result of
adopting SFAS 123R. The unfavorable impact on both basic and diluted earnings per share in fiscal 2006 was $0.11 per
share. In addition, prior to the adoption of SFAS 123R, HP presented the tax benefit of stock option exercises as operating
cash flows. Upon the adoption of SFAS 123R, the tax benefit resulting from tax deductions in excess of the tax benefit
related to compensation cost recognized for those options is classified as financing cash flows.
The pro forma table below reflects net earnings and basic and diluted net earnings per share for the following fiscal year
ended October 31, 2005, if HP had applied the fair value recognition provisions of SFAS 123:
Net earnings, as reported ..................................................................................................................................
Add: stock-based compensation included in reported net earnings, net of related tax effects..........................
Less: stock-based compensation expense determined under the fair-value based method for all awards, net
of related tax effects..........................................................................................................................................
Pro forma net earnings......................................................................................................................................
Basic net earnings per share:
As reported.....................................................................................................................................................
Pro forma .......................................................................................................................................................
Diluted net earnings per share:
As reported.....................................................................................................................................................
Pro forma .......................................................................................................................................................
Employee Stock Purchase Plan
2005
In millions,
except per
share
amounts
$2,398
144
(621)
$1,921
$0.83
$0.67
$0.82
$0.66
HP sponsors the Hewlett-Packard Company 2000 Employee Stock Purchase Plan, also known as the Share Ownership
Plan (the “ESPP”), pursuant to which eligible employees may contribute up to 10% of base compensation, subject to certain
income limits, to purchase shares of HP’s common stock. Prior to November 1, 2005, employees were able to purchase stock
semi-annually at a price equal to 85% of the fair market value at certain plan-defined dates. As of November 1, 2005, HP
changed the ESPP so that employees will purchase stock semi-annually at a price equal to 85% of the fair market value on
the purchase date. Since the price of the shares is now determined at the purchase date and there is no longer a look-back
period, HP recognizes the expense based on the 15% discount at
89
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 2: Stock-Based Compensation (Continued)
purchase. In fiscal 2007, ESPP compensation expense was $56 million, net of taxes. At October 31, 2007, approximately
161,000 employees were eligible to participate and approximately 51,000 employees were participants in the ESPP. In fiscal
2006, ESPP compensation expense was $53 million, net of taxes. At October 31, 2006, approximately 147,000 employees
were eligible to participate and approximately 53,000 employees were participants in the ESPP. In fiscal 2007, participants
purchased approximately 8,744,000 shares of HP common stock at a weighted-average price of $39 per share. In fiscal 2006,
participants purchased approximately 11,076,000 shares of HP common stock at a weighted-average price of $30 per share.
In fiscal 2005, participants purchased approximately 20,673,000 shares of HP common stock at a weighted-average price of
$17 per share.
Incentive Compensation Plans
HP stock option plans include principal plans adopted in 2004, 2000, 1995 and 1990 (“principal option plans”), as well
as various stock option plans assumed through acquisitions under which stock options are outstanding. All regular employees
meeting certain employment qualifications were eligible to receive stock options in fiscal 2007. There were approximately
99,000 employees holding options under one or more of the option plans as of October 31, 2007. Options granted under the
principal option plans are generally non-qualified stock options, but the principal option plans permit some options granted to
qualify as “incentive stock options” under the U.S. Internal Revenue Code. The exercise price of a stock option is equal to the
fair market value of HP’s common stock on the option grant date (as determined by the average of the highest and lowest
reported sale prices of HP’s common stock on that date). The contractual term of options granted since fiscal 2003 was
generally eight years, while the contractual term of options granted prior to fiscal 2003 was generally ten years. Under the
principal option plans, HP may choose, in certain cases, to establish a discounted exercise price at no less than 75% of fair
market value on the grant date. HP has not granted any discounted options since fiscal 2003.
Under the principal option plans, HP granted certain employees cash, restricted stock awards, or both. Restricted stock
awards are nonvested stock awards that may include grants of restricted stock or grants of restricted stock units. Cash and
restricted stock awards are independent of option grants and are generally subject to forfeiture if employment terminates prior
to the release of the restrictions. Such awards generally vest one to three years from the date of grant. During that period,
ownership of the shares cannot be transferred. Restricted stock has the same cash dividend and voting rights as other common
stock and is considered to be currently issued and outstanding. Restricted stock units have dividend equivalent rights equal to
the cash dividend paid on restricted stock. Restricted stock units do not have the voting rights of common stock, and the
shares underlying the restricted stock units are not considered issued and outstanding. HP expenses the cost of the restricted
stock awards, which HP has determined to be the fair market value of the shares at the date of grant, ratably over the period
during which the restrictions lapse. In fiscal 2007, HP granted 1,469,000 shares of restricted stock with a weighted-average
grant date fair value of $43. In fiscal 2006, HP granted 1,492,000 shares of restricted stock with a weighted-average grant
date fair value of $32. In fiscal 2005, HP granted 6,773,000 shares of restricted stock with a weighted-average grant date fair
value of $21. HP had 4,763,000 shares of restricted stock outstanding at October 31, 2007, 5,492,000 shares of restricted
stock outstanding at October 31, 2006 and 7,099,000 shares of restricted stock outstanding at October 31, 2005. In fiscal
2007, HP granted 151,000 shares of restricted stock units with a
90
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 2: Stock-Based Compensation (Continued)
weighted-average grant date fair value of $45. In fiscal 2006, HP granted 33,000 shares of restricted stock units with a
weighted-average grant date fair value of $30. In fiscal 2005, HP granted 1,820,000 shares of restricted stock units with a
weighted-average grant date fair value of $21. HP had restricted stock units covering approximately 935,000 shares
outstanding at October 31, 2007, 873,000 shares outstanding at October 31, 2006 and 1,780,000 shares outstanding at
October 31, 2005.
In light of new accounting guidance under SFAS 123R, beginning in the second quarter of fiscal 2005 HP reevaluated its
assumptions used in estimating the fair value of employee options granted. As part of this assessment, management
determined that implied volatility calculated based on actively traded options on HP common stock is a better indicator of
expected volatility and future stock price trends than historical volatility. Therefore, expected volatility in fiscal 2007, 2006
and 2005 was based on a market-based implied volatility.
As part of its SFAS 123R adoption, HP also examined its historical pattern of option exercises in an effort to determine
if there were any discernable activity patterns based on certain employee populations. From this analysis, HP identified three
employee populations. HP used the Black-Scholes option pricing model to value the options for each of the employee
populations. The table below presents the weighted-average expected life in months of the combined three identified
employee populations. The expected life computation is based on historical exercise patterns and post-vesting termination
behavior within each of the three populations identified. The risk-free interest rate for periods within the contractual life of
the award is based on the U.S. Treasury yield curve in effect at the time of grant.
The fair value of share-based payment awards was estimated using the Black-Scholes option pricing model with the
following assumptions and weighted-average fair values:
2005
$5.63
Stock Options(1)
2006
$9.38
ESPP
2005
2007
$13.01
$6.01
4.68% 4.35% 3.93% 2.66%
1.5% 1.6%
0.8%
30%
28%
28%
6
54
59
1.0%
29%
57
Weighted-average fair value of grants ..............................................................................
Risk-free interest rate........................................................................................................
Dividend yield ..................................................................................................................
Expected volatility ............................................................................................................
Expected life in months ....................................................................................................
(1) The fair value calculation was based on stock options granted during the period.
91
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 2: Stock-Based Compensation (Continued)
Option activity under the principal option plans as of October 31 during each fiscal year were as follows:
Outstanding at beginning of year...........
Granted and assumed through
acquisitions ......................................
Exercised................................................
Forfeited/cancelled/expired ...................
Outstanding at end of year.....................
Vested and expected to vest at end of
year...................................................
Exercisable at end of year......................
Shares
In thousands
445,740
45,562
(106,302)
(17,661)
367,339
361,496
265,366
2007
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Term
In years
Aggregate
Intrinsic
Value
In millions
$31
$40
$26
$43
$33
$33
$33
4.2
4.2
3.4
Shares
In thousands
531,233
52,271
(100,986)
(36,778)
445,740
437,109
$7,375
$7,256
$5,298
316,341
2006
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Term
In years
Aggregate
Intrinsic
Value
In millions
$30
$31
$22
$40
$31
$31
$33
4.7
4.6
4.0
$4,861
$4,742
$3,081
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between HP’s
closing stock price on the last trading day of fiscal 2007 and fiscal 2006 and the exercise price, multiplied by the number of
in-the-money options) that would have been received by the option holders had all option holders exercised their options on
October 31, 2007 and 2006. This amount changes based on the fair market value of HP’s stock. Total intrinsic value of
options exercised in fiscal 2007 and 2006 was $2.0 billion and $1.2 billion, respectively. Total fair value of options vested
and expensed in fiscal 2007 and 2006 was $297 million and $265 million, respectively, net of taxes.
Option activity was as follows for the fiscal year ended October 31, 2005:
Outstanding at beginning of year......................................................................................................
Granted .............................................................................................................................................
Assumed through acquisitions ..........................................................................................................
Exercised ..........................................................................................................................................
Forfeited or cancelled .......................................................................................................................
Outstanding at end of year ................................................................................................................
Exercisable at end of year.................................................................................................................
Weighted-
Average
Exercise
Price
$30
$22
$1
$17
$35
$30
$33
Shares
In thousands
549,868
63,635
558
(46,628)
(36,200)
531,233
386,303
92
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 2: Stock-Based Compensation (Continued)
Information about options outstanding was as follows at October 31, 2007:
Range of Exercise Prices
$0-$9.99...........................................................
$10-$19.99.....................................................
$20-$29.99.....................................................
$30-$39.99.....................................................
$40-$49.99.....................................................
$50-$59.99.....................................................
$60 and over ..................................................
Options Outstanding
Options Exercisable
Weighted-
Average
Remaining
Contractual
Life in Years
Shares
Outstanding
Weighted-
Average
Exercise Price
Shares
Exercisable
Weighted-
Average
Exercise Price
678
40,902
134,093
85,074
71,619
21,759
13,214
367,339
Shares in thousands
$5
$16
$23
$33
$45
$57
$71
$34
6.0
3.8
4.5
4.6
4.3
2.7
1.7
4.2
357
40,145
95,882
51,330
43,405
21,033
13,214
265,366
$6
$16
$23
$34
$46
$57
$71
$33
As of October 31, 2007, $771 million of total unrecognized compensation cost related to stock options is expected to be
recognized over a weighted-average of 2.11 years. As of October 31, 2006, $677 million of total unrecognized compensation
cost related to stock options was expected to be recognized over a weighted-average period of 2.30 years.
Cash received from option exercises and purchases under the ESPP in fiscal 2007 was $3.1 billion. The actual tax benefit
realized for the tax deduction from option exercises of the share-based payment awards in fiscal 2007 totaled $675 million.
Cash received from option exercises and purchases under the ESPP in fiscal 2006 was $2.5 billion. The actual tax benefit
realized for the tax deduction from option exercises of the share-based payment awards in fiscal 2006 totaled $420 million.
Nonvested restricted stock awards as of October 31, 2007 and 2006 were as follows:
Nonvested at October 31, 2005................................................................................................
Granted ....................................................................................................................................
Vested ......................................................................................................................................
Forfeited...................................................................................................................................
Nonvested at October 31, 2006................................................................................................
Granted ....................................................................................................................................
Vested ......................................................................................................................................
Forfeited...................................................................................................................................
Nonvested at October 31, 2007................................................................................................
Shares
In thousands
8,869
1,525
(2,521)
(1,508)
6,365
1,620
(1,284)
(1,003)
5,698
Weighted-
Average Grant
Date Fair Value
$21
$32
$21
$21
$24
$44
$25
$24
$29
93
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 2: Stock-Based Compensation (Continued)
As of October 31, 2007, there was $83 million of unrecognized stock-based compensation expense related to nonvested
restricted stock awards. That cost is expected to be recognized over a weighted-average period of 1.02 years. As of
October 31, 2006, there was $90 million of unrecognized stock-based compensation expense related to nonvested restricted
stock awards. That cost is expected to be recognized over a weighted-average period of 1.46 years.
HP recorded $84 million, $58 million and $144 million of stock-based compensation expense, net of taxes, relating to
options assumed through acquisitions and restricted stock awards in fiscal 2007, 2006, and 2005 respectively.
HP allocated stock-based compensation expense related to the ESPP and the principal option plans under SFAS 123R as
follows for each of the fiscal years:
2007
2006
In millions
Cost of sales..................................................................................................................................................
Research and development ...........................................................................................................................
Selling, general and administrative...............................................................................................................
Stock-based compensation expense before income taxes .............................................................................
Income tax benefit ........................................................................................................................................
Total stock-based compensation expense after income taxes .......................................................................
$161
74
394
629
(182)
$447
$144
70
322
536
(160)
$376
Total stock-based compensation expense before taxes in fiscal 2007 excludes a $14 million credit adjustment in
restructuring charges associated with the fiscal 2005 restructuring plan and a $29 million restructuring charge for accelerating
the vesting of options held by those employees who elected to participate in the 2007 EER. In fiscal 2005, as part of its fiscal
2005 restructuring plans, HP accelerated the vesting on options held by terminated employees and included a one-year post-
termination exercise period on the options. This modification resulted in compensation expense of $107 million that HP
included in the restructuring charges. In fiscal 2006, an adjustment of $14 million was recorded as a reduction to the
$107 million in restructuring charges to reflect actual stock-based compensation expense related to employees who left the
company.
Stock-based compensation expense recognized under incentive compensation plans was approximately $644 million in
fiscal 2007 (including the $14 million credit adjustment in restructuring charges and a $29 million charge for accelerating the
vesting of options held by those employees who elected to participate in the 2007 EER, both referred to above) $522 million
in fiscal 2006 (including the $14 million credit in restructuring charges referred to above), and $211 million in fiscal 2005
(including the $107 million in restructuring charges referred to above).
Shares Reserved
Shares available for future grant under the ESPP and stock-based compensation plans were 181,704,000 at October 31,
2007, including 45,312,000 shares under the assumed Compaq plans; 217,556,000 at October 31, 2006, including 39,151,000
shares under the assumed Compaq plans; and 260,669,000 at October 31, 2005, including 32,449,000 shares under the
assumed Compaq plans.
94
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 2: Stock-Based Compensation (Continued)
HP had 549,045,000 shares of common stock reserved at October 31, 2007, 664,267,000 shares of common stock
reserved at October 31, 2006, and 794,750,000 shares of common stock reserved at October 31, 2005 for future issuance
under all stock-related benefit plans. Additionally, HP had 21,494,000 shares of common stock reserved at each of
October 31, 2007, October 31, 2006 and October 31, 2005 for future issuances related to conversion of its outstanding zero-
coupon subordinated notes.
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 the effect from potential issuance of common stock, such as
stock issuable pursuant to the exercise of stock options and the assumed conversion of convertible notes.
The reconciliation of the numerators and denominators of the basic and diluted EPS calculations was as follows for the
following fiscal years ended October 31:
Numerator:
2007
2005
2006
In millions, except per share
amounts
Net earnings ....................................................................................................................................... $7,264 $6,198 $2,398
—
Adjustment for interest expense on zero-coupon subordinated convertible notes, net of taxes.........
Net earnings, adjusted........................................................................................................................ $7,271 $6,205 $2,398
7
7
Denominator:
Weighted-average shares used to compute basic EPS ....................................................................... 2,630 2,782
Effect of dilutive securities:
62
Dilution from employee stock plans ..................................................................................................
8
Zero-coupon subordinated convertible notes .....................................................................................
Dilutive potential common shares......................................................................................................
70
Weighted-average shares used to compute diluted EPS .................................................................... 2,716 2,852
78
8
86
2,879
30
—
30
2,909
Net earnings per share:
Basic .................................................................................................................................................. $2.76 $2.23
Diluted ............................................................................................................................................... $2.68 $2.18
$0.83
$0.82
HP excludes options with exercise prices that are greater than the average market price from the calculation of diluted
EPS because their effect would be anti-dilutive. In fiscal 2007, 2006 and 2005, HP excluded 60 million shares, 130 million
shares and 255 million shares, respectively, from its diluted EPS calculation. Also, as a result of adopting SFAS 123R on
November 1, 2005, HP excluded from the calculation of diluted EPS options to purchase an additional 33 million shares and
48 million shares in fiscal 2007 and fiscal 2006, respectively, whose combined exercise price, unamortized fair value and
excess tax benefits were greater in each of those periods than the average market price for HP’s common stock, as their effect
would be anti-dilutive. In addition, HP excluded approximately 8 million
95
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 3: Net Earnings Per Share (Continued)
shares of HP stock issuable upon the assumed conversion of zero-coupon subordinated notes from the calculation of diluted
EPS in fiscal 2005 because the effect was anti-dilutive.
Note 4: Balance Sheet Details
Balance sheet details were as follows for the following fiscal years ended October 31:
Accounts and Financing Receivables
Accounts receivable.................................................................................................................................
Allowance for doubtful accounts .............................................................................................................
Financing receivables ..............................................................................................................................
Allowance for doubtful accounts .............................................................................................................
2007
2006
In millions
$13,646
(226)
$13,420
$2,547
(40)
$2,507
$11,093
(220)
$10,873
$2,480
(40)
$2,440
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 approximately $525 million as of October 31,
2007. HP sold approximately $2.2 billion of trade receivables during fiscal 2007. As of October 31, 2007, HP had
approximately $117 million available under these programs.
Inventory
Finished goods ..............................................................................................................................................
Purchased parts and fabricated assemblies ...................................................................................................
Other Current Assets
Deferred tax assets—short-term ...................................................................................................................
Tax, supplier and other receivables ..............................................................................................................
Prepaid and other current assets....................................................................................................................
2007
2006
In millions
$5,404
2,629
$8,033
$5,424
2,326
$7,750
2007
2006
In millions
$4,609
5,655
1,733
$4,144
5,242
1,393
$11,997 $10,779
96
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 4: Balance Sheet Details (Continued)
Property, Plant and Equipment
Land ..........................................................................................................................................................
Buildings and leasehold improvements ....................................................................................................
Machinery and equipment ........................................................................................................................
Accumulated depreciation ........................................................................................................................
2007
2006
In millions
$464
6,044
9,903
16,411
(8,613)
$7,798
$534
5,771
8,719
15,024
(8,161)
$6,863
Depreciation expense was approximately $1.9 billion in fiscal 2007 and $1.7 billion in both fiscal 2006 and fiscal 2005.
Long-Term Financing Receivables and Other Assets
Financing receivables ...............................................................................................................................
Deferred tax assets—long-term ................................................................................................................
Other .........................................................................................................................................................
Other Accrued Liabilities
Other accrued taxes..................................................................................................................................
Warranty ..................................................................................................................................................
Sales and marketing programs .................................................................................................................
Other ........................................................................................................................................................
Other Liabilities
Pension, post-retirement, and post-employment liabilities .........................................................................
Long-term deferred revenue .......................................................................................................................
Other long-term liabilities...........................................................................................................................
2007
2006
In millions
$2,778
961
3,908
$7,647
$2,340
1,475
2,834
$6,649
2007
2006
In millions
$2,965
1,762
2,930
6,126
$13,783
$2,366
1,585
2,394
4,789
$11,134
2007
2006
In millions
$1,495
2,459
1,962
$5,916
$2,099
1,750
1,648
$5,497
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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 4: Balance Sheet Details (Continued)
Long-term deferred revenue represents service and product deferred revenue to be recognized after one year from the
balance sheet date. Deferred revenue represents amounts received or billed in advance for fixed-price support or maintenance
contracts, software customer support contracts, outsourcing services start-up or transition work, consulting and integration
projects, product sales and leasing income. The fixed-price support or maintenance contracts include stand-alone product
support packages, routine maintenance service contracts, upgrades or extensions to standard product warranty, as well as high
availability services for complex, global, networked, multi-vendor environments. HP defers these service amounts at the time
HP bills the customer, and HP then recognizes the amounts ratably over the contract life or as HP renders the services.
Note 5: Supplemental Cash Flow Information
Supplemental cash flow information was as follows for the following fiscal years ended October 31:
Cash paid for income taxes, net ............................................................................................................... $956
Cash paid for interest ............................................................................................................................... $489
Non-cash investing and financing activities:
2007
2006
In millions
$637
$299
2005
$884
$447
Issuance of common stock and options assumed in business acquisitions............................................
Purchase of assets under financing arrangement...................................................................................
Purchase of assets under capital leases .................................................................................................
$41
$57
$— $19
$13
$12
$— $—
$—
Note 6: Acquisitions
HP has recorded all acquisitions using the purchase method of accounting and, accordingly, included the results of
operations in HP’s consolidated results as of the date of each acquisition. HP allocates the purchase price of its acquisitions to
the tangible assets, liabilities and intangible assets acquired, including in-process research & development (“IPR&D”)
charges, based on their estimated fair values. The excess purchase price over those fair values is recorded as goodwill. The
fair value assigned to assets acquired is based on valuations using management’s estimates and assumptions. HP does not
expect goodwill recorded on a majority of these acquisitions to be deductible for tax purposes. HP has not presented pro
forma results of operations because these acquisitions are not material to HP’s consolidated results of operations on either an
individual or an aggregate basis.
Mercury Acquisition
On November 2, 2006, HP completed its tender offer for Mercury Interactive Corporation (“Mercury”), a leading IT
management software and services company, and acquired approximately 96% of Mercury common shares for cash
consideration of $52 per share. On November 6, 2006, HP acquired the remaining outstanding common shares, and Mercury
became a wholly owned subsidiary of HP. This acquisition combines Mercury’s application management, application
delivery and IT governance capabilities with HP’s broad portfolio of management solutions.
The aggregate purchase price of approximately $4.9 billion consisted of cash paid for outstanding stock, vested in-the-
money stock options and direct transaction costs. In addition, the purchase price
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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 6: Acquisitions (Continued)
also included the estimated fair value of earned unvested stock options and out-of-the-money vested stock options assumed
by HP.
Based on valuations prepared using estimates and assumptions provided by management, the purchase price allocation as
of the date of acquisition has been allocated as follows:
Cash and short-term investments .............................................................................................................................
Other tangible assets ................................................................................................................................................
Notes payable ..........................................................................................................................................................
Other liabilities assumed..........................................................................................................................................
Total net assets......................................................................................................................................................
Amortizable intangible assets ..................................................................................................................................
Goodwill ..................................................................................................................................................................
IPR&D .....................................................................................................................................................................
Total purchase price.................................................................................................................................................
In millions
$830
541
(303)
(954)
114
1,079
3,480
181
$4,854
Note 8 contains information related to the cost of restructuring programs for Mercury employees, which was also
included as part of other liabilities assumed.
HP has included Mercury in the OpenView business within the HP Software segment. Goodwill, which represents the
excess of the purchase price over the net tangible and intangible assets acquired, is not deductible for tax purposes. The
amortizable intangible assets are being amortized over their estimated useful lives as follows:
Technology ....................................................................................................................................
Customer relationships ..................................................................................................................
Maintenance contracts ...................................................................................................................
Trademarks ....................................................................................................................................
Total amortizable intangible assets................................................................................................
Opsware Acquisition
In millions
$592
243
239
5
$1,079
Weighted-
average
useful life
4.2 years
7.0 years
6.8 years
6.0 years
5.4 years
On September 17, 2007, HP completed its tender offer for Opsware Inc. (“Opsware”), a leader in data center automation,
and acquired more than 90% of Opsware’s common shares for cash consideration of $14.25 per share. On September 21,
2007, HP acquired all remaining outstanding Opsware shares and Opsware became a wholly owned subsidiary of HP which
will be included in the HP Software segment.
The aggregate purchase price of approximately $1.7 billion consisted of cash paid for outstanding stock, vested in-the-
money stock options and direct transaction costs. In addition, the purchase price also included the estimated fair value of
earned unvested stock options and out-of-the-money vested stock options assumed by HP. In connection with this
acquisition, HP recorded approximately
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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 6: Acquisitions (Continued)
$1.3 billion of goodwill and $249 million of amortizable intangible assets. HP is amortizing the purchased intangibles on a
straight-line basis over their estimated lives ranging from five to six years. HP did not record any IPR&D in connection with
the Opsware acquisition.
Other Acquisitions in fiscal 2007
HP also completed eight other acquisitions during fiscal 2007. Total consideration for these acquisitions was
approximately $1.0 billion, which included direct transaction costs, the estimated fair value of earned unvested stock options
and certain liabilities recorded in connection with these acquisitions. The largest of these transactions was the acquisition of
Neoware, Inc., which HP expects to further its leadership in personal computing by accelerating HP’s thin client portfolio.
HP recorded approximately $700 million of goodwill and $182 million of purchased intangibles in connection with these
other acquisitions. HP also recorded approximately $9 million of IPR&D related to these acquisitions in fiscal 2007. Projects
that qualify for treatment as IPR&D have not yet reached technological feasibility and have no alternative use.
HP has included the results of operations of these transactions prospectively from the respective date of the transaction.
Pending and Subsequent Acquisitions
In November 2007, HP agreed to acquire EYP Mission Critical Facilities Inc., a consulting company specializing in
strategic technology planning, design and operations support for large-scale data centers. The transaction is subject to certain
closing conditions and is expected to be completed during HP’s first quarter of fiscal 2008. Upon completion, the business is
expected to be fully integrated into HP Services.
In November 2007, HP completed the acquisition of MacDermid ColorSpan Inc., a privately held manufacturer of wide-
format digital inkjet printers. The business is being integrated into HP’s Imaging and Printing Group.
In November 2007, HP completed the acquisition of Atos Origin Middle East Group, one of the Middle East’s leading
systems integrators. The business is being integrated into HP Services.
In December 2007, HP agreed to acquire NUR Macroprinters Ltd., a maker of industrial wide-format digital inkjet
printers. This transaction is subject to certain closing conditions and is expected to be completed during HP’s second quarter
of fiscal 2008. Upon completion, the business is expected to be fully integrated into HP’s Imaging and Printing Group.
Acquisitions in fiscal 2006
Peregrine
On December 19, 2005, HP acquired the outstanding shares of Peregrine Systems, Inc. (“Peregrine”) in a cash merger for
$26.08 per share. The purchase price was approximately $538 million, consisting of $442 million of cash paid, which
includes direct transaction costs, as well as the assumption of certain liabilities in connection with the transaction. The
acquisition of Peregrine added key asset and service management components to the HP OpenView portfolio, a distributed
management software suite for business operations and IT. In connection with this acquisition, HP
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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 6: Acquisitions (Continued)
recorded approximately $342 million of goodwill and $162 million of amortizable intangible assets. HP also expensed
$34 million for IPR&D. HP is amortizing the purchased intangibles, principally customer relationships and developed
technology, on a straight-line basis over their estimated useful lives ranging from five to six years.
Other Acquisitions in fiscal 2006
HP also completed seven other acquisitions during fiscal 2006. Total consideration for these acquisitions and the buyout
of a minority interest was approximately $473 million, which included direct transaction costs. The largest of these
transactions was the acquisition of substantially all of the assets of Scitex Vision Ltd (“Scitex”). The Scitex asset acquisition
expanded HP’s leadership in printing into the industrial wide-format market.
HP recorded approximately $193 million of goodwill and $205 million of purchased intangibles in connection with these
other acquisitions. HP also recorded approximately $18 million of IPR&D related to these acquisitions in fiscal 2006.
In addition, HP paid approximately $17 million for the balance of the outstanding shares of Digital Globalsoft Limited, a
consolidated subsidiary of HP (“DGS”), and as a result increased HP’s ownership from 98.5% to 100%. This subsidiary has
enhanced HP’s capability in IT services, including expertise in life cycle services such as migration, technical and application
services.
HP has included the results of operations of these transactions prospectively from the respective date of the transaction.
HP has not presented the pro forma results of operations of the acquired businesses because the results are not material to
HP’s results of operations on either an individual or an aggregate basis.
Note 7: Goodwill and Purchased Intangible Assets
Goodwill
Goodwill allocated to HP’s business segments as of October 31, 2007 and 2006 and changes in the carrying amount of
goodwill during the fiscal year ended October 31, 2007 are as follows:
HP
Services
Enterprise
Storage and
Servers
HP
Software
Balance at October 31, 2006...............
Goodwill acquired during the period ..
Goodwill adjustments .........................
Balance at October 31, 2007...............
$6,339
93
(211)
$6,221
$5,091
173
(188)
$5,076
$1,098
4,868
(45)
$5,921
Personal
Systems
Group
In millions
$2,322
290
(89)
$2,523
Imaging
and
Printing
Group
$1,853
71
(37)
$1,887
HP
Financial
Services
Total
$150
—
(5)
$145
$16,853
5,495
(575)
$21,773
The goodwill adjustments relate primarily to the reversal of income tax reserves of Compaq Computer Corporation
(“Compaq”), which HP acquired in 2002, for pre-acquisition tax years. These tax years have been audited and agreed upon
with the Internal Revenue Service and the statute of
101
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 7: Goodwill and Purchased Intangible Assets (Continued)
limitations for them has expired. Accordingly, the reserves have been reclassified as a reduction of goodwill.
Based on the results of its annual impairment tests, HP determined that no impairment of goodwill existed as of
August 1, 2007 or August 1, 2006. However, future goodwill impairment tests could result in a charge to earnings. HP will
continue to evaluate goodwill on an annual basis as of the beginning of its fourth fiscal quarter and whenever events and
changes in circumstances indicate that there may be a potential impairment.
Purchased Intangible Assets
HP’s purchased intangible assets associated with completed acquisitions for each of the following fiscal years ended
October 31 are composed of:
Customer contracts, customer lists and
distribution agreements................................
Developed and core technology and patents....
Product trademarks ..........................................
Total amortizable purchased intangible assets.
Compaq trade name .........................................
Total purchased intangible assets.....................
Gross
$3,239
2,768
115
6,122
1,422
$7,544
2007
Accumulated
Amortization
Net
Gross
In millions
2006
Accumulated
Amortization
Net
$(1,679)
(1,694)
(92)
(3,465)
$1,560
1,074
23
2,657
— 1,422
$4,079
$(3,465)
$2,586
1,923
103
4,612
1,422
$6,034
$(1,293)
(1,307)
(82)
(2,682)
$1,293
616
21
1,930
— 1,422
$3,352
$(2,682)
Amortization expense related to finite-lived purchased intangible assets was approximately $783 million in fiscal 2007,
$604 million in fiscal 2006 and $622 million in fiscal 2005.
Based on the results of its annual impairment tests, HP determined that no impairment of the Compaq trade name existed
as of August 1, 2007 or August 1, 2006. However, future impairment tests could result in a charge to earnings. HP will
continue to evaluate the purchased intangible asset with an indefinite life on an annual basis as of the beginning of its fourth
fiscal quarter and whenever events and changes in circumstances indicate that there may be a potential impairment.
The finite-lived purchased intangible assets consist of customer contracts, customer lists and distribution agreements,
which have weighted-average useful lives of approximately eight years, and developed and core technology, patents and
product trademarks, which have weighted-average useful lives of approximately six years.
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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 7: Goodwill and Purchased Intangible Assets (Continued)
Estimated future amortization expense related to finite-lived purchased intangible assets at October 31, 2007 was as
follows:
Fiscal year:
2008 ......................................................................................................................................................................
2009 ......................................................................................................................................................................
2010 ......................................................................................................................................................................
2011 ......................................................................................................................................................................
2012 ......................................................................................................................................................................
Thereafter..............................................................................................................................................................
Total......................................................................................................................................................................
In millions
779
$
692
585
337
166
98
$ 2,657
Note 8: Restructuring Charges
Fiscal 2007 U.S. Enhanced Early Retirement Program
In the second quarter of fiscal 2007, HP announced that it was offering eligible employees an option to participate in the
2007 EER. The 2007 EER was open to employees who satisfied defined eligibility criteria based on combined age and years
of service as well as to otherwise eligible employees who had been included in previous restructuring programs or who
voluntarily left the company since November 30, 2006. A total of 3,080 employees participated in the 2007 EER, including
595 persons who had been included in previous restructuring programs or who had voluntarily left the company since
November 30, 2006. All participating employees left the company by May 31, 2007. HP recorded a net restructuring charge
of $354 million in fiscal 2007 in connection with the 2007 EER. This charge reflected $367 million of severance and benefits
cost for the participating employees, $29 million of stock-based compensation expense for accelerating the vesting of options
held by participating employees and $2 million of outplacement costs. These charges were partially offset by a $28 million
settlement gain from HP’s U.S. pension plan and a $16 million curtailment gain from its U.S. post-retirement benefit plans.
The net restructuring charge of $354 million for the 2007 EER program was subsequently offset by a $542 million
curtailment gain that HP recognized in fiscal 2007, resulting from changes in the U.S. defined benefit pension and post-
retirement plans that HP also announced in the second quarter of 2007. HP funded the cash expenditures associated with the
2007 EER primarily by using available U.S. pension plan assets. For more information, see Note 15, which is incorporated
herein by reference.
Fiscal 2007 Mercury Plan
In connection with the acquisition of Mercury, HP’s management approved and initiated plans to restructure the
operations of Mercury to eliminate certain duplicative activities, reduce the cost structure and better align product and
operating expenses with existing general economic conditions. During fiscal 2007, HP recorded $45 million in
severance-related costs associated with the initial estimate of the elimination of approximately 370 positions primarily in the
United States and in Europe. HP eliminated substantially all of these positions and paid the majority of the related severance
payments in fiscal 2007.
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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 8: Restructuring Charges (Continued)
During fiscal 2007, HP also recorded a total cost of $13 million related to exiting duplicative leased facilities. HP expects
to pay the costs for exiting the facilities through 2014.
All Mercury restructuring costs are reflected in the purchase price of Mercury in accordance with EITF 95-3,
“Recognition of Liabilities in Connection with a Purchase Business Combination.” These costs are subject to change based
on the actual costs incurred. Changes to these estimates could increase or decrease the amount of the purchase price allocated
to goodwill.
Fiscal 2005 Restructuring Plans
In the fourth quarter of fiscal 2005, HP’s Board of Directors approved a restructuring plan designed to simplify HP’s
structure, reduce costs and place greater focus on its customers. At that time, HP estimated that it would eliminate 15,300
positions in connection with the restructuring plan. Subsequent to the initial estimate, HP reduced the number of total
positions to 14,985. As of October 31, 2007, HP had substantially completed eliminating these positions. The initial charge
for these actions totaled $1.6 billion. During fiscal 2007, HP recognized a net $46 million reduction recorded in the first
quarter of fiscal 2007, which included severance adjustments for employees whose positions HP eliminated but who found
other positions within HP, a $14 million non-cash stock-based compensation expense adjustment, and a $9 million
curtailment gain relating to the HP subsidized U.S. retiree medical program. This net reduction was offset by $46 million of
higher employee severance and other benefit charges than originally estimated. HP had paid the majority of the costs related
to severance and other employee benefits as of October 31, 2007 and expects to pay out the remaining costs associated
primarily with tax payments for early retirees through fiscal 2018.
In the third quarter of fiscal 2005, HP’s management approved a restructuring plan and HP recorded restructuring
charges of $109 million related to severance and related costs associated with the termination of approximately 1,450
employees, all of whom left HP as of October 31, 2005. HP paid all of the costs associated with the restructuring plan as of
January 31, 2007.
Fiscal 2003, 2002 and 2001 Restructuring Plans
The 2003, 2002 and 2001 restructuring plans are substantially complete, although HP records minor revisions to
previous estimates as necessary. In fiscal 2007, HP recorded an adjustment of $33 million in additional restructuring charges
relating primarily to facility lease obligations. As of October 31, 2007, the aggregate $69 million outstanding restructuring
liability with respect to these plans relates primarily to facility lease obligations. HP expects to pay the majority of these
obligations over the lives of the related obligations, which extend to the end of fiscal 2010.
Workforce Rebalancing
As part of our ongoing business operations, HP incurs workforce rebalancing charges for severance and related costs
within certain business segments. Workforce rebalancing activities are considered part of normal operations as HP continues
to optimize our cost structure. Workforce rebalancing costs are included in HP’s business segment results, and HP expects to
incur additional workforce rebalancing costs in the future.
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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 8: Restructuring Charges (Continued)
Summary of Restructuring Plans
The activity in the accrued restructuring balances related to all of the plans described above was as follows for fiscal
2007:
Balance,
October 31,
2006
Fiscal
year 2007
charges
(reversals)
Goodwill
adjustments
Cash
payments
Non-cash
settlements
and other
adjustments
In millions
$354
$(2)
$(352)
$45
13
$58
$—
(10)
$48
$(30)
(7)
$(37)
$(484)
(83)
$(606)
$2
1
$3
$43
12
$(294)
$521
117
$638
$—
33
$387
As of October 31, 2007
Total costs
and
adjustments
to date
Total
expected
costs and
adjustments
Balance,
October 31,
2007
$—
$17
7
$24
$80
69
$173
$354
$354
$45
13
$58
$1,780
4,145
$6,337
$45
13
$58
$1,780
4,145
$6,337
Fiscal 2007 U.S. Enhanced Early
Retirement Program
Employee severance and other
benefits charges ................................
Fiscal 2007 Mercury Plan:
Employee severance and other
benefits charges ................................
Infrastructure ........................................
Total employee severance and other
benefits charges ................................
Fiscal 2005 plan .......................................
Fiscal 2003, 2002 and 2001 plans ...........
Total restructuring plans...........................
At October 31, 2007 and October 31, 2006, HP included the long-term portion of the restructuring liability of
$50 million and $91 million, respectively, in Other Liabilities in the accompanying Consolidated Balance Sheets.
Note 9: Financial Instruments
Investments in Debt and Equity Securities
Investments in available-for-sale debt and equity securities at fair value were as follows for the following fiscal years
ended October 31:
2007
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Cost
Estimated
Fair Value Cost
In millions
2006
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
Available-for-Sale Securities
Debt securities:
Time deposits..................................... $141
Commercial paper.............................. 104
11
Corporate debt....................................
27
Other debt securities ..........................
Total debt securities .............................. 283
3
Equity securities in public companies...
$286
$—
—
—
—
—
6
$6
$—
—
—
(2)
(2)
—
$(2)
$141
$2
104 —
20
11
21
25
43
281
9
13
$290 $56
$—
—
—
—
—
23
$23
$—
—
—
(1)
(1)
—
$(1)
$2
—
20
20
42
36
$78
105
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 9: Financial Instruments (Continued)
Time deposits consist of certificate of deposits with maturity dates greater than three months. Commercial paper
investments include asset-backed commercial paper. Corporate debt consists primarily of loans to the other companies that
are guaranteed by standby letters of credit issued by third-party banks. Other debt securities consist primarily of fixed-interest
securities invested for early retirement purposes. Equity securities in public companies are primarily common stock.
HP estimated the fair values based on quoted market prices or pricing models using current market rates. These
estimated fair values may not be representative of actual values that could have been realized as of year-end or that will be
realized in the future.
The gross unrealized losses as of October 31, 2007 were associated with other debt securities with a fair value of
$20 million that had been in a continuous loss position for 12 months or longer. The gross unrealized losses were due
primarily to changes in interest rates. Because HP has the intent and ability to retain the investment for a period of time
sufficient to allow for the anticipated recovery in fair value, HP does not consider those investments to be other-than-
temporarily impaired as of October 31, 2007. The gross unrealized losses as of October 31, 2006 were associated with other
debt securities with a fair value of $18 million and had been in a continuous loss position for fewer than 12 months.
Contractual maturities of available-for-sale debt securities were as follows at October 31, 2007:
Available-for-Sale
Securities
Cost
Estimated
Fair Value
In millions
Due in less than one year ......................................................................................................................... $152
131
Due in 1-5 years.......................................................................................................................................
$283
$152
129
$281
Proceeds from sales or maturities of available-for-sale and other securities were $425 million in fiscal 2007, $91 million
in fiscal 2006 and $2.1 billion in fiscal 2005. The gross realized gains totaled $42 million in fiscal 2007. The gross realized
gains and losses totaled $35 million and $2 million, respectively, in fiscal 2006. The gross realized gains and losses totaled
$31 million and $1 million, respectively, in fiscal 2005. The specific identification method is used to account for gains and
losses on available-for-sale securities.
106
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 9: Financial Instruments (Continued)
A summary of the carrying values and balance sheet classification of all investments in debt and equity securities was as
follows for the following fiscal years ended October 31:
Available-for-sale debt securities .........................................................................................................................
Short-term investments ......................................................................................................................................
Available-for-sale debt securities .........................................................................................................................
Available-for-sale equity securities ......................................................................................................................
Equity securities in privately-held companies and other investments ..................................................................
Included in long-term financing receivables and other assets...............................................................................
Total investments..................................................................................................................................................
2007
2006
In millions
$152
152
129
9
533
671
$823
$22
22
20
36
362
418
$440
Equity securities in privately-held companies include cost basis and equity method investments. Other investments
consist primarily of marketable trading securities held to generate returns that HP expects to offset changes in certain
liabilities related to deferred compensation arrangements. HP includes gains or losses from changes in fair value of these
securities, offset by losses or gains on the related liabilities, in interest and other, net, in HP’s Consolidated Statements of
Earnings. The gains or losses associated with these securities are not material for both fiscal years 2007 and 2006.
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, swaps and options, to hedge certain foreign currency and interest rate 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 use derivative contracts for
speculative purposes. HP applies hedge accounting based upon the criteria established by SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities” (“SFAS 133”), whereby HP designates its derivatives as fair value hedges,
cash flow hedges or hedges of the foreign currency exposure of a net investment in a foreign operation (“net investment
hedges”). HP recognizes all derivatives in the Consolidated Balance Sheets at fair value and reports them in other current
assets, long-term financing receivables and other assets, other accrued liabilities, and other liabilities. HP classifies cash
flows from the derivative programs as cash flows from operating activities in the Consolidated Statement of Cash Flows.
Fair Value Hedges
HP may enter into fair value hedges to reduce the exposure of its debt portfolio to both interest rate risk and foreign
currency exchange rate risk. HP issues long-term debt in either U.S. dollars or foreign currencies based on market conditions
at the time of financing. HP may then use interest rate or cross currency swaps to modify the market risk exposures in
connection with the debt to achieve primarily U.S. dollar LIBOR-based floating interest expense and to manage exposure to
changes in foreign currency exchange rates. The swap transactions generally involve the exchange of fixed for
107
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 9: Financial Instruments (Continued)
floating interest payments, and, when the underlying debt is denominated in a foreign currency, exchange of the foreign
currency 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. HP may choose not to hedge the foreign currency risk associated with its foreign currency
denominated debt if this debt acts as a natural hedge for foreign currency assets denominated in the same currency. When
investing in fixed rate instruments, HP may enter into interest rate swaps that convert the fixed interest returns into variable
interest returns and would classify these swaps as fair value hedges. For derivative instruments that are designated and
qualify as fair value hedges, HP recognizes the gain or loss on the derivative instrument, as well as the offsetting loss or gain
on the hedged item in interest and other, net, in the Consolidated Statements of Earnings in the current period. When HP
terminates an interest rate swap before maturity, the resulting gain or loss from the termination is amortized over the
remaining life of the underlying hedged item.
Cash Flow Hedges
HP may use cash flow hedges to hedge the variability of LIBOR-based interest income HP receives on certain variable-
rate investments. HP may enter into interest rate swaps that convert variable rate interest returns into fixed-rate interest
returns. For interest rate swaps that HP designates and that qualify as cash flow hedges, HP records changes in the fair values
in accumulated other comprehensive income as a separate component of stockholders’ equity and subsequently reclassifies
such changes into earnings in the period during which the hedged transaction is recognized in earnings.
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 denominated in
currencies other than the U.S. dollar. HP’s foreign currency cash flow hedges mature generally within six months. However,
certain leasing revenue-related 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 portions of the
gain or loss on the derivative instrument in accumulated other comprehensive 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. As of October 31, 2007, amounts related to derivatives qualifying as cash flow hedges
amounted to an accumulated other comprehensive loss of $64 million, net of taxes, of which $63 million HP expects to
reclassify to earnings in the next 12 months along with the earnings effects of the related forecasted transactions. In addition,
during fiscal 2007 and 2006 HP did not discontinue any cash flow hedges 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. For derivative instruments that are designated as net investment hedges, 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. Cumulative translation adjustment
decreased as result of
108
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 9: Financial Instruments (Continued)
an unrecognized net loss on net investment hedges of $109 million and $31 million for the fiscal years ended October 31,
2007 and 2006, respectively.
Other Derivatives
Other derivatives not designated as hedging instruments under SFAS 133 consist primarily of forward contracts HP uses
to hedge foreign currency balance sheet exposures. For derivative instruments not designated as hedging instruments under
SFAS 133, HP recognizes changes in the fair values in earnings in the period of change. HP recognizes the gains or losses 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. Interest and other, net,
included net foreign currency exchange gains of approximately $86 million in fiscal 2007, gains of approximately
$54 million in fiscal 2006, and gains of approximately $70 million in fiscal 2005.
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 and investments with the change in fair value of the derivative. For interest rate swaps designated as cash
flow hedges, HP measures effectiveness by offsetting the change in the variable portion of the interest rate swaps with the
changes in expected interest income received due to the fluctuations in the LIBOR based interest rate. For foreign currency
option and forward contracts designated as cash flow or net investment hedges, HP measures effectiveness by comparing the
cumulative change in the hedge contract with the cumulative change in the hedged item, both of which are based on forward
rates. HP recognizes any ineffective portion of the hedge, as well as amounts not included in the assessment of effectiveness,
in the Consolidated Statements of Earnings. As of October 31, 2007, the portion of hedging instruments’ gains or losses
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 fiscal years ended October 31,
2007, 2006 and 2005.
HP estimates the fair values of derivatives based on quoted market prices or pricing models using current market rates
and records all derivatives on the balance sheet at fair value. The gross notional
109
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 9: Financial Instruments (Continued)
and fair market value of derivative financial instruments and the respective SFAS 133 classification on the Consolidated
Balance Sheets were as follows for the following fiscal years ended October 31:
Gross
Notional
$2,450
9,657
1,002
17,854
$30,963
Other
Current
Assets
$—
73
5
86
$164
2007
Long-term
Financing
Receivables
and
Other Assets
Other
Accrued
Liabilities
Other
Liabilities
Total
In millions
$21
—
—
7
$28
2006
$—
(183)
(78)
(377)
$(638)
$21
$—
— (110)
(100)
(371)
$(560)
(27)
(87)
$(114)
Long-term
Financing
Receivables
and
Other Assets
Other
Current
Assets
Other
Accrued
Liabilities
Other
Liabilities
$1
33
1
25
$60
In millions
$2
—
1
13
$16
$(1)
(97)
(8)
(135)
$(241)
$(3)
—
(7)
(28)
$(38)
Gross
Notional
$2,550
8,768
844
10,482
$22,644
Total
$(1)
(64)
(13)
(125)
$(203)
Fair value hedges ............................................
Cash flow hedges............................................
Net investment hedges ....................................
Other derivatives.............................................
Total................................................................
Fair value hedges ............................................
Cash flow hedges............................................
Net investment hedges ....................................
Other derivatives.............................................
Total................................................................
Fair Value of Other Financial Instruments
For certain of HP’s financial instruments, including cash and cash equivalents, short-term investments, accounts
receivable, financing receivables, notes payable and short-term borrowings, accounts payable and other accrued liabilities,
the carrying amounts approximate fair value due to their short maturities. The estimated fair value of HP’s short- and long-
term debt was approximately $8.1 billion at October 31, 2007, compared to a carrying value of $8.2 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 10: Financing Receivables and Operating Leases
Financing receivables represent sales-type and direct-financing leases resulting from the marketing of HP’s 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
110
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 10: Financing Receivables and Operating Leases (Continued)
included in financing receivables and long-term financing receivables and other assets, were as follows for the following
fiscal years ended October 31:
2007
2006
In millions
Minimum lease payments receivable...................................................................................................
Allowance for doubtful accounts .........................................................................................................
Unguaranteed residual value................................................................................................................
Unearned income .................................................................................................................................
Financing receivables, net....................................................................................................................
Less current portion .............................................................................................................................
Amounts due after one year, net ..........................................................................................................
$5,568
(84)
291
(490)
5,285
(2,507)
$2,778
$5,010
(80)
289
(439)
4,780
(2,440)
$2,340
As of October 31, 2007, scheduled maturities of HP’s minimum lease payments receivable were as follows for the
following fiscal years ended October 31:
Scheduled maturities of minimum lease payments receivable....
$2,706 $1,485 $759 $334 $168
$116 $5,568
2008
2009
2010
2012
2011
In millions
Thereafter
Total
Equipment leased to customers under operating leases was $2.4 billion at October 31, 2007 and $2.1 billion at
October 31, 2006 and is included in machinery and equipment. Accumulated depreciation on equipment under lease was
$0.6 billion at both October 31, 2007 and October 31, 2006. As of October 31, 2007, minimum future rentals on non-
cancelable operating leases related to leased equipment were as follows for the following fiscal years ended October 31:
Minimum future rentals on non-cancelable operating leases......
$882 $430 $196
2008
2009
2010
Note 11: Guarantees
Indemnifications
2011
2012
In millions
$31
$85
Thereafter
Total
$25
$1,649
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
111
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 11: Guarantees (Continued)
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,
material usage or service delivery costs differ from estimates, revisions to the estimated warranty liability would be required.
The changes in HP’s aggregate product warranty liabilities were as follows for the following fiscal years ended
October 31:
Product warranty liability at beginning of year ................................................
Accruals for warranties issued..........................................................................
Adjustments related to pre-existing warranties (including changes in
estimates)..........................................................................................................
Settlements made (in cash or in kind)...............................................................
Product warranty liability at end of year ..........................................................
2007
2006
In millions
$2,248
2,712
(108)
$2,172
2,467
(45)
(2,476)
$2,376
(2,346)
$2,248
Note 12: Borrowings
Notes Payable and Short-Term Borrowings
Notes payable and short-term borrowings, including the current portion of long-term debt, were as follows for the
following fiscal years ended October 31:
Current portion of long-term debt.............................................
Commercial paper.....................................................................
Notes payable to banks, lines of credit and other......................
2007
2006
Amount
Outstanding
Weighted-
Average
Interest Rate
Amount
Outstanding
Weighted-
Average
Interest Rate
$675
2,065
446
$3,186
In millions
4.0%
5.0%
5.2%
$2,081
190
434
$2,705
5.7%
3.3%
4.6%
Notes payable to banks, lines of credit and other includes deposits associated with HP’s banking-related activities of
approximately $391 million and $393 million at October 31, 2007 and 2006, respectively.
112
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 12: Borrowings (Continued)
Long-Term Debt
Long-term debt was as follows for the following fiscal years ended October 31:
U.S. Dollar Global Notes
$1,000 issued December 2001 at 5.75%, matured and paid December 2006 .......................................
$1,000 issued June 2002 at 5.5%, matured and paid July 2007 ............................................................
$500 issued June 2002 at 6.5%, due July 2012.....................................................................................
$500 issued March 2003 at 3.625%, due March 2008 ..........................................................................
$1,000 issued May 2006 at floating interest rate, due May 2009 and redeemed June 2007 .................
$600 issued February 2007 at floating interest rate, due March 2012 ..................................................
$900 issued February 2007 at 5.25%, due March 2012 ........................................................................
$500 issued February 2007 at 5.4%, due March 2017 ..........................................................................
$1,000 issued June 2007 at floating interest rate, due June 2009..........................................................
$1,000 issued June 2007 at floating interest rate, due June 2010..........................................................
Series A Medium-Term Notes
$50 issued December 2002 at 4.25%, due December 2007 ..................................................................
Other
$505, U.S. dollar zero-coupon subordinated convertible notes, issued in October and November
1997 at an imputed rate of 3.13%, due 2017 (“LYONs”) ..................................................................
Other, including capital lease obligations, at 3.75%-15%, due 2006-2029...........................................
Fair value adjustment related to SFAS No. 133.......................................................................................
Less current portion .................................................................................................................................
2007
2006
In millions
$—
—
499
500
—
600
900
499
1,000—
1,000
4,998
50
50
371
263
634
(10)
(675)
$4,997
$1,000
999
498
499
1,000
—
—
—
—
3,996
50
50
360
228
588
(63)
(2,081)
$2,490
HP may redeem some or all of the Global Notes and the Series A Medium-Term Notes (collectively, the “Notes”), as set
forth in the above table, at any time at the redemption prices described in the prospectus supplements relating thereto. The
Notes are senior unsecured debt.
In May 2006, HP filed a shelf registration statement (the “2006 Shelf Registration Statement”) with the Securities and
Exchange Commission (the “SEC”) to enable HP to offer and sell, from time to time, in one or more offerings, debt
securities, common stock, preferred stock, depositary shares and warrants. On May 23, 2006, HP issued $1.0 billion in
floating rate global notes due May 22, 2009 under the 2006 Shelf Registration Statement. The notes bear interest at a floating
rate equal to the three-month USD LIBOR plus 0.125% per annum. HP used a portion of the proceeds it received to repay its
5.25% Euro Medium-Term Notes due July 2006 at maturity and the remainder of the net proceeds for general corporate
purposes.
113
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 12: Borrowings (Continued)
On February 22, 2007, HP issued an additional $2.0 billion of global notes under the 2006 Shelf Registration Statement.
The global notes included $600 million of notes due March 2012 with a floating interest rate equal to the three-month USD
LIBOR plus 0.11% per annum, $900 million of notes due March 2012 with a fixed interest rate of 5.25% per annum, and
$500 million of notes due March 2017 with a fixed interest rate of 5.40% per annum. HP issued the $600 million notes at par,
and HP issued the $900 million notes and $500 million notes at discounts to par at 99.938% and 99.694%, respectively. HP
used the net proceeds from this offering for general corporate purposes, including funding the repurchase of the notes it
assumed in connection with the Mercury acquisition as described in detail below and repaying short-term commercial paper.
On June 12, 2007, HP issued an additional $2.0 billion of global notes under the 2006 Shelf Registration Statement. The
global notes included $1.0 billion of notes due June 2009 with a floating interest rate equal to the three-month USD LIBOR
plus 0.01% per annum, and $1.0 billion of notes due June 2010 with a floating interest rate equal to the three-month USD
LIBOR plus 0.06% per annum. HP issued these global notes at par. HP used the net proceeds from these offerings for general
corporate purposes, including the redemption of the floating rate global notes due May 22, 2009 in June 2007 and the
repayment of short-term commercial paper.
HP registered the sale of up to $3.0 billion of debt or global securities, common stock, preferred stock, depositary shares
and warrants under a shelf registration statement in March 2002 (the “2002 Shelf Registration Statement”). In
December 2002, HP filed a supplement to the 2002 Shelf Registration Statement, which allows HP to offer from time to time
up to $1.5 billion of Medium-Term Notes, Series B, due nine months or more from the date of issuance (the “Series B
Medium-Term Note Program”). As of October 31, 2007, HP has not issued Medium-Term Notes pursuant to the Series B
Medium-Term Note Program.
HP registered the sale of up to $3.0 billion of Medium-Term Notes under its Euro Medium-Term Note Programme filed
with the Luxembourg Stock Exchange. HP can denominate these notes in any currency, including the euro. HP has not and
will not register these notes in the United States. In July 2006, HP repaid the previously issued 750 million euro notes at
maturity under this programme.
The LYONs are convertible by the holders at an adjusted rate of 15.09 shares of HP common stock for each $1,000 face
value of the LYONs, payable in either cash or common stock at HP’s election. In December 2000, the HP Board of Directors
authorized a repurchase program for the LYONs that allowed HP to repurchase the LYONs from time to time at varying
prices. The last repurchase under this program occurred in fiscal 2002.
In November 2006, in connection with the Mercury acquisition, HP assumed notes issued by Mercury (the “Mercury
Notes”) with a face value of $300 million, maturing on July 1, 2007 and bearing interest at a rate of 4.75% per annum. As of
July 31, 2007, HP had repurchased or repaid at maturity all of the outstanding Mercury Notes.
HP has a U.S. commercial paper program with a $6.0 billion capacity. Its 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. Commitment fees, interest rates and other terms of borrowing under the
credit facility vary, based on HP’s external credit ratings. The credit facility is a
114
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 12: Borrowings (Continued)
senior unsecured committed borrowing arrangement primarily to support the issuance of U.S. commercial paper. No amounts
are outstanding under the credit facility.
HP also maintains uncommitted lines of credit from a number of financial institutions that are available through various
foreign subsidiaries. The amount available for use as of October 31, 2007 was approximately $1.8 billion.
Included in Other, including capital lease obligations, are borrowings that are collateralized by certain financing
receivable assets. As of October 31, 2007, the carrying value of the assets approximated the carrying value of the borrowings
of $5 million.
At October 31, 2007, HP had up to approximately $10 billion of available borrowing resources under the 2002 Shelf
Registration Statement and other programs. HP also may issue additional debt securities, common stock, preferred stock,
depositary shares and warrants under the 2006 Shelf Registration Statement.
Aggregate future maturities of long-term debt at face value (excluding the fair value adjustment related to SFAS 133 of
$10 million and discount on debt issuance of $145 million) were as follows at October 31, 2007:
Aggregate future maturities of debt outstanding
including capital lease obligations .........................
$683
$1,037
$1,022
$5
$2,007
$1,073
$5,827
2008
2009
2010
2011
2012
Thereafter
Total
In millions
Interest expense on borrowings was $531 million in fiscal 2007, $336 million in fiscal 2006, and $334 million in fiscal
2005.
Note 13: Taxes on Earnings
The domestic and foreign components of earnings (losses) were as follows for the following fiscal years ended
October 31:
U.S................................................................................................................................. $3,577 $1,645 $(1,406)
4,949
Non-U.S. ....................................................................................................................... $5,600 5,546
$3,543
$9,177 $7,191
2007
2006
In millions
2005
115
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 13: Taxes on Earnings (Continued)
The provision for (benefit from) taxes on earnings was as follows for the following fiscal years ended October 31:
2007
2006
In millions
2005
U.S. federal taxes:
Current ......................................................................................................................................
Deferred ....................................................................................................................................
$211
657
$(443)
524
Non-U.S. taxes:
Current ......................................................................................................................................
Deferred ....................................................................................................................................
1,281
(125)
State taxes:
Current ......................................................................................................................................
Deferred ....................................................................................................................................
34
(145)
$1,913
755
173
(11)
(5)
$993
$687
(139)
598
(19)
21
(3)
$1,145
The significant components of deferred tax assets and deferred tax liabilities were as follows for the following fiscal
years ended October 31:
2007
2006
Deferred
Tax
Assets
Deferred
Tax
Liabilities
Deferred
Tax
Assets
Deferred
Tax
Liabilities
Loss carryforwards ........................................................................
Credit carryforwards......................................................................
Unremitted earnings of foreign subsidiaries ..................................
Inventory valuation........................................................................
Intercompany transactions—profit in inventory ............................
Intercompany transactions—excluding inventory .........................
Fixed assets....................................................................................
Warranty ........................................................................................
Employee and retiree benefits........................................................
Accounts receivable allowance......................................................
Capitalized research and development...........................................
Purchased intangible assets............................................................
Restructuring .................................................................................
Equity investments.........................................................................
Deferred revenue ...........................................................................
Other ..............................................................................................
Gross deferred tax assets and liabilities .........................................
Valuation allowance ......................................................................
Total deferred tax assets and liabilities ..........................................
$1,573
1,999
—
173
506
1,850
295
709
1,014
190
1,538
48
75
61
748
1,134
11,913
(1,543)
$10,370
In millions
$—
—
4,018
11
—
—
7
—
543
2
—
627
—
—
—
112
5,320
—
$5,320
$558
2,247
—
135
519
1,471
362
670
1,545
152
1,880
58
182
54
592
896
11,321
(840)
$10,481
$—
—
4,111
74
—
—
5
—
553
—
—
445
—
—
—
103
5,291
—
$5,291
116
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 13: Taxes on Earnings (Continued)
The breakdown between current and long-term deferred tax assets and deferred tax liabilities was as follows for the
following fiscal years ended October 31:
2007
2006
In millions
Current deferred tax assets............................................................................................................................
Current deferred tax liabilities ......................................................................................................................
Long-term deferred tax assets.......................................................................................................................
Long-term deferred tax liabilities .................................................................................................................
Total deferred tax assets net of deferred tax liabilities .................................................................................
$4,609
(123)
961
(397)
$5,050
$4,144
(138)
1,475
(291)
$5,190
At October 31, 2007, HP had a deferred tax asset of $1.6 billion related to loss carryforwards, of which $1.2 billion
relates to foreign net operating losses. HP has provided a valuation allowance of $1.1 billion on those foreign net operating
loss carryforwards that HP does not expect to utilize. The remaining $377 million deferred tax asset relates to $970 million
and $805 million of federal and state net operating losses, respectively, including losses from acquired companies. HP has
provided $178 million in valuation allowance for such losses, which begin to expire in fiscal 2010.
Of the total tax credit carryforwards of $2.0 billion, HP had foreign tax credit carryforwards of $1.1 billion, of which
$29 million will expire in fiscal 2012 and the remainder of which will begin to expire in fiscal 2015. HP had alternative
minimum tax credit carryforwards of $86 million, which do not expire, and research and development credit carryforwards of
$387 million, which will begin to expire in fiscal 2019. HP also had tax credit carryforwards of $436 million in various states
and foreign countries, on which HP has provided a valuation allowance of $263 million. These credits begin to expire in
fiscal 2009.
Gross deferred tax assets at October 31, 2007 and 2006 were reduced by valuation allowances of $1.5 billion and $840
million, respectively. Total valuation allowances increased by $703 million. This valuation allowance increase was composed
of a $787 million net increase attributable to foreign net operating losses not previously recorded as deferred tax assets, a $96
million increase attributable to non-U.S. tax credits, and a $20 million increase attributable to federal net operating loss
carryovers. These increases were partially offset by an $86 million decrease in the valuation allowances on unrealized
domestic capital losses, and a $114 million decrease in the valuation allowances for state tax credits and net operating losses.
Of the $1.5 billion in valuation allowances at October 31, 2007, $140 million was related to deferred tax assets for acquired
companies that existed at the time of acquisition. In the future, if HP determines that the realization of these deferred tax
assets is more likely than not, the reversal of the related valuation allowance will reduce goodwill instead of the provision for
taxes.
Of the total tax benefits resulting from the exercise of employee stock options and other employee stock programs, the
amounts recorded to stockholders’ equity were approximately $530 million in fiscal 2007, $356 million in fiscal 2006 and
$30 million in fiscal 2005.
117
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 13: Taxes on Earnings (Continued)
The differences between the U.S. federal statutory income tax rate and HP’s effective tax rate were as follows for the
following fiscal years ended October 31:
U.S. federal statutory income tax rate .......................................................
State income taxes, net of federal tax benefit ............................................
Lower rates in other jurisdictions, net .......................................................
Jobs Act Repatriation, including state taxes ..............................................
Research and development credit ..............................................................
Valuation allowance ..................................................................................
U.S. federal tax audit settlement................................................................
Other, net...................................................................................................
2005
2007
2006
35.0% 35.0% 35.0%
(3.0)
(0.1)
(23.6)
(11.9)
22.4
—
(0.2)
(0.2)
3.4
(1.0)
—
(7.9)
(1.7)
(0.1)
20.8% 13.8% 32.3%
0.5
(13.2)
—
(0.6)
(1.7)
—
0.8
In fiscal 2007, HP recorded $80 million of net income tax benefit related to items unique to the year. This is attributable
to a $154 million valuation allowance release attributable to state tax credits and $60 million benefit from foreign net
operating losses, offset by $96 million net increase to various tax reserves, a net tax charge of $18 million for the adjustment
to estimated fiscal 2006 tax accruals upon filing the 2006 U.S. federal and state income tax returns, and a net tax charge of
$20 million for other items.
In fiscal 2006, HP recorded $599 million of net income tax benefit related to items unique to the year. This included net
favorable tax adjustments of $565 million to income tax accruals as a result of the settlement of the Internal Revenue Service
(“IRS”) examinations of HP’s U.S. income tax returns for fiscal years 1993 to 1998. The reductions to the net income tax
accruals for these years related primarily to the resolution of issues with respect to Puerto Rico manufacturing tax incentives
and export tax incentives, and other issues involving our non-U.S. operations.
In December 2006, the Tax Relief and Health Care Act of 2006 was signed into law, which includes a retroactive
reinstatement of the research and development credit. The retroactive amount was recorded in HP’s financial statements in
the first quarter of fiscal 2007. The amount did not have a material impact on HP’s consolidated results of operations and
financial condition.
In fiscal 2005, HP recorded $697 million of net income tax expense related to items unique to the year. The tax expense
was the result primarily of $792 million associated with the repatriation of $14.5 billion under the Jobs Act and $76 million
related to additional distributions received from foreign subsidiaries. These tax expenses were offset in part by tax benefits of
$177 million resulting from agreements with the IRS and other governmental authorities, which were reflected in “Lower
rates in other jurisdictions, net” and “Other, net.”
As a result of certain employment actions and capital investments HP has undertaken, income from manufacturing
activities of subsidiaries in certain countries is subject to reduced tax rates, and in some cases is wholly exempt from taxes
through 2019. The gross income tax benefits attributable to the tax status of these subsidiaries were estimated to be
$1.2 billion ($0.43 per diluted share) in fiscal year 2007, $876 million ($0.31 per diluted share) in fiscal year 2006, and
$1.1 billion ($0.36 per diluted share) in fiscal year 2005. The gross income tax benefits were offset partially by accruals of
U.S. income taxes on undistributed earnings.
118
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 13: Taxes on Earnings (Continued)
The IRS has completed its examination of the income tax returns of HP for all years through fiscal 1998. HP’s 1993
through 1998 years were settled with the IRS’s Appeals Division and the settlements were approved by the Joint Committee
on Taxation in 2006. These tax years remain open for net operating loss and foreign tax credit carrybacks from subsequent
years if the IRS’s audits of those years approve such carrybacks.
On June 28, 2007, HP received a Notice of Deficiency from the IRS for its fiscal 1999 and 2000 tax years. The Notice of
Deficiency asserted that HP owes additional tax of $13 million for these two years. At the same time, HP received a Revenue
Agent’s Report (“RAR”) from IRS for its fiscal 2001 tax year that proposed no change in HP’s tax liability for that year. In
addition to the proposed deficiencies for fiscal 1999 and 2000, the IRS’s adjustments, if sustained, would reduce tax refund
claims HP has filed for foreign tax credit and net operating loss carrybacks to earlier fiscal years and reduce the tax benefits
of carryforwards to subsequent years, by approximately $361 million. HP plans to contest certain of the adjustments
proposed in the Notice of Deficiency and the RAR. Towards this end, HP filed a Petition with the United States Tax Court on
September 25, 2007. HP believes that it has provided adequate reserves for any tax deficiencies or reductions in refund
claims that could result from the IRS actions.
As of October 31, 2007, the IRS was in the process of concluding its examination of HP’s income tax returns for years
2002 and 2003. The IRS began an audit of HP’s 2004 and 2005 income tax returns in 2007. In addition, HP is subject to
numerous ongoing audits by state and foreign tax authorities. HP believes that adequate accruals have been provided for all
HP open tax years.
All Compaq tax years through the merger date with HP, May 3, 2002, have been audited and agreed with the IRS.
During fiscal 2007 substantially all of the remaining tax accruals for Compaq were reclassified as a reduction of goodwill
upon closing of the statute of limitations.
HP has not provided for U.S. federal income and foreign withholding taxes on $7.7 billion of undistributed earnings
from non-U.S. operations as of October 31, 2007 because HP intends to reinvest such earnings indefinitely outside of the
United States. If HP were to distribute these earnings, foreign tax credits may become available under current law to reduce
the resulting U.S. income tax liability. Determination of the amount of unrecognized deferred tax liability related to these
earnings is not practicable. HP will remit non-indefinitely reinvested earnings of its non-US subsidiaries where excess cash
has accumulated and it determines that it is advantageous for business operations, tax or cash reasons.
American Jobs Creation Act of 2004—Repatriation of Foreign Earnings
The American Jobs Creation Act of 2004 (“the Jobs Act”), enacted on October 22, 2004, provided for a temporary 85%
dividends received deduction on certain foreign earnings repatriated during a one-year period. The deduction resulted in an
approximate 5.25% federal tax rate on the repatriated earnings. During the third quarter of fiscal 2005, HP’s CEO and Board
of Directors approved a domestic reinvestment plan as required by the Jobs Act to repatriate $14.5 billion in foreign earnings
in fiscal 2005.
HP recorded tax expense in fiscal 2005 of $792 million related to this $14.5 billion dividend under the Jobs Act. The
additional tax expense consists of federal taxes of $744 million, state taxes, net of
119
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 13: Taxes on Earnings (Continued)
federal benefits, of $73 million, and a net tax benefit of $25 million related to an adjustment of deferred tax liabilities on both
repatriated and unrepatriated foreign earnings.
Note 14: Stockholders’ Equity
Dividends
The stockholders of HP common stock are entitled to receive dividends when and as declared by HP’s Board of
Directors. Dividends are paid quarterly. Dividends were $0.32 per common share in each of fiscal 2007, 2006 and 2005.
Stock Repurchase Program
HP’s share repurchase program authorizes both open market and private repurchase transactions. In fiscal 2007, HP
completed share repurchases of approximately 209 million shares. Repurchases of approximately 210 million shares were
settled for $9.1 billion, which included approximately 1 million shares repurchased in transactions that were executed in
fiscal 2006 but settled in fiscal 2007. In fiscal 2006, HP completed share repurchases of approximately 188 million shares.
Repurchases of approximately 190 million shares were settled for $6.1 billion, which included 2 million shares repurchased
in transactions that were executed in fiscal 2005 but settled in fiscal 2006. In fiscal 2005, HP completed share repurchases of
approximately 150 million shares, of which approximately 148 million shares were settled for $3.5 billion. Shares
repurchased and settled in fiscal 2007 and fiscal 2006 were all open market repurchases. Shares repurchased and settled in
fiscal 2005 included open market repurchases of 37 million shares for $1.0 billion and 111 million shares for $2.5 billion
from the David and Lucile Packard Foundation.
In addition to the above transactions, HP entered into an Accelerated Share Repurchase (the “ASR Program”) with a
third-party investment bank during the second quarter of fiscal 2007. Pursuant to the terms of the ASR Program, HP
purchased 40 million shares of its common stock from the investment bank for $1.8 billion (the “Purchase Price”) on
March 30, 2007 (the “Purchase Date”). HP decreased its shares outstanding and reduced the outstanding shares used to
calculate the weighted-average common shares outstanding for both basic and diluted EPS on the Purchase Date. The shares
delivered to HP included shares that the investment bank borrowed from third parties. The investment bank purchased an
equivalent number of shares in the open market to cover its position with respect to the borrowed shares during a
contractually specified averaging period that began on the Purchase Date and ended on June 6, 2007. At the end of the
averaging period, the investment bank’s total purchase cost based on the volume weighted-average purchase price of HP
shares during the averaging period was approximately $90 million less than the Purchase Price. Accordingly, HP had the
option to either receive additional shares of HP’s common stock or a cash payment in the amount of the difference from the
investment bank. In June 2007, HP received approximately 2 million additional shares purchased by the investment bank in
the open market with a value approximately equal to that amount. HP reduced its shares outstanding upon receipt of those
shares.
Also, HP entered into a prepaid variable share purchase program (“PVSPP”) with a third-party investment bank during
the first quarter of 2006 and prepaid approximately $1.7 billion in exchange for the right to receive a variable number of
shares of its common stock weekly over a one-year period beginning in the second quarter of fiscal 2006 and ending during
the second quarter of fiscal 2007. Under the PVSPP, the prices at which HP purchased the shares were subject to a minimum
and
120
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 14: Stockholders’ Equity (Continued)
maximum price that was determined in advance of any repurchases being completed under the program, thereby effectively
hedging HP’s repurchase price. The minimum and maximum number of shares HP could receive under the program was
52 million shares and 70 million shares, respectively. The exact number of shares to be repurchased was based upon the
volume weighted-average market price of HP’s shares during each weekly settlement period, subject to the minimum and
maximum price as well as regulatory limitations on the number of shares HP was permitted to repurchase. HP decreased its
shares outstanding each settlement period as shares were physically received. HP completed all repurchases under the PVSPP
on March 9, 2007. As of that date, HP had cumulatively received a total of 53 million shares. HP retired all shares
repurchased and no longer deems those shares outstanding.
HP’s Board of Directors authorized an additional $8.0 billion, $10.0 billion and $4.0 billion for future share repurchases
in fiscal 2007, 2006 and 2005, respectively. As of October 31, 2007, HP had remaining authorization of $2.7 billion for
future share repurchases. On November 19, 2007, HP’s Board of Directors authorized an additional $8.0 billion for future
share repurchases.
Comprehensive Income
The changes in the components of other comprehensive income, net of taxes, were as follows for the following fiscal
years ended October 31:
2006
In millions
Net earnings..................................................................................................................................... $7,264 $6,198
Net change in unrealized gains on available-for-sale securities:
2007
2005
$2,398
Change in net unrealized gains, net of taxes of $2 in 2007, $3 in 2006 and of $6 in 2005...........
Net unrealized gains reclassified into earnings, net of taxes of $7 in 2007, $9 in 2006 and $6 in
2005 ...........................................................................................................................................
2
(14)
7
(13)
9
(10)
(12)
(6)
(1)
Net change in unrealized losses on cash flow hedges:
Change in net unrealized losses, net of tax benefit of $37 in 2007, $24 in 2006 and $16 in
(63)
(41)
(28)
2005 ...........................................................................................................................................
Net unrealized losses reclassified into earnings, net of tax benefit of $26 in 2007, $24 in 2006
45
41
97
and $56 in 2005..........................................................................................................................
Net change in cumulative translation adjustment, net of tax benefit of $37 in 2007, $40 in 2006
and $8 in 2005 .................................................................................................................................
Net change in additional minimum pension liability, net of tax benefit of $1 in 2007, tax benefit
of $1 in 2006 and taxes of $89 in 2005............................................................................................
Comprehensive income.................................................................................................................... $7,337 $6,237
(3)
(9)
(18)
106
—
54
69
(17)
171
$2,620
121
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 14: Stockholders’ Equity (Continued)
The components of accumulated other comprehensive income, net of taxes, were as follows for the following fiscal years
ended October 31:
In millions
$4
Net unrealized gains on available-for-sale securities......................................................................
(64)
Net unrealized losses on cash flow hedges .....................................................................................
Cumulative translation adjustment .................................................................................................
173
Additional minimum pension liability............................................................................................ —
Unrealized components of defined benefit pension plan ................................................................
446
Accumulated other comprehensive income .................................................................................... $559
$16
(46)
67
(19)
—
$18
2007
2006
Note 15: Retirement and Post-Retirement Benefit Plans
Plan Design Changes
In fiscal 2007, HP modified its U.S. defined benefit pension plan for the remaining number of U.S. employees still
accruing benefits under the program. Effective January 1, 2008, these employees will cease accruing pension benefits, and
HP will calculate the final pension benefit amount based on pay and service through December 31, 2007. In addition, HP
limited future eligibility for the Pre-2003 HP Retiree Medical Program to those employees who were within five years of
satisfying the program’s retirement criteria on June 30, 2007. These actions resulted in reductions to the U.S. defined benefit
and post-retirement plan obligations. As a result, HP recognized one-time curtailment gains of $541 million for the U.S.
defined benefit pension plan and $1 million for the post-retirement benefit plan. As part of this announcement, HP offered an
option for eligible affected employees to participate in the 2007 EER. A total of 3,080 employees participated in the 2007
EER. HP recognized a special termination benefit expense of $307 million in fiscal 2007, which reflects aggregate additional
lump-sum benefits that HP expects to pay to those individuals participating in the 2007 EER. HP will distribute this amount
from the plan assets. Also, HP recognized a special termination benefit expense of $60 million for the HP retiree medical
plans for those employees participating in the 2007 EER. This expense amount reflects the additional medical coverage that
HP expects to provide to those employees participating in the 2007 EER. The total $367 million expense for the 2007 EER
was included in the restructuring charge of fiscal 2007. HP will fund the cash expenditures associated with the 2007 EER
primarily by using available U.S. pension plan assets. Eligible employees whose pension accruals will cease effective
December 31, 2007 will benefit from an increased company 401(k) match opportunity from 4 percent to 6 percent of eligible
earnings effective January 1, 2008.
In fiscal 2007, HP also recognized a net settlement loss of $8 million for its U.S. pension plans, including a settlement
loss of $36 million, which was partially offset by a settlement gain of $28 million for its U.S. pension plans. The settlement
loss of $36 million related to the distributions and the subsequent transfer of accrued pension benefits from the U.S. Excess
Benefit Plan to the U.S. Executive Deferred Compensation Plan for the terminated vested plan participants. The distributions
and the transfer of this pension obligation represented a reduction in the projected benefit obligation and exceeded the sum of
service and interest cost for this plan. As a result, HP recognized a portion of the unrecognized loss, re-measured as of
January 31, 2007, in the second quarter of fiscal 2007. The settlement gain of $28 million primarily resulted from the
distribution of lump-sum benefit payments
122
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 15: Retirement and Post-Retirement Benefit Plans (Continued)
made to pension plan participants who left HP under the 2007 EER. These lump sum benefit payments, which were paid out
to participants during the October 1, 2006 to September 30, 2007 measurement period, represent a reduction in the projected
benefit obligation. As a result, a portion of the unrecognized gain was recognized in fiscal 2007. The gain was recorded in
accordance with SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans
and for Termination Benefits,” which requires that a settlement event be recorded once prescribed payment thresholds have
been reached. HP recorded this $28 million as a reduction to the restructuring charge recorded in connection with the
2007 EER.
In fiscal 2007, HP recognized a net curtailment gain of $26 million for its U.S. post-retirement benefit plans. The gain
included $16 million and $9 million, resulting from the reduction in the eligible plan population stemming from the
2007 EER and the restructuring plans implemented in fiscal 2005, respectively. HP reported these gains as reductions to the
restructuring charge. HP also recorded a one-time curtailment gain of $1 million for its post-retirement benefit plans as a
result of the modification of its Pre-2003 HP Retiree Medical Program in fiscal 2007 as described above in detail.
In fiscal 2007 HP recognized net curtailment gains of $13 million in connection with its non-U.S. defined benefit plans.
These gains reflected a plan design change in Mexico and Canada of $11 million where HP ceased pension accruals for
current employees who did not meet defined criteria based on age and years of service and a $2 million gain related to the
fiscal 2005 restructuring programs recorded as a reduction to the restructuring charges in fiscal 2007. Also in fiscal 2007, HP
recognized a restructuring settlement expense of $4 million. The settlement expense reflected primarily the distribution of
lump-sum benefit payments in Mexico and Canada, thereby resulting in a portion of the unrecognized loss being recorded as
expense once the settlement recognition thresholds had been reached. In addition, HP incurred a $4 million restructuring
special termination benefit expense associated with the early retirement of employees in the U.K. and Ireland.
Defined Benefit Plans
HP sponsors a number of defined benefit pension plans worldwide, of which the most significant are in the United
States. The HP Retirement Plan (the “Retirement Plan”) is a defined benefit pension plan for U.S. employees hired on or
before December 31, 2002. Benefits under the Retirement Plan generally are based on pay and years of service, except for
eligible pre-acquisition Compaq employees, who do not receive credit for years of service prior to January 1, 2003. Effective
December 31, 2005, participants whose combination of age plus years of service is less than 62 ceased accruing benefits
under the Retirement Plan. Effective January 1, 2008, the remaining number of U.S. employees still accruing benefits under
the program will cease accruing pension benefits.
For U.S employees hired or rehired on or after January 1, 2003, HP sponsors the Hewlett-Packard Company Cash
Account Pension Plan (the “Cash Account Pension Plan”), under which benefits accrue pursuant to a cash accumulation
account formula based upon a percentage of pay plus interest. Effective November 30, 2005, HP merged the Cash Account
Pension Plan into the Retirement Plan; the merged plan is treated as one plan for certain legal and financial purposes,
including funding requirements. The merger has no impact on the separate benefit structures of the plans. Effective
December 31, 2005, the Cash Account Pension Plan was closed to new participants, and participants whose combination of
age plus years of service is less than 62 will cease accruing benefits.
123
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 15: Retirement and Post-Retirement Benefit Plans (Continued)
HP reduces the benefit payable to a U.S. employee under the Retirement Plan for service before 1993, if any, by any
amounts due to the employee under HP’s frozen defined contribution Deferred Profit-Sharing Plan (“the DPSP”). HP closed
the DPSP to new participants in 1993. The DPSP plan obligations are equal to the plan assets and are recognized as an offset
to the Retirement Plan when HP calculates its defined benefit pension cost and obligations. The fair value of plan assets and
projected benefit obligations for the U.S. defined benefit plans combined with the DPSP as of the September 30 measurement
date is as follows for the following fiscal years ended October 31:
U.S. defined benefit plans.............................................................................
DPSP.............................................................................................................
Total..............................................................................................................
Post-Retirement Benefit Plans
2007
2006
Projected
Benefit
Obligation
Plan
Assets
Projected
Benefit
Obligation
In millions
$3,982
1,029
$5,011
$4,325
1,095
$5,420
$4,688
1,095
$5,783
Plan
Assets
$4,258
1,029
$5,287
Through fiscal 2005, substantially all of HP’s U.S. employees at December 31, 2002 could become eligible for partially
subsidized retiree medical benefits and retiree life insurance benefits under the Pre-2003 HP Retiree Medical Program (the
“Pre-2003 Program”) and certain other retiree medical programs. Plan participants in the Pre-2003 Program make
contributions based on their choice of medical option and length of service. U.S. employees hired or rehired on or after
January 1, 2003 may be eligible to participate in a post-retirement medical plan, the HP Retiree Medical Program but must
bear the full cost of their participation. Effective January 1, 2006, employees whose combination of age and years of service
is less than 62 no longer will be eligible for the subsidized Pre-2003 Program, but instead will be eligible for the HP Retiree
Medical Program. Employees no longer eligible for the Pre-2003 Program, as well as employees hired on or after January 1,
2003, are eligible for certain credits under the HP Retirement Medical Savings Account Plan (“RMSA Plan”) upon attaining
age 45. Upon retirement, former employees may use credits under the RMSA Plan for the reimbursement of certain eligible
medical expenses, including premiums required for participation in the HP Retiree Medical Program. Also, HP limited future
eligibility for the pre-2003 HP Retiree Medical Program to those employees who were within five years of satisfying the
program’s retirement criteria on June 30, 2007.
Defined Contribution Plans
HP offers various defined contribution plans for U.S. and non-U.S. employees. Total defined contribution expense was
$481 million in fiscal 2007, $430 million in fiscal 2006 and $422 million in fiscal 2005. U.S. employees are automatically
enrolled in the Hewlett-Packard Company 401(k) Plan (the “HP 401(k) Plan”) when they meet eligibility requirements,
unless they decline participation.
During fiscal 2007, HP matched employee contributions to the HP 401(k) Plan with cash contributions up to a maximum
of 6% of eligible compensation. Effective January 1, 2008, all U.S. employees will be eligible for a 6% HP matching
contribution.
124
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 15: Retirement and Post-Retirement Benefit Plans (Continued)
Effective January 31, 2004, HP designated the HP Stock Fund, an investment option under the HP 401(k) Plan, as an
Employee Stock Ownership Plan and, as a result, participants in the HP Stock Fund may receive dividends in cash or may
reinvest such dividends into the HP Stock Fund. HP paid approximately $9 million, $10 million and $12 million in dividends
for the HP common shares held by the HP Stock Fund in fiscal 2007, 2006 and 2005, respectively. HP records the dividends
as a reduction of retained earnings in the Consolidated Statements of Stockholders’ Equity. The HP Stock Fund held
approximately $28 million shares of HP common stock at October 31, 2007.
Implementation of SFAS 158
SFAS 158 requires that the funded status of defined benefit postretirement plans be recognized on the company’s
balance sheet and changes in the funded status be reflected in comprehensive income, effective for fiscal years ending after
December 15, 2006, which HP adopted effective October 31, 2007. SFAS 158 also requires companies to measure the funded
status of the plan as of the date of their fiscal year-end, effective for fiscal years ending after December 15, 2008. HP expects
to adopt the measurement provisions of SFAS 158 effective October 31, 2009. The following table summarizes the financial
impact stemming from the initial adoption of SFAS 158:
Before
application
of SFAS 158
Adjustments
In millions
After
application
of SFAS 158
Other long-term assets (including pension assets)....................
Deferred tax assets, long-term ..................................................
Total assets ...............................................................................
Pension, post-retirement, and post-employment
liabilities ...................................................................................
Deferred tax liabilities, long-term.............................................
Total liabilities..........................................................................
Accumulated other comprehensive income ..............................
Total stockholders’ equity ........................................................
$3,431
$1,040
$88,301
$1,739
$223
$50,243
$91
$38,058
$477
$(79)
$398
$(244)
$174
$(70)
$468
$468
$3,908
$961
$88,699
$1,495
$397
$50,173
$559
$38,526
The following table summarizes the pre-tax net experience (gain) / loss and prior service cost / (benefit) recognized in
accumulated other comprehensive income for the company’s defined benefit and postretirement benefit plans as of
October 31, 2007.
U.S. Defined
Benefit Plans
Non-U.S. Defined
Benefit Plans
In millions
Post-Retirement
Benefit Plans
Net experience (gain) loss .................................
Prior service cost (benefit).................................
Total recognized in accumulated other
comprehensive (income) loss ............................
$(450)
(1)
$(451)
$104
(96)
$8
$214
(462)
$(248)
125
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 15: Retirement and Post-Retirement Benefit Plans (Continued)
The following table summarizes the experience (gain) / loss and prior service cost / (benefit) that will be amortized from
accumulated other comprehensive income and recognized as components of net periodic benefit cost / (credit) during the next
fiscal year.
U.S. Defined
Benefit Plans
Net experience (gain) loss ......................................................
Prior service cost (benefit)......................................................
Total recognized in accumulated other comprehensive (gain)
loss......................................................................................
$(36)
—
$(36)
Pension and Post-Retirement Benefit Expense
Non-U.S. Defined
Benefit Plans
In millions
$2
(8)
$(6)
Post-Retirement
Benefit Plans
$19
(56)
$(37)
HP’s net pension and post-retirement benefit costs were as follows for the following fiscal years ended October 31:
Service cost............................................
Interest cost............................................
Expected return on plan assets...............
Amortization and deferrals:
Actuarial (gain) / loss..........................
Prior service cost (benefit) ..................
Net periodic benefit cost ........................
Curtailment (gain) / loss......................
Settlement loss / (gain)........................
Special termination benefits................
Net benefit (gain) / cost .........................
2007
$130
260
(355)
(13)
—
22
(541)
8
307
$(204)
U.S. Defined
Benefit Plans
2006
2005
2007
Non-U.S. Defined
Benefit Plans
2006
In millions
2005
Post-Retirement
Benefit Plans
2006
2007
2005
$177
276
(361)
$338
275
(290)
38
(14)
2
1
79
363
— (199)
—
352
$516
(46)
—
$33
$261
366
(579)
87
(7)
128
(13)
4
4
$123
$299
325
(495)
136
(3)
262
1
2
12
$277
$236
304
(412)
104
(1)
231
—
1
3
$235
$31
77
(38)
26
(54)
42
(26)
—
60
$76
$32
84
(34)
$63
98
(32)
35
39
(18)
(55)
146
66
—
(24)
—
—
— 55
$201
$42
The weighted average assumptions used to calculate net benefit cost were as follows for the following fiscal years ended
October 31:
Discount rate.................................................................
Average increase in compensation levels .....................
Expected long-term return on assets .............................
U.S. Defined
Benefit Plans
2006
Non-U.S. Defined
Benefit Plans
2005
2006
2007
5.9% 5.9% 5.7% 4.4% 4.2% 4.9% 5.8% 5.8% 5.6%
4.0% 4.0% 4.0% 3.3% 3.7% 3.7% —
—
8.3% 8.3% 8.3% 6.7% 6.7% 6.7% 8.3% 8.3% 8.3%
Post-Retirement
Benefit Plans
2006
2007
2005
2007
2005
—
As a result of the restructuring plans implemented in fiscal 2007, HP re-measured its U.S. defined benefit plan and post-
retirement benefit plan obligations. The 2007 discount rates outlined in the table
126
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 15: Retirement and Post-Retirement Benefit Plans (Continued)
above are those rates used by HP in conducting each of the respective plan re-measurements and reflect the weighted-average
rate across all measurement periods.
The medical cost and related assumptions used to calculate the net post-retirement benefit cost for the following fiscal
years ended October 31 were as follows:
2005
Current medical cost trend rate ................................................................................................................ 8.5% 9.5% 10.5%
Ultimate medical cost trend rate .............................................................................................................. 5.5% 5.5% 5.5%
2010
Year the medical cost rate reaches ultimate trend rate............................................................................. 2010
2010
2006
2007
A 1.0 percentage point increase in the medical cost trend rate would have increased the fiscal 2007 service and interest
components of the post-retirement benefit costs by $1.8 million, while a 1.0 percentage point decrease would have resulted in
a decrease of $2.2 million in the same period.
127
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 15: Retirement and Post-Retirement Benefit Plans (Continued)
Funded Status
The funded status of the defined benefit and post-retirement benefit plans was as follows for the following fiscal years
ended October 31:
U.S. Defined
Benefit Plans
Non-U.S. Defined
Benefit Plans
Post-Retirement
Benefit Plans
2007
2006
2007
2006
2007
2006
Change in fair value of plan assets:
Fair value—beginning of year ...........................................
Acquisition/addition/deletion of plans ...............................
Actual return on plan assets ...............................................
Employer contributions......................................................
Participants’ contributions .................................................
Benefits paid ......................................................................
Settlements.........................................................................
Currency impact.................................................................
Fair value—end of year .....................................................
Change in benefit obligation:
Projected benefit obligation—beginning of year ...............
Acquisition/addition/deletion of plans ...............................
Service cost........................................................................
Interest cost........................................................................
Participants’ contributions .................................................
Actuarial (gain) / loss.........................................................
Benefits paid ......................................................................
Plan amendments ...............................................................
Curtailment ........................................................................
Settlement ..........................................................................
Special termination benefits...............................................
Currency impact.................................................................
Projected benefit obligation—end of year ............................
Plan assets greater (less) than benefit obligation ..................
Unrecognized net experience (gain) loss ..............................
Unrecognized prior service cost (benefit) related to plan
amendments .......................................................................
Net prepaid (accrued) amount recognized ............................
Contributions after measurement date ..................................
Net amount recognized .........................................................
Accumulated benefit obligation............................................
$4,325
$4,775
———39 —
482
51
—
(42)
(941)
—
4,325
667
124
—
(299)
(559)
—
4,258
$4,688
$5,296
———70 8
177
276
—
(86)
(42)
(2)
10
(941)
—
—
4,688
(363)
(142)
3
130
260
—
136
(299)
—
(681)
(559)
307
—
3,982
276
—
—
In millions
$8,367
$7,152
$448
669
145
88
(235)
(62)
844
9,816
671
244
50
(199)
(25)
435
8,367
68
56
42
(125)
—
—
489
$8,089
$7,566
$1,367
261
366
88
(811)
(235)
—
(39)
(62)
4
765
8,426
1,390
299
325
50
(393)
(199)
(48)
(13)
(25)
12
445
8,089
278
— 1,078
(92)
—
31
77
42
(74)
(125)
(91)
21
—
60
7
1,323
(834)
—
—
$426
—
43
67
37
(125)
—
—
448
$1,496
(34)
32
84
37
(151)
(125)
—
26
—
—
2
1,367
(919)
346
(480)
276
—
$276
$3,963
(502)
—
$(502)
$4,066
1,390
13
$1,403
$7,677
1,264
25
$1,289
$7,264
(834)
6
$(828)
(1,053)
4
$(1,049)
128
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 15: Retirement and Post-Retirement Benefit Plans (Continued)
After the adoption of SFAS 158, the net amount recognized for HP’s defined benefit and post-retirement benefit plans in
HP’s Consolidated Balance Sheet as of October 31, 2007 was as follows:
Non-current assets .........................................................................
Current liability..............................................................................
Non-current liability ......................................................................
Net amount recognized ..................................................................
$407
(15)
(116)
$276
In millions
$1,751
(18)
(330)
$1,403
$—
(70)
(758)
$(828)
U.S. Defined
Benefit Plans
Non-U.S. Defined
Benefit Plans
Post-Retirement
Benefit Plans
The net amount recognized for HP’s defined benefit and post-retirement benefit plans was as follows for the fiscal year ended
October 31, 2006(1):
U.S. Defined
Benefit Plans
Non-U.S. Defined
Benefit Plans
In millions
Post-Retirement
Benefit Plans
Prepaid benefit costs ....................................................................
Pension, post-retirement and post-employment liabilities ...........
Intangible asset.............................................................................
Accumulated other comprehensive loss .......................................
Contribution after measurement date ...........................................
Net amount recognized ................................................................
$—
(502)
—
—
—
$(502)
$1,527
(297)
4
30
25
$1,289
$—
(1,053)
—
—
4
$(1,049)
(1) Due to the adoption of SFAS 158, which was implemented at October 31, 2007, year-to-year comparability is not
practical.
The weighted average assumptions used to calculate the benefit obligation as of the September 30 measurement date
were as follows:
Discount rate.......................................................................................................
Average increase in compensation levels ...........................................................
Current medical cost trend rate ...........................................................................
Ultimate medical cost trend rate .........................................................................
Year the rate reaches ultimate trend rate.............................................................
U.S. Defined
Benefit Plans
Post-Retirement
Benefit Plans
Non-U.S.
Defined
Benefit Plans
2006
2007
2006
2007
2006
2007
6.2% 5.8% 5.1% 4.4% 6.2% 5.8%
—
4.0% 4.0% 3.4% 3.3%
— — — 7.5% 8.5%
— — — 5.5% 5.5%
2010
— — — 2010
—
—
—
—
A 1.0 percentage point increase in the medical cost trend rate would have increased the total post-retirement benefit
obligation reported at October 31, 2007 by $30 million, while a 1.0 percentage point decrease would have resulted in a
decrease of $36 million.
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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 15: Retirement and Post-Retirement Benefit Plans (Continued)
Defined benefit plans with projected benefit obligations exceeding the fair value of plan assets were as follows:
Aggregate fair value of plan assets .....................................................................................
Aggregate projected benefit obligation...............................................................................
—
$131
In millions
$4,325 $422
$4,688 $776
$1,984
$2,411
Defined benefit plans with accumulated benefit obligations exceeding the fair value of plan assets were as follows:
U.S. Defined
Benefit Plans
2006
2007
Non-U.S. Defined
Benefit Plans
2006
2007
U.S. Defined
Benefit Plans
2006
2007
Non-U.S.
Defined
Benefit Plans
2006
2007
In millions
Aggregate fair value of plan assets .............................................................................................. — — $116
$360
Aggregate accumulated benefit obligation .................................................................................. $124 $146
$350
$586
Plan Asset Allocations
HP’s weighted-average target and asset allocations at the September 30 measurement date were as follows:
U. S. Defined
Benefit Plans
Non-U.S. Defined
Benefit Plans
Post-Retirement
Benefit Plans
Asset Category
Public equity securities ..............
Private equity securities .............
Real estate and other..................
Equity-related investments ........
Public debt securities .................
Cash ...........................................
Total........................................
Investment Policy
2007
Target
Allocation
Plan Assets
Plan Assets
2007
Target
Allocation
2007
2006
62.5% 70.5%
5.8% 3.4%
0.6% 0.3%
70% 68.9% 74.2%
28% 28.0% 25.8%
—
2% 3.1%
100% 100% 100%
2006
2007
62.1% 63.5%
—
—
2.6%
6.5%
67% 68.6% 66.1%
33% 30.9% 33.4%
0.5%
100% 100.0% 100.0%
— 0.5%
2007
Target
Allocation
Plan Assets
2007
2006
64.3% 66.8%
8.6%
11.5%
0.9%
0.7%
76% 76.7% 76.1%
21% 20.5% 23.9%
2.8%
—
3%
100% 100.0% 100.0%
HP’s investment strategy for worldwide plan assets is to seek a competitive rate of return relative to an appropriate level
of risk. The majority of the plans’ investment managers employ active investment management strategies with the goal of
outperforming the broad markets in which they invest. Risk management practices include diversification across asset classes
and investment styles and periodic rebalancing toward asset allocation targets. A number of the plans’ investment managers
are
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Notes to Consolidated Financial Statements (Continued)
Note 15: Retirement and Post-Retirement Benefit Plans (Continued)
authorized to utilize derivatives for investment purposes, and HP occasionally utilizes derivatives to effect asset allocation
changes or to hedge certain investment exposures.
The target asset allocation selected for each plan reflects a risk/return profile HP feels is appropriate relative to each
plan’s liability structure and return goals. HP regularly conducts periodic asset-liability studies for U.S. plan assets in order to
model various potential asset allocations in comparison to each plan’s forecasted liabilities and liquidity needs. HP invests a
portion of the U.S. defined benefit plan assets and post-retirement benefit plan assets in private market securities such as
venture capital funds, private debt and private equity to provide diversification and higher expected returns.
Outside the United States, local regulations require different approaches to target asset allocations, resulting in a higher
percentage allocation in fixed income securities. For each country outside the U.S., the local pension board decides on the
target allocation after consideration of local regulations. HP’s corporate office acts in a governance role in periodically
reviewing investment strategy and providing a recommended list of investment managers for each country plan.
Basis for Expected Long-Term Rate of Return on Plan Assets
The expected long-term rate of return on assets for each U.S. plan reflects the expected returns for each major asset class
in which the plan invests, the weight of each asset class in the target mix, the correlations among asset classes and their
expected volatilities. Expected asset class returns reflect the current yield on U.S. government bonds and risk premiums for
each asset class. Because HP’s investment policy is to employ primarily active investment managers who seek to outperform
the broader market, the asset class expected returns are adjusted to reflect the expected additional returns net of fees.
In the beginning of fiscal 2008, HP implemented a liability-driven investment strategy for the U.S. defined benefit
pension plan, which will be frozen by December 31, 2007 and is currently overfunded. As part of the strategy, HP has
transitioned its equity allocation to predominantly fixed income assets. The expected return on the plan assets, used in
calculating the net benefit cost, has been reduced from 8.3% to 6.3% for fiscal 2008 to reflect the changes in its asset
allocation policy.
The approach used to arrive at the expected rate of return on assets for the non-U.S. plans reflects the asset allocation
policy of each plan to the expected country real returns for equity and fixed income investments. On an annual basis, HP
gathers empirical data from the local country subsidiaries to determine expected long-term rates of return for equity and fixed
income securities. HP then weights these expected real rates of return based on country specific allocation mixes adjusted for
inflation.
Future Contributions and Funding Policy
In fiscal 2008, HP expects to contribute approximately $145 million to its pension plans and approximately $15 million
to cover benefit payments to U.S. non-qualified plan participants. HP expects to pay approximately $80 million to cover
benefit claims for HP’s post-retirement benefit plans. HP’s funding policy is to contribute cash to its pension plans so that it
meets at least the minimum contribution requirements, as established by local government and funding and taxing authorities.
In August 2006, the Pension Protection Act of 2006 (the “Act”) was enacted into law. The Act did not have any
significant effect on HP’s current funding strategy for its U.S. pension plan.
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Notes to Consolidated Financial Statements (Continued)
Note 15: Retirement and Post-Retirement Benefit Plans (Continued)
Estimated Future Benefits Payable
HP estimates that the future benefits payable for the retirement and post-retirement plans in place were as follows at
October 31, 2007:
U.S. Defined
Benefit Plans
Non-U.S. Defined
Benefit Plans
In millions
Post-Retirement
Benefit Plans(1)
Fiscal year ending October 31
2008 ....................................................
2009 ....................................................
2010 ....................................................
2011 ....................................................
2012 ....................................................
Next five fiscal years to October 31,
$365
$269
$289
$316
$353
$204
$215
$228
$253
$272
2017...................................................
$1,623
$1,809
$123
$115
$118
$121
$112
$584
(1) The estimated future benefits payable for the post-retirement plans are reflected net of the expected Medicare Part D
subsidy.
Note 16: Commitments
HP leases certain real and personal property under non-cancelable operating leases. Certain leases require HP to pay
property taxes, insurance and routine maintenance and include escalation clauses. Rent expense was approximately $767
million in fiscal 2007, $744 million in fiscal 2006 and $770 million in fiscal 2005. Sublease rental income was approximately
$44 million in fiscal 2007, $47 million in fiscal 2006 and $43 million in fiscal 2005.
Future annual minimum lease payments and sublease rental income commitments at October 31, 2007 were as follows:
Minimum lease payments ......................................................................
Less: Sublease rental income .................................................................
2008
2009
$595
(56)
$539
$441
(57)
$384
2010
2012
2011
In millions
$320 $233 $176
(57)
(34)
(40)
$263 $193 $142
Thereafter
$428
(74)
$354
At October 31, 2007, HP had unconditional purchase obligations of approximately $2.0 billion. These unconditional
purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on HP and
that specify all significant terms, including fixed or minimum quantities to be purchased, fixed, minimum or variable price
provisions and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable
without penalty. These unconditional purchase obligations are related principally to inventory and other items. Future
unconditional purchase obligations at October 31, 2007 were as follows:
Unconditional purchase obligations...................................................
$1,826
$100
In millions
$64
$12
$12
$15
2008
2009
2010
2011
2012
Thereafter
132
Note 17: 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, which arise in the
ordinary course of business. In accordance with SFAS No. 5, “Accounting for Contingencies”, HP records a provision for a
liability when management believes that it is both probable that a liability has been incurred and the amount of the loss can be
reasonably estimated. HP believes it has adequate provisions for any such matters. HP reviews these provisions at least
quarterly and adjusts these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and
other information and events pertaining to a particular case. Based on its experience, HP believes that any damage amounts
claimed in the specific matters discussed below are not a meaningful indicator of HP’s potential liability. Litigation is
inherently unpredictable. However, HP believes that it has valid defenses with respect to legal matters pending against it.
Nevertheless, it is possible that cash flows or results of operations could be materially affected in any particular period by the
unfavorable resolution of one or more of these contingencies, or because of the diversion of management’s attention and the
creation of significant expenses.
Litigation, Proceedings and Investigations
Copyright levies. As described below, proceedings are ongoing against HP in certain European Union (“EU”) member
countries, including litigation in Germany, seeking to impose levies upon equipment (such as multifunction devices
(“MFDs”) and printers) and alleging that these devices enable producing private copies of copyrighted materials. The total
levies due, if imposed, would be 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
are opposing the extension of levies to the digital environment and advocating compensation to rights holders through digital
rights management systems.
VerwertungsGesellschaft Wort (“VG Wort”), a collection agency representing certain copyright holders, instituted non-
binding arbitration proceedings against HP in June 2001 in Germany before the arbitration board of the Patent and Trademark
Office. The proceedings relate to whether and to what extent copyright levies for photocopiers should be imposed in
accordance with copyright laws implemented in Germany on MFDs that allegedly enable the production of copies by private
persons. Following unsuccessful arbitration, VG Wort filed a lawsuit against HP in May 2004 in the Stuttgart Civil Court in
Stuttgart, Germany seeking levies on MFDs sold from 1997 to 2001. On December 22, 2004, the court held that HP is liable
for payments regarding MFDs sold in Germany, and ordered HP to pay VG Wort an amount equal to 5% of the outstanding
levies claimed plus interest on MFDs sold in Germany up to December 2001. VG Wort appealed this decision. On July 6,
2005, the Stuttgart Court of Appeals ordered HP to pay VG Wort levies based on the published tariffs for photocopiers in
Germany (which range from EUR 38.35 to EUR 613.56 per unit) plus interest on MFDs sold in Germany up to
December 2001. HP has appealed the Stuttgart Court of Appeals’ decision to the Bundesgerichtshof (the German Federal
Supreme Court). An oral hearing has been set for January 30, 2008.
On September 26, 2005, VG Wort filed an additional lawsuit against HP in the Stuttgart Civil Court in Stuttgart,
Germany seeking levies on MFDs sold in Germany between 1997 and 2001, as well
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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 17: Litigation and Contingencies (Continued)
as for products sold from 2002 onwards. On July 26, 2007, the court issued a decision following the ruling of the Stuttgart
Court of Appeals with respect to the initial VG Wort lawsuit as described above. HP has appealed the decision. The Appeal
Court has stayed the proceedings pending the German Federal Supreme Court judgment in the initial VG Wort lawsuit
seeking levies on MFDs described above.
In July 2004, VG Wort filed a separate lawsuit against HP in the Stuttgart Civil Court seeking levies on printers. On
December 22, 2004, the court held that HP is liable for payments regarding all printers using ASCII code sold in Germany
but did not determine the amount payable per unit. HP appealed this decision in January 2005 to the Higher Regional Court
of Baden Wuerttemberg. On May 11, 2005, the Higher Regional Court 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 has not yet
issued a written decision, and VG Wort has indicated that it is considering a claim to the German Federal Constitutional
Court.
In September 2003, VG Wort filed a lawsuit against Fujitsu Siemens Computer GmbH (“FSC”) in Munich State Court
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 State Court held that
PCs are subject to a levy and that FSC must pay 12 euros plus compound interest for each PC sold in Germany since
March 2001. FSC appealed this decision in January 2005 to the Higher Regional Court of Bavaria. On December 15, 2005,
the Higher Regional Court affirmed the Munich State Court decision. FSC filed an appeal with the German Federal Supreme
Court in February 2006.
On December 29, 2005, ZPU, a joint association of various German collection societies, instituted non-binding
arbitration proceedings against HP before the arbitration board of the Patent and Trademark Office demanding reporting of
every PC sold by HP in Germany from January 2002 through December 2005 and seeking a levy of 18.42 euros plus tax for
each PC sold during that period. HP filed a notice of defense in connection with these proceedings in February 2006, and an
arbitration hearing was held in December 2006. On August 3, 2007, the arbitration board issued a ruling proposing a levy of
15 euros plus tax for each PC sold during that period. HP has rejected the ruling of the arbitration board, and the arbitration
proceedings have concluded. ZPU has indicated it will pursue the claim through the regular courts.
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.
Alvis v. HP is a defective product consumer class action filed in the District Court of Jefferson County, Texas in
April 2001. In February 2000, a similar suit captioned LaPray v. Compaq was filed in the District Court of Jefferson County,
Texas. The basic allegation is that HP and Compaq sold computers containing floppy disk controllers that fail to alert the user
to certain floppy disk controller errors. That failure is alleged to result in data loss or data corruption. The complaints in Alvis
and LaPray seek injunctive relief, declaratory relief, unspecified damages and attorneys’ fees. In July 2001, a
134
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 17: Litigation and Contingencies (Continued)
nationwide class was certified in the LaPray case, which the Beaumont Court of Appeals affirmed in June 2002. The Texas
Supreme Court reversed the certification and remanded to the trial court in May 2004. On March 29, 2005, the Alvis trial
court certified a Texas-wide class action for injunctive relief only, which HP appealed on April 15, 2005. HP’s appeal in the
Alvis case is still pending. On June 4, 2003, each of Barrett v. HP and Grider v. Compaq was filed in the District Court of
Cleveland County, Oklahoma, with factual allegations similar to those in Alvis and LaPray. The complaints in Barrett and
Grider seek, among other things, specific performance, declaratory relief, unspecified damages and attorneys’ fees. On
December 22, 2003, the District Court entered an order staying the Barrett case until the conclusion of Alvis. On
September 23, 2005, the District Court granted the Grider plaintiffs’ motion to certify a nationwide class action which the
Oklahoma Court of Civil Appeals affirmed on October 13, 2006. On November 5, 2006, HP filed a Petition for Writ of
Certiorari with the Oklahoma Supreme Court seeking reversal of the lower courts’ decisions. That petition was denied on
March 26, 2007. The Grider case is scheduled for trial in April of 2008. On November 5, 2004, Batiste v. HP (formerly Scott
v. HP), and on January 27, 2005, Schultz v. HP (formerly Jurado v. HP), were filed in state court in San Joaquin County,
California, with factual allegations similar to those in LaPray and Alvis, seeking certification of a California-only class,
injunctive relief, unspecified damages (including punitive damages), restitution, costs, and attorneys’ fees. On November 27,
2006, the trial court granted plaintiff’s motion for class certification and certified the Schultz case as a California-only class.
On March 26, 2007, HP filed a Petition for Writ of Mandate with the California Supreme Court; that petition was summarily
denied on May 9, 2007. On December 11, 2007, the court in the Grider v. Compaq and Barrett v. HP cases preliminarily
approved a settlement under which the Grider, Barrett, Alvis, LaPray, Schultz and Batiste class actions will be dismissed
with prejudice. Under the proposed settlement, eligible class members will each have the right to obtain a redemption
certificate for use in purchasing a PC through HP’s website; a USB flash drive as long as the class member meets certain
requirements; and a software patch designed to address the alleged defect at issue in the lawsuits. In addition, class counsel
and the class representatives will be paid attorneys’ fees and expenses and stipends in an amount that is yet to be finally
approved by the court. As of October 31, 2007, HP had established adequate reserves to cover the costs associated with the
settlement, including the anticipated attorneys’ fees and expenses and stipends. The court has scheduled a hearing for
April 29, 2008 to determine whether to grant final approval of the settlement. In addition, the Civil Division of the
Department of Justice, the General Services Administration Office of Inspector General and other Federal agencies are
conducting an investigation of allegations that HP and Compaq made, or caused to be made, false claims for payment to the
United States for computers known by HP and Compaq to contain defective parts or otherwise to perform in a defective
manner relating to the same alleged floppy disk controller errors. HP’s agreement with the Department of Justice to extend
the statute of limitations on its investigation expired on December 6, 2006. HP is cooperating fully with this investigation.
Barbara’s Sales, et al. v. Intel Corporation, Hewlett-Packard Company, et al. and Neubauer, et al. v. Compaq Computer
Corporation are separate lawsuits filed on June 3, 2002 in the Circuit Court, Third Judicial District, Madison County, Illinois,
alleging that HP and Compaq (along with Intel) misled the public by suppressing and concealing the alleged material fact that
systems that use the Intel Pentium 4 processor are less powerful and slower than systems using the Intel Pentium III
processor and processors made by a competitor of Intel. The plaintiffs seek unspecified damages, restitution, attorneys’ fees
and costs, and certification of a nationwide class. The trial court in the HP action certified an Illinois class as to Intel but
denied a nationwide class. Both parties appealed the trial
135
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 17: Litigation and Contingencies (Continued)
court’s decision. On July 25, 2006, the Fifth District Appellate Court ruled that the trial court erred in applying Illinois law in
deciding to certify the Illinois class and to deny certification of the nationwide class and directed the trial court to reconsider
those decisions applying California law instead. On August 28, 2006, Intel appealed the Fifth District’s decision to the
Illinois Supreme Court. On November 29, 2007, the Illinois Supreme Court reversed certification of the nationwide class,
held that no statewide class could be certified under Illinois law, and remanded the case back to the trial court. Skold, et al. v.
Intel Corporation and Hewlett-Packard Company is a lawsuit to which HP was joined on June 14, 2004 that was initially
filed in state court in Alameda County, California, based upon factual allegations similar to those in the Illinois cases. The
plaintiffs in the Skold matter also seek unspecified damages, restitution, attorneys’ fees and costs, and certification of a
nationwide class. The Skold case has since been transferred to state court in Santa Clara County, California.
Feder v. HP (formerly Tyler v. HP) is a lawsuit filed in the United States District Court for the Northern District of
California on June 16, 2005 asserting breach of express and implied warranty, unjust enrichment, violation of the Consumers
Legal Remedies Act and deceptive advertising and unfair business practices in violation of California’s Unfair Competition
Law. Among other things, plaintiffs alleged 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. Plaintiffs also contend 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. On September 6, 2005, a lawsuit captioned Ciolino v. HP was filed in the United States District Court
for the Northern District of California. The allegations in the Ciolino case are substantively identical to those in Feder, and
the two cases have been formally consolidated in a single proceeding in the District Court for the Northern District of
California under the caption In re HP Inkjet Printer Litigation. In addition, on January 17, 2007, an additional lawsuit
captioned Blennis v. HP was filed in the United States District Court for the Northern District of California with allegations
substantially the same as those consolidated in In re Inkjet Printer Litigation. The plaintiffs seek class certification,
restitution, damages (including enhanced damages), injunctive relief, interest, costs, and attorneys’ fees. Three related
lawsuits filed in California state court, Tyler v. HP (filed in Santa Clara County on February 17, 2005), Obi v. HP (filed in
Los Angeles County on February 17, 2005), and Weingart v. HP (filed in Los Angeles County on March 18, 2005), have
been dismissed without prejudice by the plaintiffs. In addition, two related lawsuits filed in federal court, namely Grabell v.
HP (filed in the District of New Jersey on March 18, 2005) and Just v. HP (filed in the Eastern District of New York on
April 20, 2005), have been dismissed without prejudice by the plaintiffs. Substantially similar allegations have been made
against HP and its subsidiary, Hewlett-Packard (Canada) Co., in four Canadian class actions, 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, all seeking class certification, restitution, declaratory relief, injunctive relief and unspecified statutory,
compensatory and punitive damages.
Schorsch v. HP is a consumer class action filed against HP on October 28, 2003 in Illinois state court alleging that HP
has included an electrically erasable programmable read only memory (EEPROM) chip in certain of its LaserJet printers that
prematurely advises the user that the drum kit needs replacing in violation of Illinois state law. The plaintiffs subsequently
filed an amended complaint seeking to expand the class from purchasers of drum kits to purchasers of all HP printer
consumables
136
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 17: Litigation and Contingencies (Continued)
that contain EEPROM chips. The most current amended complaint seeks certification of an Illinois-only class and seeks
unspecified damages, attorneys’ fees and costs. On June 6, 2007, a separate consumer class action lawsuit captioned Baggett
v. HP was filed in the United States District Court for the Central District of California containing similar allegations that HP
employs a technology in its LaserJet color printers whereby the printing process shuts down prematurely, preventing
customers from using the toner that is stranded in the cartridge. The plaintiffs 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.
Rich v. HP is a consumer class action 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 seek injunctive and monetary relief on
behalf of a nationwide class. The Court has granted HP’s motion to dismiss several of the plaintiffs’ claims, and HP answered
the remaining claims in February 2007.
On December 27, 2001, Cornell University and the Cornell Research Foundation, Inc. filed a complaint, amended on
September 6, 2002, against HP in United States District Court for the Northern District of New York alleging that HP’s PA-
RISC 8000 family of microprocessors, and servers and workstations incorporating those processors, infringe a patent
assigned to Cornell Research Foundation, Inc. that describes a way of executing microprocessor instructions. The complaint
seeks declaratory and injunctive relief and unspecified damages. On March 26, 2004, the district court issued a ruling
interpreting the disputed claim terms in the patent at issue. HP filed five motions for summary judgment on September 29,
2006. The district court ruled on those motions September 24, 2007, eliminating certain patent claims but otherwise allowing
the case to proceed to trial. The patent at issue in this litigation, United States Patent No. 4,807,115, expired on February 21,
2006. Therefore, the plaintiffs are no longer entitled to seek injunctive relief against HP. No trial date has been set.
Digwamaje et al. v. Bank of America et al. is a purported class action lawsuit that names HP and numerous other
multinational corporations as defendants. It was filed on September 27, 2002 in United States District Court for the Southern
District of New York on behalf of current and former South African citizens and their survivors who suffered violence and
oppression under the apartheid regime. The lawsuit alleges that HP and other companies helped perpetuate, profited from,
and otherwise aided and abetted the apartheid regime during the period from 1948-1994 by selling products and services to
agencies of the South African government. Claims are based on the Alien Tort Claims Act, the Torture Victims Protection
Act, the Racketeer Influenced and Corrupt Organizations Act and state law. The complaint seeks, among other things, an
accounting, the creation of a historic commission, compensatory damages in excess of $200 billion, punitive damages in
excess of $200 billion, costs and attorneys’ fees. On November 29, 2004, the District Court dismissed with prejudice the
plaintiffs’ complaint. On October 12, 2007, the United States Court of Appeals for the Second Circuit affirmed in part and
reversed in part the District Court’s decision. The Second Circuit affirmed the dismissal of the plaintiffs’ claims under the
Torture Victims Protection Act, but reversed the District Court’s dismissal of the plaintiffs’ Alien Tort Claims Act claims,
finding that it was possible for the plaintiffs to state such
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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 17: Litigation and Contingencies (Continued)
a claim. The Second Circuit, therefore, remanded the case to the District Court to permit the plaintiffs to attempt to plead the
allegations needed to state a claim under the Alien Tort Claims Act.
CSIRO Patent Litigation. Microsoft Corporation, Hewlett-Packard Company, et al. v. Commonwealth Scientific and
Industrial Research Organisation of Australia is an action filed by HP and two other plaintiffs on May 9, 2005 in the District
Court for the Northern District of California seeking a declaratory judgment against Commonwealth Scientific and Industrial
Research Organisation of Australia (“CSIRO”) that HP’s products employing the IEEE 802.11a and 8.02.11g wireless
protocol standards do not infringe CSIRO’s US patent no. 5,487,069 relating to wireless transmission of data at frequencies
in excess of 10GHz. On September 22, 2005, CSIRO filed an answer and counterclaims alleging that all HP products which
employ those wireless protocol standards infringe the CSIRO patent and seeking damages, including enhanced damages and
attorneys fees and costs, and an injunction against sales of infringing products. On December 12, 2006, CSIRO successfully
moved to have the case transferred to the District Court of the Eastern District of Texas, a court that has granted CSIRO’s
motions for summary judgment on the issues of validity and patent infringement and a permanent injunction in favor of
CSIRO in a patent infringement action brought by CSIRO against a third party vendor of wireless networking products based
on the same patent. On June 15, 2007, CSIRO filed an amended answer and counterclaims adding the allegation that all HP
products which employ the draft IEEE 802.11n wireless protocol infringe the CSIRO patent. Trial is scheduled for
April 2009.
Polaroid Corp. v. HP is a lawsuit filed against HP by Polaroid Corporation on December 2006 in the United States
District Court for the District of Delaware. The lawsuit involves a single U.S. patent that will expire in April 2008. Polaroid
alleges that certain HP products containing “Digital Flash” or “Adaptive Lighting” technology infringe Polaroid’s U.S. Patent
No. 4,829,381 relating to a system and method for continuously enhancing electronic images by varying the contrast in
different portions of the image. Polaroid seeks monetary relief. A trial is scheduled for December 2008.
Tandberg Data Corporation v. HP: In January 2006, Exabyte Corporation, which has since been acquired by Tandberg
Data Corporation, sued HP in the United States District Court for the District of Colorado. The plaintiff alleges that a
particular HP tape drive infringes a patent that describes an apparatus and method for recovering data from a distorted tape by
rewinding and replaying the tape at a slower speed. The complaint seeks injunctive relief and unspecified damages. In
June 2006, HP asserted counterclaims against the plaintiff and is now asserting two HP patents relating to tape drive
technology. HP seeks injunctive relief and unspecified damages for the plaintiff’s alleged infringement. A claim construction
hearing is scheduled for January 2008, and a trial is scheduled for September 2008.
Convolve, Inc. and Massachusetts Institute of Technology v. Compaq Computer Corporation and Seagate Technology,
Inc. In July 2000, Compaq and Seagate were sued in the United States District court for the Southern District of New York
by MIT and a small technology company named Convolve. Convolve accused Compaq and Seagate of misappropriating
certain confidential information and infringing certain patents in Seagate’s development of certain disk drive products and
Compaq’s development of a user interface. MIT and Convolve are owners of one of the patents at issue. With respect to one
of the patents, the accused feature is contained within the Seagate drive procured by Compaq, not in Compaq’s own designs
or products; therefore, Seagate is taking the lead in defending against Convolve’s claims. The second patent relates to a user
interface that HP has removed from its
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Notes to Consolidated Financial Statements (Continued)
Note 17: Litigation and Contingencies (Continued)
products. Seagate has agreed to indemnify HP with respect to one patent; HP has requested but not received indemnification
from Seagate with respect to the second. Pre-trial discovery is ongoing. A claim construction hearing was held on March 30-
31, 2004; the court issued its ruling on August 10, 2005. No trial date has been set.
The United States of America, ex rel. Norman Rille and Neal Roberts v. Hewlett-Packard Company, et al. In 2004, two
private individuals filed a civil “qui tam” complaint under the False Claims Act in the United States District Court for the
Eastern District of Arkansas containing generalized allegations that HP and several other companies participated in an
industry-wide practice of using partnership and alliance programs to make improper payments and cause the submission of
false claims in connection with contracts to provide products and services to the federal government. On April 12, 2007, the
U.S. Department of Justice intervened in the qui tam action and filed a complaint against HP (and several other companies in
separate actions) on behalf of the United States containing allegations that HP violated the False Claims Act and the Anti-
Kickback Act of 1986 by providing millions of dollars in kickbacks to its alliance partners, including “influencer fees” and
“new business opportunity rebates.” The U.S. complaint further alleges that HP violated the False Claims Act and the Anti-
Kickback Act, breached its federal government contracts, induced the federal government to make payments to HP to which
HP was not entitled to receive under those contracts, and was unjustly enriched by expressly or impliedly making false
statements, records or certifications to the federal government that it complied with and would continue to comply with the
Anti-Kickback Act and by submitting claims to the government that allegedly were inflated because they included the
amounts of the influencer fees and new business opportunity rebates. The U.S. complaint seeks treble damages plus civil
penalties in connection with the alleged violations of the False Claims Act, double damages plus civil penalties in connection
with the alleged violations of the Anti-Kickback Act and disgorgement of profits earned in connection with the breach of
contract and unjust enrichment claims.
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 has 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.
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Notes to Consolidated Financial Statements (Continued)
Note 17: Litigation and Contingencies (Continued)
• Beginning in September 2006, HP has 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 Chairman and Chief Executive Officer, and related matters. HP has responded to those requests. In
addition, Mr. Hurd voluntarily gave testimony before 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 is responding to that
request.
• Beginning in September 2006, HP has received requests from the Division of Enforcement of the Securities and
Exchange Commission for records and information and interviews with current and former HP directors and officers
relating to the leak investigation, the resignation of Thomas J. Perkins from HP’s Board of Directors, HP’s May 22,
2006 and September 6, 2006 filings with the SEC on Form 8-K, stock repurchases by HP and securities transactions
by its officers and directors that occurred between May 1 and October 1, 2006, and HP’s policies, practices and
approval of securities transactions. In May 2007, HP consented to the entry of an order by the SEC ordering HP to
cease and desist from committing or causing violations of the public reporting requirements of the Securities
Exchange Act of 1934, as amended. HP has been advised by the staff of the Division of Enforcement that the staff
has completed its investigation and does not intend to recommend that any other SEC enforcement action be brought
in connection with these matters.
•
In September 2006, HP received a request from the U.S. Federal Communications Commission for records and
information relating to the processes employed in the leak investigation. HP has responded to that request.
HP is continuing to cooperate fully with all ongoing inquiries and investigations.
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 of which 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
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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 17: Litigation and Contingencies (Continued)
consolidated the two cases under the caption In re Hewlett-Packard Company Derivative Litigation and subsequently stayed
the proceedings, as the parties have reached a tentative settlement. The HP Board of Directors has 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, which agreement is subject to the approval of the California and Delaware courts before it becomes
final. Under the terms of the proposed settlement, HP has agreed to continue certain corporate governance changes until
December 31, 2012 and to pay the plaintiffs’ attorneys’ fees.
Mercury Interactive Corporation Proceedings. In November 2006, HP completed its acquisition of Mercury Interactive
Corporation (“Mercury”). Upon completion of the acquisition, HP assumed oversight for all litigation and regulatory matters
pending or subsequently commenced against Mercury. The following Mercury-related litigation and regulatory inquiries
currently are pending:
•
Prior to the announcement of the acquisition, and beginning on or about August 19, 2005, four securities class action
lawsuits were filed against Mercury and certain of its officers and directors on behalf of purchasers of Mercury’s
stock from October 2003 to November 2005: Archdiocese of Milwaukee Supporting Fund, Inc. v. Mercury
Interactive, et al, Johnson v. Mercury Interactive, et al., Munao v. Mercury Interactive, et al., and Public
Employees’ Retirement System of Mississippi v. Mercury Interactive, et al. These class action lawsuits were
consolidated in the United States District Court for the Northern District of California as In re Mercury Interactive
Corporation Securities Litigation. The consolidated complaint filed on September 8, 2006 alleges that, during the
putative class period of October 17, 2000 through November 1, 2005, the defendants made false or misleading
public statements regarding Mercury’s business and operations in violation of Section 10(b) and Section 20(a) of the
Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder and seeks unspecified
monetary damages and other relief. On July 30, 2007, the court granted the defendants’ motion to dismiss the
consolidated complaint with leave to amend. On October 15, 2007, HP and counsel for the plaintiffs reached an
agreement in principle to settle the consolidated class action lawsuit. The agreement, if finalized and approved by
the court, provides for HP to pay an aggregate of $117.5 million to administer the settlement, to compensate the
class, and to pay attorneys’ fees.
• On February 26, 2007, HP received a request from the Permanent Subcommittee on Investigations of the U.S.
Senate Committee on Homeland Security and Governmental Affairs for information relating to Mercury’s past
executive compensation and stock option granting policies and procedures, including information about the practice
of backdating the grant date of options that allegedly occurred before HP acquired Mercury. HP has responded to the
Subcommittee’s request and intends to cooperate with the inquiry.
European Commission OEM Investigation. In May 2002, the European Commission of the EU publicly stated that it
was considering conducting an investigation into original equipment manufacturer (“OEM”) activities concerning the sales of
printers and supplies to consumers within the EU. The European Commission contacted HP requesting information on the
printing systems businesses. HP has cooperated fully in response to the initial inquiry and intends to cooperate fully with
respect to subsequent requests for information.
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Notes to Consolidated Financial Statements (Continued)
Note 17: Litigation and Contingencies (Continued)
Environmental
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. It is our policy to
apply strict standards for environmental clean-up to sites outside the United States, even where we are not required to do so
under applicable local laws and regulations.
The European Union (“EU”) adopted the Waste Electrical and Electronic Equipment Directive in January 2003. The
directive makes producers of electrical goods, including computers and printers, financially responsible for specified
collection, recycling, treatment and disposal of past and future covered products. The deadline for the individual member
states of the EU to enact legislation implementing the directive in their respective countries was August 13, 2004 (such
legislation, together with the directive, the “WEEE Legislation”). The EU member states were obliged to make producers
participating in the market financially responsible for implementing these responsibilities under the WEEE Legislation
beginning in August 2005. Implementation in certain of the member states has been delayed into 2007. Similar legislation has
been or may be enacted in other jurisdictions, including in the United States, Canada, Mexico, China and Japan. HP is
continuing to evaluate the impact of and take steps to comply with the WEEE Legislation and similar legislation in other
jurisdictions as individual countries issue their implementation legislation and guidance.
The liability for environmental remediation and other environmental costs is accrued when it is considered probable and
the costs can be reasonably estimated. We have accrued amounts in conjunction with the foregoing environmental issues that
we believe was adequate as of October 31, 2007. These accruals were not material to our operations or financial position and
we do not currently anticipate material capital expenditures for environmental control facilities.
Note 18: Segment Information
Description of Segments
HP is a leading global provider of products, technologies, software, solutions and services to individual consumers, small
and medium sized businesses (“SMBs”), and large enterprises including the public and education sectors. HP’s offerings span
personal computing and other access devices; imaging and printing-related products and services; enterprise information
technology (“IT”) infrastructure, including enterprise storage and server technology; software that optimizes business
technology investments; and multi-vendor customer services, including technology support and maintenance, consulting and
integration and outsourcing services.
HP and its operations are organized into seven business segments: Enterprise Storage and Servers (“ESS”), HP Services
(“HPS”), HP Software, the Personal Systems Group (“PSG”), the Imaging and Printing Group (“IPG”), HP Financial
Services (“HPFS”), and Corporate Investments. HP’s organizational structure is based on a number of factors that
management
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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 18: Segment Information (Continued)
uses to evaluate, view and run its business operations, which include, but are not limited to, customer base, homogeneity of
products and technology. The business segments disclosed in the accompanying Consolidated Financial Statements are based
on this organizational structure and information reviewed by HP’s management to evaluate the business segment results.
ESS, HPS and HP Software are structured beneath a broader Technology Solutions Group (“TSG”). In order to provide a
supplementary view of HP’s business, aggregated financial data for TSG is presented herein.
HP has reclassified segment operating results for fiscal 2006 and fiscal 2005 to conform to certain fiscal 2007
organizational realignments. These realignments are immaterial in size and reflect primarily revenue shifts among business
units within the same business segment. None of the changes impacts HP’s previously reported consolidated net revenue,
earnings from operations, net earnings or net earnings per share. Future changes to this organizational structure may result in
changes to the business segments disclosed. A description of the types of products and services provided by each business
segment follows.
Technology Solutions Group. Each of the business segments within TSG is described in detail below.
• Enterprise Storage and Servers provides storage and server products. The various server offerings range from
entry-level servers to high-end scalable servers, including Superdome servers. Industry standard servers include
primarily entry-level and mid-range ProLiant servers, which run primarily Windows®(1), Linux and Novell operating
systems and leverage Intel Corporation (“Intel”) and Advanced Micro Devices (“AMD”) processors. The business
spans a range of product lines, including pedestal-tower servers, density-optimized rack servers and HP’s
BladeSystem family of server blades. Business critical systems include Itanium®(2)-based Integrity servers running
on HP-UX, Windows®, Linux and OpenVMS operating systems, including the high-end Superdome servers and
fault-tolerant Integrity NonStop servers. Business critical systems also include the Reduced Instruction Set
Computing (“RISC”)-based servers with the HP 9000 line running on the HP-UX operating system, HP
AlphaServers running on both Tru64 UNIX®(3) and OpenVMS, and MIPs-based NonStop servers. HP’s
StorageWorks offerings include entry-level, mid-range and high-end arrays, storage area networks (“SANs”),
network attached storage (“NAS”), storage management software, and virtualization technologies, as well as tape
drives, tape libraries and optical archival storage.
• HP Services provides a portfolio of multi-vendor IT services including technology services, consulting and
integration and outsourcing services. HPS also offers a variety of services tailored to particular industries such as
communications, media and entertainment, manufacturing and distribution, financial services, health and life
sciences and the public sector, including government services. HPS collaborates with the Enterprise Storage and
Servers and HP Software, as well as with third-party system integrators and software and networking companies to
bring solutions to HP customers. HPS also works with HP’s Imaging and Printing Group and Personal Systems
Group to provide managed print services, end user workplace services, and mobile workforce productivity solutions
to enterprise customers. Technology Services provides a range of services, including standalone product support and
high availability services for complex, global, networked and multi-vendor environments. Technology Services also
manages the delivery of product warranty support through its own service organization, as well as through
(1) Windows® is a registered trademark of Microsoft Corporation.
(2)
Itanium® is a registered trademark of Intel Corporation.
(3) UNIX® is a registered trademark of The Open Group.
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Notes to Consolidated Financial Statements (Continued)
Note 18: Segment Information (Continued)
authorized partners. Consulting and Integration provides services to architect, design and implement technology and
industry-specific solutions for customers. Consulting and Integration also provides cross-industry solutions in the
areas of architecture and governance, infrastructure, applications and packaged applications, security, IT service
management, information management and enterprise Microsoft solutions. Outsourcing Services offers a variety of
IT management and outsourcing services that support customers’ infrastructure, applications, business processes,
end user workplace, print environment and business continuity and recovery requirements.
• HP Software has OpenView and OpenCall businesses. OpenView, including Mercury’s product lines, provides a
suite of Business Technology Optimization (“BTO”) software for automating key processes across critical IT
functions, including strategy, applications, and operations. HP BTO software solutions help customers drive
business results for a wide range of functional IT initiatives, including demand and portfolio management, service
oriented architecture transformation, software quality management, business service management, IT service
management, and IT infrastructure library. Under the OpenCall brand, HP Software also delivers a suite of solutions
and platforms that enables service providers to develop and deploy next generation multimedia services including
voice, data and video.
HP’s other business segments are described below.
• Personal Systems Group provides commercial PCs, consumer PCs, workstations, handheld computing devices,
digital entertainment systems, calculators and other related accessories, software and services for the commercial
and consumer markets. Commercial PCs are optimized for commercial uses, including enterprise and SMB
customers, and for connectivity and manageability in networked environments. Commercial PCs include the HP
Compaq business desktops, business notebooks and Tablet PCs. 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
HP Media Center and Voodoo Gaming PCs. Workstations are individual computing products designed for users
demanding enhanced performance, such as computer animation, engineering design and other programs requiring
high-resolution graphics. Workstations run on UNIX®, Windows® and Linux-based operating systems. Handheld
computing devices include a series of HP iPAQ handheld computing devices, ranging from Pocket PCs and
navigation devices to smartphones and data devices, that run on Windows® Mobile software, and include software
and support. Handheld computing also offers software and support that provide security and manageability of
mobile devices. Digital entertainment products include plasma and LCD flat-panel televisions, HD DVD and RW
drives, DVD writers, and the HP Digital Entertainment Center.
•
Imaging and Printing Group provides consumer and commercial printer hardware, printing supplies, printing media
and scanning devices. IPG is also focused on imaging solutions in the commercial markets, from managed print
services solutions to addressing new growth opportunities in commercial printing in areas such as industrial
applications, outdoor signage, and the graphic arts business. Inkjet systems include desktop single function and
inkjet all-in-one printers, including photo, productivity and business inkjet printers and scanners. Digital imaging
products and services include photo specialty printers, photo kiosks, digital cameras, accessories and online photo
services through Snapfish. LaserJet systems include monochrome and color
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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 18: Segment Information (Continued)
laser printers, printer-based MFDs and Total Print Management Solutions for enterprise customers. Graphics and
Imaging products include large format (DesignJet) printers, Indigo and Scitex digital presses, digital publishing
solutions and graphics printing solutions. Printer supplies include LaserJet toner and inkjet printer cartridges and
other printing-related media such as HP-branded Vivera and ColorSphere ink and HP Premium and Premium Plus
photo papers.
• HP Financial Services supports and enhances HP’s global product and services solutions, providing a broad range of
value-added financial life-cycle management services. HPFS enables HP’s worldwide customers to acquire
complete IT solutions, including hardware, software and services. HPFS offers leasing, financing, utility programs,
and asset recovery services, as well as financial asset management services, for large global and enterprise
customers. HPFS also provides an array of specialized financial services to SMBs and educational and governmental
entities. HPFS offers innovative, customized and flexible alternatives to balance unique customer cash flow,
technology obsolescence and capacity needs.
• Corporate Investments is managed by the Office of Strategy and Technology and includes HP Labs and certain
business incubation projects. Revenue in this segment is attributable to the sale of certain network infrastructure
products, including Ethernet switch products that enhance computing and enterprise solutions under the brand
“ProCurve Networking,” as well as the licensing of 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 amortization of purchased intangible assets, stock-based
compensation expense related to HP-granted employee stock options and the employee stock purchase plan, certain
acquisition-related charges and charges for purchased IPR&D, as well as certain corporate governance costs.
HP does not allocate to its business segments restructuring charges and any associated adjustments related to
restructuring actions.
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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 18: Segment Information (Continued)
Selected operating results information for each business segment was as follows for the following fiscal years ended
October 31:
Total Net Revenue
2006
2007
2005
In millions
Earnings (Loss) from
Operations
2006
2007
2005
Enterprise Storage and Servers .......................................
HP Services.....................................................................
HP Software....................................................................
Technology Solutions Group ..........................................
Personal Systems Group .................................................
Imaging and Printing Group ...........................................
HP Financial Services.....................................................
Corporate Investments ....................................................
Segment total ..................................................................
$18,769
16,646
2,325
37,740
36,409
28,465
2,336
762
$105,712
$17,308
15,617
1,301
34,226
29,166
26,786
2,078
566
$92,822
$16,717
15,536
1,061
33,314
26,741
25,155
2,102
523
$87,835
$1,980
1,829
347
4,156
1,939
4,315
155
(57)
$10,508
$1,446
1,507
85
3,038
1,152
3,978
147
(151)
$8,164
$800
1,151
(49)
1,902
657
3,413
213
(174)
$6,011
The reconciliation of segment operating results information to HP consolidated totals was as follows for the following
fiscal years ended October 31:
Net revenue:
Segment total ......................................................................................................................
Elimination of intersegment net revenue and other ............................................................
Total HP consolidated net revenue .....................................................................................
2007
2006
In millions
2005
$105,712
(1,426)
$104,286
$92,822
(1,164)
$91,658
$87,835
(1,139)
$86,696
Earnings before taxes:
Total segment earnings from operations.............................................................................
Corporate and unallocated costs and eliminations ..............................................................
Unallocated costs related to certain stock-based compensation expense............................
Amortization of purchased intangible assets ......................................................................
In-process research and development charges ....................................................................
Restructuring charges .........................................................................................................
Pension curtailments and settlements, net...........................................................................
Interest and other, net .........................................................................................................444 606
Gains (losses) on investments.............................................................................................
Total HP consolidated earnings before taxes......................................................................
$10,508
(439)
(507)
(783)
(190)
(387)
517
14
$9,177
$8,164
(331)
(459)
(604)
(52)
(158)
—
25
$7,191
$6,011
(429)
—
(622)
(2)
(1,684)
199
83
(13)
$3,543
HP allocates its assets to its business segments based on the primary segments benefiting from the assets. Corporate and
unallocated assets are composed primarily of cash and cash equivalents. As described above, fiscal 2007 segment asset
information is stated based on the fiscal 2007 organizational
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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 18: Segment Information (Continued)
structure. Total assets by segment as well as for TSG and the reconciliation of segment assets to HP consolidated total assets
were as follows at October 31:
Enterprise Storage and Servers .............................................................................................
HP Services...........................................................................................................................
HP Software..........................................................................................................................
Technology Solutions Group .............................................................................................
Personal Systems Group .......................................................................................................
Imaging and Printing Group .................................................................................................
HP Financial Services...........................................................................................................
Corporate Investments ..........................................................................................................
Corporate and unallocated assets ..........................................................................................
Total HP consolidated assets ................................................................................................
2007
$13,518
17,232
8,366
$39,116
14,153
14,573
9,001
297
11,559
$88,699
2006
In millions
$13,647
15,712
1,909
$31,268
12,237
13,889
7,927
305
16,355
$81,981
2005
$13,591
15,381
1,408
$30,380
11,277
13,523
7,856
297
13,984
$77,317
Major Customers
No single customer represented 10% or more of HP’s total net revenue in any fiscal year presented.
Geographic Information
Net revenue, classified by the major geographic areas in which HP operates, was as follows for the following fiscal years
ended October 31:
Net revenue:
U.S.........................................................................................................
Non-U.S.................................................................................................
Total HP consolidated net revenue........................................................
2007
2006
In millions
2005
$34,814
69,472
$104,286
$32,244
59,414
$91,658
$30,548
56,148
$86,696
Net revenue by geographic area is based upon the sales location that predominately represents the customer location.
Other than the United States, no single country represented more than 10% of HP’s total consolidated net revenue in any
period presented. HP reports revenue net of sales taxes, use taxes and value-added taxes directly imposed by governmental
authorities on HP’s revenue producing transactions with its customers.
At October 31, 2007, no single country other than the United States had 10% or more of HP’s total consolidated net
assets. At October 31, 2006, Belgium and the Netherlands each represented 10% or more of HP’s total consolidated net assets
in addition to the United States. At October 31, 2005, no single country other than the United States had 10% or more of
HP’s total consolidated net assets.
No single country other than the United States had more than 10% of HP’s total consolidated net property, plant and
equipment in any period presented. HP’s long-lived assets other than goodwill and
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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 18: Segment Information (Continued)
purchased intangible assets, which HP does not allocate to specific geographic locations as it is impracticable for HP to do so,
are composed principally of net property, plant and equipment.
Net property, plant and equipment, classified by major geographic areas in which HP operates, was as follows for the
following fiscal years ended October 31:
Net property, plant and equipment:
U.S..................................................................................................................
Non-U.S..........................................................................................................
Total HP consolidated net property, plant and equipment..............................
2007
2006
In millions
2005
$4,321
3,477
$7,798
$3,710
3,153
$6,863
$3,427
3,024
$6,451
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Notes to Consolidated Financial Statements (Continued)
Note 18: Segment Information (Continued)
Net revenue by segment and business unit
The following table provides net revenue by segment and business unit for the following fiscal years ended October 31:
Net revenue(1):
Industry standard servers...............................................................................................................................................................
Business critical systems ...............................................................................................................................................................
Storage ...........................................................................................................................................................................................
Enterprise Storage and Servers..........................................................................................................................................................
Technology services ......................................................................................................................................................................
Outsourcing services(2) ..................................................................................................................................................................
Consulting and integration ............................................................................................................................................................
HP Services........................................................................................................................................................................................
OpenView......................................................................................................................................................................................
OpenCall & other...........................................................................................................................................................................
HP Software.......................................................................................................................................................................................
Technology Solutions Group.............................................................................................................................................................
Notebooks......................................................................................................................................................................................
Desktops ........................................................................................................................................................................................
Workstations..................................................................................................................................................................................
Handhelds ......................................................................................................................................................................................
Other ..............................................................................................................................................................................................
Personal Systems Group....................................................................................................................................................................
Commercial hardware ...................................................................................................................................................................
Consumer hardware.......................................................................................................................................................................
Supplies .........................................................................................................................................................................................
Other ..............................................................................................................................................................................................
Imaging and Printing Group ..............................................................................................................................................................
HP Financial Services........................................................................................................................................................................
Corporate Investments .......................................................................................................................................................................
Total segments...............................................................................................................................................................................
Eliminations of inter-segment net revenue and other........................................................................................................................
Total HP consolidated net revenue................................................................................................................................................
2007
2006
In millions
2005
$11,380
3,564
3,825
18,769
8,678
4,821
3,147
16,646
1,988
337
2,325
37,740
17,642
15,850
1,721
490
706
36,409
7,181
4,442
16,788
54
28,465
2,336
762
105,712
(1,426)
$104,286
$9,982
3,656
3,670
17,308
8,348
4,382
2,887
15,617
899
402
1,301
34,226
12,000
14,613
1,368
620
565
29,166
6,899
4,427
15,402
58
26,786
2,078
566
92,822
(1,164)
$91,658
$9,389
3,812
3,516
16,717
8,599
4,097
2,840
15,536
691
370
1,061
33,314
9,763
14,406
1,195
836
541
26,741
6,558
4,497
14,045
55
25,155
2,102
523
87,835
(1,139)
$86,696
(1) Certain fiscal 2007 organizational realignments have been reflected retroactively to provide improved visibility and
comparability. For fiscal year 2006, the realignments primarily resulted in revenue movement within business units
within the ESS and HPS segments. There was no impact to total segment revenue.
(2) Reflects the name change from Managed Services to Outsourcing Services effective in fiscal 2007.
149
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Quarterly Summary
(Unaudited)
2007
Net revenue...........................................................................................................................................
Cost of sales(1).......................................................................................................................................
Research and development ...................................................................................................................
Selling, general and administrative ......................................................................................................
Amortization of purchased intangible assets........................................................................................
In-process research and development charges .....................................................................................
Restructuring.........................................................................................................................................
Pension curtailments and pension settlements, net...............................................................................
Total costs and expenses.......................................................................................................................
Earnings from operations......................................................................................................................
Interest and other, net ...........................................................................................................................
Gains (losses) on investments...............................................................................................................
Earnings before taxes............................................................................................................................
Provision for taxes ................................................................................................................................
Net earnings ..........................................................................................................................................
Net earnings per share:(2)
Basic .................................................................................................................................................
Diluted ..............................................................................................................................................
Cash dividends paid per share ..............................................................................................................
Range of per share closing stock prices on the New York Stock Exchange
Low ...................................................................................................................................................
High ..................................................................................................................................................
2006
Net revenue...........................................................................................................................................
Cost of sales(1).......................................................................................................................................
Research and development ...................................................................................................................
Selling, general and administrative ......................................................................................................
Amortization of purchased intangible assets........................................................................................
In-process research and development charges .....................................................................................
Restructuring.........................................................................................................................................
Total costs and expenses.......................................................................................................................
Earnings from operations......................................................................................................................
Interest and other, net ...........................................................................................................................
(Losses) gains on investments ..............................................................................................................
Earnings before taxes............................................................................................................................
Provision for (benefit from) taxes ........................................................................................................
Net earnings ..........................................................................................................................................
Net earnings per share:(2)
Basic .................................................................................................................................................
Diluted ..............................................................................................................................................
Cash dividends paid per share ..............................................................................................................
Range of per share closing stock prices on the New York Stock Exchange and Nasdaq Stock
Market:
Low ...................................................................................................................................................
High ..................................................................................................................................................
(1) Cost of products, cost of services and financing interest.
Three-month periods ended
January 31
April 30
July 31
October 31
In millions, except per share amounts
$25,082
19,136
877
2,908
201
167
(41)
(9)
23,239
1,843
111
10
1,964
417
$1,547
$0.57
$0.55
$0.08
$38.22
$43.53
$22,659
17,392
871
2,692
147
50
15
21,167
1,492
38
(2)
1,528
301
$1,227
$0.43
$0.42
$0.08
$28.12
$32.24
$25,534
19,283
903
3,044
212
19
453
(508)
23,406
2,128
87
13
2,228
453
$1,775
$0.67
$0.65
$0.08
$38.67
$43.13
$22,554
16,970
930
2,858
151
2
(14)
20,897
1,657
157
6
1,820
(79)
$1,899
$0.68
$0.66
$0.08
$25,377
19,164
917
3,002
183
—
(5)
—
23,261
2,116
165
5
2,286
508
$1,778
$0.68
$0.66
$0.08
$42.83
$48.54
$21,890
16,472
920
2,830
153
—
5
20,380
1,510
221
7
1,738
363
$1,375
$0.50
$0.48
$0.08
$28,293
21,304
914
3,272
187
4
(20)
—
25,661
2,632
81
(14)
2,699
535
$2,164
$0.84
$0.81
$0.08
$46.01
$52.87
$24,555
18,593
870
2,886
153
—
152
22,654
1,901
190
14
2,105
408
$1,697
$0.62
$0.60
$0.08
$30.27
$34.36
$29.79
$33.87
$31.67
$39.87
(2) EPS for each quarter is computed using the weighted-average number of shares outstanding during that quarter, while
EPS for the fiscal year is computed using the weighted-average number of shares outstanding during the year. Thus, the
sum of the EPS for each of the four quarters may not equal the EPS for the fiscal year.
150
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
ITEM 9A. Controls and Procedures.
Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and
principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended, as of the end of the period covered by this report (the “Evaluation Date”). Based on this evaluation, our principal
executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and
procedures were effective such that the information relating to HP, including our consolidated subsidiaries, required to be
disclosed in our Securities and Exchange Commission (“SEC”) reports (i) is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to HP’s management,
including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding
required disclosure.
See Management’s Report on Internal Control over Financial Reporting in Item 8, which is incorporated herein by
reference.
ITEM 9B. Other Information.
Not applicable.
151
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance of the Registrant.
The names of the executive officers of HP and their ages, titles and biographies as of the date hereof are incorporated by
reference from Part I, Item 1, above.
The following information is included in HP’s Notice of Annual Meeting of Stockholders and Proxy Statement to be
filed within 120 days after HP’s fiscal year end of October 31, 2007 (the “Proxy Statement”) and is incorporated herein by
reference:
•
•
•
•
Information regarding directors of HP who are standing for reelection and any persons nominated to become
directors of HP is set forth under “Election of Directors.”
Information regarding HP’s Audit Committee and designated “audit committee financial experts” is set forth under
“Corporate Governance Principles and Board Matters—Board Structure and Committee Composition—Audit
Committee.”
Information on HP’s code of business conduct and ethics for directors, officers and employees, also known as the
“Standards of Business Conduct,” and on HP’s Corporate Governance Guidelines is set forth under “Corporate
Governance Principles and Board Matters.”
Information regarding Section 16(a) beneficial ownership reporting compliance is set forth under “Section 16(a)
Beneficial Ownership Reporting Compliance.”
ITEM 11. Executive Compensation.
The following information is included in the Proxy Statement and is incorporated herein by reference:
•
•
Information regarding HP’s compensation of its named executive officers is set forth under “Executive
Compensation.”
Information regarding HP’s compensation of its directors is set forth under “Director Compensation and Stock
Ownership Guidelines.”
• The report of HP’s HR and Compensation Committee is set forth under “HR and Compensation Committee Report
on Executive Compensation.”
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following information is included in the Proxy Statement and is incorporated herein by reference:
•
•
Information regarding security ownership of certain beneficial owners, directors and executive officers is set forth
under “Common Stock Ownership of Certain Beneficial Owners and Management.”
Information regarding HP’s equity compensation plans, including both stockholder approved plans and non-
stockholder approved plans, is set forth in the section entitled “Equity Compensation Plan Information.”
ITEM 13. Certain Relationships and Related Transactions, and Director Independence.
The following information is included in the Proxy Statement and is incorporated herein by reference:
152
•
•
Information regarding transactions with related persons is set forth under “Related Person Transaction Policy and
Procedures.”
Information regarding director independence is set forth under “Corporate Governance Principles and Board
Matters—Board Independence.”
ITEM 14. Principal Accountant Fees and Services.
Information regarding principal auditor fees and services is set forth under “Principal Accountant Fees and Services” in
the Proxy Statement, which information is incorporated herein by reference.
153
PART IV
ITEM 15. Exhibits and Financial Statement Schedules.
(a) The following documents are filed as part of this report:
1. All Financial Statements:
The following financial statements are filed as part of this report under Item 8—”Financial Statements and
Supplementary Data.”
Reports of Independent Registered Public Accounting Firm ....................................................... 72
Management’s Report on Internal Control Over Financial Reporting.......................................... 74
Consolidated Statements of Earnings ........................................................................................... 75
Consolidated Balance Sheets........................................................................................................ 76
Consolidated Statements of Cash Flows....................................................................................... 77
Consolidated Statements of Stockholders’ Equity........................................................................ 78
Notes to Consolidated Financial Statements................................................................................. 79
Quarterly Summary ...................................................................................................................... 150
2. Financial Statement Schedules:
Schedule II—Valuation and Qualifying Accounts for the three fiscal years ended October 31, 2007.
All other schedules are omitted as the required information is inapplicable or the information is presented in the
Consolidated Financial Statements and notes thereto in Item 8 above.
3. Exhibits:
A list of exhibits filed or furnished with this report on Form 10-K (or incorporated by reference to exhibits previously
filed or furnished by HP) is provided in the Exhibit Index on page 158 of this report. HP will furnish copies of exhibits
for a reasonable fee (covering the expense of furnishing copies) upon request. Stockholders may request exhibits copies
by contacting:
Hewlett-Packard Company
Attn: Investor Relations
3000 Hanover Street
Palo Alto, CA 94304
(866) GET-HPQ1 or (866) 438-4771
154
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Valuation and Qualifying Accounts
Schedule II
For the fiscal years ended October 31
2006
In millions
2007
2005
Allowance for doubtful accounts—accounts receivable:
Balance, beginning of period ................................................................................................
Amount acquired through acquisition...................................................................................
Addition of bad debt provision .............................................................................................
Deductions, net of recoveries................................................................................................
Balance, end of period ..........................................................................................................
Allowance for doubtful accounts—financing receivables:
Balance, beginning of period ................................................................................................
Additions (reversal) to allowance .........................................................................................
Deductions, net of recoveries................................................................................................
Balance, end of period ..........................................................................................................
$220
3
32
(29)
$226
$80
15
(11)
$84
$227
4
37
(48)
$220
$111
(33)
2
$80
$286
—
17
(76)
$227
$213
(39)
(63)
$111
155
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: December 18, 2007
HEWLETT-PACKARD COMPANY
By:
/s/ CHARLES N. CHARNAS
Charles N. Charnas
Vice President, Deputy General Counsel and Assistant
Secretary
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Charles N. Charnas and Catherine A. Lesjak, or either of them, his or her attorneys-in-fact, for such person in any
and all capacities, to sign any amendments to this report and to file the same, with exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that either of said
attorneys-in-fact, or substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
/s/ MARK V. HURD
Mark V. Hurd
Title(s)
Chairman, Chief Executive Officer
and President
(Principal Executive Officer)
/s/ CATHERINE A. LESJAK
Catherine A. Lesjak
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
/s/ JAMES T. MURRIN
James T. Murrin
Senior Vice President and Controller
(Principal Accounting Officer)
/s/ LAWRENCE T. BABBIO, JR.
Lawrence T. Babbio, Jr.
/s/ SARI M. BALDAUF
Sari M. Baldauf
/s/ RICHARD A. HACKBORN
Richard A. Hackborn
/s/ JOHN H. HAMMERGREN
John H. Hammergren
Director
Director
Director
Director
Date
December 18, 2007
December 18, 2007
December 18, 2007
December 18, 2007
December 18, 2007
December 18, 2007
December 18, 2007
156
Signature
Title(s)
Date
/s/ JOEL Z. HYATT
Joel Z. Hyatt
/s/ JOHN R. JOYCE
John R. Joyce
/s/ ROBERT L. RYAN
Robert L. Ryan
/s/ LUCILLE S. SALHANY
Lucille S. Salhany
/s/ G. KENNEDY THOMPSON
G. Kennedy Thompson
Director
Director
Director
Director
Director
December 18, 2007
December 18, 2007
December 18, 2007
December 18, 2007
December 18, 2007
157
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit
Number
2 None.
Exhibit Description
Form
File No.
Incorporated by Reference
Exhibit(s)
Filing Date
3(a) Registrant’s Certificate of
10-Q
001-04423
3(a)
June 12, 1998
Incorporation.
3(b) Registrant’s Amendment to the
10-Q
001-04423
3(b)
March 16, 2001
Certificate of Incorporation.
3(c) Registrant’s Amended and Restated
8-K
001-04423
99.1
November 19, 2007
By-Laws effective November 15, 2007.
4(a) Indenture dated as of October 14, 1997
among Registrant and Chase Trust
Company of California regarding
Liquid Yield Option Notes due 2017.
S-3
333-44113
4.2
January 12, 1998
4(b) Supplemental Indenture dated as of
10-Q
001-04423
4(b)
September 12, 2000
March 16, 2000 to Indenture dated as of
October 14, 1997 among Registrant and
Chase Trust Company of California
regarding Liquid Yield Option Notes
due 2017.
4(c) Second Supplemental Indenture to
10-Q
001-04423
4(c)
September 10, 2004
Indenture dated as of October 14, 1997
among Registrant and J.P. Morgan
Trust Company (as successor to Chase
Trust Company of California) regarding
Liquid Yield Option Notes due 2017.
4(d) Form of Senior Indenture.
S-3
333-30786
4.1
March 17, 2000
4(e) Form of Registrant’s Fixed Rate Note
8-K
001-04423
4.1, 4.2 and
4.4
May 24, 2001
and Floating Rate Note and related
Officers’ Certificate.
4(f) Form of Registrant’s 6.50% Global
Note due July 1, 2012, and form of
related Officers’ Certificate.
4(g) Form of Registrant’s Fixed Rate Note
and form of Floating Rate Note.
8-K
001-04423
4.2 and 4.3
June 27, 2002
8-K
001-04423
4.1 and 4.2 December 11, 2002
4(h) Form of Registrant’s 3.625% Global
8-K
001-04423
4.1 and 4.2 March 14, 2003
Note due March 15, 2008, and related
Officers’ Certificate.
4(i) Indenture, dated as of June 1, 2000,
S-3
333-134327
4.9
June 7, 2006
between the Registrant and J.P. Morgan
Trust Company, National Association
(formerly Chase Manhattan Bank), as
Trustee.
158
Exhibit
Number
Exhibit Description
Form
File No.
Incorporated by Reference
Exhibit(s)
4.1, 4.2 and 4.3
001-04423
Filing Date
February 28, 2007
4(j) Form of Registrant’s Floating Rate Global Note
due March 1, 2012, form of 5.25% Global Note
due March 1, 2012 and form of 5.40% Global
Note due March 1, 2017.
8-K
4(k) Form of Registrant’s Floating Rate Global Note
10-Q
001-04423
4(l)
September 7, 2007
due June 15, 2009 and Floating Rate Global Note
due June 15, 2010.
4(l) Specimen certificate for the Registrant’s common
8-A/A
001-04423
4.1
June 23, 2006
stock.
9 None.
10(a) Registrant’s 2004 Stock Incentive Plan.*
S-8
333-114253
4.1
April 7, 2004
10(b) Registrant’s 2000 Stock Plan, amended and
10-K
001-04423
10(a)
January 21, 2003
restated effective November 21, 2002.*
10(c) Registrant’s 1997 Director Stock Plan, amended
and restated effective November 1, 2005.*
10(d) Registrant’s 1995 Incentive Stock Plan, amended
and restated effective November 21, 2002.*
10(e) Registrant’s 1990 Incentive Stock Plan, amended
and restated effective November 21, 2002.*
10(f) Compaq Computer Corporation 2001 Stock
Option Plan, amended and restated effective
November 21, 2002.*
10(g) Compaq Computer Corporation 1998 Stock
Option Plan, amended and restated effective
November 21, 2002.*
8-K
001-04423
99.4
November 23, 2005
10-K
001-04423
10(c)
January 21, 2003
10-K
001-04423
10(d)
January 21, 2003
10-K
001-04423
10(f)
January 21, 2003
10-K
001-04423
10(g)
January 21, 2003
10(h) Compaq Computer Corporation 1995 Equity
10-K
001-04423
10(h)
January 21, 2003
Incentive Plan, amended and restated effective
November 21, 2002.*
10(i) Compaq Computer Corporation 1989 Equity
10-K
001-04423
10(i)
January 21, 2003
Incentive Plan, amended and restated effective
November 21, 2002.*
10(j) Compaq Computer Corporation 1985
S-3
333-86378
10.5
April 18, 2002
Nonqualified Stock Option Plan for
Non-Employee Directors.*
10(k) Amendment of Compaq Computer Corporation
S-3
333-86378
10.11
April 18, 2002
Non-Qualified Stock Option Plan for
Non-Employee Directors, effective September 3,
2001.*
10(l) Compaq Computer Corporation 1998 Former
S-3
333-86378
10.9
April 18, 2002
Nonemployee Replacement Option Plan.*
159
Exhibit
Number
Exhibit Description
Form
File No.
Incorporated by Reference
Exhibit(s)
Filing Date
10(m) Registrant’s Excess Benefit Retirement
Plan, amended and restated as of
January 1, 2006.*
8-K
001-04423
10.2
September 21, 2006
10(n) Hewlett-Packard Company Cash
8-K
001-04423
99.3
November 23, 2005
Account Restoration Plan, amended
and restated as of January 1, 2005.*
10(o) Registrant’s 2005 Pay-for-Results
8-K
001-04423
99.5
November 23, 2005
Plan.*
10(p) Registrant’s 2005 Executive Deferred
Compensation Plan, as amended and
restated effective October 1, 2006.*
8-K
001-04423
10.1
September 21, 2006
10(q) First Amendment to the Registrant’s
10-Q
001-04423
10(q)
June 8, 2007
2005 Executive Deferred
Compensation Plan, as amended and
restated effective October 1, 2006.*
10(r) Employment Agreement, dated
8-K
001-04423
99.1
March 30, 2005
March 29, 2005, between Registrant
and Mark V. Hurd.*
10(s) Employment Agreement, dated June 9,
2005, between Registrant and R. Todd
Bradley.*
10-Q
001-04423
10(x)
September 8, 2005
10(t) Employment Agreement, dated July 11,
10-Q
001-04423
10(y)
September 8, 2005
2005, between Registrant and Randall
D. Mott.*
10(u) Registrant’s Amended and Restated
Severance Plan for Executive
Officers.*
8-K
001-04423
99.1
July 27, 2005
10(v) Form letter to participants in the
10-Q
001-04423
10(w)
March 10, 2006
Registrant’s Pay-for-Results Plan for
fiscal year 2006.*
10(w) Registrant’s Executive Severance
10-Q
001-04423
10(u)(u)
June 13, 2002
Agreement.*
10(x) Registrant’s Executive Officers
Severance Agreement.*
10(y) Form letter regarding severance offset
for restricted stock and restricted
units.*
10(z) Form of Indemnity Agreement between
Compaq Computer Corporation and its
executive officers.*
10-Q
001-04423
10(v)(v)
June 13, 2002
8-K
001-04423
10.2
March 22, 2005
10-Q
001-04423
10(x)(x)
June 13, 2002
160
Exhibit
Number
Exhibit Description
Form
File No.
Incorporated by Reference
Exhibit(s)
10(a)(a)
Filing Date
10(a)(a) Form of Stock Option Agreement for Registrant’s
10-Q
001-04423
June 8, 2007
2004 Stock Incentive Plan, Registrant’s 2000
Stock Plan, as amended, Registrant’s 1995
Incentive Stock Plan, as amended, the Compaq
Computer Corporation 2001 Stock Option Plan,
as amended, the Compaq Computer Corporation
1998 Stock Option Plan, as amended, the
Compaq Computer Corporation 1995 Equity
Incentive Plan, as amended and the Compaq
Computer Corporation 1989 Equity Incentive
Plan, as amended.*
10(b)(b) Form of Restricted Stock Agreement for
Registrant’s 2004 Stock Incentive Plan,
Registrant’s 2000 Stock Plan, as amended, and
Registrant’s 1995 Incentive Stock Plan, as
amended.*
10-Q
001-04423
10(b)(b)
June 8, 2007
10(c)(c) Form of Restricted Stock Unit Agreement for
10-Q
001-04423
10(c)(c)
June 8, 2007
Registrant’s 2004 Stock Incentive Plan.*
10(d)(d) Form of Stock Option Agreement for Registrant’s
1990 Incentive Stock Plan, as amended.*
10(e)(e) Form of Common Stock Payment Agreement and
Option Agreement for Registrant’s 1997 Director
Stock Plan, as amended.*
10-K
001-04423
10(e)
January 27, 2000
10-Q
001-04423
10(j)(j)
March 11, 2005
10(f)(f) Form of Restricted Stock Grant Notice for the
10-Q
001-04423
10(w)(w)
June 13, 2002
Compaq Computer Corporation 1989 Equity
Incentive Plan.*
10(g)(g) Forms of Stock Option Notice for the Compaq
10-K
001-04423
10(r)(r)
January 14, 2005
Computer Corporation Non-Qualified Stock
Option Plan for Non-Employee Directors, as
amended.*
10(h)(h) Form of Long-Term Performance Cash Award
10-K
001-04423
10(t)(t)
January 14, 2005
Agreement for Registrant’s 2004 Stock Incentive
Plan and Registrant’s 2000 Stock Plan, as
amended.*
10(i)(i) Amendment One to the Long-Term Performance
Cash Award Agreement for the 2004 Program.*
10(j)(j) Form of Long-Term Performance Cash Award
Agreement for the 2005 Program.*
10-Q
001-04423
10(q)(q)
September 8, 2005
10-Q
001-04423
10(r)(r)
September 8, 2005
10(k)(k) Form of Long-Term Performance Cash Award
10-Q
001-04423
10(o)(o)
March 10, 2006
Agreement.*
161
Exhibit
Number
Exhibit Description
Form
File No.
Incorporated by Reference
Exhibit(s)
Filing Date
10(l)(l) Second Amendment to the Registrant’s 2005
Executive Deferred Compensation Plan, as
amended and restated effective October 1,
2006.*‡
11 None.
12 Statement of Computation of Ratio of Earnings to
Fixed Charges.‡
13-14 None.
16 None.
18 None.
21 Subsidiaries of the registrant as of October 31,
2007.‡
22 None.
23 Consent of Independent Registered Public
Accounting Firm.‡
24 Power of Attorney (included on the signature
page).
31.1 Certification of Chief Executive Officer pursuant
to Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act of 1934, as amended.‡
31.2 Certification of Chief Financial Officer pursuant
to Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act of 1934, as amended.‡
32 Certification of Chief Executive Officer and
Chief Financial Officer pursuant to 18 U.S.C.
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.†
*
‡
†
Indicates management contract or compensatory plan, contract or arrangement.
Filed herewith.
Furnished herewith.
The registrant agrees to furnish to the Commission supplementally upon request a copy of (1) any instrument with
respect to long-term debt not filed herewith as to which the total amount of securities authorized thereunder does not exceed
10 percent of the total assets of the registrant and its subsidiaries on a consolidated basis and (2) any omitted schedules to any
material plan of acquisition, disposition or reorganization set forth above.
162
Exhibit 31.1
I, Mark V. Hurd, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Hewlett-Packard Company;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: December 14, 2007
/s/ MARK V. HURD
Mark V. Hurd
Chairman, Chief Executive Officer and President
(Principal Executive Officer)
Exhibit 31.2
I, Catherine A. Lesjak, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Hewlett-Packard Company;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: December 14, 2007
/s/ CATHERINE A. LESJAK
Catherine A. Lesjak,
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Exhibit 32
CERTIFICATION
OF
CHIEF EXECUTIVE OFFICER
AND
CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Mark V. Hurd, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that the Annual Report on Form 10-K of Hewlett-Packard Company for the fiscal year ended October 31, 2007 fully
complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information
contained in such Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of
operations of Hewlett-Packard Company.
December 14, 2007
By:
/s/ MARK V. HURD
Mark V. Hurd
Chairman, Chief Executive Officer and President
I, Catherine A. Lesjak, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that the Annual Report on Form 10-K of Hewlett-Packard Company for the fiscal year ended October 31, 2007 fully
complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information
contained in such Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of
operations of Hewlett-Packard Company.
December 14, 2007
By:
/s/ CATHERINE A. LESJAK
Catherine A. Lesjak
Executive Vice President and
Chief Financial Officer
A signed original of this written statement required by Section 906 has been provided to Hewlett-Packard Company and will
be retained by Hewlett-Packard Company and furnished to the Securities and Exchange Commission or its staff upon request.
For more information on HP’s non-financial performance, read our Global Citizenship Report at www.hp.com/go/report.
paper. © 2008 Hewlett Packard Development Company, LP. The information contained herein is subject to change without notice. The only warranties
Printed on recycled
for HP products and services are set forth in the express warranty statements accompanying such products and services. Nothing herein should be
construed as constituting an additional warrant. HP shall not be liable for technical or editorial errors or omissions contained herein.
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