HP 2007 Annual Report Download - page 37

additional suppliers. Replacing a single source supplier could delay production of some products as replacement
suppliers initially may be subject to capacity constraints or other output limitations. For some components, such as
customized components and some of the processors that we obtain from Intel, alternative sources may not exist or
those alternative sources may be unable to produce the quantities of those components necessary to satisfy our
production requirements. In addition, we sometimes purchase components from single source suppliers under short-
term agreements that contain favorable pricing and other terms but that may be unilaterally modified or terminated
by the supplier with limited notice and with little or no penalty. The performance of such single source suppliers
under those agreements (and the renewal or extension of those agreements upon similar terms) may affect the
quality, quantity and price of supplies to HP. The loss of a single source supplier, the deterioration of our
relationship with a single source supplier, or any unilateral modification to the contractual terms under which we are
supplied components by a single source supplier could adversely effect our revenue and gross margins.
If we fail to comply with our customer contracts or government contracting regulations, our revenue could suffer.
Our contracts with our customers may include unique and specialized performance requirements. In particular, our
contracts with federal, state, provincial and local governmental customers are subject to various procurement regulations,
contract provisions and other requirements relating to their formation, administration and performance. Any failure by us to
comply with the specific provisions in our customer contracts or any violation of government contracting regulations could
result in the imposition of various civil and criminal penalties, which may include termination of contracts, forfeiture of
profits, suspension of payments and, in the case of our government contracts, fines and suspension from future government
contracting. In addition, we are currently, and in the future may be, subject to qui tam litigation brought by private
individuals on behalf of the government relating to our government contracts, which could include claims for up to treble
damages. Further, any negative publicity related to our customer contracts or any proceedings surrounding them, regardless
of its accuracy, may damage our business by affecting our ability to compete for new contracts. If our customer contracts are
terminated, if we are suspended from government work, or if our ability to compete for new contracts is adversely affected,
we could suffer a material reduction in expected revenue.
The revenue and profitability of our operations have historically varied, which makes our future financial results less
predictable.
Our revenue, gross margin and profit vary among our products and services, customer groups and geographic markets
and therefore will likely be different in future periods than our current results. Overall gross margins and profitability in any
given period are dependent partially on the product, customer and geographic mix reflected in that period’ s net revenue. In
particular, IPG and certain of its business units such as printer supplies contribute significantly to our gross margin and
profitability. Competition, lawsuits, investigations and other risks affecting IPG, therefore may have a significant impact on
our overall gross margin and profitability. Certain segments, and ESS in particular, have a higher fixed cost structure and
more variation in gross margins across their business units and product portfolios than others and may therefore experience
significant operating profit volatility on a quarterly basis. In addition, newer geographic markets may be relatively less
profitable due to investments associated with entering those markets and local pricing pressures, and we may have difficulty
establishing and maintaining the operating infrastructure necessary to support the high growth rate associated with some of
those markets. Market trends, competitive pressures, commoditization of products, seasonal rebates, increased component or
shipping costs, regulatory impacts and other factors may result in reductions in revenue or pressure on gross margins of
certain segments in a given period, which may necessitate adjustments to our operations.
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