HP 2012 Annual Report Download - page 58

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
and interest rate exposures. When active market quotes are not available, we use industry standard
valuation models. Where applicable, these models project future cash flows and discount the future
amounts to a present value using market-based observable inputs including interest rate curves, credit
risk, foreign exchange rates, and forward and spot prices for currencies. In certain cases, market-based
observable inputs are not available and, in those cases, we use management judgment to develop
assumptions which are used to determine fair value.
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 and long-term
return on plan assets. 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 expectations
related to the future economic environment, as well as target asset allocations. Actual results in any
given year will often differ from actuarial assumptions because of economic and other factors.
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 2012, 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 $61 million;
• A decrease of 25 basis points in the discount rate would have increased our net benefit cost by
approximately $78 million; and
• An increase of 25 basis points in the future compensation rate would have increased our net
benefit cost by approximately $23 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
judgment is required to determine both probability and the estimated amount. We review these
provisions at least quarterly and adjust these provisions to reflect the impact of negotiations,
settlements, rulings, advice of legal counsel and updated information. Litigation is inherently
unpredictable and is subject to significant uncertainties, some of which are beyond our control. Should
any of these estimates and assumptions change or prove to have been incorrect, it could have a
material impact on our results of operations, financial position and cash flows. See Note 18 to the
Consolidated Financial Statements in Item 8 for a further discussion of litigation and contingencies.
CONSTANT CURRENCY PRESENTATION
Revenue from our international operations has historically represented, and we expect will
continue to represent, a majority of our overall net revenue. As a result, our revenue growth has been
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