HP 2006 Annual Report Download

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Annual Report 2006

Table of contents

  • Page 1
    Annual Report 2006

  • Page 2
    Markets & Individuals

  • Page 3

  • Page 4

  • Page 5
    ... on which registered Common stock, par value $0.01 per share Liquid Yield Option↩ Notes due 2017 New York Stock Exchange The Nasdaq Stock Market Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer as defined...

  • Page 6
    ... 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 Certain Beneficial Owners and Management and Related Stockholder...

  • Page 7
    ..., technologies, software, solutions and services to individual consumers, small and medium sized businesses (''SMBs''), large enterprises, including the public and education sectors. Our offerings span: • personal computing and other access devices, • imaging and printing-related products and...

  • Page 8
    ... business segments: Enterprise 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. Given the solution sale approach across our enterprise offerings...

  • Page 9
    ... sector, including government and education services. HPS collaborates with the Enterprise Storage and Servers and Software groups, as well as with third-party system integrators and software and networking companies to bring solutions to HP customers. HPS also works with HP's Imaging and Printing...

  • Page 10
    ... company. The acquisition will combine HP OpenView's systems, network and IT service management software solutions with Mercury's application management, application delivery, and IT governance offerings. This portfolio of solutions is expected to enable our customers to reduce IT costs and make...

  • 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
    ... for commercial products and go-to-market activities with systems integrators and ISVs. TSG also drives HP's vertical sales and marketing approach in the communication, media and entertainment, financial services manufacturing and distribution and public sector industries. PSG manages SMB customer...

  • Page 13
    ...We employ BTO capabilities to maximize manufacturing efficiencies by producing high volumes of basic product configurations. CTO permits configuration of units to the particular hardware and software customization requirements of certain customers. Our inventory management and distribution practices...

  • Page 14
    ... continue to develop, manufacture and market products and services that meet customer requirements for innovation and quality, our revenue and gross margin may suffer,'' in Item 1A, which is incorporated herein by reference. Patents Our general policy has been to seek patent protection for those...

  • Page 15
    ..., price, quality, reliability, brand, reputation, distribution, range of products and services, ease of use of our products, account relationships, customer training, service and support, security and availability of application software and our Internet infrastructure offerings. The markets for...

  • Page 16
    ... service and support offerings and the availability of our broad based distribution of products from retail and commercial channels to direct sales. Imaging and Printing Group. We are the leading imaging and printing systems provider in the world for printer hardware, printing supplies and scanning...

  • Page 17
    ... 2006. He was appointed Vice President and Deputy General Counsel in 2002. Since 1999, he has headed the Corporate, Securities and Mergers and Acquisitions Section of HP's worldwide Legal Department. Mr. Charnas is not an executive officer for purposes of Section 16 of the Securities Exchange...

  • Page 18
    ... for Enterprise Marketing and Solutions and Vice President of Finance for the Software Global Business Unit. From June 2000 to May 2002, Ms. Lesjak was Controller for the Software Solutions Organization. In December 2006, Ms. Lesjak was elected Executive Vice President and Chief Financial Officer...

  • 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
    ... same time trying to maintain or improve revenue and gross margin. The markets in which we do business, particularly the personal computer and printing markets, are highly competitive, and we encounter aggressive price competition for all of our products and services from numerous companies globally...

  • Page 21
    ... affect our revenue and reported results. Finding solutions to quality issues can be expensive and may result in additional warranty, replacement and other costs, adversely affecting our profits. If new or existing customers have difficulty operating our products, our operating margins could be...

  • Page 22
    ..., the claims can be time-consuming and costly to defend and divert management's attention and resources away from our business. Claims of intellectual property infringement also might require us to redesign affected products, enter into costly settlement or license agreements or pay costly damage...

  • Page 23
    ...the future, gross margin declines in certain businesses, reflecting the effect of items such as competitive pricing pressures, inventory write-downs, charges associated with the cancellation of planned production line expansion, and increases in pension and post-retirement benefit expenses. Economic...

  • Page 24
    ... outside of the United States and margins on sales of products that include components obtained from suppliers located outside of the United States. We use a combination of forward contracts and options designated as cash flow hedges to protect against foreign currency exchange rate risks. Such...

  • Page 25
    ..., 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 26
    ..., our revenue and gross margin could suffer as we could lose time-sensitive sales, incur additional freight costs or be unable to pass on price increases to our customers. If we cannot adequately address supply issues, we might have to reengineer some products or service offerings, resulting...

  • Page 27
    ... in the United States. Any of these changes could affect our profitability. Furthermore, our tax provisions could be adversely affected as a result of any new interpretative accounting guidance related to accounting for uncertain tax positions. Our sales cycle makes planning and inventory management...

  • Page 28
    ... Asia, and increased costs associated with workforce reductions in those locations, redundancies among restructuring programs, decreases in employee morale and the failure to meet operational targets due to the loss of employees, particularly sales employees. During HP's third fiscal quarter of 2006...

  • Page 29
    ... costs associated with our stock-based compensation programs. Moreover, difficulties relating to obtaining stockholder approval of equity compensation plans could make it harder or more expensive for us to grant share-based payment awards to employees in the future. Like other companies, HP...

  • Page 30
    ... software programs and security vulnerabilities could be significant, and the efforts to address these problems could result in interruptions, delays, cessation of service and loss of existing or potential customers that may impede our sales, manufacturing, distribution or other critical functions...

  • Page 31
    ... related to severance pay, early retirement costs, employee benefit costs, asset impairment charges, charges from the elimination of duplicative facilities and contracts, in-process research and development charges, inventory adjustments, assumed litigation and other liabilities, legal, accounting...

  • Page 32
    ...associated with an acquisition could adversely affect our ability to borrow and result in more restrictive borrowing terms. In addition, HP's effective tax rate on an ongoing basis is uncertain, and extraordinary transactions could impact our effective tax rate. We also may experience risks relating...

  • Page 33
    ... 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 legislation. We...

  • Page 34
    ... 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 at October 31, 2006 were as...

  • Page 35
    ... Rico Europe, Middle East, Africa Herrenberg, Germany Dublin, Ireland Rehovot and Netanya, Israel Amersfoort, The Netherlands Barcelona, Spain Erskine, United Kingdom Asia Pacific, including Japan Shanghai, China Akishima, Japan Singapore Hewlett-Packard Laboratories Palo Alto, California Bangalore...

  • Page 36
    ... of Equity Securities Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Period Total Number of Shares Purchased Average Price Paid per Share Approximate Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs Month #1 (August 2006) ...Month...

  • Page 37
    ... price as well as regulatory limitations on the number of shares HP is permitted to repurchase. HP decreases its shares outstanding each settlement period as shares are physically received. HP will retire all shares repurchased under the PVSPP, and HP will no longer deem those shares outstanding...

  • Page 38
    ... items: 2006 2005 2004 In millions 2003 2002 Amortization of purchased intangible assets . . Stock-based compensation expense ...Restructuring charges ...In-process research and development charges Pension curtailment ...Acquisition-related charges ...Acquisition-related inventory write-downs...

  • Page 39
    ...global technology company and generate net revenue and earn our profits from the sale of products, technologies, solutions and services to consumers, businesses and governments. Our portfolio is broad and includes personal computers, handheld computing devices, home and business imaging and printing...

  • Page 40
    ... CRITICAL ACCOUNTING POLICIES AND ESTIMATES General The Consolidated Financial Statements of HP are prepared in accordance with U.S. generally accepted accounting principles, which require management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities...

  • Page 41
    ... 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...

  • Page 42
    ...for share-based payment awards under Accounting Principles Board Opinion No. 25, ''Accounting for Stock Issued to Employees'' (''APB 25'') and, accordingly, generally recognized compensation expense only when we granted options with a discounted exercise price. Determining the appropriate fair value...

  • Page 43
    ... changes in our estimates of cash, working capital and long-term investment requirements in the various jurisdictions in which we do business could impact our effective tax rate. We are subject to income taxes in the United States and over sixty foreign countries, and we are subject to routine...

  • Page 44
    ... an approximately $26 million increase to our trade allowance at the end of fiscal year 2006. 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 45
    ... warranty costs have averaged approximately 3.4% 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 relate primarily to discount rates, salary growth, long-term return...

  • Page 46
    ...(2) Net revenue ...Cost of sales(1) ...Gross profit ...Research and development ...Selling, general and administrative ...Pension curtailment ...Restructuring charges ...Amortization of purchased intangible assets . In-process research and development charges Acquisition-related charges ...Earnings...

  • Page 47
    ...of weighted average net revenue growth were as follows for the following fiscal years ended October 31: 2006 2005 Percentage points Personal Systems Group ...Imaging and Printing Group . . Enterprise Storage and Servers Software ...HP Services ...HP Financial Services ...Corporate Investments/Other...

  • Page 48
    ... of the change in gross margin were as follows for the following fiscal years ended October 31: 2006 2005 Percentage points Enterprise Storage and Servers HP Services ...Imaging and Printing Group . . Software ...Personal Systems Group ...HP Financial Services ...Corporate Investments/Other...

  • Page 49
    ... consumer hardware margins. The improvement in Software gross margin in fiscal 2006 was due primarily to an increase in revenue and more effective management of the support and services costs for OpenView and OpenCall. The gross margin improvement in PSG resulted primarily from reduced warranty...

  • Page 50
    ... In conjunction with management's plan to restructure certain of our operations, as discussed in Note 8 to the Consolidated Financial Statements in Item 8, we modified our U.S. retirement programs to align more closely to industry practice. Effective January 1, 2006, we ceased pension accruals and...

  • Page 51
    ... quarter of fiscal 2005. Also of the total charges for fiscal 2005, $109 million was related to severance and related costs associated with the termination of approximately 1,450 employees in connection with a restructuring plan approved by our management in the third quarter of fiscal 2005. All...

  • Page 52
    ... 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 fiscal...

  • Page 53
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) portfolios. Partially offsetting these losses were gains attributable to the sale of investments. Net gains in fiscal 2004 were attributable mainly to the ...

  • Page 54
    ... dollar against the euro and the yen. The net revenue growth in industry standard servers of 6% in fiscal 2006 compared to fiscal 2005 was driven by strong unit growth and the growth in Blade revenue as well as increased option attach rates in the ProLiant server line. Storage net revenue increased...

  • Page 55
    ... prices ASPs in industry standard servers, as a result of both unit growth and increased option attach rates in the ProLiant server line. The fiscal 2005 net revenue growth rate in industry standard servers benefited from certain internal execution problems that unfavorably impacted the business...

  • Page 56
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) operating expenses as a percentage of net revenue and an increase in gross margin. We recorded $57 million of workforce reduction costs in the first two quarters...

  • Page 57
    ...by a decrease in operating expense as a percentage of net revenue. The gross margin decline in HPS reflected primarily competitive pricing pressures and portfolio mix shifts within technology services, as well as the cost of higher employee bonuses recorded in the second half of the fiscal year, and...

  • Page 58
    ... 2006. OpenCall, our telecommunications solutions product line, contributed the remaining 3 percentage points of the weighted average net revenue increase for fiscal 2006. OpenView net revenue growth was the result of acquisitions and increases in support and services contracts. OpenCall net revenue...

  • Page 59
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) contracts and license fees and, to a lesser extent, acquisitions. OpenCall net revenue growth was the result of an increase in licenses. The operating margin ...

  • Page 60
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) from lower component costs as well as competitive pricing pressures, which were partially offset by a strong monitor attach rate in commercial desktops PCs. PSG ...

  • Page 61
    ... primarily to increased sales of color-related products. The growth in commercial hardware net revenue in fiscal 2005 was attributable to unit volume growth in color LaserJet printers, multifunction printers and the digital press business. New product introductions added to the net revenue growth in...

  • Page 62
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) In fiscal 2005, IPG earnings from operations as a percentage of net revenue declined by 2.3 percentage points due primarily to a decline in gross margin as a ...

  • Page 63
    ... to higher financing of HP product sales and a favorable currency impact. 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...

  • Page 64
    ... in operating expenses related to corporate development, global alliances and HP Labs. The increase in gross margin was due primarily to a favorable product mix and lower trade discounts as a percentage of net revenue for network infrastructure products. LIQUIDITY AND CAPITAL RESOURCES Our cash...

  • Page 65
    ... billion for prepayment for common stock to be repurchased in future periods, $0.9 billion for cash dividends and $0.9 billion for cash payments on acquisitions. Cash flows from financing activities benefited from $2.5 billion of proceeds relating to employee stock plans. Our cash position remains...

  • Page 66
    ... common stock related to our employee stock plans mainly due to increased exercises of employee stock options as a result of higher market prices for our common stock during fiscal 2006. We repurchase shares of our common stock under an ongoing program to manage the dilution created by shares issued...

  • Page 67
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) our common stock in the open market over time. The prepaid funds will be expended ratably over the term of the program. Under the PVSPP, the prices at which we ...

  • Page 68
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) 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 ...

  • Page 69
    ... securities issuable under the 2002 shelf registration statement include notes with due dates of nine months or more from issuance. The lines of credit are uncommitted and are available primarily through various foreign subsidiaries. In April 2005, we increased our U.S. commercial paper program to...

  • Page 70
    ...-qualified plan participants. We expect to pay approximately $80 million to cover benefit claims for our post-retirement benefit plans. Our funding policy is to contribute cash to our pension plans so that we meet at least the minimum contribution requirements, as established by local government and...

  • Page 71
    ... fiscal 2007. Also in December 2006, we agreed to acquire Bitfone Corporation, a privately held global software and services company that develops software solutions for mobile device management for the wireless industry. The transaction is subject to certain closing conditions and is expected to be...

  • Page 72
    ... We use a combination of forward contracts and options designated as cash flow hedges to protect against the foreign currency exchange rate risks inherent in our forecasted net revenue and, to a lesser extent, cost of sales denominated in currencies other than the U.S. dollar. In addition, when debt...

  • Page 73
    ... 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 $11 million at October 31, 2006 and $19 million at October 31, 2005. The aggregate cost of privately-held companies and other investments is $362...

  • Page 74
    ... Financial Statements ...Note 1: Summary of Significant Accounting Policies ...Note 2: Stock-Based Compensation ...Note 3: Net Earnings Per Share (''EPS'') ...Note 4: Balance Sheet Details ...Note 5: Supplemental Cash Flow Information ...Note 6: Acquisitions ...Note 7: Goodwill and Purchased...

  • Page 75
    ... 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 76
    ... with the standards of the Public Company Accounting Oversight Board (United States), the accompanying consolidated balance sheets of Hewlett-Packard Company and subsidiaries as of October 31, 2006 and 2005, and the related consolidated statements of earnings, stockholders' equity and cash flows for...

  • Page 77
    ... public accounting firm, as stated in their report which appears on page 72 of this Annual Report on Form 10-K. /s/ MARK V. HURD Mark V. Hurd Chairman, Chief Executive Officer and President December 15, 2006 /s/ ROBERT P. WAYMAN Robert P. Wayman Executive Vice President and Chief Financial Officer...

  • Page 78
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Consolidated Statements of Earnings For the fiscal years ended October 31 2006 2005 2004 In millions, except per share amounts Net revenue: Products ...Services ...Financing income ...Total net revenue ...Costs and expenses: Cost of products ...Cost of ...

  • Page 79
    ...term financing receivables Goodwill ...Purchased intangible assets ...and other assets ... Total assets ...LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and short-term borrowings Accounts payable ...Employee compensation and benefits ...Taxes on earnings ...Deferred revenue...

  • Page 80
    ... property, plant and equipment ...Purchases of available-for-sale and other investments ...Maturities and sales of available-for-sale securities and other investments ...Payments made in connection with business acquisitions, net ...Net cash used in investing activities ...Cash flows from financing...

  • Page 81
    ... loss on cash flow hedges ...Minimum pension liability, net of taxes ...Cumulative translation adjustment . . ... Comprehensive income ...Assumption of stock options in connection with business acquisitions . Issuance of common stock in connection with employee stock plans and other . Repurchases...

  • Page 82
    ...of products or services or subject to customerspecified 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 resumes revenue recognition...

  • Page 83
    ... cost of post-sale obligations, including basic product warranties, based on historical experience at the time HP recognizes revenue. Services HP recognizes revenue from fixed-price support or maintenance contracts, including extended warranty contracts and software post-customer support contracts...

  • Page 84
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Note 1: Summary of Significant Accounting Policies (Continued) Taxes on Earnings HP recognizes deferred tax assets and liabilities for the expected tax consequences of temporary differences between the ...

  • Page 85
    ... and related accounting policies, which is incorporated herein by reference. Investments HP's investments consist principally of time deposits, other debt securities, money market securities and equity securities of publicly-traded and privately-held companies. HP classifies investments with...

  • Page 86
    ... and its equity investments in public companies as available-for-sale securities and carries them at fair value. HP determines fair values for investments in public companies using quoted market prices. HP records the unrealized gains and losses on available-for-sale securities, net of taxes, in...

  • Page 87
    ... the option vesting term of four years. Prior to the adoption of SFAS 123R, HP recognized stock-based compensation expense in accordance with Accounting Principles Board (''APB'') Opinion No. 25, ''Accounting for Stock Issued to Employees'' (''APB 25''). In March 2005, the Securities and Exchange...

  • Page 88
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Note 1: Summary of Significant Accounting Policies (Continued) Foreign Currency Transactions HP uses the U.S. dollar predominately as its functional currency. Assets and liabilities denominated in non...

  • Page 89
    ...to early retirement programs which create incentives for employees, within a specific age group, to transition from full or part-time employment to retirement before legal retirement age. • EITF 06-2, ''Accounting for Sabbatical Leave and Other Similar Benefits.'' Issued in June 2006 and effective...

  • Page 90
    ...2006, HP has the stock-based employee compensation plans described below. The total compensation expense before taxes related to these plans was $536 million in fiscal 2006, excluding a $14 million credit adjustment in restructuring charges as disclosed below. Prior to November 1, 2005, HP accounted...

  • Page 91
    ... contribute up to 10% of base compensation, subject to certain income limits, to purchase shares of HP's common stock. Prior to November 1, 2005, employees were able to purchase stock semi-annually at a price equal to 85% of the fair market value at certain plan-defined dates. As of November 1, 2005...

  • Page 92
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Note 2: Stock-Based Compensation (Continued) exercise price of a stock option is equal to the fair market value of HP's common stock on the option grant date (as determined by the average of the highest ...

  • Page 93
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Note 2: Stock-Based Compensation (Continued) The fair value of share-based payment awards was estimated using the Black-Scholes option pricing model with the following assumptions and weighted average ...

  • Page 94
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Note 2: Stock-Based Compensation (Continued) Option activity was as follows for the following fiscal years ended October 31: 2005 2004 WeightedWeightedAverage Average Exercise Exercise Shares Price ...

  • Page 95
    ... of taxes, relating to options assumed through acquisitions and restricted stock awards in fiscal years 2005 and 2004, respectively. In fiscal 2006, HP allocated stock-based compensation expense related to the ESPP and the principal option plans under SFAS 123R as follows: In millions Cost of sales...

  • Page 96
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Note 2: Stock-Based Compensation (Continued) Shares Reserved Shares available for the ESPP and stock-based compensation plans were 217,556,000 at October 31, 2006, including 39,151,000 shares under the ...

  • Page 97
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Note 3: Net Earnings Per Share (''EPS'') (Continued) 48 million options in fiscal 2006, whose combined exercise price, unamortized fair value and excess tax benefit were greater than the average market ...

  • Page 98
    ... Financing Receivables and Other Assets 2006 2005 In millions Financing receivables ...Deferred tax assets-long-term ...Other ... $2,340 1,475 2,834 $6,649 $2,246 2,263 2,993 $7,502 Other Accrued Liabilities 2006 2005 In millions Other accrued taxes ...Warranty ...Sales and marketing programs...

  • Page 99
    ...for income taxes, net ...Cash paid for interest ...Non-cash investing and financing activities: Net issuances of restricted stock and other employee stock benefits ...Issuance of common stock and options assumed in business acquisitions Purchase of assets under capital leases ...Note 6: Acquisitions...

  • Page 100
    ...2, 2006, HP completed its tender offer for Mercury Interactive Corporation (''Mercury''), a leading IT management software and services company, and acquired approximately 96% of Mercury shares for cash consideration of $52 per common share. On November 6, 2006, HP acquired the remaining outstanding...

  • Page 101
    ...Mercury executive officers and key employees under a retention plan adopted in connection with the acquisition, as well as costs related to integration efforts. Pending Acquisitions In December 2006, HP agreed to acquire Knightsbridge Solutions Holdings Corporation, a privately held services company...

  • Page 102
    ... liability associated with restructuring plans of Compaq Computer Corporation (''Compaq'') prior to its acquisition by HP. These reductions resulted from adjusting original estimates to actual costs incurred at various locations throughout the world. Based on the results of its annual impairment...

  • Page 103
    ... in Europe. The charge in the fourth quarter of fiscal 2005 included approximately $400 million related to employee severance and other benefits associated with the early retirement of 3,200 U.S. employees who left HP by October 31, 2005. The majority of these costs were funded by HP's pension plan...

  • Page 104
    ... 2007. In the third quarter of fiscal 2005, HP's management approved a restructuring plan and HP recorded restructuring charges of $109 million related to severance and related costs associated with the termination of approximately 1,450 employees, all of whom left HP as of October 31, 2005. Of the...

  • Page 105
    ... payments adjustments 2006 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 106
    ... fixed-interest securities invested for early retirement purposes as required by German laws. 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...

  • Page 107
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Note 9: Financial Instruments (Continued) Other investments consist primarily of marketable securities held to generate returns that HP expects to offset changes in certain liabilities related to ...

  • Page 108
    ... currency exchange rate risks inherent in its forecasted net revenue and, to a lesser extent, cost of sales denominated in currencies other than the U.S. dollar. HP's foreign currency cash flow hedges mature generally within six months. However, certain leasing revenue-related forward contracts...

  • Page 109
    ... as follows for the following fiscal years ended October 31: 2006 Long-term Financing Receivables Other and Accrued Other Assets Liabilities In millions Gross Notional Other Current Assets Other Liabilities Total Fair value hedges ...Cash flow hedges ...Net investment hedges Other derivatives...

  • Page 110
    ... fair value of the debt is based primarily on quoted market prices, as well as borrowing rates currently available to HP for bank loans with similar terms and maturities. Note 10: Financing Receivables and Operating Leases Financing receivables represent sales-type and direct-financing leases...

  • Page 111
    ... revenue. HP engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers; however, product warranty terms offered to customers, ongoing product failure rates, material usage and service delivery costs incurred...

  • Page 112
    ... revenue represents amounts received or billed in advance primarily for fixed-price support or maintenance contracts. These services include stand-alone product support packages, routine maintenance service contracts, upgrades or extensions to standard product warranty, as well as high availability...

  • Page 113
    ...registration statement (the ''2006 Shelf Registration Statement'') with the SEC to enable HP to offer and sell, from time to time, in one or more offerings, debt securities, common stock, preferred stock, depositary shares and warrants. On May 23, 2006, HP issued $1.0 billion in Floating Rate Global...

  • Page 114
    ... value of the borrowings of $16.4 million. At October 31, 2006, HP had up to $12.5 billion of available borrowing resources under the 2002 Shelf Registration Statement and other programs described above. HP also may issue additional debt securities, common stock, preferred stock, depositary shares...

  • Page 115
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Note 12: Borrowings (Continued) Aggregate future maturities of long-term debt at face value (excluding the fair value adjustment related to SFAS 133 of $63 million and discount on debt issuance of $153 ...

  • Page 116
    ...-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 117
    ... 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 $356 million in fiscal 2006, $30...

  • Page 118
    ... result of certain employment actions and capital investments HP has undertaken, income from manufacturing activities of subsidiaries in certain countries is subject to reduced tax rates, and in some cases is wholly exempt from taxes through fiscal 2019. The gross income tax benefits attributable to...

  • Page 119
    ..., and the payment was included in the cash flows from financing activities in the Consolidated Statement of Cash Flows. In connection with this program, the investment bank has purchased and will continue to trade shares of HP's common stock in the open market over time. The prepaid funds will be...

  • Page 120
    ... weighted-average price for composite New York Stock Exchange transactions on trading days in which a repurchase occurred. Either HP or the Packard Foundation may suspend or terminate sales under the amended and restated memorandum of understanding at any time. HP's Board of Directors authorized an...

  • Page 121
    ...with management's plan to restructure certain of its operations, as discussed in Note 8 to the Consolidated Financial Statements, HP modified its U.S. retirement programs to align more closely to industry practice. Effective January 1, 2006, HP no longer offers U.S. defined benefit pension plans and...

  • Page 122
    ... 2003. Effective December 31, 2005, participants whose combination of age plus years of service was less than 62 ceased accruing benefits under the Retirement Plan. For U.S employees hired or rehired on or after January 1, 2003, HP sponsors the Hewlett-Packard Company Cash Account Pension Plan (the...

  • Page 123
    ...U.S. employees are automatically enrolled in the Hewlett-Packard Company 401(k) Plan (the ''HP 401(k) Plan'') when they meet eligibility requirements, unless they decline participation. On May 3, 2002, HP assumed sponsorship of the Compaq Computer Corporation 401(k) Investment Plan (the ''Compaq 401...

  • Page 124
    ...of retained earnings in the Consolidated Statements of Stockholders' Equity. The HP Stock Fund held approximately 31 million shares of HP common stock at October 31, 2006. Pension and Post-Retirement Benefit Expense HP's net pension and post-retirement benefit costs were as follows for the following...

  • Page 125
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Note 15: Retirement and Post-Retirement Benefit Plans (Continued) The medical cost and related assumptions used to calculate the net post-retirement benefit cost for the following fiscal years ended ...

  • Page 126
    ... 31: U.S. Defined Benefit Plans 2006 2005 Non-U.S. Defined Benefit Plans 2006 2005 In millions Post-Retirement Benefit Plans 2006 2005 Change in fair value of plan assets: Fair value-beginning of year ...Acquisition/addition/deletion of plans Actual return on plan assets ...Employer contributions...

  • Page 127
    ... cost trend rate would have increased the total post-retirement benefit obligation reported at October 31, 2006 by $30 million, while a 1.0 percentage point decrease would have resulted in a decrease of $36 million. The net amount recognized for HP's defined benefit and post-retirement benefit plans...

  • Page 128
    ... plan's forecasted liabilities and liquidity needs. HP invests a portion of the U.S. defined benefit plan assets and post-retirement benefit plan assets in private market securities such as venture capital funds, private debt and private equity to provide diversification and higher expected returns...

  • Page 129
    ... cover benefit claims for HP's post-retirement benefit plans. HP's funding policy is to contribute cash to its pension plans so that it meets at least the minimum contribution requirements, as established by local government and funding and taxing authorities. In August 2006, the Pension Protection...

  • Page 130
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Note 15: Retirement and Post-Retirement Benefit Plans (Continued) Estimated Future Benefits Payable HP estimates that the future benefits payable for the retirement and post-retirement plans in place ...

  • Page 131
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Consolidated Statements of Earnings (Continued) Note 17: Litigation and Contingencies HP is involved in lawsuits, claims, investigations and proceedings, including those identified below, consisting of intellectual property, commercial, securities, ...

  • Page 132
    ... board of the Patent and Trademark Office demanding reporting of every PC sold by HP in Germany from January 2002 through December 2005 and seeking a levy of 18.42 euros plus tax for each PC sold during that period. HP filed a notice of defense in connection with these proceedings in February 2006...

  • Page 133
    ...of the Department of Justice, the General Services Administration Office of Inspector General and other Federal agencies are conducting an investigation of allegations that HP and Compaq made, or caused to be made, false claims for payment to the United States for computers known by HP and Compaq to...

  • Page 134
    ... HP. Miller, et al. v. Hewlett-Packard Company is a lawsuit filed on March 21, 2005 in the United States District Court for the District of Idaho on behalf of a putative class of persons who were employed by third-party temporary service agencies and who performed work at HP facilities in the United...

  • Page 135
    .... CSIRO Patent Litigation. Microsoft Corporation, Hewlett-Packard Company, et al. v. Commonwealth Scientific and Industrial Research Organisation of Australia is an action filed by HP and two other plaintiffs on May 9, 2005 in the District Court for the Northern District of California seeking...

  • Page 136
    ...former directors, officers and employees. Under the terms of the agreement, HP will pay a total of $14.5 million and implement and maintain for five years a series of measures designed to ensure that HP's corporate investigations are conducted in accordance with California law and the company's high...

  • Page 137
    ... the EU publicly stated that it was considering conducting an investigation into original equipment manufacturer activities concerning the sales of printers and supplies to consumers within the EU. The European Commission contacted HP requesting information on the printing systems businesses. HP has...

  • Page 138
    ... of products, technologies, software, solutions and services to individual consumers, small and medium sized businesses (''SMBs''), and large enterprises including the public and education sectors. HP's offerings span personal computing and other access devices, imaging and printing-related products...

  • Page 139
    ... sector, including government and education services. HPS collaborates with the Enterprise Storage and Servers, and Software groups, as well as with third-party system integrators and software and networking companies to bring solutions to HP customers. HPS also works with HP's Imaging and Printing...

  • Page 140
    ...of purchased intangible assets, stock-based compensation expense related to HP-granted employee stock options and the employee stock purchase plan, certain acquisition-related charges and charges for purchased IPR&D, as well as certain corporate governance costs. HP does not allocate to its business...

  • Page 141
    ... (Loss) from Total Net Revenue Operations 2006 2005 2004 2006 2005 2004 In millions Enterprise Storage and Servers ...$17,308 $16,717 $15,084 $1,446 $ 800 $ 157 HP Services ...15,617 15,536 13,848 1,507 1,151 1,282 Software ...1,301 1,061 923 85 (49) (152) Technology Solutions Group ...Personal...

  • Page 142
    ... to HP consolidated total assets were as follows at October 31: 2006 2005 In millions 2004 Enterprise Storage and Servers ...HP Services ...Software ...Technology Solutions Group ...Personal Systems Group ...Imaging and Printing Group ...HP Financial Services ...Corporate Investments ...Corporate...

  • Page 143
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Note 18: Segment Information (Continued) locations as it is impracticable for HP to do so, are composed principally of net property, plant and equipment. Net property, plant and equipment, classified by ...

  • Page 144
    ... & 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 145
    ... per share ...Range of per share closing stock prices on the New York Stock Exchange and Nasdaq Stock Market: Low ...High ...2005 Net revenue ...Cost of sales(1) ...Research and development ...Selling, general and administrative ...Amortization of purchased intangible assets ...Pension curtailment...

  • Page 146
    ... executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to HP, including our consolidated subsidiaries, required to be disclosed in our Securities and Exchange Commission...

  • Page 147
    ... by reference: • Information regarding security ownership of certain beneficial owners, directors and executive officers is set forth under ''Common Stock Ownership of Certain Beneficial Owners and Management.'' • Information regarding HP's equity compensation plans, including both stockholder...

  • Page 148
    ... page 148 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 149
    ...HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Valuation and Qualifying Accounts For the fiscal years ended October 31 2006 2005 2004 In millions Allowance for doubtful accounts-accounts receivable: Balance, beginning of period ...Amount acquired through acquisition...doubtful accounts-financing receivables...

  • Page 150
    ...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 22, 2006 HEWLETT-PACKARD COMPANY By: /s/ CHARLES N. CHARNAS Charles N. Charnas Acting General Counsel, Vice President and Assistant...

  • Page 151
    Signature Title(s) Date /s/ ROBERT L. RYAN Robert L. Ryan /s/ LUCILLE S. SALHANY Lucille S. Salhany /s/ G. KENNEDY THOMPSON G. Kennedy Thompson Director December 22, 2006 Director December 22, 2006 Director December 22, 2006 147

  • Page 152
    ... Form 2(a) Agreement and Plan of Reorganization by and among Hewlett-Packard Company, Heloise Merger Corporation and Compaq Computer Corporation. 2(b) Agreement and Plan of Merger by and among Hewlett-Packard Company, Mars Landing Corporation and Mercury Interactive Corporation dated as of July 25...

  • Page 153
    ...2002.* 10(j) Compaq Computer Corporation 1985 S-3 333-86378 10.5 April 18, 2002 Nonqualified Stock Option Plan for NonEmployee Directors.* 10(k) Amendment of Compaq Computer S-3 333-86378 10.11 April 18, 2002 Corporation Non-Qualified Stock Option Plan for Non-Employee Directors, effective September...

  • Page 154
    .... 1997 Equity Incentive Plan* 10(r) Performant, Inc. 2000 Stock Option/ Restricted Stock Plan* 10(s) Systinet Corporation 2001 Stock Option and Incentive Plan* 10(t) Registrant's Excess Benefit Retirement Plan, amended and restated as of January 1, 2006.* 10(u) Hewlett-Packard Company Cash Account...

  • Page 155
    ... Stock Payment Agreement and Option Agreement for Registrant's 1997 Director Stock Plan, as amended.* 10(m)(m) Form of Restricted Stock Grant Notice for the Compaq Computer Corporation 1989 Equity Incentive Plan.* 10(n)(n) Forms of Stock Option Notice for the Compaq Computer Corporation NonQualified...

  • Page 156
    ...registrant as of October 31, 2006.‡ 22 None. 23 Consent of Independent Registered Public Accounting Firm.‡ 24 Power of Attorney (included on the signature page). 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as...

  • Page 157
    ... 12 HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Statements of Computation of Ratio of Earnings to Fixed Charges(1) Fiscal Years Ended October 31, 2005 2004 2003 In millions, except ratios 2006 2002 Earnings (loss): Earnings (loss) before cumulative effect of change in accounting principle and taxes...

  • Page 158
    ... CANADA -Hewlett-Packard (Canada) Co. CAYMAN ISLANDS -Hewlett-Packard Equity Investments Limited CHILE -Hewlett-Packard Chile Comercial Limitada -HP Financial Services (Chile) Limitada CHINA -Hewlett-Packard Trading (Shanghai) Co. Ltd. -China Hewlett-Packard Company Limited -Shanghai Hewlett-Packard...

  • Page 159
    ... -Hewlett-Packard Magyarorszag Kft INDIA -Hewlett-Packard India Sales Private Limited -Hewlett-Packard Globalsoft Limited INDONESIA -PT Hewlett-Packard Berca Servisindo IRELAND -Hewlett-Packard International Bank Public Limited Company -Hewlett-Packard Ireland Limited -Hewlett-Packard (Manufacturing...

  • Page 160
    ... RUSSIA -ZAO Hewlett-Packard AO SERBIA-MONTENEGRO -Hewlett-Packard d.o.o. (Beograd) SINGAPORE -Hewlett-Packard Asia Pacific Pte. Ltd. -Hewlett-Packard International Pte. Ltd. -Hewlett-Packard Singapore (Private) Limited -Hewlett-Packard Singapore (Sales) Pte. Ltd. SLOVAKIA -Hewlett-Packard Slovakia...

  • Page 161
    ...-Packard Luxembourg Enterprises LLC -Hewlett-Packard Products CV 1, LLC -Hewlett-Packard Products CV 2, LLC -Hewlett-Packard World Trade, Inc. -HP Financial Services International Holdings Company -HPFS Global Holdings I, LLC -HPQ Holdings, LLC -Compaq Latin America Corporation -Computer Insurance...

  • Page 162
    ... to the 2005 Executive Deferred Compensation Plan, (13) Registration Statement (Form S-8 No. 002-92331) pertaining to the Hewlett-Packard Company 401(k) Plan, (14) Registration Statement (Form S-8 No. 033-31496) pertaining to the Employee Stock Purchase Plan and Service Anniversary Stock Plan, (15...

  • Page 163
    ...Equity Incentive Plan, Compaq Computer Corporation 1995 Equity Incentive Plan, Compaq Computer Corporation Nonqualified Stock Option Plan for Non-Employee Directors, Compaq Computer Corporation 1998 Stock Option Plan and Compaq Computer Corporation 2001 Stock Option Plan, (26) Registration Statement...

  • Page 164
    ..., 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 15, 2006 /s/ MARK V. HURD Mark V. Hurd Chairman, Chief Executive Officer and President (Principal Executive Officer)

  • Page 165
    ... 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 15, 2006 /s/ ROBERT P. WAYMAN Robert P. Wayman, Executive Vice President and Chief Financial Officer (Principal Financial...

  • Page 166
    ...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 167
    Financial Highlights $25.0 $24.0 $23.0 $22.0 $21.0 $20.0 $19.0 $18.0 $17.0 $12.0 $10.0 $8.0 $6.0 $4.0 $2.0 $0.0

  • Page 168
    ... Report at www.hp.com/go/report. Cover printed on 100-percent recycled paper. © 2007 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...