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Annual Report
2008

Table of contents

  • Page 1
    Annual Report 2008

  • Page 2
    ... with double-digit growth in revenue for the year and improved profitability. The EDS Acquisition-Disciplined Execution of a Multi-year Strategy In August, HP completed its acquisition of EDS, a global technology services, outsourcing and consulting leader, for a purchase price of $13 billion. The...

  • Page 3
    ... • Reduction of annual energy consumption in data centers by 60 percent • Increase in processing power of 250 percent For all that we have accomplished in creating a more efficient company, there is still a great deal of work left to do and several more years of cost cutting for HP to reach the...

  • Page 4
    ... operational discipline These advantages will be put to good use by our outstanding executive leadership team. We will continue to make strategic investments for the future in sales coverage, opportunistic acquisitions, research and development, and customer service and support. Our plan is to get...

  • Page 5
    ... Senior Vice President and Group Executive of the IBM Global Services division; Chief Financial Officer; President, IBM Asia Pacific; and Vice President and Controller for IBM's global operations. Mr. Joyce also is a director of Gartner, Inc.; Avago Technologies Limited; Serena Software, Inc...

  • Page 6
    ... performance, market share or demand relating to HP's products and services; any statements regarding anticipated operational and financial results, including the execution of cost reduction programs and restructuring and integration plans; any statements including estimates regarding market size or...

  • Page 7
    ... shell company (as defined by Rule 12b-2 of the Exchange Act). Yes អ No ፤ The aggregate market value of the registrant's common stock held by non-affiliates was $114,540,461,000 based on the last sale price of common stock on April 30, 2008. The number of shares of HP common stock outstanding as...

  • Page 8
    ......PART III Directors, Executive Officers and Corporate Governance ...Executive Compensation ...Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...Certain Relationships and Related Transactions, and Director Independence ...Principal Accounting Fees and...

  • Page 9
    ...Software, the Personal Systems Group (''PSG''), the Imaging and Printing Group (''IPG''), HP Financial Services (''HPFS'') and Corporate Investments. In the fourth quarter of 2008, we added the business operations that we acquired through our acquisition of Electronic Data Systems Corporation (''EDS...

  • Page 10
    ... reduce costs to optimize the business outcomes of customers' IT investments. Companies around the globe leverage HP's infrastructure solutions to deploy next generation data centers and address business challenges ranging from compliance to business continuity. TSG's modular IT systems and services...

  • Page 11
    ... our acquisition of EDS were added as a new business unit within HPS for financial reporting purposes in the fourth quarter of 2008. EDS provides information technology, applications, and business process outsourcing services to commercial customers mainly in the manufacturing, financial services...

  • Page 12
    ..., data and converged network services. Personal Systems Group PSG is the leading provider of personal computers (''PCs'') in the world based on unit volume shipped and annual revenue. PSG provides commercial PCs, consumer PCs, workstations, handheld computing devices, calculators and other related...

  • Page 13
    ...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, utility programs and asset recovery services, as well as financial asset management services...

  • Page 14
    ...through HP Home & Home Office. IPG manages HP's overall consumer-related sales and marketing activities, including our annual consumer product launch for the back-to-school and holiday seasons. IPG also manages consumer channel relationships with third-party retail locations for imaging and printing...

  • Page 15
    ... 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 16
    ... 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 inventions...

  • Page 17
    ... on the basis of the factors listed above. In addition, we compete with many of our current and potential partners, including OEMs that design, manufacture and often market their products under their own brand names. Our successful management of these competitive partner relationships will...

  • Page 18
    ... of offerings, our extensive 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. The markets for printer hardware and associated supplies are highly competitive, especially...

  • Page 19
    ... or personal injury claims, if we were to violate or become liable under environmental laws. Many of our products are subject to various federal, state, local and foreign laws governing chemical substances in products and their safe use, including laws regulating the manufacture and distribution...

  • Page 20
    .... R. Todd Bradley; age 50; Executive Vice President, Personal Systems Group Mr. Bradley has served as Executive Vice President of HP's Personal Systems Group since June 2005. Previously he served as the Chief Executive Officer of palmOne Inc., a mobile computing company, from October 2003 to June...

  • Page 21
    ...: Hewlett-Packard Company Attention: Investor Relations 3000 Hanover Street Palo Alto, CA 94304 (866) GET-HPQ1 or (866) 438-4771 http://www.hp.com/investor/informationrequest We submitted the certification of the CEO of HP required by Section 303A.12(a) of the New York Stock Exchange ''NYSE'' Listed...

  • Page 22
    ... our competitors may target our key market segments. We compete 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...

  • Page 23
    ... 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 24
    overlaps in the current products and services of HP and portfolios acquired through mergers and acquisitions that we must manage. In addition, it may be difficult to ensure performance of new customer contracts in accordance with our revenue, margin and cost estimates and to achieve operational ...

  • Page 25
    ...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, increases in pension and post-retirement benefit expenses, and increases in...

  • Page 26
    ... and wars may seriously harm our business and revenue, costs and expenses and financial condition and stock price. Terrorist acts, conflicts or wars (wherever located around the world) may cause damage or disruption to HP, our employees, facilities, partners, suppliers, distributors, resellers or...

  • Page 27
    ..., 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 28
    ..., 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 29
    ...adversely affect our revenue and gross margins. Our revenue and profitability could suffer if we do not manage the risks associated with our IT services business properly. As a result of our acquisition of EDS in August 2008, we have significantly increased the size of the IT services portion of our...

  • Page 30
    ... 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...

  • Page 31
    ..., the carrying value of deferred tax assets, which are predominantly in the United States, is dependent on our ability to generate future taxable income in the United States. Any of these changes could affect our profitability. Our sales cycle makes planning and inventory management difficult and...

  • Page 32
    ... harm our business include delays in implementation of workforce reductions in highly regulated locations outside of the United States, particularly in Europe and Asia, delays in hiring and integrating new employees, decreases in employee morale and the failure to meet operational targets due to...

  • Page 33
    ...exposure to market volatility, prospects, business combination or investment transactions, or executive team; • the announcement of new products, services, technological innovations or acquisitions by HP or its competitors; • quarterly increases or decreases in revenue, gross margin, earnings or...

  • Page 34
    ...existing or potential customers that may impede our sales, manufacturing, distribution or other critical functions. Our outsourcing services business routinely processes, stores and transmits large amounts of data for our clients, including sensitive and personally identifiable information. Breaches...

  • Page 35
    ... our revenue, gross margin and profitability. Integration issues are complex, time-consuming and expensive and, without proper planning and implementation, could significantly disrupt our business. The challenges involved in integration include: • combining product offerings and entering into new...

  • Page 36
    ..., legal, accounting and financial advisory fees, and required payments to executive officers and key employees under retention plans. Moreover, HP has incurred and will incur additional depreciation and amortization expense over the useful lives of certain assets acquired in connection with business...

  • Page 37
    ... to receive a premium for their shares of HP common stock and also could affect the price that some investors are willing to pay for HP common stock. ITEM 1B. Unresolved Staff Comments. Not applicable. ITEM 2. Properties. As of October 31, 2008, we owned or leased a total of approximately...

  • Page 38
    ... Alto, California, United States of America. Headquarters of Geographic Operations The locations of our headquarters of geographic operations at October 31, 2008 were as follows: Americas Houston, Texas Europe, Middle East, Africa Geneva, Switzerland Asia Pacific, including Japan Singapore Product...

  • Page 39
    ... scale service management centers, or SMCs, to service our IT outsourcing operations in locations throughout the United States and in Australia, Brazil, Canada, France, Germany, the Netherlands and the United Kingdom. In addition, we provide applications services from our Solution Centers located...

  • Page 40
    ... offering. Issuer Purchases of Equity Securities Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs Period Total Number of Shares Purchased Average Price Paid per Share Month...

  • Page 41
    ... cumulative total stockholder return assuming the investment of $100 on the date specified (and the reinvestment of dividends thereafter) in each of HP common stock, the S&P 500 Index, and the S&P Information Technology Index.(1) The comparisons in the graph below are based upon historical data and...

  • Page 42
    ..., in order to understand further the factors that may affect the comparability of the financial data presented below. HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Selected Financial Data 2008 For the fiscal years ended October 31, 2007 2006 2005 In millions, except per share amounts 2004 Net revenue...

  • Page 43
    ...devices; • imaging and printing-related products and services; • enterprise information technology infrastructure, including enterprise storage and server technology, and software that optimizes business technology investments; and • multi-vendor customer services, including technology support...

  • Page 44
    ... at lower costs; and • We are repurchasing 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. On August 26, 2008, we completed our acquisition of EDS, a leading provider...

  • Page 45
    ... for business acquisitions, $9.6 billion paid to repurchase our common stock, and $2.6 billion net investments in property, plant and equipment, all of which were partially offset by $14.6 billion in cash provided from operations, a $6.3 billion net increase in our outstanding debt and commercial...

  • Page 46
    ...recognize revenue using the completed contract method. We record estimated reductions to revenue for customer and distributor programs and incentive offerings, including price protection, promotions, other volume-based incentives and expected returns. Future market conditions and product transitions...

  • Page 47
    ... compensation cost for only those shares expected to vest on a straight-line basis over the requisite service period of the award. Prior to SFAS 123R adoption, we accounted for share-based payment awards under Accounting Principles Board Opinion No. 25, ''Accounting for Stock Issued to Employees...

  • Page 48
    ... volatility used in the Black-Scholes option pricing model in fiscal years 2008, 2007 and 2006 was based on market-based implied volatility. We issue performance-based restricted units (''PRUs'') representing hypothetical shares of HP common stock. Each PRU award reflects a target number of shares...

  • Page 49
    ... 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 corporate income tax audits in...

  • Page 50
    ... than the carrying value. Determining the fair value of a reporting unit or an indefinite-lived purchased intangible asset is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to...

  • Page 51
    ... for each of HP's reporting units. Warranty Provision We provide for the estimated cost of product warranties at the time we recognize revenue. We evaluate our warranty obligations on a product group basis. Our standard product warranty terms generally include post-sales support and repairs or...

  • Page 52
    ... • An increase of 25 basis points in the future compensation rate would have increased our net benefit cost by approximately $12 million. RECENT ACCOUNTING PRONOUNCEMENTS As previously reported in our 2007 Annual Report on Form 10-K, we recognized the funded status of our benefit plans at October...

  • Page 53
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) material impact on our consolidated results of operations and financial condition since we do not expect to apply the fair value option to any existing eligible ...

  • Page 54
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer's non-convertible debt borrowing rate. FSP APB ...

  • Page 55
    ... as compared to prior-year periods were as follows for the following fiscal years ended October 31: 2008 2007 Percentage points Personal Systems Group ...HP Services ...Imaging and Printing Group . . Enterprise Storage and Servers HP Software ...HP Financial Services ...Corporate Investments/Other...

  • Page 56
    .... HPS net revenue, excluding EDS, also increased in fiscal 2008 from fiscal 2007 as a result of revenue growth in technology services primarily from IT solution support services, existing account growth in outsourcing services and base business growth in our consulting and integration business unit...

  • Page 57
    ... margin as compared to prior-year periods were as follows for the following fiscal years ended October 31: 2008 2007 Percentage points HP Software ...Enterprise Storage and Servers Personal Systems Group ...Imaging and Printing Group . . HP Services ...HP Financial Services ...Corporate Investments...

  • Page 58
    ... in supply chain costs per unit, which were partially offset by ASP declines. During fiscal 2007, IPG gross margin decreased due primarily to unfavorable hardware margins, increased costs associated with new product introductions and a change in product mix. HPS gross margin increased during...

  • Page 59
    ... fiscal 2007, while HP Software experienced a year-over-year increase in SG&A expense. Amortization of Purchased Intangible Assets The increase in amortization expense during fiscal 2008 as compared to fiscal 2007 was due primarily to amortization expenses related to the EDS acquisition as well as...

  • Page 60
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Workforce Rebalancing As part of our ongoing business operations, we incurred workforce rebalancing charges for severance and related costs within certain ...

  • Page 61
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) The increase in the overall tax rate in fiscal 2007 from fiscal 2006 was related in part to favorable income tax adjustments of $599 million recorded in fiscal ...

  • Page 62
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) performance in mid-range EVA, entry MSA, tape media and storage software. Industry standard servers net revenue grew 2% in fiscal 2008 compared to fiscal 2007 as...

  • Page 63
    ...of EDS since the date of acquisition. EDS net revenue includes revenue from infrastructure outsourcing services, applications services and business process outsourcing services, which accounted for approximately 56%, 30% and 14% of revenues, respectively. HPS net revenue, excluding EDS, increased 11...

  • Page 64
    ... pressure. Consulting and integration operating margin decreased in fiscal 2007 due mainly to increased customer project losses and acquisition related costs, the impact of which was partially offset by more efficient utilization of our consultants and operating expense improvement. HP Software For...

  • Page 65
    ... gross margins than the remainder of the segment. The decrease in operating expenses as a percentage of net revenue in fiscal 2008 was due primarily to continued cost controls, the effect of which was partially offset by increased field selling costs driven by sales force investments. HP Software...

  • Page 66
    ... was related primarily to increased sales of third-party branded options and extended warranties. The revenue increase was partially offset by a decline in handhelds revenue driven by product transition within converged devices. In fiscal 2008, the positive revenue impact from the PSG unit volume...

  • Page 67
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) PSG net revenue increased 24.8% (20.6% when adjusted for currency) in fiscal 2007 from fiscal 2006. Unit volumes increased by 28% in fiscal 2007, driving double-...

  • Page 68
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) The decrease in consumer hardware net revenue in fiscal 2008 from fiscal 2007 was due primarily to discontinued sales of cameras, competitive pricing pressures ...

  • Page 69
    ... of net revenue. The gross margin decrease was driven primarily by increased bad debt expenses and lower bad debt recoveries, as well as lower margins on leases and used equipment sales. The decline in operating expenses as a percentage of net revenue was due to continued cost controls. Financing...

  • Page 70
    ... for doubtful accounts ...Operating lease equipment reserve ...Total reserves ...Net portfolio assets ...Reserve coverage ...Debt to equity ratio(2) ...(1) $8,297 90 60 150 $8,147 1.8% 6.5x $8,415 84 49 133 $8,282 1.6% 6.0x Portfolio assets include gross financing receivables of approximately...

  • Page 71
    ...by network infrastructure products and lower expenses related to HP Labs. In fiscal 2007, the majority of the net revenue in Corporate Investments related to network infrastructure products, which grew 33% from fiscal 2006 as new product introductions continued to drive increased sales of enterprise...

  • Page 72
    ... 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 73
    ... paper and debt. Common Stock Repurchases We repurchase shares of our common stock under an ongoing program to manage the dilution created by shares issued under employee benefit plans as well as to repurchase shares opportunistically. This program authorizes repurchases in the open market or in...

  • Page 74
    ...an equivalent number of shares in the open market to cover its position with respect to the borrowed shares during a contractually specified averaging period that began on the Purchase Date and ended on June 6, 2007. At the end of the averaging period, the investment bank's total purchase cost based...

  • Page 75
    ... total borrowings collateralized by certain financing receivable assets. As of October 31, 2008, a significant portion of our outstanding debt is related to HPFS. We issue debt in order to finance HPFS and as needed for other purposes, including acquisitions. HPFS has a business model that is asset...

  • Page 76
    ...to a number of factors, including liquidity conditions and business performance. In October 2008, we registered for the Commercial Paper Funding Facility (CPFF) provided by the Federal Reserve Bank of New York. The facility enables us to issue three-month unsecured commercial paper through a special...

  • Page 77
    ...cash payments of our long-term debt and do not include any fair value adjustments or discounts. Included in our long-term debt are approximately $372 million of capital lease obligations that are secured by certain equipment. Purchase obligations include agreements to purchase goods or services that...

  • Page 78
    ...by local government, funding and taxing authorities. We expect to use contributions made to the post-retirement benefit plans primarily for the payment of retiree health claims incurred during the fiscal year. We will make a significant cash payment associated with our fiscal 2008 bonus programs. We...

  • Page 79
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) these guarantees in the event our or our subsidiaries' nonperformance permits termination of the related contract by our client, the likelihood of which we ...

  • Page 80
    ... 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 and inter-company lease loan denominated in currencies other than the U.S. dollar. In addition, when debt is...

  • Page 81
    ... positions from time to time. We do not purchase our equity securities with the intent to use them for speculative purposes. A hypothetical 30% 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...

  • Page 82
    ...Summary of Significant Accounting Policies ...Note 2: Stock-Based Compensation ...Note 3: Net Earnings Per Share ...Note 4: Balance Sheet Details ...Note 5: Supplemental Cash Flow Information ...Note 6: Acquisitions ...Note 7: Goodwill and Purchased Intangible Assets ...Note 8: Restructuring Charges...

  • Page 83
    ...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 Company's internal control over financial reporting as of...

  • Page 84
    ...Data Systems Corporation constituted 3 percent of HewlettPackard Company's total net revenue, and the fair value assigned to tangible assets for purposes of applying the purchase method of accounting as of the acquisition date accounted for approximately 11 percent of Hewlett-Packard Company's total...

  • Page 85
    ... 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, 2008 and 2007, and the related consolidated statements of earnings, stockholders' equity and cash flows for...

  • Page 86
    ... 31, 2008. Revenue from the business operations acquired from EDS represented approximately 3 percent of HP's total net revenue for the fiscal year ended October 31, 2008, and the fair value assigned to tangible assets for purposes of applying the purchase method of accounting as of the date of the...

  • Page 87
    ... revenue ...Costs and expenses: Cost of products ...Cost of services ...Financing interest ...Research and development ...Selling, general and administrative ...Amortization of purchased intangible assets ...In-process research and development charges ...Restructuring charges ...Acquisition-related...

  • Page 88
    ...Property, plant and equipment ...Long-term financing receivables and other assets . Goodwill ...Purchased intangible assets ... Total assets ...LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and short-term borrowings ...Accounts payable ...Employee compensation and benefits...

  • Page 89
    ...-process research and development charges ...Acquisition-related charges ...Deferred taxes on earnings ...Excess tax benefit from stock-based compensation ...Losses (gains) on investments ...Other, net ...Changes in assets and liabilities: Accounts and financing receivables ...Inventory ...Accounts...

  • Page 90
    ... plans and other . Prepaid stock repurchase ...Repurchases of common stock ...Tax benefit from employee stock plans . . Dividends ...Stock-based compensation expense under SFAS 123R ...2,837,196 In millions, except number of shares in thousands $28 $20,490 $ - $16,679 $ (21) 6,198 (6) (9) 54 Total...

  • Page 91
    ...the date of each acquisition. HP allocates the purchase price of its acquisitions to the tangible assets acquired, liabilities assumed and intangible assets acquired, including in-process research & development (''IPR&D'') charges, based on their estimated fair values. The excess purchase price over...

  • Page 92
    ... the collected taxes recorded as current liabilities until remitted to the relevant government authority. Products Hardware Under HP's standard terms and conditions of sale, HP transfers title and risk of loss to the customer at the time product is delivered to the customer and revenue is recognized...

  • Page 93
    ... leases on a straight-line basis as service revenue over the rental period. HP recognizes costs associated with outsourcing contracts as incurred, unless such costs relate to the transition phase of the outsourcing contract, in which case HP defers and subsequently amortizes these set-up costs...

  • Page 94
    ... of bankruptcy filings or deterioration in the customer's operating results or financial 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...

  • Page 95
    ... and testing of the software. HP amortizes capitalized costs using the straight-line method over the estimated useful lives of the software, generally from three to five years. Goodwill and Indefinite-Lived Purchased Intangible Assets Statement of Financial Accounting Standards (''SFAS'') No. 142...

  • Page 96
    ... a new cost basis for the investment at its current fair value. In order to determine whether a decline in value is other than temporary, HP evaluates, among other factors: the duration and extent to which the fair value has been less than the carrying value; the financial condition of and business...

  • Page 97
    ... terms under which HP is supplied components by a single source supplier could adversely affect HP's revenue and gross margins. Stock-Based Compensation Stock-based compensation expense for all share-based payment awards granted after November 1, 2005 is determined based on the grant-date fair value...

  • Page 98
    ... on stock-based compensation. Foreign Currency Transactions HP uses the U.S. dollar predominately as its functional currency. Assets and liabilities denominated in non-U.S. dollars are remeasured into U.S. dollars at current exchange rates for monetary assets and liabilities, and historical exchange...

  • Page 99
    ...not currently believe adoption will have a material impact on its consolidated results of operations and financial condition since we do not expect to apply the fair value option to any existing eligible assets or liabilities. In December 2007, the FASB issued SFAS No. 141 (revised 2007), ''Business...

  • Page 100
    ...FSP APB 14-1''). FSP APB 14-1 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer's non...

  • Page 101
    ... total compensation expense before taxes related to these plans was $606 million, $629 million and $536 million for fiscal 2008, 2007 and 2006, respectively. Employee Stock Purchase Plan HP sponsors the Hewlett-Packard Company 2000 Employee Stock Purchase Plan, also known as the Share Ownership Plan...

  • Page 102
    ... options'' under the U.S. Internal Revenue Code. The 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 reported sale prices of HP's common stock when the market closes on that date). The contractual term of options...

  • Page 103
    ...-PACKARD COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Note 2: Stock-Based Compensation (Continued) executive officers. Each PRU award reflects a target number of shares that may be issued to the award recipient. The actual number of shares the recipient receives...

  • Page 104
    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 105
    ... of total unrecognized compensation cost related to stock options was expected to be recognized over a weighted-average period of 2.1 years. Restricted Stock Awards Nonvested restricted stock awards as of October 31, 2008 and 2007 were as follows: WeightedAverage Grant Date Fair Value Shares In...

  • Page 106
    ... $83 million of unrecognized stock-based compensation expense related to nonvested restricted stock awards. That cost is expected to be recognized over a weighted-average period of 1.0 years. Performance-based Restricted Units HP estimated the fair value of a target PRU share using the Monte Carlo...

  • Page 107
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Note 2: Stock-Based Compensation (Continued) The following assumptions were used to determine the fair value of the PRU awards for the first year: 2008 Expected Risk-free Dividend Expected (1) ...

  • Page 108
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Note 2: Stock-Based Compensation (Continued) Cash received from option exercises and purchases under the ESPP in fiscal 2008 was $1.8 billion. The actual tax benefit realized for the tax deduction from ...

  • Page 109
    ... to purchase an additional 28 million shares, 33 million shares and 48 million shares in fiscal 2008, 2007 and 2006, respectively, whose combined exercise price, unamortized fair value and excess tax benefits were greater in each of those periods than the average market price for HP's common stock...

  • Page 110
    ... under these programs. Inventory 2008 2007 In millions Finished goods ...Purchased parts and fabricated assemblies ... $5,219 2,660 $7,879 $5,404 2,629 $8,033 Other Current Assets 2008 2007 In millions Deferred tax assets - short-term ...Value added taxes receivable from the government Supplier...

  • Page 111
    ...-Term Financing Receivables and Other Assets 2008 2007 In millions Financing receivables ...Deferred tax assets-long-term ...Other ... $ 2,722 792 6,954 $10,468 $2,778 961 3,908 $7,647 Other Accrued Liabilities 2008 2007 In millions Other accrued taxes ...Warranty ...Sales and marketing programs...

  • Page 112
    ... date. Deferred revenue represents amounts received or billed in advance for fixed-price support or maintenance contracts, software customer support contracts, outsourcing services start-up or transition work, consulting and integration projects, product sales and leasing income. The fixed-price...

  • Page 113
    ... during the purchase price allocation period (generally one year from the acquisition date) as valuations are finalized. In millions Cash and short-term investments Accounts receivable ...Property, plant and equipment . . Other tangible assets ...Notes payable and debt ...Pension liability (Note 15...

  • Page 114
    ... technology and trade name assets include patents, business processes and tools, proprietary business methods and the EDS family brand. EDS's technology can be leveraged to assist and improve existing services. IPR&D charges relate to amounts assigned to tangible and intangible assets to be used in...

  • Page 115
    ... Software, LLC, which has been integrated into HP's Imaging and Printing Group. The total purchase price paid was approximately $720 million, which included direct transaction costs as well as certain debt that was repaid at the acquisition date. In connection with this acquisition, HP recorded...

  • Page 116
    ...management solutions. The aggregate purchase price of approximately $4.9 billion consisted of cash paid for outstanding stock, the fair value of stock options assumed and direct transaction costs. Based on valuations prepared using estimates and assumptions provided by management, the purchase price...

  • Page 117
    ... the fiscal year ended October 31, 2008 are as follows: Enterprise Imaging Storage Personal and HP HP and HP Systems Printing Financial Corporate Services Servers Software Group Group Services Investments In millions Total Balance at October 31, 2007 ...$ 6,221 $5,076 Goodwill acquired during the...

  • Page 118
    ... Amortization Gross Net Gross In millions Net Customer contracts, customer lists and distribution agreements ...Developed and core technology and patents ...Product trademarks ...Total amortizable purchased intangible assets ...Compaq trade name ...Total purchased intangible assets ... $ 6,530...

  • Page 119
    ... related to severance costs for approximately 2,700 employees and the cost to vacate duplicate facilities. All restructuring costs associated with pre-acquisition EDS are reflected in the purchase price of EDS in accordance with EITF 95-3, ''Recognition of Liabilities in Connection with a Purchase...

  • Page 120
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Note 8: Restructuring Charges (Continued) approximately $77 million of accrued restructuring expenses associated with these plans. HP expects to pay the majority of these costs through 2018. Workforce ...

  • Page 121
    ... Other debt securities consist primarily of fixed-interest securities invested for early retirement purposes and also fixed income fund. 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...

  • Page 122
    ...-held companies include cost basis and equity method investments. Marketable trading securities and other investments consist primarily of marketable trading securities held to generate returns that HP expects to offset changes in certain liabilities related to deferred compensation arrangements. HP...

  • Page 123
    ...Value Hedges HP may enter into fair value hedges to reduce the exposure of its debt portfolio to both interest rate risk and foreign currency exchange rate risk. HP issues long-term debt in either U.S. dollars or foreign currencies based on market conditions at the time of financing. HP may then use...

  • Page 124
    ... exchange rate risks inherent in its forecasted net revenue and, to a lesser extent, cost of sales and intercompany lease loan 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...

  • Page 125
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) ...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...

  • Page 126
    ...that date. The estimated 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...

  • Page 127
    ... 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 actively monitoring and 121

  • Page 128
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Note 11: Guarantees (Continued) evaluating the quality of its component suppliers; however, product warranty terms offered to customers, ongoing product failure rates, material usage and service delivery...

  • Page 129
    ...convertible notes, due 2017 (''LYONs''), issued in October and November 1997 at an imputed rate of 3.13%, and redeemed March 2008 ...Other, including capital lease obligations, at 3.75%-8.63%, due 2007-2029 ...Fair value adjustment related to SFAS No. 133 ...Less current portion ... $ 499 - 600 900...

  • Page 130
    ... Directors approved increasing the capacity of HP's U.S. commercial paper program by $10.0 billion to $16.0 billion. HP's subsidiaries are authorized to issue up to an additional $1.0 billion of commercial paper, of which $500 million of capacity is currently available to be used by Hewlett-Packard...

  • Page 131
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Note 12: Borrowings (Continued) The maximum amount of commercial paper that HP may issue at any time through this program is $10.4 billion less the total principal amount of all other outstanding ...

  • Page 132
    ... ...State taxes: Current ...Deferred ... ... $ 405 686 922 (85) 44 172 $2,144 $ 639 229 1,281 (125) 67 (178) $1,913 $(183) 264 755 173 9 (25) $ 993 (1) HP has revised the presentation for the fiscal years ended October 31, 2007 and 2006 regarding the tax benefit of stock option plans. The...

  • Page 133
    ... - 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 134
    ... foreign tax credits and net operating losses carryovers. Of the $1.8 billion in valuation allowances at October 31, 2008, $565 million was related to deferred tax assets for acquired companies that existed at the time of acquisition. Prior to the effective date of SFAS 141(R), to the extent that HP...

  • Page 135
    ...result of certain employment actions and capital investments HP has undertaken, income from manufacturing activities in certain countries is subject to reduced tax rates, and in some cases is wholly exempt from taxes through 2022. The gross income tax benefits attributable to the tax status of these...

  • Page 136
    ...amount reflects certain transfer pricing adjustments that were settled during fiscal 2008. HP plans to contest certain remaining adjustments proposed in the Notice of Deficiency and the RAR. Towards this end, HP filed a petition with the United States Tax Court on April 29, 2008. HP believes that it...

  • Page 137
    ...' Equity Dividends The stockholders of HP common stock are entitled to receive dividends when and as declared by HP's Board of Directors. Dividends are paid quarterly. Dividends were $0.32 per common share in each of fiscal 2008, 2007 and 2006. Stock Repurchase Program HP's share repurchase program...

  • Page 138
    .... Pursuant to the terms of the ASR Program, HP purchased 40 million shares of its common stock from the investment bank for $1.8 billion (the ''Purchase Price'') on March 30, 2007 (the ''Purchase Date''). HP decreased its shares outstanding and reduced the outstanding shares used to calculate the...

  • Page 139
    ... 15: Retirement and Post-Retirement Benefit Plans Acquisition of EDS $ On August 26, 2008, EDS became a wholly owned subsidiary of HP. EDS sponsors qualified and non-qualified defined benefit pension plans covering substantially all of its employees. The majority of the EDS defined benefit pension...

  • Page 140
    ... on pay and service through December 31, 2007. HP reduces the benefit payable to a U.S. employee under the Retirement Plan for service before 1993, if any, by any amounts due to the employee under HP's frozen defined contribution Deferred Profit-Sharing Plan (the ''DPSP''). HP closed the DPSP to new...

  • Page 141
    ... changing the limits on future cost-sharing for the Pre-2003 Program whereby all future cost increases will be paid by participating retirees starting in 2011. Defined Contribution Plans HP offers various defined contribution plans for U.S. and non-U.S. employees. Total defined contribution expense...

  • Page 142
    ... on eligible compensation. Similar to the HP 401(k) plan, contributions are invested at the direction of the employee in various funds, although the EDS 401(k) plan does not offer an HP stock fund. Since the acquisition date, employer matching contributions for EDS employees have totaled $6 million...

  • Page 143
    ... Benefit Plans 2008 2007 2006 Non-U.S. Defined Benefit Plans 2008 2007 2006 Post-Retirement Benefit Plans 2008 2007 2006 Discount rate ...6.4% 5.9% 5.9% 5.2% 4.4% 4.2% 6.2% 5.8% 5.8% Average increase in compensation levels ...3.7% 4.0% 4.0% 3.3% 3.3% 3.7% - - - Expected long-term return on assets...

  • Page 144
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Note 15: Retirement and Post-Retirement Benefit Plans (Continued) Funded Status The funded status of the defined benefit and post-retirement benefit plans was as follows for the following fiscal years ...

  • Page 145
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Note 15: Retirement and Post-Retirement Benefit Plans (Continued) The net amounts recognized for HP's defined benefit and post-retirement benefit plans in HP's Consolidated Balance Sheets as of October ...

  • Page 146
    ... 2008 and 2007 fiscal close were as follows: U.S. Defined Benefit Plans 2008 2007 Non-U.S. Defined Benefit Plans 2008 2007 Post-Retirement Benefit Plans 2008 2007 Discount rate ...Average increase in compensation levels . Current medical cost trend rate ...Ultimate medical cost trend rate ...Year...

  • Page 147
    ... Assets Target Allocation 2008 2007 Post-Retirement Benefit Plans 2008 Plan Assets Target Allocation 2008 2007 Asset Category Public equity securities ...Private equity securities ...Real estate and other ...Equity-related investments ...Public debt securities ...Cash ...Total ...Investment Policy...

  • Page 148
    .... 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. Outside the United States, investment objectives...

  • Page 149
    ...557 The estimated future benefits payable for the post-retirement plans are reflected net of the expected Medicare Part D subsidy. Note 16: Commitments HP leases certain real and personal property under non-cancelable operating leases. Certain leases require HP to pay property taxes, insurance and...

  • Page 150
    ..., consisting of intellectual property, commercial, securities, employment, employee benefits and environmental matters that 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...

  • Page 151
    ... against HP before the arbitration 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...

  • Page 152
    ...impact on HP, including the number of units impacted, the amount of levies imposed and the ability of HP to recover such amounts through increased prices, remains uncertain. Sky Subscribers Services Limited and British Sky Broadcasting Limited v. EDS and EDS Limited (UK) is a lawsuit filed on August...

  • Page 153
    ...a consumer class action filed against HP on May 22, 2006 in the United States District Court for the Northern District of California. The suit alleges that HP designed its color inkjet printers to unnecessarily use color ink in addition to black ink when printing black and white images and text. The...

  • Page 154
    ...adding the allegation that all HP products which employ the draft IEEE 802.11n wireless protocol infringe the CSIRO patent. Trial is scheduled for April 2009. The United States of America, ex rel. Norman Rille and Neal Roberts v. Hewlett-Packard Company, et al. In 2004, two private individuals filed...

  • Page 155
    ... law in connection with the leak investigation. As a result of this agreement, which includes an injunction, the California Attorney General will not pursue civil claims against HP or its current and former directors, officers and employees. Under the terms of the agreement, HP paid a total of $14...

  • Page 156
    ... California cases under the caption In re Hewlett-Packard Company Derivative Litigation. The consolidated complaint filed on November 19, 2006, also seeks to recover damages in connection with sales of HP stock alleged to have been made by certain current and former HP officers and directors while...

  • Page 157
    ...and Servers (''ESS''), HP Services (''HPS''), HP Software, the Personal Systems Group (''PSG''), the Imaging and Printing Group (''IPG''), HP Financial Services (''HPFS''), and Corporate Investments. The business operation that we acquired through our acquisition of EDS is a business unit within HPS...

  • Page 158
    ...the public sector, including government services. HPS collaborates with the Enterprise Storage and Servers and HP Software, 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 Group and...

  • Page 159
    ... products include Media Smart home servers, HD DVD and RW drives and DVD writers. • Imaging and Printing Group provides consumer and commercial printer hardware, printing supplies, printing media and scanning devices. IPG is also focused on imaging solutions in the commercial markets, from managed...

  • Page 160
    ... intangible assets, stock-based compensation expense related to HP-granted employee stock options, PRU's 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 161
    ... other ...Total HP consolidated net revenue ...Earnings before taxes: Total segment earnings from operations ...Corporate and unallocated costs and eliminations ...Unallocated costs related to certain stock-based compensation expense Amortization of purchased intangible assets ...In-process research...

  • Page 162
    ...to HP consolidated total assets were as follows at October 31: 2008 2007 In millions 2006 Enterprise Storage and Servers ...HP Services ...HP Software ...Technology Solutions Group ...Personal Systems Group ...Imaging and Printing Group ...HP Financial Services ...Corporate Investments ...Corporate...

  • Page 163
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Note 18: Segment Information (Continued) purchased intangible assets, which HP does not allocate to specific geographic locations as it is impracticable for HP to do so, are composed principally of net ...

  • Page 164
    .... Desktops ...Workstations Handhelds . . Other ... Personal Systems Group ...Commercial hardware Consumer hardware . Supplies ...Other ... Imaging and Printing Group ...HP Financial Services ...Corporate Investments ...Total segments ...Eliminations of inter-segment net revenue and other ...Total HP...

  • Page 165
    ... ...Cash dividends paid per share ...Range of per share closing stock prices on the New York Stock Exchange Low ...High ...2007 Net revenue ...Cost of sales(1) ...Research and development ...Selling, general and administrative ...Amortization of purchased intangible assets ...In-process research and...

  • Page 166
    ... in our Securities and Exchange Commission (''SEC'') reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to HP's management, including our principal executive officer and principal financial...

  • Page 167
    ... 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 approved plans and non-stockholder approved plans, is set forth in the...

  • Page 168
    ...with related persons is set forth under ''Related Person Transaction Policies and Procedures.'' • Information regarding director independence is set forth under ''Corporate Governance Principles and Board Matters-Director Independence.'' ITEM 14. Principal Accounting Fees and Services. Information...

  • Page 169
    ... page 167 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 170
    Schedule II HEWLETT-PACKARD COMPANY AND SUBSIDIARIES Valuation and Qualifying Accounts For the fiscal years ended October 31 2008 2007 2006 In millions Allowance for doubtful accounts - accounts receivable: Balance, beginning of period ...Amount acquired through acquisition ...Addition of bad debt ...

  • Page 171
    ... 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 18, 2008 HEWLETT-PACKARD COMPANY By: /s/ CATHERINE A. LESJAK Catherine A. Lesjak Executive Vice President and Chief Financial...

  • Page 172
    Signature Title(s) Date /s/ JOEL Z. HYATT Joel Z. Hyatt /s/ JOHN R. JOYCE John R. Joyce /s/ ROBERT L. RYAN Robert L. Ryan /s/ LUCILLE S. SALHANY Lucille S. Salhany /s/ G. KENNEDY THOMPSON G. Kennedy Thompson Director December 18, 2008 Director December 18, 2008 Director December 18, 2008 ...

  • Page 173
    HEWLETT-PACKARD COMPANY AND SUBSIDIARIES EXHIBIT INDEX Exhibit Number Incorporated by Reference File No. Exhibit(s) Filing Date Exhibit Description Form 2(a) Agreement and Plan of Merger by and among Electronic Data Systems Corporation, Hewlett-Packard Company and Hawk Merger Corporation. 2(b) ...

  • Page 174
    ... 10(k) Amendment of Compaq Computer Corporation Non-Qualified Stock Option Plan for Non-Employee Directors, effective September 3, 2001.* 10(l) Compaq Computer Corporation 1998 Former Nonemployee Replacement Option Plan.* 10(m) Registrant's Excess Benefit Retirement Plan, amended and restated as of...

  • Page 175
    ... Form Incorporated by Reference File No. Exhibit(s) Filing Date 10(n) Hewlett-Packard Company Cash Account Restoration Plan, amended and restated as of January 1, 2005.* 10(o) Registrant's 2005 Pay-for-Results Plan.* 10(p) Registrant's 2005 Executive Deferred Compensation Plan, as amended and...

  • Page 176
    ... Grant Notice for the Compaq Computer Corporation 1989 Equity Incentive Plan.* 10(g)(g) Forms of Stock Option Notice for the Compaq Computer Corporation Non-Qualified Stock Option Plan for Non-Employee Directors, as amended.* 10(h)(h) Form of Long-Term Performance Cash Award Agreement for Registrant...

  • Page 177
    ... by Reference File No. Exhibit(s) Filing Date 10(l)(l) Second Amendment to the Registrant's 2005 Executive Deferred Compensation Plan, as amended and restated effective October 1, 2006.* 10(m)(m) Form of Stock Notification and Award Agreement for awards of performancebased restricted units.* 10...

  • Page 178
    ... debt not filed herewith as to which the total amount of securities authorized thereunder does not exceed 10 percent of the total assets of the registrant and its subsidiaries on a consolidated basis and (2) any omitted schedules to any material plan of acquisition, disposition or reorganization set...

  • Page 179
    ... I, Mark V. Hurd, certify that: 1. 2. I have reviewed this Annual Report on Form 10-K of Hewlett-Packard Company; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the...

  • Page 180
    ... 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, 2008 /s/ CATHERINE A. LESJAK Catherine A. Lesjak, Executive Vice President and Chief Financial Officer (Principal Financial...

  • Page 181
    ...Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Hewlett-Packard Company. December 15, 2008 By: /s/ CATHERINE A. LESJAK Catherine A. Lesjak Executive Vice President...

  • Page 182
    ... $ in billions $34.0 $33.6 FY08 revenue by segment Imaging & Printing Group Personal Systems Group HP Services $28.5 $28.3 $28.3 $28.0 32.0 30.0 28.0 26.0 $25.5 $25.1 $25.4 $24.6 25% 36% Enterprise Storage & Servers HP Software HP Financial Services & other 3% 1% 19% 16% 24.0 $22.7 $21.9 22...

  • Page 183
    www.hp.com © 2009 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 ...