HP 2009 Annual Report Download - page 53

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
call rates, average cost per call, and current period product shipments. If actual product failure rates,
repair rates or any other post sales support costs were to differ from our estimates, we would be
required to make revisions to the estimated warranty liability. Warranty terms generally range from
90 days to three years parts and labor, depending upon the product. Over the last three fiscal years, the
annual warranty provision has averaged approximately 3.5% of annual net product revenue, while
actual annual warranty costs have averaged approximately 3.3% 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
on plan assets and medical cost trend rates. We base the discount rate assumption on current
investment yields of high quality fixed income investments during the retirement benefits maturity
period. The salary growth assumptions reflect our long-term actual experience and future and
near-term outlook. Long-term return on plan assets is determined based on historical portfolio results
and management’s expectation of the future economic environment, as well as target asset allocations.
In the beginning of fiscal 2008, we implemented a liability-driven investment strategy for the HP
U.S. defined benefit pension plan, which was frozen effective December 31, 2007. As part of the
strategy, we transitioned our investment allocation for that plan to predominantly fixed income assets.
In fiscal 2008, we acquired EDS. The EDS U.S. defined benefit plan assets were invested
predominantly in public equity and alternative investments. At the end of fiscal 2009, the assets of the
HP and EDS plans were merged, resulting in a portfolio with a blend of fixed income, equities and
alternatives. The expected return on the plan assets, used in calculating the net benefit cost, is 7.99%
for fiscal 2010, which reflects the target asset allocation of the merged portfolio.
Our medical cost trend assumptions are developed based on historical cost data, the near-term
outlook and an assessment of likely long-term trends. Actual results that differ from our assumptions
are accumulated and are amortized generally over the estimated future working life of the plan
participants.
Our major assumptions vary by plan and the weighted-average rates used are set forth in Note 16
to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference. Each
assumption has different sensitivity characteristics, and, in general, changes, if any, have moved in the
same direction over the last several years. For fiscal 2009, changes in the weighted-average rates for the
HP benefit plans would have had the following impact on our net periodic benefit cost:
• A decrease of 25 basis points in the long-term rate of return would have increased our net
benefit cost by approximately $43 million;
• A decrease of 25 basis points in the discount rate would have increased our net benefit cost by
approximately $71 million; and
• An increase of 25 basis points in the future compensation rate would have increased our net
benefit cost by approximately $15 million.
Loss Contingencies
We are involved in various lawsuits, claims, investigations and proceedings that arise in the
ordinary course of business. We record a provision for a liability when we believe that it is both
probable that a liability has been incurred and the amount can be reasonably estimated. Significant
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