TMCNet:  HEWLETT PACKARD CO - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations.

[December 27, 2012]

HEWLETT PACKARD CO - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations.

(Edgar Glimpses Via Acquire Media NewsEdge) 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, and large enterprises, including customers in the government, health and education sectors. Our offerings span: º • º personal computing and other access devices; º • º multi-vendor customer services, including infrastructure technology and business process outsourcing, technology support and maintenance, application development and support services and consulting and integration services; º • º imaging and printing-related products and services; and º • º enterprise information technology infrastructure, including enterprise server and storage technology, networking products and solutions, IT management software, information management solutions and security intelligence/risk management solutions.

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

Our strategy and operations are currently focused on the following initiatives: Strategic Focus The core of our business is our hardware and infrastructure products, which include our PC, server, storage, networking, and imaging and printing products.

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

Leveraging our Portfolio and Scale We offer one of the IT industry's broadest portfolios of products and services, and we are leveraging that portfolio to our strategic advantage. For example, we are able to provide servers, storage and networking products packaged with services that can be delivered to customers in the 39-------------------------------------------------------------------------------- Table of Contents HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) manner of their choosing, be it in-house, outsourced as a service via the Internet, or via a hybrid environment. Our portfolio of management software completes the package by allowing our customers to manage their IT operations in an efficient and cost-effective manner. In addition, we are working to optimize our supply chain by eliminating complexity, reducing fixed costs, and leveraging our scale to ensure the availability of components at favorable prices even during shortages. We are also expanding our use of industry standard components in our enterprise products to further leverage our scale.

Addressing the Challenges Facing Our Business Our business has experienced a multi-quarter decline in revenue and operating margins. This decline in financial performance reflects a series of challenges facing our business. Many of those challenges relate to structural and execution issues, including the following: we need to align our costs with our revenue trajectory; we need to address our underinvestment in R&D and in our internal IT systems in recent years, which has made us less competitive, effective and efficient; we need to implement the data gathering and reporting tools and systems needed to track and report on all key business performance metrics so as to most effectively manage a company of our size, scale and diversity; and we need to rebuild our business relationships with our channel partners. We are also facing dynamic market trends, such as the growth of mobility, the increasing demand for hyperscale computing infrastructure, the shift to software-as-a-service and the transition towards cloud computing, and we need to develop products and services that position us to win in a very competitive marketplace. Furthermore, we face a series of significant macroeconomic challenges, including broad-based weakness in consumer spending, weak demand in the SMB and enterprise sectors in Europe, and declining growth in some emerging markets, particularly China.

We are addressing these challenges through consistency of leadership, focus, execution and, most importantly, superior products, services and solutions.

During fiscal 2012, we implemented some leadership and organizational changes, including consolidating our personal computer and printing businesses under the same senior executive leadership, merging our global accounts sales organization into ESSN, and centralizing all of our marketing and communications activities.

We also began implementing cost-reduction initiatives, including a company-wide restructuring plan we expect to be implemented through the end of fiscal 2014.

In addition, we began making significant changes to our sales force to improve our go-to-market selling activities and reduce cost, and we renewed our focus on developing new products, services and solutions. We also began working to optimize our supply chain, reduce the number of stock keeping units (SKUs) and platforms, refine our real estate strategy, improve our business processes and implement consistent pricing and promotions. During fiscal 2013, we will be focused on working through the anticipated disruptions expected to accompany the changes made in fiscal 2012 and continuing to implement our cost-reduction and operational initiatives.

Investing in our Business The cost-reduction and operational efficiency initiatives discussed above are also intended to facilitate increased investment in our business. These efforts will include optimizing our supply chain, reducing the number of stock keeping units (SKUs) and platforms, continuing to refine our real estate strategy, simplifying our go-to-market, improving business processes and implementing consistent pricing and promotions. We expect to invest savings from these efforts across our businesses, including investing to respond to market trends and customer expectations, strengthen our position in our core markets, accelerate growth in adjacent markets, and drive leadership in the three strategic areas of cloud computing, security and information management. Over time, we expect these investments to allow us to expand in higher margin and higher growth industry segments and further strengthen our 40-------------------------------------------------------------------------------- Table of Contents HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) portfolio of hardware, software and services to solve customer problems.

However, the rate at which we are able to invest in our business and the returns that we are able to achieve from these investments will be affected by many factors, including the efforts to address the execution, industry and macroeconomic challenges facing our business as discussed above. As a result, we may experience delays in the anticipated timing of activities related to these efforts, and the anticipated benefits of these efforts may not materialize.

The following provides an overview of our key fiscal 2012 financial metrics: HP(1) Personal Consolidated Systems Printing Services ESSN Software HPFS In millions, except per share amounts Net revenue $ 120,357 $ 35,650 $ 24,487 $ 34,922 $ 20,491 $ 4,060 $ 3,819 Year-over-year net revenue % (decrease) increase (5.4 )% (9.9 )% (6.5 )% (2.2 )% (7.1 )% 20.6 % 6.2 % (Loss) earnings from operations $ (11,057 ) $ 1,706 $ 3,585 $ 4,095 $ 2,132 $ 827 $ 388 (Loss) earnings from operations as a % of net revenue (9.2 )% 4.8 % 14.6 % 11.7 % 10.4 % 20.4 % 10.2 %Net loss $ (12,650 ) Net loss per share Basic $ (6.41 ) Diluted $ (6.41 ) -------------------------------------------------------------------------------- º (1) º HP consolidated net revenue includes a reduction of approximately $3.2 billion primarily related to the elimination of intersegment net revenue and revenue from our Corporate Investments segment. HP consolidated (loss) earnings from operations includes amounts related to the impairment of goodwill and purchased intangible assets, restructuring charges, amortization of purchased intangible assets, corporate and unallocated costs and eliminations, unallocated costs related to certain stock-based compensation expenses, acquisition-related charges, and a loss from the Corporate Investments segment.

Cash and cash equivalents at October 31, 2012 totaled $11.3 billion, an increase of $3.3 billion from the October 31, 2011 balance of $8.0 billion. The increase for fiscal 2012 was due primarily to $10.6 billion of cash provided from operations, the effect of which was partially offset by $3.1 billion net investment in property, plant and equipment, $2.6 billion of cash used to repurchase common stock and pay dividends and $2.0 billion from the net repayment of debt.

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 trends, uncertainties and other factors that could impact our operating results, see the section entitled "Risk Factors" in Item 1A, which is incorporated herein by reference.

41-------------------------------------------------------------------------------- Table of Contents HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) CRITICAL ACCOUNTING POLICIES AND ESTIMATES General The Consolidated Financial Statements of HP are prepared in accordance with U.S. generally accepted accounting principles ("GAAP"), 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.

The summary of significant accounting policies is included in Note 1 to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably possible could materially impact the financial statements. Management believes 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 as separate units of accounting only when the delivered elements have standalone value, uncertainties regarding customer acceptance are resolved and there are no customer-negotiated refund or return rights for the delivered elements. For elements with no standalone value, we recognize revenue consistent with the pattern of the associated deliverables. If the arrangement includes a customer-negotiated refund or return right relative to the delivered item and the delivery and performance of the undelivered item is considered probable and substantially in our control, the delivered element constitutes a separate unit of accounting. Changes in the allocation of the sales price between elements may impact the timing of revenue recognition but will 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 to income, as a result of revisions to cost estimates, and overall contract losses where applicable, in the period in which the facts that give rise to the revision become known.

42-------------------------------------------------------------------------------- Table of Contents HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) We recognize revenue on certain design and build (design, development and/or constructions of software and/or systems) projects using the percentage-of-completion method. We use the cost-to-cost method of measurement towards completion as determined by the percentage of cost incurred to date to the total estimated costs of the project. In circumstances when reasonable and reliable cost estimates for a project cannot be made, we recognize revenue using the completed contract method.

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 and the specific terms and conditions of the incentive, the number of customers who will actually redeem the incentive.

Under our revenue recognition policies, we establish the selling prices used for each deliverable based on the vendor-specific objective evidence ("VSOE"), if available, third-party evidence, if VSOE is not available, or estimated selling price if neither VSOE nor third-party evidence is available. We establish VSOE of selling price using the price charged for a deliverable when sold separately and, in rare instances, using the price established by management having the relevant authority. Third-party evidence of selling price is established by evaluating largely similar and interchangeable competitor products or services in standalone sales to similarly situated customers. The best estimate of selling price ("ESP") is established considering internal factors such as margin objectives, pricing practices and controls, customer segment pricing strategies and the product life cycle. Consideration is also given to market conditions such as competitor pricing strategies and industry technology life cycles. When determining ESP, we apply management judgment to establish margin objectives and pricing strategies and to evaluate market conditions and product life cycles. We may modify or develop new go-to-market practices in the future. As these go-to-market strategies evolve, we may modify our pricing practices in the future, which may result in changes in selling prices, impacting both VSOE and ESP. The aforementioned factors may result in a different allocation of revenue to the deliverables in multiple element arrangements from the current fiscal year, which may change the pattern and timing of revenue recognition for these elements but will not change the total revenue recognized for the arrangement.

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 or any other post sales support costs were to differ from our estimates, we would be required to make revisions to the estimated warranty liability. Warranty terms generally range from 90 days to three years for parts and labor, depending upon the product. Over the last three fiscal years, the annual warranty provision and actual warranty costs have averaged approximately 3.1% of annual net product revenue.

43-------------------------------------------------------------------------------- Table of Contents HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Business Combinations We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired, including in-process research and development ("IPR&D"), based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill.

When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets.

Critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows from customer contracts, customer lists, distribution agreements, and acquired developed technologies and patents; expected costs to develop IPR&D into commercially viable products and estimating cash flows from projects when completed; brand awareness and market position, as well as assumptions about the period of time the brand will continue to be used in our product portfolio; and discount rates. Management's estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.

Other estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed, as more fully discussed in Note 6 to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference.

Valuation of Goodwill and 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 recoverable. The provisions of the accounting standard for goodwill and other intangibles allows us to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. For our annual goodwill impairment test in the fourth quarter of fiscal 2012, we performed a quantitative test for all of our reporting units. Due to the recent trading values of our stock price, we believed it was appropriate to have recent fair values for each of our reporting units in order to assess the reasonableness of the sum of these fair values as compared to our market capitalization. In the first step, we compare the fair value of each reporting unit to its carrying value. We determine the fair value of our reporting units using a weighting of fair values derived most significantly from the income approach and to a lesser extent the market approach. Under the income approach, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows. Cash flow projections are based on management's estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate used is based on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the business's ability to execute on the projected cash flows. Under the market approach, we estimate the fair value based on market multiples of revenue and earnings derived from comparable publicly-traded companies with similar operating and investment characteristics as the reporting unit. The weighting of the fair value derived from the market approach ranges from 0% to 50% depending on the level of comparability of these publicly-traded companies to the reporting unit. When market comparables are not meaningful or not available, we may estimate the fair value of a reporting unit using only the income approach. 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 required. If the fair value of the reporting unit is less than the 44 -------------------------------------------------------------------------------- Table of Contents HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) carrying value, then we must perform the second step of the impairment test to measure the amount of impairment loss, if any. In the second step, the reporting unit's fair value is allocated to all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill in the same manner as if the reporting unit was being acquired in a business combination. If the implied fair value of the reporting unit's goodwill is less than the carrying value, the difference is recorded as an impairment loss. We also compare the fair value of purchased intangible assets with indefinite lives to their 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 intangible assets with indefinite lives is less than the carrying value.

We review 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. Recoverability of these intangible assets is assessed based on the estimated undiscounted future cash flows expected to result from the use of the asset. If the undiscounted future cash flows are less than the carrying amount, the purchased intangible assets with finite lives are considered to be impaired. The amount of the impairment is measured as the difference between the carrying amount of these assets and the fair value.

In order to assess the reasonableness of the calculated fair values of our reporting units, we also compare the sum of the reporting units' fair values to our market capitalization and calculate an implied control premium (the excess of the sum of the reporting units' fair values over the market capitalization).

We evaluate the control premium by comparing it to control premiums of recent comparable transactions. If the implied control premium is not reasonable in light of these recent transactions, we will reevaluate our fair value estimates of the reporting units by adjusting the discount rates and/or other assumptions.

As a result, when there is a significant decline in our stock price, as occurred during fiscal 2012, this reevaluation could correlate to lower estimated fair values for certain or all of our reporting units.

Except for Services, Software and Corporate Investments, our reporting units are consistent with the reportable segments identified in Note 19 to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference. The enterprise services ("ES") and technology services ("TS") businesses are the reporting units within the Services segment. ES includes the Infrastructure Technology Outsourcing ("ITO") and Application and Business Services ("ABS") business units. The Software segment includes two reporting units, which are Autonomy Corporation plc ("Autonomy") and the legacy HP software business. The webOS business is also a separate reporting unit within the Corporate Investments segment.

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 they 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.

During fiscal 2012, we determined that sufficient indicators of potential impairment existed to require an interim goodwill impairment analysis for the ES reporting unit. As a result, we recorded an 45-------------------------------------------------------------------------------- Table of Contents HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) impairment charge within the Services segment as discussed in Note 7 to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference.

Our annual goodwill impairment analysis, which we performed during the fourth quarter of fiscal 2012, resulted in an impairment charge for goodwill and intangible assets related to the Autonomy reporting unit within the Software segment as discussed in Note 7 to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference. Other than the impairment charges discussed for the ES and Autonomy reporting units during fiscal 2012, there was no impairment for HP's remaining reporting units. The excess of fair value over carrying value for each of our reporting units as of August 1, 2012, the annual testing date, ranged from approximately 9% to approximately 330% of carrying value. The Autonomy and the legacy HP software reporting units have the lowest excess of fair value over carrying value at 10% and 9%, respectively.

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 resulted in the Autonomy and the legacy HP software reporting units having fair values below their carrying values of 1% and 2%, respectively. For the remaining reporting units, excess fair values over carrying values range from approximately 25% to approximately 290% of the carrying values.

We will continue to evaluate goodwill on an annual basis as of the beginning of our fourth fiscal quarter and whenever events or changes in circumstances, such as significant adverse changes in business climate or operating results, changes in management's business strategy or further significant declines in our stock price, indicate that there may be a potential indicator of impairment.

During the third quarter of fiscal 2012, we approved a change to our branding strategy for personal computers which triggered an interim impairment review of the "Compaq" trade name indefinite-lived intangible asset. As a result, we recorded an impairment charge within the Personal Systems Group as discussed in Note 7 to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference. In conjunction with the change in branding strategy, we also revised our assumption as to the useful life of the "Compaq" trade name, which resulted in a reclassification of the asset from an indefinite-lived intangible to a finite-lived intangible with a remaining useful life of approximately five years.

Restructuring We have engaged, and may continue to engage, in restructuring actions, which require management to utilize significant estimates related to the timing and the expenses for severance and other employee separation costs, including enhanced early retirement programs, realizable values of assets made redundant or obsolete, lease cancellation and other exit costs. We accrue for severance and other employee separation costs under these actions when it is probable that benefits will be paid and the amount is reasonably estimable. The rates used in determining severance accruals are based upon existing plans, historical experiences, and negotiated settlements. 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 We recognize stock-based compensation expense for all share-based payment awards, net of an estimated forfeiture rate. We recognize compensation cost for only those shares expected to meet the 46-------------------------------------------------------------------------------- Table of Contents HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) service and performance vesting conditions on a straight-line basis over the requisite service period of the award. These compensation costs are determined at the aggregate grant level for service-based awards and at the individual vesting tranche level for awards with performance and/or market conditions.

Determining the appropriate fair value model and calculating the fair value of share-based payment awards requires subjective assumptions, including the expected life of the share-based payment awards and stock price volatility. We utilize the Black-Scholes option pricing model to value the service-based stock options granted under our principal option plans. To implement this model, we examined our historical pattern of option exercises to determine if there were any discernable activity patterns based on certain employee populations. From this analysis, we identified three employee populations to which to apply the Black-Scholes model. We 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.

We issued performance-based restricted units ("PRUs") representing hypothetical shares of HP common stock. Each PRU award reflected a target number of shares that may be issued to the award recipient. We determine the actual number of shares the recipient receives at the end of a three-year performance period based on results achieved versus goals. The performance goals for PRUs granted in fiscal year 2012 are based on our annual cash flow from operations as a percentage of revenue and on our annual revenue growth. The performance goals for PRUs granted prior to fiscal year 2012 are based on our annual cash flow from operations as a percentage of revenue and on a market condition based on total shareholder return ("TSR") relative to the S&P 500 over the performance period. We use our closing stock price on the measurement date to estimate the fair value of the PRU awards granted in fiscal year 2012. We use historic volatility for PRU awards granted prior to fiscal year 2012, as implied volatility cannot be used when simulating multivariate prices for companies in the S&P 500. We estimate the fair value of PRUs granted prior to fiscal year 2012 using the Monte Carlo simulation model, as the TSR modifier contains a market condition. We update the estimated expense, net of forfeitures, for the cash flow and revenue growth performance against the goal for that year at the end of each reporting period.

The assumptions used in calculating the fair value of 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 meet the service and performance vesting conditions. 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 final positions 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.

47 -------------------------------------------------------------------------------- Table of Contents HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) 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 we have 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 2024. 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 approximately 80 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 management judgments and estimates.

We evaluate our uncertain tax positions in accordance with the guidance for accounting for uncertainty in income taxes. We believe that our reserve for uncertain tax positions, including related interest, is adequate. 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 uncertain tax positions 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.

48-------------------------------------------------------------------------------- Table of Contents HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) See Note 14 to the Consolidated Financial Statements in Item 8 for a further discussion on taxes on earnings.

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 use of third-party credit risk models that generate quantitative measures of default probabilities based on market factors, the financial condition of customers, 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 and historical experience. Also, we record specific provisions for individual accounts when we become aware of specific customer circumstances, such as in the case of bankruptcy filings or deterioration in the customer's operating results or financial position. If the circumstances related to the customer 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 0.10% of net revenue over the last three fiscal years. Using our third-party credit risk model at October 31, 2012, a 50-basis-point deterioration in the weighted-average default probabilities of our significant customers would have resulted in an approximately $23 million increase to our trade allowance at the end of fiscal year 2012.

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.

Fair Value of Financial Instruments We measure certain financial assets and liabilities at fair value based on valuation techniques using the best information available, which may include quoted market prices, market comparables and discounted cash flow projections.

Financial instruments are primarily comprised of time deposits, money market funds, corporate and other debt securities, equity securities and other investments in common stock and common stock equivalents and derivative instruments.

Cash Equivalents and Investments: We hold time deposits, money market funds, mutual funds, other debt securities primarily consisting of corporate and foreign government notes and bonds, and common stock and equivalents. In general, and where applicable, we use quoted prices in active markets for identical assets to determine fair value. If quoted prices in active markets for identical assets are not available to determine fair value, then we use quoted prices for similar assets and liabilities or inputs that are observable either directly or indirectly. If quoted prices for identical or similar assets are not available, we use internally developed valuation models, whose inputs include bid prices, and third party valuations utilizing underlying asset assumptions.

Derivative Instruments: As discussed in Note 10 to the Consolidated Financial Statements in Item 8, we mainly hold non-speculative forwards, swaps and options to hedge certain foreign currency 49-------------------------------------------------------------------------------- Table of Contents HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) and interest rate exposures. When active market quotes are not available, we use industry standard valuation models. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit risk, foreign exchange rates, and forward and spot prices for currencies. In certain cases, market-based observable inputs are not available and, in those cases, we use management judgment to develop assumptions which are used to determine fair value.

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 and long-term return on plan assets. 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 expectations related to the future economic environment, as well as target asset allocations. Actual results in any given year will often differ from actuarial assumptions because of economic and other factors.

Our major assumptions vary by plan and the weighted-average rates used are set forth in Note 16 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 2012, changes in the weighted-average rates for the HP benefit plans would have had the following impact on our net periodic benefit cost: º • º A decrease of 25 basis points in the long-term rate of return would have increased our net benefit cost by approximately $61 million; º • º A decrease of 25 basis points in the discount rate would have increased our net benefit cost by approximately $78 million; and º • º An increase of 25 basis points in the future compensation rate would have increased our net benefit cost by approximately $23 million.

Loss Contingencies We are involved in various lawsuits, claims, investigations and proceedings that arise in the ordinary course of business. We record a provision for a liability when we believe that it is both probable that a liability has been incurred and the amount can be reasonably estimated. Significant judgment is required to determine both probability and the estimated amount. We review these provisions at least quarterly and adjust these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and updated information. Litigation is inherently unpredictable and is 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 impact on our results of operations, financial position and cash flows. See Note 18 to the Consolidated Financial Statements in Item 8 for a further discussion of litigation and contingencies.

CONSTANT CURRENCY PRESENTATION Revenue from our international operations has historically represented, and we expect will continue to represent, a majority of our overall net revenue. As a result, our revenue growth has been 50-------------------------------------------------------------------------------- Table of Contents HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) impacted, and we expect will continue to be impacted, by fluctuations in foreign currency exchange rates. In order to provide a framework for assessing how each of our business segments performed excluding the impact of foreign currency fluctuations, we present the year-over-year percentage change in revenue performance on a constant currency basis, which assumes no change in the exchange rate from the prior-year period. This constant currency disclosure is provided in addition to, and not as a substitute for, the year-over-year percentage change in revenue on an as-reported basis.

RESULTS OF OPERATIONS The following discussion compares the historical results of operations for the fiscal years ended October 31, 2012, 2011, and 2010. Unless otherwise noted, all comparative performance data included below reflect year-over-year comparisons.

Results of operations in dollars and as a percentage of net revenue were as follows for the following fiscal years ended October 31: 2012 2011(1) 2010(1) In millions Net revenue $ 120,357 100.0 % $ 127,245 100.0 % $ 126,033 100.0 % Cost of sales(2) 92,385 76.8 % 97,418 76.6 % 95,852 76.1 % Gross profit 27,972 23.2 % 29,827 23.4 % 30,181 23.9 % Research and development 3,399 2.8 % 3,254 2.6 % 2,959 2.3 % Selling, general and administrative 13,500 11.2 % 13,577 10.6 % 12,822 10.2 % Amortization of purchased intangible assets 1,784 1.5 % 1,607 1.3 % 1,484 1.2 % Impairment of goodwill and purchased intangibles assets(3) 18,035 15.0 % 885 0.7 % - - Restructuring charges 2,266 1.9 % 645 0.5 % 1,144 0.9 % Acquisition-related charges 45 - 182 0.1 % 293 0.2 % (Loss) earnings from operations (11,057 ) (9.2 )% 9,677 7.6 % 11,479 9.1 % Interest and other, net(4) (876 ) (0.8 )% (695 ) (0.5 )% (505 ) (0.4 )% (Loss) earnings before taxes (11,933 ) (10.0 )% 8,982 7.1 % 10,974 8.7 % Provision for taxes (717 ) (0.5 )% (1,908 ) (1.5 )% (2,213 ) (1.7 )% Net (loss) earnings $ (12,650 ) (10.5 )% $ 7,074 5.6 % $ 8,761 7.0 % -------------------------------------------------------------------------------- º (1) º In connection with organizational realignments implemented in the first quarter of fiscal 2012, certain costs previously reported as Cost of sales have been reclassified as Selling, general and administrative expenses to better align those costs with the functional areas that benefit from those expenditures.

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

º (3) º For the period ended October 31, 2012, represents a goodwill and intangible asset impairment charge of $8.8 billion associated with the Autonomy reporting unit within the Software segment, a goodwill impairment charge of $8.0 billion associated with the ES reporting unit within the Services segment and an intangible asset impairment charge of $1.2 billion associated with the "Compaq" trade name within the Personal Systems segment. For the period ended October 31, 2011, includes impairment charges to goodwill and purchased intangible assets associated with the 51-------------------------------------------------------------------------------- Table of Contents HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) acquisition of Palm, Inc. on July 1, 2010 recorded as result of the decision announced on August 18, 2011 to wind down the webOS device business.

º (4) º For fiscal 2011, includes $276 million of charges in connection with the acquisition of Autonomy, which is primarily comprised of the $265 million net cost of British pound options bought to limit foreign exchange rate risk.

Net Revenue The components of the weighted net revenue change were as follows for the following fiscal years ended October 31: 2012 2011(1) Percentage Points Personal Systems (3.1 ) (0.9 ) Printing (1.3 ) - Enterprise Servers, Storage and Networking (1.2 ) 1.5 Services (0.6 ) 0.3 Corporate Investments/Other 0.1 (0.7 ) HP Financial Services 0.2 0.4 Software 0.5 0.4 Total HP (5.4 ) 1.0 -------------------------------------------------------------------------------- º (1) º Reflects certain reclassifications made to historical results to conform to the current year presentation as noted in Note 19 to the Consolidated Financial Statements in Item 8.

Fiscal 2012 In fiscal 2012, total HP net revenue decreased 5.4% (decreased 4.4% on a constant currency basis). U.S. net revenue decreased 4.5% to $42.1 billion, while net revenue from outside of the United States decreased 5.9% to $78.2 billion. HP's revenue decreased due primarily to a weak customer demand environment resulting in volume declines in our hardware businesses and printing supplies coupled with contractual rate declines on ongoing contracts in Services. The Software segment contributed favorably to the total HP net revenue change as a result of the acquisition of Autonomy in October 2011. An analysis of the change in net revenue for each business segment is included under "Segment Information" below.

Fiscal 2011 In fiscal 2011, total HP net revenue increased 1.0% (decreased 0.9% on a constant currency basis). U.S. net revenue decreased 1.0% to $44.1 billion, while net revenue from outside of the United States increased 2.0% to $83.1 billion. As reflected in the table above, the ESSN segment was the largest contributor to HP net revenue growth as a result of balanced growth across all regions. ESSN segment net revenue growth was helped by the strong performance in products related to our 3PAR Inc. ("3PAR") and 3Com Corporation ("3Com") acquisitions. An analysis of the change in net revenue for each business segment is included under "Segment Information" below.

52-------------------------------------------------------------------------------- Table of Contents HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Gross Margin Fiscal 2012 In fiscal 2012, total HP gross margin decreased by 0.2 percentage points.

Gross margins were impacted by continued margin pressure in Services and competitive pricing in our hardware businesses, along with an unfavorable mix of lower-margin revenue in ESSN and unfavorable currency impacts.

Personal Systems gross margin decreased in fiscal 2012. The decrease was driven by higher component costs combined with an unfavorable currency impact.

These negative impacts to gross margin were partially offset by lower warranty and logistics costs, benefits from insurance proceeds related to flooding in Thailand in July 2011 and an increased level of component vendor rebates.

Printing gross margin declined in fiscal 2012 due to an unfavorable currency impact driven by the strength of the Japanese yen and from lower ink supplies volumes as a result of demand declines in all regions. These effects were partially offset by our focus on higher-end inkjet printers combined with a higher mix of supplies.

Services gross margin decreased in fiscal 2012 due primarily to lower than expected revenue, contractual rate declines on ongoing contracts, a lower than expected resource utilization rate and additional costs associated with certain contract deliverable delays. These effects were partially offset by a continued focus on operating improvements and cost initiatives that favorably impacted the cost structure of all business units.

ESSN gross margin decreased in fiscal 2012 due primarily to competitive pricing pressures, particularly in Industry Standard Servers ("ISS") and, to a lesser extent, in Networking.

Software gross margin decreased in fiscal 2012 due primarily to a lower mix of license revenue, the effect of which was partially offset by a highly profitable software deal entered into in the fourth quarter of fiscal 2012.

HPFS gross margin increased in fiscal 2012 due primarily to lower bad debt expense, the effect of which was partially offset by lower margins on end-of-term activities, including buyouts and lease extensions.

Fiscal 2011 In fiscal 2011, total HP gross margin decreased by 0.5 percentage points.

The decline was driven by a lower gross margin in the Services, Printing and Corporate Investments segments, the effect of which was partially offset by a favorable commodity pricing environment in the Personal Systems and ESSN segments, and a favorable mix from higher Software and Networking revenue.

Personal Systems gross margin increased in fiscal 2011 primarily as a result of a favorable commodity pricing environment, combined with lower warranty costs.

Printing gross margin declined in fiscal 2011 due primarily to increased logistics costs and supply chain constraints in LaserJet printer engines and toner as a result of the earthquake and tsunami in Japan, and an unfavorable currency impact driven primarily by the strength of the yen. In addition, Printing gross margin declined due to a continuing mix shift in Consumer Hardware and Commercial Hardware toward lower price point products, coupled with a lower mix of supplies revenue. These effects were partially offset by reductions in Printing's cost structure as a result of continued efforts to optimize our supply chain.

53-------------------------------------------------------------------------------- Table of Contents HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Services gross margin decreased in fiscal 2011 due primarily to lower than expected revenue, rate concessions arising from recent contract renewals, a lower than expected resource utilization rate and a higher mix of lower-margin Infrastructure Technology Outsourcing revenue. These effects were partially offset by a continued focus on operating improvements and cost initiatives that favorably impacted the cost structure of both our enterprise services and technology services businesses.

ESSN gross margin increased in fiscal 2011 primarily as a result of lower product costs and a higher mix of networking products, the effect of which was partially offset by price declines as a result of competitive pressure.

Software gross margin decreased in fiscal 2011 due primarily to rate declines in licenses and services.

HPFS gross margin decreased in fiscal 2011 due primarily to lower portfolio margins from a higher mix of operating leases, the effect of which was partially offset by lower bad debt expense as a percentage of revenue and higher margins on lease extensions and buyouts.

Corporate Investments gross margin decreased in fiscal 2011 primarily as a result of the impact of the wind down of the webOS device business, which resulted in expenses for supplier-related obligations, sales incentive programs and inventory write downs.

Operating Expenses Research and Development Total research and development ("R&D") expense increased in fiscal 2012 due primarily to additional expense from the acquisition of Autonomy and innovation-focused spending for storage, networking and HP converged cloud.

These effects were partially offset by the elimination of R&D expense associated with the former webOS device business. In fiscal 2012, R&D expense increased for ESSN, Software, Personal Systems, Printing and Services and decreased for Corporate Investments.

Total R&D expense increased in fiscal 2011 due primarily to additional expenses from acquired companies. In fiscal 2011, R&D expense increased for ESSN, Corporate Investments and Software and decreased for Services and Personal Systems. The increase for ESSN was driven by acquisition investments and innovation-focused spend in networking and storage products. The increase for Corporate Investments was due to investments in the development of webOS and webOS devices during the first three quarters of fiscal 2011.

Selling, General and Administrative Total selling, general and administrative ("SG&A") expense decreased in fiscal 2012 due primarily to lower marketing costs. Included in SG&A was $103 million in net gains from the sale of real estate. In fiscal 2012, SG&A expense as a percentage of net revenue was mostly flat for each of our segments except for Corporate Investments, which experienced a decrease.

Total SG&A expense increased in fiscal 2011 due primarily to higher field selling costs as a result of our investments in sales resources to grow revenue.

The increase in fiscal 2011 was partially offset by $334 million in net gains on the sale of real estate and a $77 million net gain on the divestiture of our Halo video collaboration products business. In fiscal 2011, SG&A expense as a percentage of net revenue increased for each of our segments except for HPFS, Services and Printing, each of which experienced a decrease.

54-------------------------------------------------------------------------------- Table of Contents HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Impairment of Goodwill and Purchased Intangible Assets In fiscal 2012, we recorded goodwill impairment charges of $8.0 billion and $5.7 billion associated with the Services segment and the acquisition of Autonomy, respectively. In addition, we recorded intangible asset impairment charges of $3.1 billion and $1.2 billion associated with the acquisition of Autonomy and the "Compaq" trade name, respectively.

In fiscal 2011, we recorded $885 million impairment charges to goodwill and purchased intangible assets associated with the acquisition of Palm, Inc. on July 1, 2010 as a result of the decision announced on August 18, 2011 to wind down the webOS device business.

For more information on our impairment charges, see Note 7 to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference.

Restructuring Charges The increase in restructuring costs for fiscal 2012 was due primarily to charges of $2.1 billion for the restructuring plan announced in May 2012 (the "2012 Plan"), the effect of which was partially offset by lower charges in the fiscal 2008 and fiscal 2010 ES restructuring plans. Restructuring charges for fiscal 2012 were $2.3 billion. These charges included $2.1 billion costs related to the 2012 Plan, $106 million costs related to our fiscal 2008 restructuring plan and $75 million costs related to our fiscal 2010 ES restructuring plan.

The decrease in restructuring costs for fiscal 2011 was due primarily to lower charges in the fiscal 2008 and fiscal 2010 ES restructuring plans.

Restructuring charges for fiscal 2011 were $645 million. These charges included $326 million of severance and facility costs related to our fiscal 2008 restructuring plan, $266 million of severance and facility costs related to our fiscal 2010 ES restructuring plan and $33 million related to the decision to wind down the webOS device business.

Restructuring charges for fiscal 2010 were $1.1 billion. These charges included $650 million of severance and facility costs related to our fiscal 2010 ES restructuring plan, $429 million of severance and facility costs related to our fiscal 2008 restructuring plan, $46 million and $18 million associated with the Palm and 3Com restructuring plans, respectively, and an increase of $1 million related to adjustments to other restructuring plans.

For more information on our restructuring charges, see Note 8 to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference.

As part of our ongoing business operations, we incurred 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. Workforce rebalancing costs are included in our business segment results, and we expect to incur additional workforce rebalancing costs in the future.

Amortization of Purchased Intangible Assets The increase in amortization expense in fiscal 2012 was due primarily to amortization expenses related to the intangible assets purchased as part of the Autonomy acquisition. This increase was partially offset by decreased amortization expenses related to certain intangible assets associated with prior acquisitions reaching the end of their amortization periods.

55-------------------------------------------------------------------------------- Table of Contents HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) The increase in amortization expense in fiscal 2011 was due primarily to increased amortization of purchased intangible assets from acquisitions completed during fiscal 2010. This increase was partially offset by decreased amortization expenses related to certain intangible assets associated with prior acquisitions reaching the end of their amortization periods.

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.

Acquisition-Related Charges In fiscal 2012, we recorded acquisition-related charges of $45 million. The decrease in acquisition-related charges was due primarily to lower consulting and integration costs associated with the Autonomy acquisition, fewer acquisitions, and lower retention bonuses associated with acquisitions completed in fiscal 2011 and 2010.

In fiscal 2011, we recorded acquisition-related charges of $182 million. The decrease in acquisition-related charges was due primarily to lower consulting, integration and acquisition costs associated with the Electronic Data Systems Corporation and 3Com acquisitions, the effect of which was partially offset by consulting and integration costs associated with the Autonomy acquisition.

Interest and Other, Net Interest and other, net expense increased by $181 million in fiscal 2012.

The increase was driven primarily by higher interest expense due to higher average debt balances and higher currency transaction losses.

Interest and other, net expense increased by $190 million in fiscal 2011.

The increase was driven by $276 million of charges incurred in connection with the acquisition of Autonomy, which is primarily comprised of the $265 million net cost of British pound options bought to limit foreign exchange rate risk.

The increase was also as a result of higher interest expenses due to higher average debt balances, the effect of which was partially offset by lower litigation costs and lower currency transaction losses.

Provision for Taxes Our effective tax rates were (6.0)%, 21.2% and 20.2% in fiscal 2012, 2011 and 2010, respectively. Our effective tax rate generally differs from the U.S.

federal statutory rate of 35% due to favorable tax rates associated with certain earnings from our operations in lower-tax jurisdictions throughout the world.

The jurisdictions with favorable tax rates that have the most significant effective tax rate impact in the periods presented include Singapore, the Netherlands, China, Ireland and Puerto Rico. We plan to reinvest some of the earnings of these jurisdictions indefinitely outside the United States and therefore have not provided U.S. taxes on those indefinitely reinvested earnings.

In addition to the above factors, the overall tax rates in fiscal 2012 and 2011 were impacted by nondeductible goodwill impairments and increases in valuation allowances against certain deferred tax assets.

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 14 to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference.

56-------------------------------------------------------------------------------- Table of Contents HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Segment Information A description of the products and services, as well as financial data, for each segment can be found in Note 19 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, 2011 and 2010 to reflect changes in HP's organizational structure that occurred at the beginning of the first quarter of fiscal 2012. We describe these changes more fully in Note 19.

We have presented the business segments in this Annual Report on Form 10-K based on the distinct nature of various businesses such as customer base, homogeneity of products and technology. The discussions below include the results of each of our segments.

Effective November 1, 2012, we created the Enterprise Group segment consisting of the business units within our ESSN segment and our TS business unit, which is a part of our existing Services segment. The remaining business units in our Services segment, ITO and ABS, will comprise a new Enterprise Services segment.

Printing and Personal Systems Group Printing and Personal Systems segments were realigned beneath a newly formed Printing and Personal Systems Group during fiscal 2012. We describe the results of the business segments within the Printing and Personal Systems Group in more detail below.

Personal Systems For the fiscal years ended October 31 2012 2011 2010 In millions Net revenue $ 35,650 $ 39,574 $ 40,741 Earnings from operations $ 1,706 $ 2,350 $ 2,032 Earnings from operations as a % of net revenue 4.8 % 5.9 % 5.0 % The components of the weighted net revenue change by Personal Systems business units were as follows for the following fiscal years ended October 31: 2012 2011 Percentage Points Notebook PCs (6.3 ) (3.2 ) Desktop PCs (3.4 ) (0.7 ) Workstations (0.2 ) 1.1 Other - (0.1 ) Total Personal Systems (9.9 ) (2.9 ) Personal Systems net revenue decreased 9.9% (decreased 8.8% when adjusted for currency) in fiscal 2012. The revenue decline was due primarily to a decline in unit volumes, the effect of which was partially offset by a nominal increase in average selling prices ("ASPs"). ASPs increased due primarily to a mix shift toward higher-end models, the effect of which was partially offset by unfavorable currency impacts. Unit volume was down 11% due primarily to continued demand weakness in both the consumer and commercial markets. In fiscal 2012, net revenue from Notebook PCs decreased 12% while net revenue from Desktop PCs decreased 9% as a result of the overall market decline.

57-------------------------------------------------------------------------------- Table of Contents HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Workstations revenue decreased 3% due to weak demand in the commercial PC market. In fiscal 2012, net revenue for consumer clients decreased 15% while commercial client revenue decreased 6%.

Personal Systems earnings from operations as a percentage of net revenue decreased 1.1 percentage points in fiscal 2012. The decrease was due primarily to a gross margin decline resulting from higher component costs combined with an unfavorable currency impact. These negative impacts to gross margin were partially offset by lower warranty and logistics costs, benefits from insurance proceeds related to flooding in Thailand in July 2011 and an increased level of component vendor rebates. In addition, operating expenses as a percentage of net revenue increased due primarily to the decline in revenue coupled with increased investments in research and development, the effects of which were partially offset by a decrease in administrative expenses.

Personal Systems net revenue decreased 2.9% (decreased 4.7% when adjusted for currency) in fiscal 2011 due primarily to softness in the consumer PC markets, the effect of which was partially offset by strength in commercial businesses. Unit volume was up 2% due primarily to the continued commercial refresh cycle, the effect of which was partially offset by a decline in volume in the consumer business. In fiscal 2011, Workstations revenue increased 24% due to the ongoing corporate refresh cycle and strength in the commercial PC market.

Net revenue from Desktop PCs decreased 2% while Notebook PCs revenue decreased 6% as a result of consumer market softness. In fiscal 2011, net revenue for consumer clients decreased 15% while commercial client revenue increased 9%. Net revenue in Other decreased 7% due primarily to the wind down of the handheld business and decreased sales of consumer warranty extensions. For fiscal 2011, the favorable impact on Personal Systems net revenue from unit increases was offset by a 5% decrease in ASPs due primarily to the competitive pricing environment.

Personal Systems earnings from operations as a percentage of net revenue increased 0.9 percentage points in fiscal 2011. The increase was driven by improvements in gross margin resulting primarily from a favorable component pricing environment and lower warranty costs. Partially offsetting the increase in gross margin was an increase in operating expenses as a percentage of net revenue due primarily to unfavorable currency impact and increased selling costs.

Printing For the fiscal years ended October 31 2012 2011 2010 In millions Net revenue $ 24,487 $ 26,176 $ 26,176 Earnings from operations $ 3,585 $ 3,927 $ 4,357 Earnings from operations as a % of net revenue 14.6 % 15.0 % 16.6 % The components of the weighted net revenue change by Printing business units were as follows for the following fiscal years ended October 31: 2012 2011 Percentage Points Supplies (3.9 ) 0.0 Consumer Hardware (1.5 ) 0.0 Commercial Hardware (1.1 ) 0.0 Total Printing (6.5 ) 0.0 58 -------------------------------------------------------------------------------- Table of Contents HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Printing net revenue decreased 6.5% (decreased 6.3% when adjusted for currency) in fiscal 2012, driven by broad-based consumer demand weakness in all regions. Printer unit volume declined 15%, while average revenue per unit increased by 8%. Net revenue for Supplies decreased 6% in fiscal 2012 driven by demand declines in all regions, the effects of which were partially offset by growth in large format printing supplies. Net revenue for Consumer Hardware decreased 14% in fiscal 2012, due primarily to a decline in consumer demand.

Inkjet unit volume reductions of 18% were partially offset by a higher mix of high value inkjet units reflecting an increase in average revenue per unit of 6%. Net revenue for Commercial Hardware decreased 5% in fiscal 2012. The net revenue decline was driven by volume declines of 8%, due primarily to a weak worldwide demand environment impacting our LaserJet printer business. These negative impacts were offset by higher average revenue per unit of 2% and net revenue growth in both large format printers and our managed print services business.

Printing earnings from operations as a percentage of net revenue decreased by 0.4 percentage points in fiscal 2012. Gross margin declined in fiscal 2012 due to an unfavorable currency impact driven by the strength of the Japanese yen and from lower ink supplies volumes as a result of demand declines in all regions. These effects were partially offset by our focus on higher-end inkjet printers combined with a higher mix of supplies. Operating expenses as a percentage of net revenue increased due to the decline in revenue and investments in research and development, the effects of which were partially offset by declines in marketing and administrative expenses.

Printing net revenue remained flat (decreased 1.0% when adjusted for currency) in fiscal 2011. Net revenue for Commercial Hardware increased 3% in fiscal 2011 due primarily to double-digit net revenue growth in the graphics business, coupled with strong performance in transactional laser products in emerging geographies. These effects were partially offset by supply chain constraints in LaserJet printers as a result of the earthquake and tsunami in Japan. Net revenue for Supplies decreased 1% in fiscal 2011, driven by slower demand, particularly in Europe. These effects were partially offset by growth in large format printing supplies. Net revenue for Consumer Hardware decreased 4% in fiscal 2011, driven primarily by overall reductions in consumer electronics spending and competitive pricing pressures reflected in a mix shift towards lower-priced products and a decline in the average revenue per unit of 6%.

Printing earnings from operations as a percentage of net revenue decreased by 1.6 percentage points in fiscal 2011, due primarily to a decline in gross margin, the effect of which was partially offset by lower operating expenses as a percentage of net revenue. The gross margin decline in fiscal 2011 was due primarily to increased logistics costs and supply chain constraints in LaserJet printers as a result of the Japan earthquake and tsunami, an unfavorable currency impact driven primarily by the strength of the yen, a continued mix shift in Consumer Hardware and Commercial Hardware to lower price point products coupled with a lower mix of supplies. These effects were partially offset by reductions in Printing's cost structure as a result of continued efforts to optimize our supply chain. The decrease in operating expenses as a percentage of net revenue in fiscal 2011 was due primarily to reduced marketing and administrative expenses, the effect of which was partially offset by higher field selling cost expenses.

59-------------------------------------------------------------------------------- Table of Contents HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Services For fiscal years ended October 31 2012 2011 2010 In millions Net revenue $ 34,922 $ 35,702 $ 35,276 Earnings from operations $ 4,095 $ 5,203 $ 5,714 Earnings from operations as a % of net revenue 11.7 % 14.6 % 16.2 % The components of the weighted net revenue change by Services business units were as follows for the following fiscal years ended October 31: 2012 2011 Percentage Points Infrastructure Technology Outsourcing (1.5 ) 0.7 Application and Business Services (0.5 ) (0.3 ) Technology Services (0.2 ) 0.8 Total Services (2.2 ) 1.2 Services net revenue decreased 2.2% (decreased 0.5% when adjusted for currency) in fiscal 2012 due to revenue decreases in all business units. ITO net revenue decreased by 3% in fiscal 2012. Contractual rate declines on ongoing contracts, increased deal selectivity designed to meet threshold margins and strategic fit, and an unfavorable currency impact contributed to the decrease in revenues. These effects were partially offset by an increase in product-related revenue and increased revenue from cloud and security offerings. The deal selectivity and contractual rate declines mentioned above are expected to adversely affect revenue in future periods. ABS net revenue decreased by 2% in fiscal 2012. The decrease was driven by declines in short-term project work combined with an unfavorable currency impact, the effect of which was partially offset by increases in sales of cloud and information management and analytics offerings. TS net revenue decreased by 1% in fiscal 2012, due primarily to revenue declines in our support business driven by an unfavorable currency impact. Support contract renewals remained steady while declines in third-party hardware support were offset by growth in project services.

Services earnings from operations as a percentage of net revenue decreased by 2.9 percentage points in fiscal 2012. The decrease was due primarily to a gross margin decline driven by lower than expected revenue, contractual rate declines on ongoing contracts, a lower than expected resource utilization rate and additional costs associated with certain contract deliverable delays. These effects were partially offset by a continued focus on operating improvements and cost initiatives that favorably impacted the cost structure of all business units.

Services net revenue increased 1.2% (decreased 1.3% when adjusted for currency) in fiscal 2011 due to revenue increases in ITO and TS business units.

ITO net revenue increased by 2% in fiscal 2011. An increase in product-related revenue and a favorable currency impact were partially offset by a shortfall in short-term project contracts with existing clients. TS net revenue increased by 3% in fiscal 2011, due primarily to growth in our consulting business and a favorable currency impact, the effect of which was partially offset by reduced sales of third-party hardware. ABS net revenue decreased by 1% in fiscal 2011.

The decrease was driven by the ExcellerateHRO divestiture completed at the end of the third quarter of fiscal 2010, declines in short-term project work and weakness in public sector spending. These effects were partially offset by a favorable currency impact.

60 -------------------------------------------------------------------------------- Table of Contents HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Services earnings from operations as a percentage of net revenue decreased by 1.6 percentage points in fiscal 2011. Operating margin decreased due primarily to lower than expected revenue, rate concessions arising from recent contract renewals, a lower than expected resource utilization rate and a higher mix of lower-margin Infrastructure Technology Outsourcing revenue. The decrease in operating margin was partially offset by a reduction in bad debt expense and a continued focus on operating improvements and cost initiatives that favorably impacted the cost structure of both our enterprise services and technology services businesses.

Enterprise Servers, Storage and Networking For the fiscal years ended October 31 2012 2011 2010 In millions Net revenue $ 20,491 $ 22,064 $ 20,246 Earnings from operations $ 2,132 $ 2,997 $ 2,814 Earnings from operations as a % of net revenue 10.4 % 13.6 % 13.9 % The components of the weighted net revenue change by ESSN business units were as follows for the following fiscal years ended October 31: 2012 2011 Percentage Points Industry Standard Servers (4.2 ) 4.7 Business Critical Systems ("BCS") (2.2 ) (1.0 ) Storage (1.1 ) 1.3 Networking 0.4 4.0 Total ESSN (7.1 ) 9.0 ESSN net revenue decreased 7.1% (6.4% when adjusted for currency) in fiscal 2012 due primarily to revenue decreases in ISS, BCS and Storage. In fiscal 2012, ISS net revenue decreased by 7% driven by declines in unit volume and average unit prices. The declines were due primarily to competitive pricing pressures and macroeconomic challenges in EMEA. These effects were partially offset by increased demand for public and private cloud offerings. BCS net revenue decreased by 23% in fiscal 2012 mainly as a result of lower demand for our Itanium-based servers, the impact of which was slightly offset by growth in NonStop servers. Storage net revenue decreased 6% in fiscal 2012, due primarily to revenue declines in storage tape and networking products, the effect of which was partially offset by strong growth in 3PAR products and StoreOnce data deduplication solutions. Networking net revenue increased 4% in fiscal 2012 due to higher market demand for our core data center products, the effect of which was partially offset by competitive pricing pressures and the divestiture of our video surveillance business.

ESSN earnings from operations as a percentage of net revenue decreased by 3.2 percentage points in fiscal 2012 driven by a decrease in gross margin coupled with an increase in operating expenses as a percentage of net revenue.

The decrease in gross margin was due primarily to competitive pricing pressures, particularly in ISS and, to a lesser extent, in Networking. The increase in operating expenses as a percentage of net revenue was driven by an increase in research and development costs and field selling costs, the effect of which was partially offset by lower administrative and marketing expenses.

61-------------------------------------------------------------------------------- Table of Contents HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) ESSN net revenue increased 9.0% (7.0% when adjusted for currency) in fiscal 2011 due to growth in Networking and ISS. Total revenue from server and storage blades increased by 11% in fiscal 2011. ISS net revenue increased by 8% in fiscal 2011, driven primarily by unit volume growth coupled with increased average unit prices due to favorable demand for the latest generation of ISS products. The revenue increase was also driven by expansion in our converged infrastructure solutions and strong demand from public and private cloud customers. Networking net revenue increased by 50% due largely to our acquisition of 3Com in April 2010, strong market demand for our core data center products and the impact of our continued investments in sales coverage. Storage net revenue increased by 7% in fiscal 2011 driven primarily by strong performance in products related to our acquisition of 3PAR in September 2010 and growth in scale out storage arrays, entry-level arrays and StoreOnce data deduplication products. BCS net revenue decreased by 9% in fiscal 2011 mainly as a result of orders being delayed or cancelled following an announcement by an alliance partner that it intends to cease software development for our Itanium-based servers. The impact from reduced sales of Itanium-based servers was partially offset by higher demand for the latest generation of BCS scale-up x86 products and growth in NonStop servers.

ESSN earnings from operations as a percentage of net revenue decreased by 0.3 percentage points in fiscal 2011 driven by an increase in operating expenses as a percentage of net revenue, the effect of which was partially offset by an increase in gross margin. The increase in operating expenses as a percentage of net revenue was due primarily to additional expenses associated with acquisitions and investments in R&D and sales coverage. The gross margin increase was driven by lower product costs and a higher mix of networking products, the effect of which was partially offset by price declines as a result of competitive pressure.

Software For the fiscal years ended October 31 2012 2011 2010 In millions Net revenue $ 4,060 $ 3,367 $ 2,812 Earnings from operations $ 827 $ 722 $ 787 Earnings from operations as a % of net revenue 20.4 % 21.4 % 28.0 % Software net revenue increased 20.6% (21.3% when adjusted for currency) in fiscal 2012 due to revenues from acquired companies, primarily Autonomy, which was acquired in October, 2011. In fiscal 2012, net revenue from services, support and licenses increased by 71%, 16% and 8%, respectively.

Software earnings from operations as a percentage of net revenue decreased by 1.0 percentage points in fiscal 2012 due primarily to a decrease in gross margin and a slight increase in operating expenses as a percentage of net revenue. The gross margin decline was due primarily to a lower mix of license revenue, the effect of which was partially offset by a highly profitable software deal entered into in the fourth quarter of fiscal 2012.

Software net revenue increased 19.7% (18.1% when adjusted for currency) in fiscal 2011 due to revenues from acquired companies as well as growth in the organic business. The revenue growth was driven by good performance from our security and management suite offerings. In fiscal 2011, net revenue from services, licenses and support increased by 26%, 23% and 16%, respectively.

62-------------------------------------------------------------------------------- Table of Contents HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Software earnings from operations as a percentage of net revenue decreased by 6.6 percentage points in fiscal 2011. The operating margin decline was due primarily to the impact of deferred revenue write-downs and integration costs associated with acquisitions and investments in sales coverage and R&D, the effect of which was partially offset by the capitalization of certain software development costs.

HP Financial Services For the fiscal years ended October 31 2012 2011 2010 In millions Net revenue $ 3,819 $ 3,596 $ 3,047 Earnings from operations $ 388 $ 348 $ 281 Earnings from operations as a % of net revenue 10.2 % 9.7 % 9.2 % HPFS net revenue increased by 6.2% in fiscal 2012. The net revenue increase was due primarily to portfolio growth, along with higher buyout activity and higher end-of-lease revenue from residual expirations in line with portfolio growth. The effects of these changes were partially offset by unfavorable currency movements.

HPFS earnings from operations as a percentage of net revenue increased by 0.5 percentage points in fiscal 2012. The increase was due primarily to an increase in gross margin. The increase in gross margin was due primarily to lower bad debt expense, the effect of which was partially offset by lower margins on end-of-term activities, including buyouts and lease extensions.

Operating expenses as a percentage of net revenue were flat due to our continued focus on cost efficiencies.

HPFS net revenue increased by 18.0% in fiscal 2011. The net revenue increase was due primarily to portfolio growth as a result of higher customer demand, a higher operating lease mix due to higher service-led financing volume, higher end-of-lease revenue from residual expirations in line with portfolio growth, and higher early buyout revenue and favorable currency movements.

HPFS earnings from operations as a percentage of net revenue increased by 0.5 percentage points in fiscal 2011 due primarily to a decrease in operating expenses as a percentage of revenue, the effect of which was partially offset by a decrease in gross margin. The decrease in operating expenses was due primarily to continued improvement in cost efficiencies. The decrease in gross margin was the result of lower portfolio margins from a higher mix of operating leases, the effect of which was partially offset by lower bad debt expense as a percentage of revenue and higher margins on lease extensions and buyouts.

Financing Originations For the fiscal years ended October 31 2012 2011 2010 In millions Total financing originations $ 6,590 $ 6,765 $ 5,987 New financing originations, which represent the amount of financing provided to customers for equipment and related software and services, including intercompany activity, decreased 2.6% and increased 13.0% in fiscal 2012 and fiscal 2011, respectively. The decrease was driven by lower financing associated with HP product sales and services offerings, along with unfavorable currency impact.

63 -------------------------------------------------------------------------------- Table of Contents HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) 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.

The portfolio assets and ratios derived from the segment balance sheet for HPFS were as follows for the following fiscal years ended October 31: 2012 2011 In millions Portfolio assets(1) $ 13,054 $ 12,699 Allowance for doubtful accounts(2) 149 130 Operating lease equipment reserve 81 84 Total reserves 230 214 Net portfolio assets $ 12,824 $ 12,485 Reserve coverage 1.8 % 1.7 % Debt to equity ratio(3) 7.0x 7.0x -------------------------------------------------------------------------------- º (1) º Portfolio assets include gross financing receivables of approximately $7.7 billion and $7.3 billion at October 31, 2012 and October 31, 2011, respectively, and net equipment under operating leases of $2.4 billion and $2.7 billion at October 31, 2012 and October 31, 2011, respectively, as disclosed in Note 11 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 $0.9 billion and $1.0 billion at October 31, 2012 and October 31, 2011, respectively, and intercompany leases of approximately $2.1 billion and $1.7 billion at October 31, 2012 and October 31, 2011, respectively, both of which are eliminated in consolidation.

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

º (3) º HPFS debt consists of intercompany equity that is treated as debt for segment reporting purposes, intercompany debt and debt issued directly by HPFS. At October 31, 2012 and 2011, debt allocated to HPFS totalled $11.3 billion and $10.8 billion, respectively. The allocated intercompany debt to equity ratio above is comparable to that of other similar financing companies.

At October 31, 2012 and 2011, HPFS cash balances were approximately $700 million and $500 million, respectively.

Net portfolio assets at October 31, 2012 increased 2.7% from October 31, 2011. The increase resulted from higher levels of new financing originations in fiscal 2012, the effect of which was partially offset by an unfavorable currency impact. The overall percentage of portfolio asset reserves increased as a percentage of the portfolio assets.

64-------------------------------------------------------------------------------- Table of Contents HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) HPFS recorded net bad debt expenses of $54 million and $60 million in fiscal 2012 and fiscal 2011, respectively.

Corporate Investments For the fiscal years ended October 31 2012 2011 2010 In millions Net revenue $ 108 $ 208 $ 214 Loss from operations $ (238 ) $ (1,619 ) $ (358 ) Loss from operations as a % of net revenue (220.4 )% (778.4 )% (167.3 )% Net revenue in Corporate Investments in fiscal 2012 relates primarily to business intelligence solutions and the former webOS device business. In fiscal 2012, the revenue decrease was a result of lower sales due to the wind down of the webOS device business announced in August 2011.

Corporate Investments reported a smaller loss from operations in fiscal 2012 due primarily to the absence in the current period of charges recognized in the prior period related to the wind down of the webOS device business. The loss from operations in Corporate Investments was also due to expenses carried in the segment associated with corporate strategy, global alliances and HP Labs.

Net revenue in Corporate Investments in fiscal 2011 relates primarily to mobile devices associated with the Palm acquisition, business intelligence solutions and licensing of HP technology to third parties. In fiscal 2011, the revenue decrease was due primarily to lower business intelligence solutions revenue, the effect of which was partially offset by revenue from webOS devices.

Business intelligence solutions revenue declined mainly due to lower revenue from consulting services.

Corporate Investments reported a higher loss from operations in fiscal 2011 due to $755 million of expenses primarily for supplier-related obligations and sales incentive programs related to winding down the webOS device business. The loss from operations in Corporate Investments was also due to expenses carried in the segment associated with corporate development, global alliances and HP Labs, which expenses increased from fiscal 2010 and were partially offset by a gain on the divestiture of HP's Halo video collaboration products business.

LIQUIDITY AND CAPITAL RESOURCES Our cash balances are held in numerous locations throughout the world, with substantially all of those amounts held outside of the United States. Amounts held outside of the United States are generally utilized to support non-U.S.

liquidity needs, although a portion of those amounts may from time to time be subject to short-term intercompany loans into 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. Except for foreign earnings that are considered indefinitely reinvested outside of the United States, we have provided for the U.S. federal tax liability on these earnings for financial statement purposes. Repatriation could result in additional income tax payments in future years. Where local restrictions prevent an efficient intercompany transfer of funds, our intent is that cash balances would remain outside of the United States and we would meet liquidity needs through ongoing cash flows, external borrowings, or both. We utilize a variety of tax planning and financing strategies in an effort to ensure that our worldwide cash is available in the locations in which it is needed. We do not expect restrictions or potential taxes on repatriation of amounts held 65-------------------------------------------------------------------------------- Table of Contents HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) outside of the United States to have a material effect on HP's overall liquidity, financial condition or results of operations.

LIQUIDITY We use cash generated by operations as our primary source of liquidity; we believe that internally generated cash flows are generally sufficient to support business operations, capital expenditures and the payment of stockholder dividends, in addition to discretionary 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. Our liquidity is subject to various risks including the market risks identified in the section entitled "Qualitative and Quantitative Disclosures about Market Risk" in Item 7A.

For the fiscal years ended October 31 2012 2011 2010 In billions Cash and cash equivalents $ 11.3 $ 8.0 $ 10.9 Total debt $ 28.4 $ 30.6 $ 22.3 Available borrowing resources(1)(2) $ 17.4 $ 14.6 $ 13.8 -------------------------------------------------------------------------------- º (1) º In addition to these available borrowing resources, we are able to offer for sale, from time to time, in one or more offerings, an unspecified amount of debt securities, common stock, preferred stock, depositary shares and warrants under a shelf registration statement filed with the SEC in May 2012 (the "2012 Shelf Registration Statement").

º (2) º Available borrowing resources does not include £2.2 billion ($3.6 billion) in borrowing resources under our 364-day senior unsecured bridge term loan agreement that was entered into in August 2011 and terminated in November 2011.

Our cash position remains strong, and we expect that our cash balances, anticipated cash flow generated from operations and access to capital markets will be sufficient to cover cash outlays expected in fiscal 2013.

Cash Flows The following table summarizes the key cash flow metrics from our consolidated statements of cash flow: For the fiscal years ended October 31 2012 2011 2010 In millions Net cash provided by operating activities $ 10,571 $ 12,639 $ 11,922 Net cash used in investing activities (3,453 ) (13,959 ) (11,359 ) Net cash used in financing activities (3,860 ) (1,566 ) (2,913 ) Net increase (decrease) in cash and cash equivalents $ 3,258 $ (2,886 ) $ (2,350 ) 66 -------------------------------------------------------------------------------- Table of Contents HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Operating Activities Net cash provided by operating activities decreased by approximately $2.1 billion for fiscal 2012 as compared to fiscal 2011. The decrease was due primarily to lower net earnings and higher utilization of cash resources for payment of accounts payable, the impact of which was partially offset by lower investment in inventory and higher cash generated from collections of accounts and financing receivables. Net cash provided by operating activities increased by approximately $0.7 billion for fiscal 2011 as compared to fiscal 2010. The increase was due primarily to higher cash generated through the utilization of operating assets, primarily accounts and financing receivables, and lower utilization of cash resources for payment of accounts payable, the impact of which was partially offset by decreases in net earnings and cash utilized as a result of higher inventory levels.

Our key working capital metrics are as follows: October 31 2012 2011 2010 Days of sales outstanding in accounts receivable 49 51 50 Days of supply in inventory 25 27 23 Days of purchases outstanding in accounts payable (53 ) (52 ) (52 ) Cash conversion cycle 21 26 21 Days of sales outstanding in accounts receivable ("DSO") measures the average number of days our receivables are outstanding. DSO is calculated by dividing ending accounts receivable, net of allowance for doubtful accounts, by a 90-day average net revenue. Our accounts receivable balance was $16.4 billion as of October 31, 2012.

Days of supply in inventory ("DOS") measures the average number of days from procurement to sale of our product. DOS is calculated by dividing ending inventory by a 90-day average cost of goods sold. Our inventory balance was $6.3 billion as of October 31, 2012.

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 ending accounts payable by a 90-day average cost of goods sold. Our accounts payable balance was $13.4 billion as of October 31, 2012.

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 cash conversion cycle for fiscal 2012 decreased by five days compared to fiscal 2011. The decrease in DSO was due primarily to improved collections, an increase in cash discounts and a decline in extended payment terms. Additionally our DSO benefited from the current-period DSO calculation containing a full quarter of revenue from our Autonomy acquisition versus the approximately one month of revenue that was included in the prior-period DSO calculation. These favorable impacts to DSO were partially offset by revenue linearity. The decrease in DOS was due to lower inventory balances in most segments as of October 31, 2012. The increase in DPO was primarily due to improved purchasing linearity.

67 -------------------------------------------------------------------------------- Table of Contents HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) The cash conversion cycle for fiscal 2011 increased by five days as compared to fiscal 2010. The increase in DSO was primarily the result of unfavorable impact on receivables from the Autonomy acquisition, extended payment terms and an increase in unbilled and aged accounts receivables, the effect of which was offset by a favorable currency impact due to the strengthening U.S. dollar. The increase in DOS was a result of higher inventory levels at October 31, 2011 due primarily to a macro economic slowdown impacting our consumer businesses, the timing of shipments in our commercial hardware businesses and strategic purchases of certain components. DPO remained flat year over year.

Investing Activities Net cash used in investing activities decreased by $10.5 billion for fiscal 2012 as compared to fiscal 2011, due primarily to lower investments in acquisitions in 2012. Net cash used in investing activities increased by approximately $2.6 billion for fiscal 2011 as compared to fiscal 2010, due primarily to higher investments in acquisitions in 2011.

Financing Activities Net cash used in financing activities increased by approximately $2.3 billion for fiscal 2012 as compared to fiscal 2011. The increase was due primarily to lower net proceeds from the issuance of U.S. Dollar Global Notes and an increase in net repayment of commercial paper, the impact of which was partially offset by lower cash paid for repurchases of our common stock. Net cash used in financing activities decreased by approximately $1.3 billion for fiscal 2011 as compared to fiscal 2010. The decrease was due primarily to higher net proceeds from the issuance of debt and a decrease in cash paid for repurchases of our common stock, the impact of which was partially offset by higher net repayment of commercial paper and a decrease in cash received from the issuance of common stock under employee stock plans.

For more information on our share repurchase programs, see Item 5 and Note 15 to the Consolidated Financial Statements in Item 8, which are incorporated herein by reference.

CAPITAL RESOURCES Debt Levels For the fiscal years ended October 31 2012 2011 2010 In millions, except interest rates and ratios Short-term debt $ 6,647 $ 8,083 $ 7,046 Long-term debt $ 21,789 $ 22,551 $ 15,258 Debt-equity ratio 1.25x 0.79x 0.55x Weighted-average interest rate 2.95 % 2.4 % 2.0 % We maintain debt levels that we establish through consideration of a number of factors, including cash flow expectations, cash requirements for operations, cash needed to support our financing business, investment plans (including acquisitions), share repurchase activities, overall cost of capital, and targeted capital structure.

Short-term debt and long-term debt decreased by $1.4 billion and $0.8 billion, respectively, for fiscal 2012 as compared to fiscal 2011. The net decrease in total debt is due primarily to fewer acquisitions, and lower levels of share repurchases coupled with maturities in some obligations. In fiscal 68-------------------------------------------------------------------------------- Table of Contents HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) 2011, short-term debt and long-term debt increased by $1.0 billion and $7.3 billion, respectively, as compared to fiscal 2010. The net increase in total debt is due primarily to investments in acquisitions and share repurchases.

During fiscal 2013, $5.5 billion of U.S. Dollar Global Notes will mature. We expect to have sufficient cash, cash from operations and access to capital markets to repay those maturing global notes.

Our debt-equity ratio is calculated as the carrying value of debt divided by the carrying value of equity. Our debt-equity ratio increased by 0.46x in fiscal 2012, due primarily to a decrease in shareholders equity by $16.2 billion at the end of fiscal 2012. Our debt-equity ratio increased by 0.24x in fiscal 2011, due primarily to the issuance of $11.6 billion of U.S Dollar Global Notes and a decrease in shareholders equity by $1.8 billion at the end of fiscal 2011.

Our weighted-average interest rate reflects the average effective rate on our borrowings prevailing during the year; it factors in the impact of swapping some of our global notes with fixed interest rates for global notes with floating interest rates. For more information on our interest rate swaps, see Note 10 to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference. The low weighted-average interest rate over the past three years is a result of a combination of lower market interest rates and swapping some of our fixed-interest obligations associated with some of our fixed-rate U.S. Dollar Global Notes for variable-rate obligations through interest rate swaps in a declining rate environment.

For more information on our borrowings, see Note 13 to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference.

Available Borrowing Resources At October 31, 2012, we had the following resources available to obtain short-term or long-term financings if we need additional liquidity: At October 31, 2012 In millions 2012 Shelf Registration Statement(1) Unspecified Commercial paper programs(1) $16,135 Uncommitted lines of credit(1) $ 1,301 -------------------------------------------------------------------------------- º (1) º For more information on our available borrowings resources, see Note 13 to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference.

Credit Ratings Our credit risk is evaluated by three independent rating agencies based upon publicly available information as well as information obtained in our ongoing discussions with them. The ratings as of October 31, 2012 were: Standard & Poor's Moody's Investors Fitch Ratings Ratings Services Service Services Short-term debt ratings A-2 Prime-2 F2 Long-term debt ratings BBB+ A3 A- 69 -------------------------------------------------------------------------------- Table of Contents HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Our credit ratings were downgraded by Fitch Ratings Services to F2 and A- in the fourth quarter of fiscal 2012. Moody's Investors Service subsequently downgraded our long-term debt from A3 to Baa1 in November 2012. Our credit ratings remain under negative outlook by Moody's Investors Service. While we do not have any rating downgrade triggers that would accelerate the maturity of a material amount of our debt, these downgrades have increased the cost of borrowing under our credit facilities, have reduced market capacity for our commercial paper, and may require the posting of additional collateral under some of our derivative contracts. In addition, any further downgrade in our credit ratings by any of the three rating agencies may further impact us in a similar manner, and, depending on the extent of the downgrade, could have a negative impact on our liquidity and capital position. We will rely on alternative sources of funding, including drawdowns under our credit facilities or the issuance of debt or other securities under our existing shelf registration statement, if necessary, to offset reductions in the market capacity for our commercial paper.

CONTRACTUAL AND OTHER OBLIGATIONS The impact that we expect our contractual and other obligations as of October 31, 2012 to have on our liquidity and cash flow in future periods is as follows: Payments Due by Period 1 Year or More than Total Less 1-3 Years 3-5 Years 5 Years In millions Principal payments on long-term debt(1) $ 26,811 $ 5,638 $ 7,411 $ 5,824 $ 7,938 Interest payments on long-term debt(2) 5,346 600 1,035 815 2,896 Operating lease obligations 3,242 752 1,141 556 793 Purchase obligations(3) 1,632 1,131 448 53 - Capital lease obligations 354 59 251 11 33 Total $ 37,385 $ 8,180 $ 10,286 $ 7,259 $ 11,660 -------------------------------------------------------------------------------- º (1) º Amounts represent the expected principal cash payments relating to our long-term debt and do not include any fair value adjustments or discounts and premiums.

º (2) º Amounts represent the expected interest cash payments relating to our long-term debt. We have outstanding interest rate swap agreements accounted for as fair value hedges that have the economic effect of modifying the fixed-interest obligations associated with some of our fixed global notes for variable rate obligations. The impact of these interest rate swaps was factored into the calculation of the future interest payments on long-term debt.

º (3) º 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. These purchase obligations are related principally to inventory and other items. Purchase obligations exclude agreements that are cancellable without penalty. Purchase obligations also exclude open purchase orders that are routine arrangements entered into in the ordinary course of business, as they are difficult to quantify in a meaningful way.

Even though open purchase orders are considered enforceable and legally binding, the terms generally allow us the option to cancel, reschedule, and adjust our requirements based on our business needs prior to the delivery of goods or performance of services.

70-------------------------------------------------------------------------------- Table of Contents HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Income Tax Obligations In addition to the above, at October 31, 2012, we had approximately $2.3 billion of recorded liabilities and related interest and penalties pertaining to uncertainty in income tax positions, which will be partially offset by $338 million of deferred tax assets and interest receivable. These liabilities and related interest and penalties include $81 million expected to be paid within one year. For the remaining amount, we are unable to make a reasonable estimate as to when cash settlement with the tax authorities might occur due to the uncertainties related to these tax matters. See Note 14 to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference, for additional information on taxes.

Restructuring Funding Commitments As a result of our approved restructuring plans, we expect future cash expenditures of approximately $2.7 billion. We expect to make cash payments of approximately $1.6 billion in fiscal 2013 with remaining cash payments through fiscal 2016. In addition to these cash expenditures, we expect to fund approximately $833 million of the enhanced early retirement program ("EER") announced in May 2012 through use of our U.S. pension plan assets. The use of plan assets to fund the U.S. EER in fiscal 2012 did not cause us to increase our funding to our U.S. pension plan. See Note 8 and Note 16 to the Consolidated Financial Statements in Item 8, which are incorporated herein by reference, for additional information on our restructuring plans and pension activities, respectively. We expect to use a combination of cash from operations and our available borrowing resources to meet our near-term funding commitments.

Guarantees and Indemnifications See Note 12 to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference, for additional information on liabilities that may arise from guarantees and indemnifications.

Litigation and Contingencies See Note 18 to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference, for additional information on liabilities that may arise from litigation and contingencies.

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

HP has third-party financing arrangements in order to facilitate the working capital requirements of certain partners consisting of revolving short-term financing. The total aggregate capacity of the facilities was $1.5 billion as of October 31, 2012, including a $0.9 billion partial recourse facility entered into in May 2011 and an aggregate capacity of $0.6 billion in non-recourse facilities. For more information on our revolving trade receivables-based facilities, see Note 4 to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference.

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