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2005
Annual Report

Table of contents

  • Page 1
    2005 Annual Report

  • Page 2
    ... from my first 60 days as CEO. In a relatively short time, many different groups came forward and offered their input: investors, customers, partners, employees, financial and industry analysts. It was a mixed picture. In recent years, investors in HP have been confronted with inconsistent...

  • Page 3
    ...the U.S. defined benefits plan that froze pension benefits and reduced medical program benefits for current employees who did not meet defined criteria based on age and years of service. To streamline HP's operating model, we dissolved the Customer Solutions Group. This commercial sales function was...

  • Page 4
    .... Driving this evolution requires not just advanced devices, but also infrastructure, services and solid go-to-market partnerships - all strong HP assets. Additionally, the requirement for security will heavily leverage the next-generation data center architecture. Ubiquitous printing and imaging...

  • Page 5
    ... file number 1-4423 HEWLETT-PACKARD COMPANY (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 3000 Hanover Street, Palo Alto, California (Address of principal executive offices) 94-1081436 (I.R.S. employer identification...

  • Page 6
    ... ...Financial Statements and Supplementary Data ...Changes in and Disagreements with Accountants on Accounting and Financial Disclosures ...Controls and Procedures ...Other Information ...PART III Directors and Executive Officers of the Registrant . . Executive Compensation ...Security Ownership of...

  • Page 7
    ... personal computing and other access devices, and • imaging and printing-related products and services. HP was incorporated in 1947 under the laws of the State of California as the successor to a partnership founded in 1939 by William R. Hewlett and David Packard. Effective in May 1998, we changed...

  • Page 8
    ... in terms of units shipped. HP also has a strong position in blade servers, the fastest-growing segment of the market. Business Critical Servers. Business critical servers include: • Reduced Instruction Set Computing (''RISC'')-based servers with the HP 9000 line running the HP-UX operating...

  • Page 9
    ... based on unit volume shipped and annual revenue. PSG provides commercial PCs, consumer PCs, workstations, handheld computing devices, digital entertainment systems, calculators and other related accessories, software and services for the commercial and consumer markets. We group commercial desktops...

  • Page 10
    ..., printer-based multi-function devices (MFDs) and Total Print Management Solutions for enterprise customers. A key initiative in this area of IPG's business has been and continues to be driving color printing penetration in the office. Digital Photography and Entertainment. Digital imaging products...

  • Page 11
    ...HPFS supports and enhances HP's global product and service solutions, providing a broad range of value-added financial life cycle management services. HPFS enables our worldwide customers to acquire complete IT solutions, including hardware, software and services. The group offers leasing, financing...

  • Page 12
    ... element of HP's go-to-market model. TSG manages enterprise and public sector customer relationships and also is charged with simplifying sales processes across our segments to improve speed and effectiveness. In this capacity, TSG manages our direct sales for value products and pre-sales technical...

  • Page 13
    ... outside the United States was from customers other than foreign governments. For a discussion of risks attendant to HP's foreign operations, see ''Risk Factors-Due to the international nature of our business, political or economic changes or other factors could harm our future revenue, costs and...

  • Page 14
    ... primarily on the basis of technology, performance, price, quality, reliability, brand, reputation, distribution, range of products and services, ease of use of our products, account relationships, customer training, service and support, security and availability of application software and our...

  • Page 15
    ... and research and development capabilities, and the availability of our products directly from HP or through our HP channel partners. Imaging and Printing Group. We are the leading imaging and printing systems provider in the world for printer hardware, printing supplies and scanning devices. We...

  • Page 16
    ... refill and remanufactured alternatives for our supplies which, although generally offering lower print quality, may be offered at lower prices and put pressure on our supplies sales and margins. Other companies also have developed and marketed new compatible cartridges for HP's laser and inkjet...

  • Page 17
    ... was Senior Vice President of Imaging and Printing Group Operations. From March 2001 to May 2002, he was Vice President and General Manager of HP's Business Customer Operations. Mr. Bouchard also served as Vice President of Worldwide Operations for HP's Personal Computing Organization from December...

  • Page 18
    ..., he was director of Finance for Industry Standard Servers. Before HP's acquisition of Compaq, he served as Compaq's Director of Investor Relations from May 1999 to May 2002. Vyomesh Joshi; age 51; Executive Vice President, Imaging and Printing Group Mr. Joshi was elected Executive Vice President in...

  • Page 19
    ... Palo Alto, CA 94304 (866) GET-HPQ1 or (866) 438-4771 http://investor.hp.com/docreq.cfm We submitted the certification of the CEO of HP required by Section 303A.12(a) of the New York Stock Exchange (NYSE) Listed Company Manual, relating to HP's compliance with the NYSE's corporate governance listing...

  • Page 20
    ...high quality products, we may spend a proportionately greater amount on research and development than some of our competitors. If we cannot proportionately decrease our cost structure on a timely basis in response to competitive price pressures, our gross margin and therefore our profitability could...

  • Page 21
    ... in development or manufacturing, variations in costs, delays in customer purchases or reductions in price of existing products in anticipation of new introductions, difficulty in predicting customer demand for the new offerings and effectively managing inventory levels so that they are in line with...

  • Page 22
    ... declines in certain businesses, reflecting the effect of items such as competitive pricing pressures, inventory write-downs, charges associated with the cancellation of planned production line expansion, and increases in pension and post-retirement benefit expenses. Economic downturns also may lead...

  • Page 23
    ...• longer accounts receivable cycles and financial instability among customers; • trade regulations and procedures and actions affecting production, pricing and marketing of products; • local labor conditions and regulations; • managing a geographically dispersed workforce; • changes in the...

  • Page 24
    ..., our revenue, gross margin and profitability could suffer. We use a variety of different distribution methods to sell our products and services, including third-party resellers and distributors and both direct and indirect sales to both enterprise accounts and consumers. Successfully managing the...

  • Page 25
    ... to respond to changing market conditions. In the event that we become committed to purchase supplies or services for prices in excess of the current market price, we may be at a disadvantage to competitors who have access to components or services at lower prices, and our gross margin could suffer...

  • Page 26
    ...to investments associated with entering those markets and local pricing pressures. Market trends, competitive pressures, commoditization of products, seasonal rebates, increased component or shipping costs, regulatory impacts and other factors may result in reductions in revenue or pressure on gross...

  • Page 27
    ... locations outside of the United States, particularly in Europe and Asia, redundancies among restructuring programs, decreases in employee morale and the failure to meet operational targets due to the loss of employees, particularly sales employees. In order to be successful, we must attract...

  • Page 28
    ... with Financial Accounting Standards Board Statement 123R, ''Share-Based Payment,'' HP will begin recording charges to earnings for share-based payments in the first quarter of fiscal 2006. As a result, we will incur increased compensation costs associated with our share-based compensation programs...

  • Page 29
    ...expend resources to develop products and technology internally, we may be at a competitive disadvantage or we may be adversely affected by negative market perceptions, any of which may have a material adverse effect on our revenue, gross margin and profitability. Integration issues are complex, time...

  • Page 30
    ... facilities and contracts, in-process research and development charges, inventory adjustments, assumed litigation and other liabilities, legal, accounting and financial advisory fees, and required payments to executive officers and key employees under retention plans. Moreover, HP has incurred...

  • Page 31
    ...on a joint and several basis. It is our policy to apply strict standards for environmental protection to sites inside and outside the United States, even when we are not subject to local government regulations. We also could face significant costs and liabilities in connection with product take-back...

  • Page 32
    ... the flexibility to use each of the properties in whole or in part for each of the segments. Our principal executive offices, including global headquarters, are located at 3000 Hanover Street, Palo Alto, California, United States of America. The locations of our headquarters of geographic operations...

  • Page 33
    The locations of our major product development and manufacturing facilities and HP Labs at October 31, 2005 were as follows: Product Development and Manufacturing Americas Cupertino, Fremont, Ontario, Palo Alto, Roseville, San Diego and Woodland, California Fort Collins and Loveland, Colorado Boise,...

  • Page 34
    ... manage the dilution created by shares issued under employee stock plans as well as to repurchase shares opportunistically. This program, which does not have a specific expiration date, authorizes repurchases in the open market or in private transactions. On August 25, 2005, HP's Board of Directors...

  • Page 35
    .... HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Selected Financial Data(1) For the fiscal years ended October 31, 2004 2003 2002 In millions, except per share amounts 2005 2001 Net revenue ...Earnings (loss) from operations(2) ...Net earnings (loss) before cumulative effect of change in accounting...

  • Page 36
    ... Staff Accounting Bulletin No. 101, ''Revenue Recognition in Financial Statements'' (''SAB 101''), was adopted by HP in fiscal 2001. SAB 101 established that revenue is recognized when persuasive evidence of an arrangement exists, delivery occurs or services are rendered, the sales price is fixed...

  • Page 37
    ... Storage and Servers (''ESS''), HP Services (''HPS'') Software, the Personal Systems Group (''PSG''), the Imaging and Printing Group (''IPG''), HP Financial Services (''HPFS''), and Corporate Investments. ESS, HPS and Software are structured beneath a broader Technology Solutions Group (''TSG...

  • Page 38
    ... In terms of how our execution has translated into financial performance, our key fiscal 2005 financial metrics were as follows: HP Consolidated TSG ESS HPS Software Total in millions, except per share amounts IPG PSG HPFS Net revenue ...Year-over-year net revenue % increase ...Earnings (loss) from...

  • Page 39
    ...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...

  • Page 40
    ... years through 2018. Material changes in our estimates of cash, working capital and long-term investment requirements in the various jurisdictions in which we do business could impact our effective tax rate. We are subject to income taxes in the United States and over sixty foreign countries, and we...

  • Page 41
    ... an approximately $23 million increase to our trade allowance at the end of fiscal year 2005. 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...

  • Page 42
    ... warranty costs also have averaged approximately 4% of annual net product revenue. Retirement Benefits Our pension and other post-retirement benefit costs and obligations are dependent on various assumptions. Our major assumptions primarily relate to discount rates, salary growth, long-term return...

  • Page 43
    ... the same direction over the last several years. For fiscal 2005, a change in the weighted average rates would have had the following impact on our net periodic benefit cost: • a decrease of 25 basis points in the long-term rate of return would have increased our net benefit cost by approximately...

  • Page 44
    ...weighted average net revenue growth were as follows for the following fiscal years ended October 31: 2005 2004 Percentage points Personal Systems Group ...HP Services ...Enterprise Storage and Servers . Imaging and Printing Group ...HP Financial Services ...Software ...Corporate Investments & Other...

  • Page 45
    ..., managed services net revenue increased due to both new contract signings and additional contract revenue from the installed base. In fiscal 2005, ESS net revenue growth was the result primarily of continued strong sales of industry standard servers, particularly our ProLiant server line...

  • Page 46
    ... in gross margin as a percentage of net revenue were as follows for the following fiscal years ended October 31: 2005 2004 Percentage points Imaging and Printing Group ...HP Services ...Corporate Investments & Other Enterprise Storage and Servers . HP Financial Services ...Software ...Personal...

  • Page 47
    ... from the Compaq acquisition, and we shifted our business towards more standards-based products, leveraging research and development from our technology partners. These decreases as a percentage of net revenue were moderated by increased research and development spending in IPG related to strategic...

  • Page 48
    ... of Financial Condition and Results of Operations (Continued) Restructuring Charges In the fourth quarter of fiscal 2005, our Board of Directors approved a restructuring plan recommended by our chief executive officer and senior management that is designed to simplify our structure, reduce costs and...

  • Page 49
    ... revisions ...2003 plans-exits ...Remaining to exit ...Restructuring program charges: 2005 restructuring charges: Severance and other benefits ...Asset impairments ...Other infrastructure costs ...Sub-total ...2003 cost structure realignment charges: Severance and other benefits ...Asset impairments...

  • Page 50
    ... of higher short-term U.S. interest rates, which increased the interest income from our cash balances and reduced the cost associated with foreign exchange hedges. Increased interest expense and a charge related to a sales and use tax audit of Compaq prior to its acquisition by HP for the years...

  • Page 51
    .... Future changes to this organizational structure may result in changes to the reportable segments disclosed. The discussions below include the results of each of our segments. Technology Solutions Group ESS, HPS and Software are structured beneath a broader Technology Solutions Group (''TSG...

  • Page 52
    ... point increase in gross margin. We recorded $57 million of workforce reduction costs in the first two quarters of fiscal 2005. Our reduced operating expenses reflect the benefits of these measures as well as management controls on expense spending, which offset the impact of the higher employee...

  • Page 53
    ... to focus on increasing direct sales, improving option attach rates and reducing warranty costs in order to optimize gross margins. Additionally, the execution issues of the third quarter that led to an operating loss in the quarter negatively impacted full year performance. HP Services For the...

  • Page 54
    ... first quarter of fiscal 2004, technology services net revenue growth for fiscal 2005 was 4%. For fiscal 2005, managed services net revenue increased 24% from the prior-year as a result of an increase in new contracts, as well as additional revenue from our installed base of large customer contracts...

  • Page 55
    ... in integrated support, desktop lifecycle and mission critical support solutions. In fiscal 2004, the growth in managed services was due to increased net revenue from new large outsourcing deals and the expansion of services to existing customers, as well as the Triaton acquisition. An increase in...

  • Page 56
    ...particularly marketing and research and development costs, grew more slowly than net revenue despite the unfavorable impact of currency and increased acquisition-related costs. There was some gross margin decline, resulting from an increasingly competitive pricing environment. Personal Systems Group...

  • Page 57
    ... to changes in the notebook product line-up that leveraged declines in component costs and competitive pressures in consumer PCs. PSG earnings from operations as a percentage of net revenue increased 1.7 percentage points for fiscal 2005 from fiscal 2004. The increase was the result of gross margin...

  • Page 58
    ... Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) The gross margin decline were due primarily to continued competitive pressures in Europe, expansion into developing markets and a shift towards lower-end products. Imaging and Printing Group...

  • Page 59
    ... of favorable mix shifts in consumer printer hardware. Gross margin declines in digital imaging and commercial printer hardware, due in part to a shift to lower margin products in an increasingly competitive pricing environment, moderated the improvement. Within total operating expense, there was...

  • Page 60
    .... The HPFS business model is assetintensive and uses certain internal metrics to measure its performance against other financial services companies, including a segment balance sheet that is derived from HP's internal management reporting system. The accounting policies used to derive these amounts...

  • Page 61
    ...a combination of intercompany debt and equity. The increase in the debt to equity ratio reflects a planned increase in portfolio leverage. Corporate Investments For the fiscal years ended October 31 2005 2004 2003 In millions Net revenue ...Loss from operations ...Loss from operations as a % of net...

  • Page 62
    ... to increased operating expense levels, resulting from headcount growth in research and development, sales and marketing. LIQUIDITY AND CAPITAL RESOURCES Our cash balances are held in numerous locations throughout the world, and substantial amounts are held outside of the United States. The Jobs Act...

  • Page 63
    ... receivable, net of allowance for doubtful accounts, by a 90-day average net revenue. Days of supply in inventory (''DOS'') measures the average number of days from procurement to sale of our product. DOS is calculated by dividing inventory by a 90-day average cost of goods sold. Days of purchases...

  • Page 64
    ... higher overall market prices during fiscal 2005 led to increased exercises of employee stock options. We repurchase shares of our common stock under an ongoing program to manage the dilution created by shares issued under employee stock plans as well as to repurchase shares opportunistically. This...

  • Page 65
    ... payment terms of commercial receivables. Higher inventory levels at October 31, 2004 reflected planned increases in certain inventories in preparation for the 2004 holiday season as well as a change in the timing of new product rollouts, particularly within IPG and PSG. HP introduced these products...

  • Page 66
    ... of commercial paper. We did not issue any material long-term debt during fiscal 2005. HP, and not the HPFS financing business, issued or assumed the vast majority of HP's total outstanding debt. Like other financial services companies, HPFS, which, as explained above, uses intercompany equity that...

  • Page 67
    ... agreements that are cancelable without penalty. These purchase obligations are related principally to cost of sales, inventory and other items. Our purchase obligation includes the settlement agreement with EMC Corporation (''EMC'') pursuant to which HP agreed to pay $325 million (the net amount of...

  • Page 68
    ...established by local government and funding and taxing authorities. HP expects to use contributions made to the post-retirement plans primarily for the payment of retiree health claims incurred during the fiscal year. We expect to make significant cash outlays associated with the company's bonus and...

  • Page 69
    ... risk We also are exposed to interest rate risk related to our debt and investment portfolios and financing receivables. HP issues long-term debt in either U.S. dollars or foreign currencies based on market conditions at the time of financing. HP then typically uses interest rate swaps to modify the...

  • Page 70
    ...% adverse change in the stock prices of our publicly-traded equity securities would result in a loss in the fair values of our marketable equity securities of $19 million at October 31, 2005 and $21 million at October 31, 2004. The aggregate cost of privately-held companies and other investments is...

  • Page 71
    ... Public Accounting Firm ...Management's Report on Internal Control Over Financial Reporting ...Consolidated Statements of Earnings ...Consolidated Balance Sheets ...Consolidated Statements of Cash Flows ...Consolidated Statements of Stockholders' Equity ...Notes to Consolidated Financial Statements...

  • Page 72
    ... in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Hewlett-Packard...

  • Page 73
    ... opinion, Hewlett-Packard Company maintained, in all material respects, effective internal control over financial reporting as of October 31, 2005, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the...

  • Page 74
    ...'s internal control over financial reporting as of October 31, 2005 has been audited by Ernst & Young LLP, HP's independent registered public accounting firm, as stated in their report which appears on page 69 of this Annual Report on Form 10-K. /s/ MARK V. HURD Mark V. Hurd Chief Executive Officer...

  • Page 75
    ... millions, except per share amounts Net revenue: Products ...Services ...Financing income ...Total net revenue ...Costs and expenses: Cost of products ...Cost of services ...Financing interest ...Research and development ...Selling, general and administrative ...Pension curtailment ...Restructuring...

  • Page 76
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Consolidated Balance Sheets October 31 2005 2004 In millions, except par value ASSETS Current assets: Cash and cash equivalents Short-term investments . . Accounts receivable ...Financing receivables ...Inventory ...Other current assets ...$13,911 18 9,903 ...

  • Page 77
    ...-sale securities and other investments ...Payments made in connection with business acquisitions, net . Cash flows from financing activities: Repayment of commercial paper and notes payable, net Issuance of debt ...Payment of debt ...Issuance of common stock under employee stock plans . Repurchase...

  • Page 78
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Accumulated Common Stock Additional Other Number of Paid-in Retained Comprehensive Shares Par Value Capital Earnings Loss In millions, except number of shares in thousands 3,043,733 $30 $24,660 $11,973 $(401) 2,...

  • Page 79
    ...on the future delivery of products or services or subject to customer-specified return or refund privileges. HP ceases revenue recognition on delinquent accounts based upon a number of factors, including customer credit history, number of days past due and the terms of the customer agreement. HP 75

  • Page 80
    ...-price contracts as trade receivables. HP recognizes revenue from operating leases on a straight-line basis as service revenue over the rental period. Financing Income Sales-type and direct-financing leases produce financing income, which HP recognizes at level rates of return over the lease term...

  • Page 81
    ...position. If circumstances related to customers change, HP would further adjust estimates of the recoverability of receivables. Inventory HP values inventory at the lower of cost or market, with cost computed on a first-in, first-out basis. Property, Plant and Equipment HP states property, plant and...

  • Page 82
    ... market values. Capitalized Software HP capitalizes certain internal and external costs incurred to acquire or create internal use software, principally related to software coding, designing system interfaces and installation and testing of the software. HP amortizes capitalized costs using...

  • Page 83
    ...fair values for investments in public companies using quoted market prices. HP records the unrealized gains and losses on available-for-sale securities, net of taxes, in accumulated other comprehensive loss. HP carries equity investments in privately-held companies at the lower of cost or fair value...

  • Page 84
    ...its stockbased compensation. The fair value of stock options and stock purchase rights were estimated on the date of grant using the Black-Scholes option pricing model. SFAS No. 123 (revised 2004), ''Share-Based Payment'' (''SFAS 123R''), clarifies the timing for recognizing compensation expense for...

  • Page 85
    ...-line basis over the vesting period of the stock option or purchase right was as follows for the following fiscal years ended October 31: 2005 2004 2003 In millions, except per share amounts Net earnings, as reported ...Add: Stock-based compensation included in reported net earnings, net of related...

  • Page 86
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Note 1: Summary of Significant Accounting Policies (Continued) monetary assets and liabilities, and historical exchange rates for nonmonetary assets and liabilities. Net revenue, cost of sales and ...

  • Page 87
    ... be an alternative to financial statement recognition. HP will apply the Black-Scholes valuation model in determining the fair value of share-based payments to employees, which will then be amortized on a straight-line basis over the requisite service period. HP will apply the modified prospective...

  • Page 88
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Note 1: Summary of Significant Accounting Policies (Continued) the European Union (''EU''). Under the Directive, the waste management obligation for historical equipment (products put on the market on or...

  • Page 89
    ..., adjusted ...Denominator: Weighted-average shares used to compute basic EPS ...Effect of dilutive securities: Dilution from employee stock plans ...Zero-coupon subordinated convertible notes ...Dilutive potential common shares ...Weighted-average shares used to compute diluted EPS ...Net earnings...

  • Page 90
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Note 3: Balance Sheet Details (Continued) HP has revolving trade receivables-based facilities permitting us to sell certain trade receivables to third parties on a non-recourse basis. The aggregate ...

  • Page 91
    ... of restricted stock and other employee stock benefits ...Issuance of common stock and options assumed in business acquisitions Note 5: Acquisitions ... $884 $447 $137 $ 12 $609 $305 $ 68 $ 15 $464 $394 $ 3 $ - HP has recorded acquisitions using the purchase method of accounting and, accordingly...

  • Page 92
    ... Financial Statements (Continued) Note 5: Acquisitions (Continued) the purchase price of its acquisitions to the tangible assets, liabilities and intangible assets acquired, including in-process research and development (''IPR&D''), based on their estimated fair values. The excess purchase price...

  • Page 93
    ... deferred compensation, merger-related inventory adjustments and professional fees, while the charges of approximately $280 million in fiscal 2003 were attributable primarily to costs incurred for employee retention bonuses in connection with HP's acquisition of Compaq Computer Corporation (''Compaq...

  • Page 94
    ... 2004 Accumulated Amortization Gross Net Gross In millions Net Customer contracts, customer lists and distribution agreements ...$2,401 Developed and core technology and patents ...1,750 Product trademarks ...94 Total amortizable purchased intangible assets ...Compaq trade name ...4,245 1,422...

  • Page 95
    ... fourth quarter of fiscal 2005, HP's Board of Directors approved a restructuring plan recommended by its chief executive officer and senior management that was designed to simplify HP's structure, reduce costs and place greater focus on its customers. Under the plan, approximately 15,300 employees...

  • Page 96
    ... intent of better managing HP's cost structure and aligning certain of its operations more effectively with then current business conditions. The initial charge for these actions totaled $752 million and included $639 million related to severance and other employee benefits for workforce reductions...

  • Page 97
    ... payments adjustments 2005 adjustments adjustments to date adjustments In millions Fiscal 2005 plans: Employee severance and other benefits charges (by segment) Enterprise Storage and Servers HP Services ...Software ...Personal Systems Group ...Imaging and Printing Group . HP Financial Services...

  • Page 98
    ... credit issued by third party banks. Equity securities in public companies are primarily common stock. HP estimated the fair values based on quoted market prices or pricing models using current market rates. These estimated fair values may not be representative of actual values that could have been...

  • Page 99
    ... companies and other investments ...Included in long-term financing receivables and other assets ...Total investments ... $ 18 18 18 64 353 435 $453 $311 311 22 70 388 480 $791 Other investments consist primarily of marketable securities held to generate returns that HP expects to offset changes...

  • Page 100
    .... HP reports the effective portion of cash flow hedges in the same financial statement line item as the changes in value of the hedged item. As of October 31, 2005, amounts related to derivatives qualifying as cash flow hedges amounted to a reduction of accumulated other comprehensive loss of...

  • Page 101
    ...HP reports the effective portion of net investment hedges in the same financial statement line item as the changes in value of the hedged item. Other Derivatives Other derivatives not designated as hedging instruments under SFAS No. 133 consist primarily of forward contracts HP uses to hedge foreign...

  • Page 102
    ...9: Financing Receivables and Operating Leases Financing receivables represent sales-type and direct-financing leases resulting from the marketing of HP's and complementary third-party products. These receivables typically have terms from two to five years and are usually collateralized by a security...

  • Page 103
    ... not be subject to maximum loss clauses. Historically, payments made related to these indemnifications have been immaterial. Warranty HP provides for the estimated cost of product warranties at the time it recognizes revenue. HP engages in extensive product quality programs and processes, including...

  • Page 104
    ... stand-alone product support packages, routine maintenance service contracts, upgrades or extensions to standard product warranty, as well as high availability services for complex, global, networked, multi-vendor environments. HP defers these service amounts at the time it bills the customer and...

  • Page 105
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Note 11: Borrowings Notes Payable and Short-Term Borrowings Notes payable and short-term borrowings, including the current portion of long-term debt, were as follows for the following fiscal years ended ...

  • Page 106
    ... or common stock at HP's election. At any time, HP may redeem the LYONs at book value, payable in cash only. In December 2000, the Board of Directors authorized a repurchase program for the LYONs that allowed HP to repurchase the LYONs from time to time at varying prices. HP did not repurchase any...

  • Page 107
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Note 11: Borrowings (Continued) Aggregate future maturities of debt at face value (excluding the fair value adjustment related to SFAS No. 133 of $75 million and discount on debt issuance of $168 million...

  • Page 108
    ...-profit in inventory . Intercompany transactions-excluding inventory Fixed assets ...Warranty ...Employee and retiree benefits ...Accounts receivable allowance ...Capitalized research and development ...Purchased intangible assets ...Restructuring ...Equity investments ...Deferred revenue...

  • Page 109
    ... not, the reversal of the related valuation allowance will reduce goodwill instead of the provision for taxes. Of the total tax benefits resulting from the exercise of employee stock options and other employee stock programs, the amounts booked to stockholders' equity were approximately $30 million...

  • Page 110
    ... tax rate on the repatriated earnings. During the third quarter of fiscal 2005, HP's CEO and Board of Directors approved a domestic reinvestment plan as required by the Jobs Act to repatriate $14.5 billion in foreign earnings in fiscal 2005. HP recorded tax expense in fiscal 2005 of $792 million...

  • Page 111
    ... compensation, subject to certain income limits, to purchase shares of HP's common stock. Employees purchase stock semi-annually at a price equal to 85% of the fair market value at certain plan-defined dates. As of November 1, 2005, the ESPP was changed such that employees will purchase stock semi...

  • Page 112
    ...cash dividend paid on restricted stock. Restricted stock units do not have the voting rights of common stock and are not considered issued and outstanding. HP expenses the cost of the restricted stock awards, determined to be the fair market value of the shares at the date of grant, ratably over the...

  • Page 113
    ... HP repurchases shares of its common stock under an ongoing program to manage the dilution created by shares issued under employee stock plans as well as to repurchase shares opportunistically. This program authorizes purchases in the open market or in private transactions. HP's Board of Directors...

  • Page 114
    ... the investment bank's carrying costs or benefits from purchasing shares at prices other than the initial price and its benefits from receiving the $1.3 billion payment in advance of its purchases. HP accounted for the Accelerated Purchase as an equity transaction on the cash settlement dates. HP...

  • Page 115
    ... United States. The HP Retirement Plan (the ''Retirement Plan'') is a defined benefit pension plan for U.S. employees hired on or before December 31, 2002. Benefits under the Retirement Plan generally are based on pay and years of service, except for eligible pre-acquisition Compaq employees, 111

  • Page 116
    ... Deferred Profit-Sharing Plan (''the DPSP''). HP closed the DPSP to new participants in 1993. The DPSP plan obligations are equal to the plan assets and are recognized as an offset to the Retirement Plan when HP calculates its defined benefit pension cost and obligations. The fair value of plan...

  • Page 117
    ... of service is less than 62 will be eligible for a 6% HP matching contribution. Effective January 31, 2004, HP desginated the HP Stock Fund, an investment option under the HP 401(k) Plan, as an Employee Stock Ownership Plan and, as a result, participants in the HP Stock Fund may receive dividends...

  • Page 118
    ... result of the plan design changes made to the U.S. retirement programs as well as the release of final regulations by the Centers for Medicare and Medicaid Services covered under the ''Medicare Act,'' HP remeasured its U.S. defined benefit plan and post-retirement benefit plan obligations. The 2005...

  • Page 119
    ... Defined Benefit Plans 2005 2004 In millions Post-Retirement Benefit Plans 2005 2004 Change in fair value of plan assets: Fair value-beginning of year ...Acquisition/addition/deletion of plans . Actual return on plan assets ...Employer contributions ...Participants' contributions ...Asset transfer...

  • Page 120
    ... cost trend rate would have increased the total post-retirement benefit obligation reported at October 31, 2005 by $11 million, while a 1.0 percentage point decrease would have resulted in a decrease of $13 million. The net amount recognized for HP's defined benefit and post-retirement benefit plans...

  • Page 121
    ... HP's investment strategy for worldwide plan assets is to seek a competitive rate of return relative to an appropriate level of risk. The majority of the plans' investment managers employ active investment management strategies with the goal of outperforming the broad markets in which they invest...

  • Page 122
    ...HP held a higher than targeted portion of the U.S. defined benefit plan assets in short-term investments in anticipation of near-term benefit payments in connection with the special termination benefits associated with the 2005 U.S. Enhanced Early Retirement Program. Outside the United States, local...

  • Page 123
    ... quantities to be purchased, fixed, minimum or variable price provisions and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty. These unconditional purchase obligations are related principally to cost of sales, inventory and other...

  • Page 124
    ... of intellectual property, commercial, securities, employment, employee benefits and environmental matters, which arise in the ordinary course of business. In accordance with SFAS No. 5, ''Accounting for Contingencies,'' HP records a provision for a liability when management believes that it is...

  • Page 125
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Note 17: Litigation and Contingencies (Continued) range from EUR 38.35 to EUR 613.56 per unit) plus interest on MFDs sold in Germany up to December 2001. HP has appealed the Stuttgart Court of Appeal's ...

  • Page 126
    ... the proposed acquisition of Compaq by HP prior to Mr. Hewlett's disclosure of his opposition to the proposed transaction. The case has been transferred to the United States District Court for the Northern District of California. Neubauer, et al. v. Intel Corporation, Hewlett-Packard Company, et al...

  • Page 127
    ... by HP's wholly-owned subsidiary, Hewlett-Packard Development Company, LP (''HPDC''), against Gateway in the United States District Court for the Southern District of California, alleging infringement of patents relating to various notebook, desktop and enterprise computer technologies and seeking...

  • Page 128
    ... filed suit in the United States District Court for the Western District of Wisconsin against eMachines, a wholly-owned subsidiary of Gateway, alleging infringement of various HPDC patents relating to personal and desktop computers. On February 17, 2005, the action was transferred to the Southern...

  • Page 129
    ... accuses HP of patent infringement with respect to HP's products that implement JPEG compression. JPEG is a standard for data compression used in HP's computers, scanners, digital cameras, PDAs, printers, plotters and software. CLI seeks unspecified damages, an injunction, interest, costs and...

  • Page 130
    ... of California, in which HP accused additional models of certain EMC products of infringing the same seven HP patents. HP sought damages, an injunction, prejudgment interest, costs and attorneys' fees. EMC also filed suit against StorageApps, a company acquired by HP in fiscal 2001, in United States...

  • Page 131
    ... of Intergraph, in United States District Court for the Northern District of California, San Francisco Division, accusing Intergraph Corporation of infringement of four HP patents related to computer-aided design, video display technology and information retrieval technology. HP sought damages, an...

  • Page 132
    ... Statements (Continued) Note 17: Litigation and Contingencies (Continued) Canada Dispute. The Government of Canada conducted cost audits of certain contracts between Public Works and Government Services Canada (''PWGSC'') and each of Compaq Canada Corp. and Hewlett-Packard (Canada) Co. relating...

  • Page 133
    ... Storage and Servers (''ESS''), HP Services (''HPS''), Software, the Personal Systems Group (''PSG''), the Imaging and Printing Group (''IPG''), HP Financial Services (''HPFS''), and Corporate Investments. HP's organizational structure is based on a number of factors that management uses to evaluate...

  • Page 134
    ... from entry-level devices primarily used as organizers to advanced devices with biometric security and wireless capability, that run on Windows↧ Mobile software. Digital entertainment products include plasma and LCD flat panel televisions, the HP Digital Entertainment Center, DVD and RW drives, CD...

  • Page 135
    ... enhances HP's global product and services solutions, providing a broad range of value-added financial life cycle management services. HPFS enables HP's worldwide customers to acquire complete IT solutions, including hardware, software and services. HPFS offers leasing, financing, utility programs...

  • Page 136
    ... 2004 In millions 2003 Enterprise Storage and Servers ...Software ...Enterprise Systems Group ...HP Services ...Technology Solutions Group ...Personal Systems Group ...Imaging and Printing Group ...HP Financial Services ...Corporate Investments ...Corporate and unallocated assets ... $13,591 1,408...

  • Page 137
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Note 18: Segment Information (Continued) Major Customers No single customer represented 10% or more of HP's total net revenue in any fiscal year presented. Geographic Information Net revenue, classified ...

  • Page 138
    ... & other ...Software ...Technology Solutions Group ...Desktops ...Notebooks . Workstations Handhelds . Other ... Personal Systems Group ...Commercial hardware Consumer hardware . . Supplies ...Other ... Imaging and Printing Group ...HP Financial Services ...Corporate Investments ...Total segments...

  • Page 139
    ... share closing stock prices on the New York Stock Exchange and Nasdaq Stock Market: Low ...High ...2004(3) Net revenue ...Cost of sales(1) ...Research and development ...Selling, general and administrative ...Amortization of purchased intangible assets ...Restructuring charges ...Acquisition-related...

  • Page 140
    ... of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of...

  • Page 141
    ..., directors and executive officers is set forth under ''Common Stock Ownership of Certain Beneficial Owners and Management'' in the Proxy Statement, which information is incorporated herein by reference. Information regarding HP's equity compensation plans, including both stockholder approved plans...

  • Page 142
    ... page 142 of this report. HP will furnish copies of exhibits for a reasonable fee (covering the expense of furnishing copies) upon request. Stockholders may request exhibits copies by contacting: Hewlett-Packard Company Attn: Investor Relations 3000 Hanover Street Palo Alto, CA 94304 (866) GET-HPQ1...

  • Page 143
    Schedule II HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Valuation and Qualifying Accounts For the fiscal years ended October 31 2005 2004 2003 In millions Allowance for doubtful accounts-accounts receivable: Balance, beginning of period ...Amount acquired through acquisition ...Addition (reversal) of ...

  • Page 144
    ... or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: December 20, 2005 HEWLETT-PACKARD COMPANY By: /s/ CHARLES N. CHARNAS Charles N. Charnas Vice President, Deputy General Counsel...

  • Page 145
    Signature Title(s) Date /s/ GEORGE A. KEYWORTH II George A. Keyworth II /s/ TOM PERKINS Tom Perkins /s/ ROBERT L. RYAN Robert L. Ryan /s/ LUCILLE S. SALHANY Lucille S. Salhany Director December 20, 2005 Director December 20, 2005 Director December 20, 2005 Director December 20, 2005 141

  • Page 146
    ...Number Incorporated by Reference File No. Exhibit(s) Filing Date Exhibit Description Form 2(a) 3(a) 3(b) 3(c) 4(a) 4(b) 4(c) 4(d) 4(e) 4(f) 4(g) 4(h) 4(i) Agreement and Plan of Reorganization by and among Hewlett-Packard Company, Heloise Merger Corporation and Compaq Computer Corporation...

  • Page 147
    ... Compaq Computer Corporation 1989 Equity Incentive Plan, amended and restated effective November 21, 2002.* Compaq Computer Corporation 1985 Nonqualified Stock Option Plan for Non-Employee Directors.* Amendment of Compaq Computer Corporation Non-Qualified Stock Option Plan for Non-Employee Directors...

  • Page 148
    ... 1, 2005.* Hewlett-Packard Company Cash Account Restoration Plan, amended and restated as of January 1, 2005.* Registrant's 2005 Pay-for-Results Plan.* Registrant's 2005 Executive Deferred Compensation Plan, as amended and restated effective January 1, 2005.* Employment Agreement, dated March 29...

  • Page 149
    ... Stock Payment 10-Q Agreement and Option Agreement for Registrant's 1997 Director Stock Plan, as amended.* Form of Stock Option Agreement for 10-K Registrant's 1987 Director Option Plan, as amended.* Form of Restricted Stock Grant Notice 10-Q for the Compaq Computer Corporation 1989 Equity Incentive...

  • Page 150
    ... of Independent Registered Public Accounting Firm.‡ Power of Attorney (included on the signature page). Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.‡ Certification of Chief Financial Officer pursuant to...

  • Page 151
    ... Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. b) Date: December 16, 2005 /s/ MARK V. HURD Mark V. Hurd Chief Executive Officer and President (Principal Executive Officer)

  • Page 152
    ...not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. b) Date: December 16, 2005 /s/ ROBERT P. WAYMAN Robert P. Wayman, Executive Vice President and Chief Financial Officer (Principal Financial Officer)

  • Page 153
    ...WAYMAN Robert P. Wayman Executive Vice President and Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to HewlettPackard Company and will be retained by Hewlett-Packard Company and furnished to the Securities and Exchange Commission or its...

  • Page 154
    ... Human Resources Shane V. Robison Executive Vice President and Chief Strategy & Technology Officer Robert P. Wayman Executive Vice President and Chief Financial Officer Segment Revenue Trends FY02-FY05 PSG: Personal Systems Group; IPG: Imaging and Printing Group; ESS: Enterprise Storage and Servers...

  • Page 155
    www.hp.com © 2006 Hewlett-Packard Development Company, L.P. The information contained herein is subject to change without notice. The only warranties for HP products and services are set forth in the express warranty statements accompanying such products and services. Nothing herein should be ...