HP 2010 Annual Report Download - page 35

resolution of audits could be materially different from the amounts previously included in our income
tax expense and therefore could have a material impact on our tax provision, net income and cash
flows. In addition, our effective tax rate in the future could be adversely affected by changes to our
operating structure, changes in the mix of earnings in countries with differing statutory tax rates,
changes in the valuation of deferred tax assets and liabilities, changes in tax laws and the discovery of
new information in the course of our tax return preparation process. In particular, 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. In addition, President Obama’s administration has
announced proposals for other U.S. tax legislation that, if adopted, could adversely affect our tax rate.
There are also other tax proposals that have been introduced, that are being considered, or that have
been enacted by the United States Congress or the legislative bodies in foreign jurisdictions that could
affect our tax rate, the carrying value of deferred tax assets, or our other tax liabilities. For example,
the Commonwealth of Puerto Rico has enacted tax legislation effective on January 1, 2011 that, in
certain situations, would impose a new, temporary excise tax relating to our non-Puerto Rican
subsidiaries that sell products manufactured by our Puerto Rican subsidiaries. Any of these changes
could affect our profitability.
Our sales cycle makes planning and inventory management difficult and future financial results less
predictable.
In some of our segments, our quarterly sales often have reflected a pattern in which a
disproportionate percentage of each quarter’s total sales occur towards the end of such quarter. This
uneven sales pattern makes prediction of revenue, earnings, cash flow from operations and working
capital for each financial period difficult, increases the risk of unanticipated variations in quarterly
results and financial condition and places pressure on our inventory management and logistics systems.
If predicted demand is substantially greater than orders, there will be excess inventory. Alternatively, if
orders substantially exceed predicted demand, we may not be able to fulfill all of the orders received in
the last few weeks of each quarter. Other developments late in a quarter, such as a systems failure,
component pricing movements, component shortages or global logistics disruptions, could adversely
impact inventory levels and results of operations in a manner that is disproportionate to the number of
days in the quarter affected.
We experience some seasonal trends in the sale of our products that also may produce variations
in quarterly results and financial condition. For example, sales to governments (particularly sales to the
United States government) are often stronger in the third calendar quarter, consumer sales are often
stronger in the fourth calendar quarter, and many customers whose fiscal and calendar years are the
same spend their remaining capital budget authorizations in the fourth calendar quarter prior to new
budget constraints in the first calendar quarter of the following year. European sales are often weaker
during the summer months. Demand during the spring and early summer also may be adversely
impacted by market anticipation of seasonal trends. Moreover, to the extent that we introduce new
products in anticipation of seasonal demand trends, our discounting of existing products may adversely
affect our gross margin prior to or shortly after such product launches. Typically, our third fiscal
quarter is our weakest and our fourth fiscal quarter is our strongest. Many of the factors that create
and affect seasonal trends are beyond our control.
Any failure by us to execute on our strategy for operational efficiency successfully could result in total costs
and expenses that are greater than expected.
We have adopted an operating framework that includes a disciplined focus on operational
efficiency. As part of this framework, we have adopted several initiatives, including a multi-year
program announced in 2006 to reduce real estate costs by consolidating several hundred HP real estate
locations worldwide to fewer core sites, and a multi-year process of examining every function and every
one of our businesses and functions in order to optimize efficiency and reduce cost. We have also
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