HP 2005 Annual Report Download - page 50

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
In-Process Research and Development Charges
We record in-process research & development (‘‘IPR&D’’) charges in connection with acquisitions
accounted for as business combinations, as more fully described in Note 5 to the Consolidated
Financial Statements in Item 8. In fiscal 2005, 2004 and 2003 we recorded IPR&D charges of
$2 million, $37 million and $1 million, respectively, related to acquisitions during those years.
Interest and Other, Net
Interest and other, net increased $154 million in fiscal 2005 from fiscal 2004. The increase in fiscal
2005 was the result primarily 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 1998-2002 partially offset the increase in interest and other, net for
fiscal 2005.
Interest and other, net increased $14 million in fiscal 2004 from fiscal 2003. The increase in fiscal
2004 was the result of lower interest expense, which was offset partially by higher currency losses from
balance sheet remeasurement and related hedging strategies.
(Losses) Gains on Investments
The net loss for fiscal 2005 resulted primarily from impairment charges on equity investments in
our publicly-traded and privately-held investment portfolios. Partially offsetting these losses were gains
attributable to the sale of investments. The net gain for fiscal 2004 was attributable mainly to the
realization of a contingent gain associated with a prior period divestiture and realized gains from the
sale of investments in excess of impairment charges. Net losses in fiscal 2003 resulted mainly from
impairment charges in excess of gains realized on our investment portfolio.
Dispute Settlement
For fiscal 2005, we recorded a net total of $106 million in dispute settlement charges. We reached
a legal settlement of $141 million in our patent infringement case with Intergraph Hardware
Technologies Company (‘‘Intergraph’’) and recorded a charge of $116 million related to a cross-license
agreement with Intergraph for products shipped in prior years. Partially offsetting this amount was a
$10 million recovery from an individual related to a prior period settlement with the Government of
Canada for cost audits of certain contracts. During fiscal 2004, we recorded $70 million in settlement
costs from a dispute with the Government of Canada. See Note 17 of the Consolidated Financial
Statements in Item 8 for a full description of these matters, which is incorporated herein by reference.
Provision for Taxes
Our effective tax rate was 32.3%, 16.7% and 12.1% in fiscal 2005, 2004 and 2003, respectively.
The increase in the overall tax rate in fiscal 2005 from fiscal 2004 is related primarily to tax
expense associated with the repatriation of $14.5 billion under the provisions of the American Jobs
Creation Act of 2004 (the ‘‘Jobs Act’’), which was partially offset by the increase in the tax benefit
derived from lower rates in other jurisdictions. The increase in the overall tax rate in fiscal 2004 from
fiscal 2003 was the result primarily of a decline in the tax benefit from lower rates in other jurisdictions
in fiscal 2004.
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