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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-Q

(Mark One)    

ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: January 31, 2013

Or

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                        to                         

Commission file number 1-4423



HEWLETT-PACKARD COMPANY
(Exact name of registrant as specified in its charter)

Delaware   94-1081436
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. employer
identification no.)

3000 Hanover Street, Palo Alto, California

 

94304
(Address of principal executive offices)   (Zip code)

(650) 857-1501
(Registrant's telephone number, including area code)



        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ý    No o

        Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ý    No o

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o
(Do not check if a smaller
reporting company)
  Smaller reporting company o

        Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).    Yes o    No ý

        The number of shares of HP common stock outstanding as of February 28, 2013 was 1,944,019,483 shares.


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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
INDEX

 
   
   
  Page
No.
 

Part I.

  Financial Information        

  Item 1.  

Financial Statements

    4  

     

Consolidated Condensed Statements of Earnings for the three months ended January 31, 2013 and 2012 (Unaudited)

    4  

     

Consolidated Condensed Statements of Comprehensive Income for the three months ended January 31, 2013 and 2012 (Unaudited)

    5  

     

Consolidated Condensed Balance Sheets as of January 31, 2013 (Unaudited) and as of October 31, 2012 (Audited)

    6  

     

Consolidated Condensed Statements of Cash Flows for the three months ended January 31, 2013 and 2012 (Unaudited)

    7  

     

Notes to Consolidated Condensed Financial Statements (Unaudited)

    8  

  Item 2.  

Management's Discussion and Analysis of Financial Condition and Results of Operations

    55  

  Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

    91  

  Item 4.  

Controls and Procedures

    91  

Part II.

  Other Information        

  Item 1.  

Legal Proceedings

    92  

  Item 1A.  

Risk Factors

    92  

  Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

    92  

  Item 5.  

Other Information

    93  

  Item 6.  

Exhibits

    93  

Signature

    94  

Exhibit Index

    95  

Forward-Looking Statements

        This Quarterly Report on Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 2 of Part I of this report, contains forward-looking statements that involve risks, uncertainties and assumptions. If the risks or uncertainties ever materialize or the assumptions prove incorrect, the results of Hewlett-Packard Company and its consolidated subsidiaries ("HP") may differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including but not limited to any projections of revenue, margins, expenses, earnings, earnings per share, tax provisions, cash flows, benefit obligations, share repurchases, currency exchange rates or other financial items; any projections of the amount, timing or impact of cost savings or restructuring charges; any statements of the plans, strategies and objectives of management for future operations, including the execution of restructuring plans and any resulting cost savings or revenue or profitability improvements; any statements concerning the expected development, performance, market share or competitive performance relating to products or services; any statements regarding current or future macroeconomic trends or events and the impact of those trends and events on HP and its financial performance; any statements regarding pending investigations, claims or disputes; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. Risks, uncertainties and assumptions include the need to address the many challenges facing HP's businesses; the competitive pressures faced by HP's businesses; risks associated with executing HP's strategy; the impact of macroeconomic and geopolitical trends and events; the need to manage third-party suppliers and the distribution of HP's products and services effectively; the protection of HP's intellectual property assets, including intellectual property licensed from third parties; risks associated with HP's international operations;

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the development and transition of new products and services and the enhancement of existing products and services to meet customer needs and respond to emerging technological trends; the execution and performance of contracts by HP and its suppliers, customers and partners; the hiring and retention of key employees; integration and other risks associated with business combination and investment transactions; the execution, timing and results of restructuring plans, including estimates and assumptions related to the cost and the anticipated benefits of implementing those plans; the resolution of pending investigations, claims and disputes; and other risks that are described herein, including but not limited to the items discussed in "Factors that Could Affect Future Results" set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 2 of Part I of this report, and that are otherwise described from time to time in HP's Securities and Exchange Commission ("SEC") reports, including HP's Annual Report on Form 10-K for the fiscal year ended October 31, 2012. HP assumes no obligation and does not intend to update these forward-looking statements.

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PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements.

        


HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Consolidated Condensed Statements of Earnings

(Unaudited)

 
  Three months ended
January 31
 
 
  2013   2012  
 
  In millions, except
per share amounts

 

Net revenue:

             

Products

  $ 18,270   $ 19,511  

Services

    9,971     10,409  

Financing income

    118     116  
           

Total net revenue

    28,359     30,036  
           

Costs and expenses:

             

Cost of products

    14,031     15,049  

Cost of services

    7,918     8,186  

Financing interest

    80     78  

Research and development

    794     786  

Selling, general and administrative

    3,300     3,367  

Amortization of purchased intangible assets

    350     466  

Restructuring charges

    130     40  

Acquisition-related charges

    4     22  
           

Total operating expenses

    26,607     27,994  
           

Earnings from operations

    1,752     2,042  
           

Interest and other, net

    (179 )   (221 )
           

Earnings before taxes

    1,573     1,821  

Provision for taxes

    (341 )   (353 )
           

Net earnings

  $ 1,232   $ 1,468  
           

Net earnings per share:

             

Basic

  $ 0.63   $ 0.74  
           

Diluted

  $ 0.63   $ 0.73  
           

Cash dividends declared per share

  $ 0.26   $ 0.24  

Weighted-average shares used to compute net earnings per share:

             

Basic

    1,953     1,981  
           

Diluted

    1,956     1,998  
           

   

The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Consolidated Condensed Statements of Comprehensive Income

(Unaudited)

 
  Three months ended
January 31
 
 
  2013   2012  
 
  In millions
 

Net earnings

  $ 1,232   $ 1,468  
           

Other comprehensive (loss) income before tax:

             

Change in unrealized gains (losses) on available-for-sale securities

    3     (62 )
           

Change in unrealized gains / losses on cash flow hedges:

             

Unrealized (losses) gains arising during the period

    (314 )   407  

Losses (gains) reclassified into earnings

    64     (98 )
           

    (250 )   309  
           

Change in unrealized components of defined benefit plans:

             

Losses arising during the period

        (59 )

Amortization of actuarial loss and prior service benefit

    83     43  

Curtailments, settlements and other

    13     173  
           

    96     157  
           

Change in cumulative translation adjustment

    (26 )   (247 )
           

Other comprehensive (loss) income before taxes

    (177 )   157  

Benefit (Provision) for taxes

    64     (166 )
           

Other comprehensive loss, net of tax

    (113 )   (9 )
           

Comprehensive income

  $ 1,119   $ 1,459  
           

   

The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Consolidated Condensed Balance Sheets

 
  January 31,
2013
  October 31,
2012
 
 
  In millions, except par value
 
 
  (Unaudited)
   
 

ASSETS

 

Current assets:

             

Cash and cash equivalents

  $ 12,589   $ 11,301  

Accounts receivable

    14,236     16,407  

Financing receivables

    3,316     3,252  

Inventory

    6,374     6,317  

Other current assets

    13,037     13,360  
           

Total current assets

    49,552     50,637  
           

Property, plant and equipment

    11,686     11,954  

Long-term financing receivables and other assets

    10,249     10,593  

Goodwill

    31,031     31,069  

Purchased intangible assets

    4,183     4,515  
           

Total assets

  $ 106,701   $ 108,768  
           

LIABILITIES AND STOCKHOLDERS' EQUITY

 

Current liabilities:

             

Notes payable and short-term borrowings

  $ 6,475   $ 6,647  

Accounts payable

    11,660     13,350  

Employee compensation and benefits

    3,520     4,058  

Taxes on earnings

    851     846  

Deferred revenue

    7,603     7,494  

Accrued restructuring

    833     771  

Other accrued liabilities

    13,444     13,500  
           

Total current liabilities

    44,386     46,666  
           

Long-term debt

    21,752     21,789  

Other liabilities

    17,273     17,480  

Commitments and contingencies

             

Stockholders' equity:

             

HP stockholders' equity

             

Preferred stock, $0.01 par value (300 shares authorized; none issued)

         

Common stock, $0.01 par value (9,600 shares authorized; 1,953 and 1,963 shares issued and outstanding, respectively)

    20     20  

Additional paid-in capital

    6,308     6,454  

Retained earnings

    22,239     21,521  

Accumulated other comprehensive loss

    (5,672 )   (5,559 )
           

Total HP stockholders' equity

    22,895     22,436  

Non-controlling interests

    395     397  
           

Total stockholders' equity

    23,290     22,833  
           

Total liabilities and stockholders' equity

  $ 106,701   $ 108,768  
           

   

The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Consolidated Condensed Statements of Cash Flows

(Unaudited)

 
  Three months
ended January 31
 
 
  2013   2012  
 
  In millions
 

Cash flows from operating activities:

             

Net earnings

  $ 1,232   $ 1,468  

Adjustments to reconcile net earnings to net cash provided by operating activities:

             

Depreciation and amortization

    1,163     1,303  

Stock-based compensation expense

    184     175  

Provision for doubtful accounts—accounts and financing receivables

    32     18  

Provision for inventory

    92     34  

Restructuring charges

    130     40  

Deferred taxes on earnings

    500     (110 )

Excess tax benefit from stock-based compensation

        (11 )

Other, net

    167     44  

Changes in operating assets and liabilities:

             

Accounts and financing receivables

    2,246     2,311  

Inventory

    (149 )   180  

Accounts payable

    (1,690 )   (2,376 )

Taxes on earnings

    (423 )   (12 )

Restructuring

    (237 )   (174 )

Other assets and liabilities

    (685 )   (1,697 )
           

Net cash provided by operating activities

    2,562     1,193  
           

Cash flows from investing activities:

             

Investment in property, plant and equipment

    (633 )   (883 )

Proceeds from sale of property, plant and equipment

    127     96  

Purchases of available-for-sale securities and other investments

    (299 )    

Maturities and sales of available-for-sale securities and other investments

    161     96  

Payments in connection with business acquisitions, net of cash acquired

        (141 )

Proceeds from business divestiture, net

        81  
           

Net cash used in investing activities

    (644 )   (751 )
           

Cash flows from financing activities:

             

Repayment of commercial paper and notes payable, net

    (105 )   (2,607 )

Issuance of debt

    45     3,035  

Payment of debt

    (114 )   (100 )

Issuance of common stock under employee stock plans

    55     313  

Repurchase of common stock

    (253 )   (780 )

Excess tax benefit from stock-based compensation

        11  

Cash dividends paid

    (258 )   (244 )
           

Net cash used in financing activities

    (630 )   (372 )
           

Increase in cash and cash equivalents

    1,288     70  

Cash and cash equivalents at beginning of period

    11,301     8,043  
           

Cash and cash equivalents at end of period

  $ 12,589   $ 8,113  
           

Supplemental schedule of non-cash investing and financing activities:

             

Purchase of assets under capital lease

  $ 2   $ 12  

   

The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements

(Unaudited)

Note 1: Basis of Presentation

        In the opinion of management, the accompanying Consolidated Condensed Financial Statements of Hewlett-Packard Company and its consolidated subsidiaries ("HP") contain all adjustments, including normal recurring adjustments, necessary to present fairly HP's financial position as of January 31, 2013, its results of operations and cash flows for the three months ended January 31, 2013 and January 31, 2012. The Consolidated Condensed Balance Sheet as of October 31, 2012 is derived from the October 31, 2012 audited consolidated financial statements.

        The results of operations for the three months ended January 31, 2013 are not necessarily indicative of the results to be expected for the full year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with "Risk Factors," "Legal Proceedings," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Quantitative and Qualitative Disclosures About Market Risk" and the Consolidated Financial Statements and notes thereto included in Items 1A, 3, 7, 7A and 8, respectively, of the Hewlett-Packard Company Annual Report on Form 10-K for the fiscal year ended October 31, 2012.

        The preparation of financial statements in accordance with U.S. generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the amounts reported in HP's Consolidated Condensed Financial Statements and accompanying notes. Actual results could differ materially from those estimates.

        HP has made certain segment and business unit realignments in order to optimize its operating structure. Reclassifications of prior year financial information have been made to conform to the current year presentation. None of the changes impacts HP's previously reported consolidated net revenue, earnings from operations, net earnings or net earnings per share. See Note 16 for a further discussion of HP's segment reorganization.

Note 2: Stock-Based Compensation

        HP's stock-based compensation plans include HP's principal equity plans as well as various equity plans assumed through acquisitions. HP's principal equity plans include restricted stock awards, stock options and performance-based restricted units ("PRUs").

        Total stock-based compensation expense before income taxes for the three months ended January 31, 2013 and 2012 was $184 million and $175 million, respectively. The resulting income tax benefit was $57 million for each of the three months ended January 31, 2013 and January 31, 2012.

        Restricted stock awards are non-vested stock awards that include grants of restricted stock and grants of restricted stock units.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 2: Stock-Based Compensation (Continued)

        Non-vested restricted stock awards as of January 31, 2013 and changes during the three months ended January 31, 2013 were as follows:

 
  Shares   Weighted-
Average
Grant Date
Fair Value
Per Share
 
 
  In thousands
   
 

Outstanding at October 31, 2012

    25,532   $ 31  

Granted

    17,701   $ 14  

Vested

    (7,428 ) $ 32  

Forfeited

    (1,030 ) $ 28  
             

Outstanding at January 31, 2013

    34,775   $ 22  
             

        At January 31, 2013, there was $577 million of unrecognized pre-tax stock-based compensation expense related to non-vested restricted stock awards, which HP expects to recognize over the remaining weighted-average vesting period of 1.4 years.

        HP utilized the Black-Scholes option pricing model to value the service-based stock options granted under its principal equity plans. HP estimates the fair value of the performance-contingent stock options using a combination of the Monte Carlo simulation model and a lattice model, as these awards contain market conditions.

        HP estimated the weighted-average fair value of stock options using the following weighted-average assumptions:

 
  Three months ended
January 31
 
 
  2013   2012  

Weighted-average fair value of grants per share(1)

  $ 4.01   $ 9.49  

Implied volatility

    42 %   43 %

Risk-free interest rate

    0.98 %   1.20 %

Dividend yield

    3.77 %   1.73 %

Expected life in months

    70     67  

(1)
The fair value calculation was based on stock options granted during the period.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 2: Stock-Based Compensation (Continued)

        Option activity as of January 31, 2013 and changes during the three months ended January 31, 2013 were as follows:

 
  Shares   Weighted-
Average
Exercise
Price
Per Share
  Weighted-
Average
Remaining
Contractual
Term
  Aggregate
Intrinsic
Value
 
 
  In thousands
   
  In years
  In millions
 

Outstanding at October 31, 2012

    87,296   $ 29              

Granted

    23,096   $ 14              

Exercised

    (506 ) $ 11              

Forfeited/cancelled/expired

    (3,531 ) $ 27              
                         

Outstanding at January 31, 2013

    106,355   $ 26     3.8   $ 85  
                         

Vested and expected to vest at January 31, 2013

    103,137   $ 26     3.7   $ 79  
                         

Exercisable at January 31, 2013

    67,570   $ 31     1.8   $ 21  
                         

        The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value that option holders would have received had all option holders exercised their options on January 31, 2013. The aggregate intrinsic value is the difference between HP's closing stock price on the last trading day of the first quarter of fiscal 2013 and the exercise price, multiplied by the number of in-the-money options. The total intrinsic value of options exercised for the three months ended January 31, 2013 was $2 million.

        At January 31, 2013, there was $208 million of unrecognized pre-tax stock-based compensation expense related to stock options, which HP expects to recognize over the remaining weighted-average vesting period of 2.3 years.

        HP's PRU program provides for the issuance of PRUs representing hypothetical shares of HP common stock. Each PRU award reflects a target number of shares ("Target Shares") that may be issued to the award recipient before adjusting for performance and market conditions. The actual number of shares the recipient receives is determined at the end of a three-year performance period based on results achieved versus company performance goals and may range from 0% to 200% of the Target Shares granted. The performance goals for PRUs granted in fiscal year 2012 are based on HP's annual cash flow from operations as a percentage of revenue and on HP's annual revenue growth. The performance goals for PRUs granted prior to fiscal year 2012 are based on HP's annual cash flow from operations as a percentage of revenue and on a market condition based on total shareholder return ("TSR") relative to the S&P 500 over the three-year performance period.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 2: Stock-Based Compensation (Continued)

        For PRU awards granted in fiscal year 2012, HP estimates the fair value of the Target Shares using HP's closing stock price on the measurement date. The weighted-average fair value for these PRUs was as follows:

 
  Three months ended January 31  
 
  2013   2012  

Weighted-average fair value of grants per share

  $ 13.14 (1) $ 27.00 (2)

(1)
Reflects the weighted-average fair value for the second year of the three-year performance period applicable to PRUs granted in fiscal 2012. The estimated fair value of the Target Shares for the third year for PRUs granted in fiscal year 2012 will be determined on the measurement date applicable to those PRUs, which will occur during the period that the annual performance goals are approved for those PRUs, and the expense will be amortized over the remainder of the applicable three-year performance period.

(2)
Reflects the weighted-average fair value for the first year of the three-year performance period applicable to PRUs granted in fiscal 2012.

        For PRU awards granted prior to fiscal year 2012, HP estimates the fair value of the Target Shares subject to those awards using the Monte Carlo simulation model, as the TSR modifier represents a market condition. The following weighted-average assumptions, in addition to projections of market conditions, were used to determine the weighted-average fair values of these PRU awards:

 
  Three months ended
January 31
 
 
  2013   2012  

Weighted-average fair value of grants per share

  $ 0.00 (1) $ 3.35 (2)

Expected volatility(3)

    33 %   41 %

Risk-free interest rate

    0.18 %   0.14 %

Dividend yield

    3.94 %   1.78 %

Expected life in months

    12     15  

(1)
Reflects the weighted-average fair value for the third year of the three-year performance period applicable to PRUs granted in fiscal 2011.

(2)
Reflects the weighted-average fair value for the third year of the three-year performance period applicable to PRUs granted in fiscal 2010 and for the second year of the three-year performance period applicable to PRUs granted in fiscal 2011.

(3)
HP uses historic volatility for PRU awards as implied volatility cannot be used when simulating multivariate prices for companies in the S&P 500.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 2: Stock-Based Compensation (Continued)

        Non-vested PRUs as of January 31, 2013 and changes during the three months ended January 31, 2013 were as follows:

 
  Shares  
 
  In thousands
 

Outstanding Target Shares at October 31, 2012

    5,688  

Granted

     

Vested

     

Change in units due to performance and market conditions achievement for PRUs vested in the period

     

Forfeited

    (160 )
       

Outstanding Target Shares at January 31, 2013

    5,528  
       

Outstanding Target Shares assigned a fair value at January 31, 2013

    5,172 (1)
       

(1)
Excludes Target Shares for the third year for PRUs granted in fiscal 2012 as the measurement date has not yet been established. The measurement date and related fair value for the excluded PRUs will be established when the annual performance goals are approved.

        At January 31, 2013, there was $14 million of unrecognized pre-tax stock-based compensation expense related to PRUs with an assigned fair value, which HP expects to recognize over the remaining weighted-average vesting period of 1.0 year.

Note 3: Net Earnings Per Share

        HP calculates basic earnings per share ("EPS") using net earnings and the weighted-average number of shares outstanding during the reporting period. Diluted EPS includes any dilutive effect of outstanding stock options, PRUs, restricted stock units and restricted stock.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 3: Net Earnings Per Share (Continued)

        The reconciliation of the numerators and denominators of the basic and diluted EPS calculations was as follows::

 
  Three months ended
January 31
 
 
  2013   2012  
 
  In millions, except per share amounts
 

Numerator:

             

Net earnings(1)

  $ 1,232   $ 1,468  
           

Denominator:

             

Weighted-average shares used to compute basic EPS

    1,953     1,981  

Dilutive effect of employee stock plans

    3     17  
           

Weighted-average shares used to compute diluted EPS

    1,956     1,998  
           

Net earnings per share:

             

Basic

  $ 0.63   $ 0.74  

Diluted

  $ 0.63   $ 0.73  

(1)
Net earnings available to participating securities were not significant for the first quarter of fiscal 2013 and 2012. HP considers restricted stock that provides the holder with a non-forfeitable right to receive dividends to be a participating security.

        HP excludes options with exercise prices that are greater than the average market price from the calculation of diluted EPS because the effect of their inclusion would be anti-dilutive. As such, in the first quarter of fiscal 2013 and 2012, HP excluded from the calculation of diluted EPS options to purchase 74 million shares and 51 million shares, respectively. Further, during the same time periods, HP also excluded from the calculation of diluted EPS options to purchase an additional 12 million shares and 10 million shares, respectively, as their 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.

Note 4: Balance Sheet Details

        Balance sheet details were as follows:

 
  January 31,
2013
  October 31,
2012
 
 
  In millions
 

Accounts receivable

  $ 14,676   $ 16,871  

Allowance for doubtful accounts

    (440 )   (464 )
           

  $ 14,236   $ 16,407  
           

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 4: Balance Sheet Details (Continued)

        HP has third-party financing arrangements consisting of revolving short-term financing intended to facilitate the working capital requirements of certain partners. These financing arrangements, which in certain circumstances may provide for partial recourse, result in a transfer of HP's receivables and risk to the third party. As these transfers qualify as true sales, the receivables are derecognized from the Consolidated Condensed Balance Sheets upon transfer, and HP receives a payment for the receivables from the third party within a mutually agreed upon time period. For arrangements involving an element of recourse, the recourse obligation is measured using market data from similar transactions and reported as a current liability in the Consolidated Condensed Balance Sheets. The recourse obligations as of January 31, 2013 and October 31, 2012 were not material. The maximum program capacity under the partial recourse facility was $928 million, of which $456 million was available as of January 31, 2013. The aggregate maximum program capacity under arrangements not involving recourse was $765 million, of which $385 million was available as of January 31, 2013. HP had an aggregate available capacity of $847 million under these programs as of October 31, 2012.

        For the first three months of fiscal 2013 and 2012, trade receivables sold under these facilities were $1.5 billion and $1.1 billion, respectively, which approximates the amount of cash received. The resulting costs associated with the sales of trade accounts receivable for both periods were not material.

 
  January 31,
2013
  October 31,
2012
 
 
  In millions
 

Finished goods

  $ 4,058   $ 4,094  

Purchased parts and fabricated assemblies

    2,316     2,223  
           

  $ 6,374   $ 6,317  
           

 
  January 31,
2013
  October 31,
2012
 
 
  In millions
 

Land

  $ 636   $ 636  

Buildings and leasehold improvements

    8,752     8,744  

Machinery and equipment

    16,467     16,503  
           

    25,855     25,883  
           

Accumulated depreciation

    (14,169 )   (13,929 )
           

  $ 11,686   $ 11,954  
           

        For the three months ended January 31, 2013, additions to the gross property, plant and equipment of $635 million were offset by sales and retirements totaling $669 million. Accumulated depreciation associated with the assets sold and retired was $542 million.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 5: Goodwill and Purchased Intangible Assets

        Goodwill allocated to HP's reportable segments as of January 31, 2013 and changes in the carrying amount of goodwill for the three months ended January 31, 2013 are as follows:

 
  Personal
Systems
  Printing   Enterprise
Group
  Enterprise Services   Software   HP
Financial
Services
  Corporate
Investments
  Total  
 
  In millions
 

Net balance at October 31, 2012

  $ 2,498   $ 2,487   $ 17,041   $   $ 8,899   $ 144   $   $ 31,069  

Goodwill adjustments/reclassifications

            7           (45 )           (38 )
                                   

Net balance at January 31, 2013

  $ 2,498   $ 2,487   $ 17,048   $   $ 8,854   $ 144   $   $ 31,031  
                                   

        HP has implemented certain organizational realignments. As a result of these realignments, HP has re-evaluated its segment financial reporting structure and, effective in the first quarter of fiscal 2013, created two new financial reporting segments, the Enterprise Group segment ("EG") and the Enterprise Services segment ("ES"), and eliminated two other financial reporting segments, the Enterprise Servers, Storage and Networking ("ESSN") segment and the Services segment. The EG segment consists of the business units within the former ESSN segment and most of the services offerings of the Technology Services ("TS") business unit, which was previously a part of the former Services segment. The ES segment consists primarily of the Applications and Business Services ("ABS") and Infrastructure Technology Outsourcing ("ITO") business units from the former Services segment. As a result of the reporting segment changes described above, the net goodwill balance at October 31, 2012 includes the reclassification of $9.3 billion of goodwill related to the realignment of the TS business unit from the former Services segment to the EG segment. See Note 16 for a full description of the segment realignments.

        Goodwill at October 31, 2012 and January 31, 2013 is net of accumulated impairment losses of $14,518 million. Of that amount, $7,961 million relates to ES, $5,744 million relates to Software, and the remaining $813 million relates to Corporate Investments.

        HP reviews goodwill for impairment annually at the beginning of its fourth fiscal quarter and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. Based on our last annual goodwill impairment test, the excess of fair value over carrying value for each of HP's reporting units as of August 1, 2012, the annual testing date, ranged from approximately 9% to approximately 330% of carrying value. Based on that same test, the Autonomy and legacy HP software reporting units, both of which were included in the Software segment, had the lowest excess of fair value over carrying value at 10% and 9%, respectively. HP will continue to evaluate goodwill on an annual basis as of the beginning of its fourth fiscal quarter and whenever events or changes in circumstances, such as significant adverse changes in business climate or operating results, changes in management's business strategy or significant declines in HP's stock price, indicate that there may be a potential indicator of impairment.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 5: Goodwill and Purchased Intangible Assets (Continued)

        HP's purchased intangible assets associated with completed acquisitions are composed of:

 
  January 31, 2013   October 31, 2012  
 
  Gross   Accumulated
Amortization
  Accumulated
Impairment
Loss
  Net   Gross   Accumulated
Amortization
  Accumulated
Impairment
Loss
  Net  
 
  In millions
 

Customer contracts, customer lists and distribution agreements

  $ 5,764   $ (2,703 ) $ (856 ) $ 2,205   $ 5,807   $ (2,625 ) $ (856 ) $ 2,326  

Developed and core technology and patents

    6,570     (2,685 )   (2,138 )   1,747     6,580     (2,501 )   (2,138 )   1,941  

"Compaq" trade name

    1,422     (28 )   (1,227 )   167     1,422     (18 )   (1,227 )   177  

Other product trademarks

    310     (142 )   (109 )   59     310     (137 )   (109 )   64  

In-process research and development ("IPR&D")

    5             5     7             7  
                                   

Total purchased intangible assets

  $ 14,071   $ (5,558 ) $ (4,330 ) $ 4,183   $ 14,126   $ (5,281 ) $ (4,330 ) $ 4,515  
                                   

        For the first three months of fiscal 2013, the majority of the decrease in gross intangibles was related to $44 million of fully amortized intangible assets which have been eliminated from both the gross and accumulated amortization amounts.

        Estimated future amortization expense related to finite-lived purchased intangible assets at January 31, 2013 is as follows:

Fiscal year:
  In millions  

2013 (remaining 9 months)

  $ 1,014  

2014

    1,029  

2015

    840  

2016

    684  

2017

    257  

2018

    145  

Thereafter

    209  
       

Total

  $ 4,178  
       

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 6: Restructuring Charges

        HP records restructuring charges associated with management-approved restructuring plans to either reorganize one or more of HP's business segments or to remove duplicative headcount and infrastructure associated with one or more business acquisitions. Restructuring charges can include severance costs to eliminate a specified number of employees, infrastructure charges to vacate facilities and consolidate operations, and contract cancellation costs. Restructuring charges are recorded based upon planned employee termination dates and site closure and consolidation plans. The timing of associated cash payments is dependent upon the type of restructuring charge and can extend over a multi-year period. HP records the short-term portion of the restructuring liability in Accrued restructuring and the long-term portion in Other liabilities in the Consolidated Condensed Balance Sheets.

        On May 23, 2012, HP adopted a multi-year restructuring plan (the "2012 Plan") designed to simplify business processes, accelerate innovation and deliver better results for customers, employees and stockholders. HP estimates that it will eliminate approximately 29,000 positions in connection with the 2012 Plan through fiscal year 2014, with a portion of those employees exiting the company as part of voluntary enhanced early retirement ("EER") programs in the United States and in certain other countries. The majority of the U.S. EER program will be funded through HP's U.S. pension plan. In connection with the 2012 Plan, HP expects to record aggregate charges of approximately $3.7 billion through the end of HP's 2014 fiscal year as accounting recognition criteria are met. Of that amount, HP expects approximately $3.1 billion to relate to the workforce reductions and the EER programs and approximately $0.6 billion to relate to other items, including data center and real estate consolidation. Due to uncertainties associated with attrition and the acceptance rates of future international EER programs, the total expected headcount reductions could vary as much as 15% from our estimates. We could also experience similar variations in the total expense of the 2012 Plan.

        HP recorded a charge of approximately $290 million in the first quarter of fiscal 2013 relating to the 2012 Plan, of which $34 million related to data center and real estate consolidation. As of January 31, 2013, HP had eliminated approximately 15,200 positions as part of the 2012 Plan. The cash payments associated with the 2012 Plan are expected to be paid out through fiscal 2015.

        In connection with the acquisitions of Palm, Inc. ("Palm") and 3Com Corporation ("3Com") in fiscal 2010, HP's management approved and initiated plans to restructure the operations of the acquired companies, including severance for employees, contract cancellation costs, costs to vacate duplicative facilities and other items. The total expected combined cost of the plans is $101 million, which includes $33 million of additional restructuring costs recorded in the fourth quarter of fiscal 2011 in connection with HP's decision to wind down the webOS device business. As of October 31, 2011, HP had recorded the majority of the costs of the plans based upon the anticipated timing of planned terminations and facility closure costs. The Palm and 3Com plans are now closed with no further restructuring charges anticipated. The remaining severance costs associated with the webOS plan are expected to be paid out in fiscal year 2013.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 6: Restructuring Charges (Continued)

        On June 1, 2010, HP's management announced a plan to restructure its ES business, which includes the ITO and ABS business units. The multi-year restructuring program included plans to consolidate commercial data centers, tools and applications. The total expected cost of the plan was approximately $835 million, which included severance costs to eliminate approximately 8,200 positions and infrastructure charges. As of October 31, 2012 all 8,200 positions under the plan had been eliminated. As the execution of the restructuring activities has evolved, certain components and their related cost estimates have been revised. During the first quarter of fiscal 2013, HP reversed $157 million of the severance accrual to reflect the remaining reserve balance and expected cash payouts. The majority of the infrastructure charges were paid out during fiscal 2012 with the remaining charges expected to be paid out through the first half of fiscal 2015. This plan is now closed with no further restructuring charges anticipated. HP expects the majority of the remaining severance for the plan to be paid out through fiscal year 2013.

        In connection with the acquisition of Electronic Data Systems Corporation ("EDS") on August 26, 2008, HP's management approved and initiated a restructuring plan to combine and align HP's services businesses, eliminate duplicative overhead functions and consolidate and vacate duplicative facilities. The restructuring plan is expected to be implemented at a total expected cost of $3.3 billion. Approximately $1.5 billion of the expected costs were associated with pre-acquisition EDS and were reflected in the fair value of purchase consideration of EDS. These costs are subject to change based on the actual costs incurred. The remaining costs are primarily associated with HP and will be recorded as a restructuring charge.

        The restructuring plan included severance costs related to eliminating approximately 25,000 positions. As of October 31, 2011, all actions had occurred and the associated severance costs had been paid out. The infrastructure charges in the restructuring plan included facility closure and consolidation costs and the costs associated with early termination of certain contractual obligations. HP has recorded the majority of these costs based upon the execution of site closure and consolidation plans. The associated cash payments are expected to be paid out through fiscal 2016.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 6: Restructuring Charges (Continued)

        The adjustments to the accrued restructuring expenses related to all of HP's restructuring plans described above for the three months ended January 31, 2013 were as follows:

 
   
  Three
months
ended
January 31,
2013
charges
   
   
   
  As of January 31, 2013  
 
  Balance,
October 31,
2012
  Cash
payments
  Other
adjustments
and non-cash
settlements
  Balance,
January 31,
2013
  Total
costs and
adjustments
to date
  Total
expected
costs and
adjustments
 

Fiscal 2012 Plan

                                           

Severance and EER

  $ 597   $ 256   $ (172 ) $ 14   $ 695   $ 2,241   $ 3,143  

Infrastructure and other

    11     34     (22 )       23     139     575  
                               

Total 2012 Plan

    608     290     (194 )   14     718     2,380     3,718  

Fiscal 2010 acquisitions

    10                 10     101     101  

Fiscal 2010 ES Plan:

                                           

Severance

    227     (157 )   (30 )   4     44     466     466  

Infrastructure

    1                 1     369     369  
                               

Total ES Plan

    228     (157 )   (30 )   4     45     835     835  

Fiscal 2008 HP/EDS Plan:

                                           

Severance

                        2,195     2,195  

Infrastructure

    181     (3 )   (13 )       165     1,072     1,083  
                               

Total HP/EDS Plan

    181     (3 )   (13 )       165     3,267     3,278  
                               

Total restructuring plans

  $ 1,027   $ 130   $ (237 ) $ 18   $ 938   $ 6,583   $ 7,932  
                               

        At January 31, 2013 and October 31, 2012, HP included the long-term portion of the restructuring liability of $105 million and $256 million, respectively, in Other liabilities, and the short-term portion of $833 million and $771 million, respectively, in Accrued restructuring in the accompanying Consolidated Condensed Balance Sheets.

Note 7: Fair Value

        HP determines fair value based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants.

        Valuation techniques used by HP are based upon observable and unobservable inputs. Observable or market inputs reflect market data obtained from independent sources, while unobservable inputs reflect HP's assumptions about market participant assumptions based on the best information available. Observable inputs are the preferred basis of valuation. These two types of inputs create the following fair value hierarchy:

        Level 1—Quoted prices (unadjusted) for identical instruments in active markets.

        Level 2—Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 7: Fair Value (Continued)

significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

        Level 3—Prices or valuations that require management inputs that are both significant to the fair value measurement and unobservable.

        The following section describes the valuation methodologies HP uses to measure its financial assets and liabilities at fair value.

        Cash Equivalents and Investments:    HP holds time deposits, money market funds, mutual funds, other debt securities primarily consisting of corporate and foreign government notes and bonds, and common stock and equivalents. Where applicable, HP uses quoted prices in active markets for identical assets to determine fair value. If quoted prices in active markets for identical assets are not available to determine fair value, HP uses quoted prices for similar assets and liabilities or inputs that are observable either directly or indirectly. If quoted prices for identical or similar assets are not available, HP uses internally developed valuation models, whose inputs include bid prices, and third-party valuations utilizing underlying assets assumptions.

        Derivative Instruments:    As discussed in Note 8, HP mainly holds non-speculative forwards, swaps and options to hedge certain foreign currency and interest rate exposures. When active market quotes are not available, HP uses 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, HP uses management judgment to develop assumptions which are used to determine fair value.

        Short- and Long-Term Debt:    The estimated fair value of publicly-traded debt is based on quoted market prices for the identical liability when traded as an asset in an active market. For other debt for which a quoted market price is not available, an expected present value method that uses rates currently available to HP for debt with similar terms and remaining maturities is used to estimate fair value. The portion of HP's fixed-rate debt obligations that is hedged is reflected in the Consolidated Condensed Balance Sheets as an amount equal to the debt's carrying value, including a fair value adjustment representing changes in the fair value of the hedged debt obligations arising from movements in benchmark interest rates. The estimated fair value of HP's short- and long-term debt approximated its carrying value of $28.2 billion at January 31, 2013, and $28.4 billion at October 31, 2012. If measured at fair value in the Consolidated Condensed Balance Sheets, short- and long-term debt would be classified as Level 2 in the fair value hierarchy.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 7: Fair Value (Continued)

        The following table presents HP's assets and liabilities that are measured at fair value on a recurring basis:

 
  As of January 31, 2013   As of October 31, 2012  
 
  Fair Value
Measured Using
   
  Fair Value
Measured Using
   
 
 
  Total
Balance
  Total
Balance
 
 
  Level 1   Level 2   Level 3   Level 1   Level 2   Level 3  
 
  In millions
 

Assets

                                                 

Time deposits

  $   $ 2,839   $   $ 2,839   $   $ 3,641   $   $ 3,641  

Money market funds

    6,859             6,859     4,630             4,630  

Mutual funds

        517         517         469         469  

Marketable equity securities

    48     4         52     60     3         63  

Foreign bonds

    8     400         408     8     377         385  

Corporate bonds and other debt securities

    1     2     39     42     1         44     45  

Derivatives:

                                                 

Interest rate contracts

        237         237         344         344  

Foreign exchange contracts

        279     17     296         291         291  

Other derivatives

        5         5         1         1  
                                   

Total Assets

  $ 6,916   $ 4,283   $ 56   $ 11,255   $ 4,699   $ 5,126   $ 44   $ 9,869  
                                   

Liabilities

                                                 

Derivatives:

                                                 

Interest rate contracts

  $   $ 19   $   $ 19   $   $ 29   $   $ 29  

Foreign exchange contracts

        800         800         485     1     486  

Other derivatives

                        3         3  
                                   

Total Liabilities

  $   $ 819   $   $ 819   $   $ 517   $ 1   $ 518  
                                   

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments

        Cash equivalents and available-for-sale investments at fair value as of January 31, 2013 and October 31, 2012 were as follows:

 
  January 31, 2013   October 31, 2012  
 
  Cost   Gross
Unrealized
Gain
  Gross
Unrealized
Loss
  Estimated
Fair
Value
  Cost   Gross
Unrealized
Gain
  Gross
Unrealized
Loss
  Estimated
Fair
Value
 
 
  In millions
 

Cash Equivalents

                                                 

Time deposits

  $ 2,826   $   $   $ 2,826   $ 3,633   $   $   $ 3,633  

Money market funds

    6,859             6,859     4,630             4,630  

Mutual funds

    92             92     69             69  
                                   

Total cash equivalents

    9,777             9,777     8,332             8,332  
                                   

Available-for-Sale Investments

                                                 

Debt securities:

                                                 

Time deposits

    13             13     8             8  

Foreign bonds

    309     99         408     303     82         385  

Mutual funds

    425             425     400             400  

Corporate bonds and other debt securities

    62         (20 )   42     62         (17 )   45  
                                   

Total debt securities

    809     99     (20 )   888     773     82     (17 )   838  
                                   

Equity securities in public companies

    51     2     (4 )   49     50     9         59  
                                   

Total cash equivalents and available-for-sale investments

  $ 10,637   $ 101   $ (24 ) $ 10,714   $ 9,155   $ 91   $ (17 ) $ 9,229  
                                   

        Cash equivalents consist of investments in time deposits, money market funds and mutual funds with original maturities of three months or less. Time deposits were primarily issued by institutions outside the United States as of January 31, 2013 and October 31, 2012. Available-for-sale securities consist of short-term investments which mature within twelve months or less and long-term investments with maturities greater than twelve months. Investments primarily include mutual funds, institutional bonds, equity securities in public companies, fixed-interest securities and time deposits. HP estimates the fair values of its investments based on quoted market prices or pricing models using current market rates. These estimated fair values may not be representative of actual values that will be realized in the future.

        The gross unrealized loss as of January 31, 2013 and October 31, 2012 was due primarily to declines in the fair value of certain debt securities of $20 million and $17 million, respectively, that have been in a continuous loss position for more than twelve months. HP does not intend to sell these debt securities, and it is not likely that HP will be required to sell these debt securities prior to the

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments (Continued)

recovery of the amortized cost. HP has evaluated the near-term prospects of its equity investments in a gross unrealized loss position in relation to the severity and duration of the impairment and considers the decline in market value of the equity investments to be temporary in nature.

        Contractual maturities of short-term and long-term investments in available-for-sale debt securities at January 31, 2013 were as follows:

 
  January 31, 2013  
 
  Cost   Estimated
Fair Value
 
 
  In millions
 

Due in less than one year

  $ 423   $ 423  

Due in one to five years

    18     18  

Due in more than five years

    368     447  
           

  $ 809   $ 888  
           

        Equity securities in privately held companies include cost basis and equity method investments. These amounted to $51 million for the periods ended January 31, 2013 and October 31, 2012 and are included in long-term financing receivables and other assets.

        HP is a global company that is exposed to foreign currency exchange rate fluctuations and interest rate changes in the normal course of its business. As part of its risk management strategy, HP uses derivative instruments, primarily forward contracts, option contracts, interest rate swaps, and total return swaps, to hedge certain foreign currency, interest rate and, to a lesser extent, equity exposures. HP's objective is to offset gains and losses resulting from these exposures with losses and gains on the derivative contracts used to hedge them, thereby reducing volatility of earnings or protecting fair values of assets and liabilities. HP does not have any leveraged derivatives and does not use derivative contracts for speculative purposes. HP designates its derivatives as fair value hedges, cash flow hedges or hedges of the foreign currency exposure of a net investment in a foreign operation ("net investment hedges"). Additionally, for derivatives not designated as hedging instruments, HP categorizes those economic hedges as other derivatives. HP recognizes all derivatives, on a gross basis, in the Consolidated Condensed Balance Sheets at fair value and reports them in Other current assets, Long-term financing receivables and other assets, Other accrued liabilities, or Other liabilities. HP classifies cash flows from the derivative programs as operating activities in the Consolidated Condensed Statements of Cash Flows.

        As a result of the use of derivative instruments, HP is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. To mitigate the counterparty credit risk, HP has a policy of only entering into contracts with carefully selected major financial institutions based upon their credit ratings and other factors, and HP maintains dollar risk limits that correspond to each institution's credit rating and other factors. HP's established policies and procedures for mitigating credit risk on principal transactions and short-term cash include reviewing and establishing limits for credit exposure and continually assessing the creditworthiness of counterparties. Master

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments (Continued)

agreements with counterparties include master netting arrangements as further mitigation of credit exposure to counterparties. These arrangements permit HP to net amounts due from HP to a counterparty with amounts due to HP from the same counterparty.

        To further mitigate credit exposure to counterparties, HP has collateral security arrangements with substantially all of its counterparties. These arrangements require HP to post collateral or to hold collateral from counterparties when the derivative fair values exceed contractually established thresholds which are generally based on the credit ratings of HP and its counterparties. Such funds are generally transferred within two business days of the due date. As of January 31, 2013, HP held $109 million of collateral and posted $253 million under these collateralized arrangements, of which $109 million was through re-use of counterparty cash collateral and $144 million in cash. As of January 31, 2012, HP held $240 million of collateral and posted $23 million through re-use of counterparty cash collateral under these collateralized arrangements.

        HP enters into fair value hedges to reduce the exposure of its debt portfolio to interest rate risk. HP issues long-term debt in U.S. dollars based on market conditions at the time of financing. HP uses interest rate swaps to mitigate the market risk exposures in connection with the debt to achieve primarily U.S. dollar LIBOR-based floating interest expense. The swap transactions generally involve principal and interest obligations for U.S. dollar-denominated amounts. Alternatively, HP may choose not to swap fixed for floating interest payments or may terminate a previously executed swap if it believes a larger proportion of fixed-rate debt would be beneficial. When investing in fixed-rate instruments, HP may enter into interest rate swaps that convert the fixed interest payments into variable interest payments and would classify these swaps as fair value hedges. For derivative instruments that are designated and qualify as fair value hedges, HP recognizes the gain or loss on the derivative instrument, as well as the offsetting loss or gain on the hedged item, in Interest and other, net in the Consolidated Condensed Statements of Earnings in the current period.

        HP uses a combination of forward contracts and options designated as cash flow hedges to protect against the foreign currency exchange rate risks inherent in its forecasted net revenue and, to a lesser extent, cost of sales, operating expenses, and intercompany lease loans denominated in currencies other than the U.S. dollar. HP's foreign currency cash flow hedges mature generally within twelve months. However, certain leasing revenue-related forward contracts and intercompany lease loan forward contracts extend for the duration of the lease term, which can be up to five years. For derivative instruments that are designated and qualify as cash flow hedges, HP initially records the effective portion of the gain or loss on the derivative instrument in accumulated other comprehensive income or loss as a separate component of stockholders' equity and subsequently reclassifies these amounts into earnings in the period during which the hedged transaction is recognized in earnings. HP reports the effective portion of cash flow hedges in the same financial statement line item as the changes in value of the hedged item. During the three months ended January 31, 2013 there was no significant impact to results of operations as a result of discontinued cash flow hedges. During the three months ended

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments (Continued)

January 31, 2012, HP did not discontinue any cash flow hedge for which it was probable that a forecasted transaction would not occur.

        HP uses forward contracts designated as net investment hedges to hedge net investments in certain foreign subsidiaries whose functional currency is the local currency. These derivative instruments are designated as net investment hedges and, as such, HP records the effective portion of the gain or loss on the derivative instrument together with changes in the hedged items in cumulative translation adjustment as a separate component of stockholders' equity.

        Other derivatives not designated as hedging instruments consist primarily of forward contracts HP uses to hedge foreign currency balance sheet exposures. HP also uses total return swaps and, to a lesser extent, interest rate swaps, based on the equity and fixed income indices, to hedge its executive deferred compensation plan liability. For derivative instruments not designated as hedging instruments, HP recognizes changes in the fair values in earnings in the period of change. HP recognizes the gain or loss on foreign currency forward contracts used to hedge balance sheet exposures in Interest and other, net in the same period as the remeasurement gain and loss of the related foreign currency denominated assets and liabilities. HP recognizes the gain or loss on the total return swaps and interest rate swaps in Interest and other, net in the same period as the gain or loss from the change in market value of the executive deferred compensation plan liability.

        For interest rate swaps designated as fair value hedges, HP measures effectiveness by offsetting the change in fair value of the hedged debt with the change in fair value of the derivative. For foreign currency options and forward contracts designated as cash flow or net investment hedges, HP measures effectiveness by comparing the cumulative change in the hedge contract with the cumulative change in the hedged item, both of which are based on forward rates. HP recognizes any ineffective portion of the hedge, as well as amounts not included in the assessment of effectiveness, in the Consolidated Condensed Statements of Earnings. As of January 31, 2013 and 2012, the portion of hedging instruments' gain or loss excluded from the assessment of effectiveness was not material for fair value, cash flow or net investment hedges. Hedge ineffectiveness for fair value, cash flow and net investment hedges was not material in the three months ended January 31, 2013 and 2012.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments (Continued)

        As discussed in Note 7, HP estimates the fair values of derivatives primarily based on pricing models using current market rates and records all derivatives on the balance sheet at fair value. The gross notional and fair value of derivative financial instruments in the Consolidated Condensed Balance Sheets were as follows:

 
  As of January 31, 2013   As of October 31, 2012  
 
  Gross
Notional(1)
  Other
Current
Assets
  Long-term
Financing
Receivables
and Other
Assets
  Other
Accrued
Liabilities
  Other
Liabilities
  Gross
Notional(1)
  Other
Current
Assets
  Long-term
Financing
Receivables
and Other
Assets
  Other
Accrued
Liabilities
  Other
Liabilities
 
 
  In millions
 

Derivatives designated as hedging instruments

                                                             

Fair value hedges:

                                                             

Interest rate contracts

  $ 7,650   $ 23   $ 197   $   $   $ 7,900   $ 43   $ 276   $   $  

Cash flow hedges:

                                                             

Foreign exchange contracts

    18,612     129     29     529     96     19,409     160     24     277     79  

Net investment hedges:

                                                             

Foreign exchange contracts

    1,714     12     18     34     23     1,683     14     15     36     24  
                                           

Total derivatives designated as hedging instruments

    27,976     164     244     563     119     28,992     217     315     313     103  
                                           

Derivatives not designated as hedging instruments

                                                             

Foreign exchange contracts

    16,010     95     13     101     17     18,687     61     17     51     19  

Interest rate contracts(2)

    2,200     17         19         2,200     25         29      

Other derivatives

    329     5                 383     1         3      
                                           

Total derivatives not designated as hedging instruments

    18,539     117     13     120     17     21,270     87     17     83     19  
                                           

Total derivatives

  $ 46,515   $ 281   $ 257   $ 683   $ 136   $ 50,262   $ 304   $ 332   $ 396   $ 122  
                                           

(1)
Represents the face amounts of contracts that were outstanding as of January 31, 2013 and October 31, 2012, respectively.

(2)
Represents offsetting swaps acquired through previous business combinations that were not designated as hedging instruments.

        The before-tax effect of derivative instruments and related hedged items in a fair value hedging relationship for the three months ended January 31, 2013 and 2012 were as follows:

 
  Gain (Loss) Recognized in Income on Derivative and Related Hedged Item  
Derivative Instrument
  Location   Three
months
ended
January 31,
2013
  Hedged Item   Location   Three
months
ended
January 31,
2013
 
 
   
  In millions
   
   
  In millions
 

Interest rate contracts

  Interest and other, net   $ (99 ) Fixed-rate debt   Interest and other, net   $ 98  

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments (Continued)


 
  Gain (Loss) Recognized in Income on Derivative and Related Hedged Item  
Derivative Instrument
  Location   Three
months
ended
January 31,
2012
  Hedged Item   Location   Three
months
ended
January 31,
2012
 
 
   
  In millions
   
   
  In millions
 

Interest rate contracts

  Interest and other, net   $ 4   Fixed-rate debt   Interest and other, net   $  

        The before-tax effect of derivative instruments in cash flow and net investment hedging relationships for the three months ended January 31, 2013 and 2012 were as follows:

 
  Gain (Loss)
Recognized in
Other
Comprehensive
Income ("OCI")
on Derivative
(Effective
Portion)
  Gain (Loss) Reclassified from
Accumulated OCI Into Income
(Effective Portion)
  Gain Recognized in
Income on Derivative
(Ineffective portion
and Amount Excluded
from Effectiveness Testing)
 
 
  Three
months
ended
January 31,
2013
  Location   Three
months
ended
January 31,
2013
  Location   Three
months
ended
January 31,
2013
 
 
  In millions
   
  In millions
   
  In millions
 

Cash flow hedges:

                           

Foreign exchange contracts

  $ (213 ) Net revenue   $ (61 ) Net revenue   $  

Foreign exchange contracts

    (125 ) Cost of products     (3 ) Cost of products      

Foreign exchange contracts

    8   Other operating expenses     1   Other operating expenses      

Foreign exchange contracts

    2   Interest and other, net     (5 ) Interest and other, net      

Foreign exchange contracts

    14   Net revenue     4   Interest and other, net      
                       

Total cash flow hedges

  $ (314 )     $ (64 )     $  
                       

Net investment hedges:

                           

Foreign exchange contracts

  $ (15 ) Interest and other, net   $   Interest and other, net   $  
                       

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments (Continued)


   
  Gain (Loss)
Recognized in
OCI on
Derivative
(Effective
Portion)
  Gain (Loss) Reclassified from
Accumulated OCI Into Income
(Effective Portion)
  Gain Recognized in
Income on Derivative
(Ineffective portion
and Amount Excluded
from Effectiveness Testing)
 
   
  Three
months
ended
January 31,
2012
  Location   Three
months
ended
January 31,
2012
  Location   Three
months
ended
January 31,
2012
 
   
  In millions
   
  In millions
   
  In millions
 
 

Cash flow hedges:

                           
 

Foreign exchange contracts

  $ 427   Net revenue   $ 88   Net revenue   $  
 

Foreign exchange contracts

    (8 ) Cost of products     16   Cost of products      
 

Foreign exchange contracts

    (3 ) Other operating expenses     (1 ) Other operating expenses      
 

Foreign exchange contracts

    (9 ) Net revenue     (5 ) Interest and other, net      
                         
 

Total cash flow hedges

  $ 407       $ 98       $  
                         
 

Net investment hedges:

                           
 

Foreign exchange contracts

  $ 25   Interest and other, net   $   Interest and other, net   $  
                         

        As of January 31, 2013, HP expects to reclassify an estimated net accumulated other comprehensive loss of approximately $254 million, net of taxes, to earnings in the next twelve months along with the earnings effects of the related forecasted transactions in association with cash flow hedges.

        The before-tax effect of derivative instruments not designated as hedging instruments on the Consolidated Condensed Statements of Earnings for the three months ended January 31, 2013 and 2012 were as follows:

 
  Gain (Loss) Recognized in Income on
Derivative
 
 
  Location   Three months
ended
January 31,
2013
 
 
   
  In millions
 

Foreign exchange contracts

  Interest and other, net   $ (40 )

Other derivatives

  Interest and other, net     7  

Interest rate contracts

  Interest and other, net     2  
           

Total

      $ (31 )
           

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments (Continued)


 
  Gain (Loss) Recognized in Income on
Derivative
 
 
  Location   Three months
ended
January 31,
2012
 
 
   
  In millions
 

Foreign exchange contracts

  Interest and other, net   $ 82  

Other derivatives

  Interest and other, net     (10 )

Interest rate contracts

  Interest and other, net     10  
           

Total

      $ 82  
           

        For the balance of HP's financial instruments, accounts receivable, financing receivables, accounts payable and other accrued liabilities, the carrying amounts approximate fair value due to their short maturities.

Note 9: Financing Receivables and Operating Leases

        Financing receivables represent sales-type and direct-financing leases resulting from the placement of HP and third-party products. These receivables typically have terms from two to five years and are usually collateralized by a security interest in the underlying assets. Financing receivables also include billed receivables from operating leases. The components of financing receivables, which are included in Financing receivables and Long-term financing receivables and other assets in the accompanying Consolidated Condensed Balance Sheets, were as follows:

 
  January 31,
2013
  October 31,
2012
 
 
  In millions
 

Minimum lease payments receivable

  $ 8,016   $ 8,133  

Unguaranteed residual value

    254     248  

Unearned income

    (679 )   (688 )
           

Financing receivables, gross

    7,591     7,693  

Allowance for doubtful accounts

    (154 )   (149 )
           

Financing receivables, net

    7,437     7,544  

Less current portion

    (3,316 )   (3,252 )
           

Amounts due after one year, net

  $ 4,121   $ 4,292  
           

        Equipment leased to customers under operating leases was $3.8 billion and $3.9 billion at January 31, 2013 and October 31, 2012, respectively, and is included in machinery and equipment. Accumulated depreciation on equipment under lease was $1.5 billion at both January 31, 2013 and October 31, 2012.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 9: Financing Receivables and Operating Leases (Continued)

        Due to the homogenous nature of its leasing transactions, HP manages its financing receivables on an aggregate basis when assessing and monitoring credit risk. Credit risk is generally diversified due to the large number of entities comprising HP's customer base and their dispersion across many different industries and geographical regions. The credit quality of an obligor is evaluated at lease inception and monitored over the term of a transaction. Risk ratings are assigned to each lease based on the creditworthiness of the obligor and other variables that augment or diminish the inherent credit risk of a particular transaction. Such variables include the underlying value and liquidity of the collateral, the essential use of the equipment, the term of the lease, and the inclusion of guarantees, letters of credit, security deposits or other credit enhancements.

        The credit risk profile of the gross financing receivables, based on internally assigned ratings, was as follows:

 
  January 31,
2013
  October 31,
2012
 
 
  In millions
 

Risk Rating

             

Low

  $ 4,346   $ 4,461  

Moderate

    3,148     3,151  

High

    97     81  
           

Total

  $ 7,591   $ 7,693  
           

        Accounts rated low risk typically have the equivalent of a Standard & Poor's rating of BBB- or higher, while accounts rated moderate risk would generally be the equivalent of BB+ or lower. HP closely monitors accounts rated high risk and, based upon an impairment analysis, may establish specific reserves against a portion of these leases.

        The allowance for doubtful accounts balance is comprised of a general reserve, which is determined based on a percentage of the financing receivables balance, and a specific reserve, which is established for certain leases with identified exposures, such as customer default, bankruptcy or other events, that make it unlikely that HP will recover its investment in the lease. The general reserve percentages are maintained on a regional basis and are based on several factors, which include consideration of historical credit losses and portfolio delinquencies, trends in the overall weighted-average risk rating of the portfolio, and information derived from competitive benchmarking.

        The allowance for doubtful accounts and the related financing receivables were as follows:

 
  Three months ended
January 31, 2013
 
 
  In millions
 

Allowance for doubtful accounts

       

Balance, beginning of period

  $ 149  

Additions to allowance

    9  

Deductions, net of recoveries

    (4 )
       

Balance, end of period

  $ 154  
       

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 9: Financing Receivables and Operating Leases (Continued)

 
  January 31,
2013
  October 31,
2012
 
 
  In millions
 

Allowance for financing receivables individually evaluated for loss

  $ 52   $ 45  

Allowance for financing receivables collectively evaluated for loss

    102     104  
           

Total

  $ 154   $ 149  
           

Gross financing receivables individually evaluated for loss

  $ 496   $ 338  

Gross financing receivables collectively evaluated for loss

    7,095     7,355  
           

Total

  $ 7,591   $ 7,693  
           

        Accounts are generally put on non-accrual status (cessation of interest accrual) when they reach 90 days past due. The non-accrual status may not impact a customer's risk rating. In certain circumstances, such as when the delinquency is deemed to be of an administrative nature, accounts may still accrue interest when they reach 90 days past due. A write-off or specific reserve is generally recorded when an account reaches 180 days past due. Total financing receivables on non-accrual status were $253 million and $225 million at January 31, 2013 and October 31, 2012, respectively. Total financing receivables greater than 90 days past due and still accruing interest were $243 million and $113 million at January 31, 2013 and October 31, 2012, respectively.

Note 10: Guarantees

        In the ordinary course of business, HP may provide certain clients with subsidiary performance guarantees and/or financial performance guarantees, which may be backed by standby letters of credit or surety bonds. In general, HP would be liable for the amounts of these guarantees in the event HP or HP's subsidiaries' nonperformance permits termination of the related contract by the client, the likelihood of which HP believes is remote. HP believes that the company is in compliance with the performance obligations under all material service contracts for which there is a performance guarantee.

        HP has certain service contracts supported by client financing or securitization arrangements. Under specific circumstances involving nonperformance resulting in service contract termination or failure to comply with terms under the financing arrangement, HP would be required to acquire certain assets. HP considers the possibility of its failure to comply to be remote and the asset amounts involved to be immaterial.

        In the ordinary course of business, HP enters into contractual arrangements under which HP may agree to indemnify the third party to such arrangement from any losses incurred relating to the services they perform on behalf of HP or for losses arising from certain events as defined within the particular contract, which may include, for example, litigation or claims relating to past performance. Such indemnification obligations may not be subject to maximum loss clauses. Historically, payments made related to these indemnifications have been immaterial.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 10: Guarantees (Continued)

        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 evaluating the quality of its component suppliers. Product warranty terms offered to customers, ongoing product failure rates, material usage and service delivery costs incurred in correcting a product failure, as well as specific product class failures outside of HP's baseline experience affect the estimated warranty obligation. If actual product failure rates, repair rates or any other post-sales support costs differ from these estimates, revisions to the estimated warranty liability would be required.

        The changes in HP's aggregate product warranty liabilities for the three months ended January 31, 2013 were as follows:

 
  In millions  

Product warranty liability at October 31, 2012

  $ 2,170  

Accruals for warranties issued

    523  

Adjustments related to pre-existing warranties (including changes in estimates)

    (7 )

Settlements made (in cash or in kind)

    (566 )
       

Product warranty liability at January 31, 2013

  $ 2,120  
       

Note 11: Borrowings

        Notes payable and short-term borrowings, including the current portion of long-term debt, were as follows:

 
  January 31, 2013   October 31, 2012  
 
  Amount
Outstanding
  Weighted-
Average
Interest
Rate
  Amount
Outstanding
  Weighted-
Average
Interest
Rate
 
 
  In millions
   
  In millions
   
 

Current portion of long-term debt

  $ 5,656     1.4 % $ 5,744     1.6 %

Commercial paper

    353     0.7 %   365     0.9 %

Notes payable to banks, lines of credit and other

    466     2.1 %   538     2.8 %
                       

  $ 6,475         $ 6,647        
                       

        Notes payable to banks, lines of credit and other includes deposits associated with HP's banking-related activities of approximately $350 million and $369 million at January 31, 2013 and October 31, 2012, respectively.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 11: Borrowings (Continued)

        Long-term debt was as follows:

 
  January 31,
2013
  October 31,
2012
 
 
  In millions
 

U.S. Dollar Global Notes

             

2006 Shelf Registration Statement:

             

$500 issued at discount to par at a price of 99.694% in February 2007 at 5.4%, due March 2017

  $ 499   $ 499  

$1,500 issued at discount to par at a price of 99.921% in March 2008 at 4.5%, paid March 2013

    1,500     1,500  

$750 issued at discount to par at a price of 99.932% in March 2008 at 5.5%, due March 2018

    750     750  

$2,000 issued at discount to par at a price of 99.561% in December 2008 at 6.125%, due March 2014

    1,998     1,998  

$1,500 issued at discount to par at a price of 99.993% in February 2009 at 4.75%, due June 2014

    1,500     1,500  

2009 Shelf Registration Statement:

             

$1,100 issued at discount to par at a price of 99.921% in September 2010 at 1.25%, due September 2013

    1,100     1,100  

$1,100 issued at discount to par at a price of 99.887% in September 2010 at 2.125%, due September 2015

    1,100     1,100  

$650 issued at discount to par at a price of 99.911% in December 2010 at 2.2%, due December 2015

    650     650  

$1,350 issued at discount to par at a price of 99.827% in December 2010 at 3.75%, due December 2020

    1,348     1,348  

$1,750 issued at par in May 2011 at three month USD LIBOR plus 0.28%, due May 2013

    1,750     1,750  

$500 issued at par in May 2011 at three month USD LIBOR plus 0.4%, due May 2014

    500     500  

$500 issued at discount to par at a price of 99.971% in May 2011 at 1.55%, due May 2014

    500     500  

$1,000 issued at discount to par at a price of 99.958% in May 2011 at 2.65%, due June 2016

    1,000     1,000  

$1,250 issued at discount to par at a price of 99.799% in May 2011 at 4.3%, due June 2021

    1,248     1,248  

$750 issued at discount to par at a price of 99.977% in September 2011 at 2.35%, due March 2015

    750     750  

$1,300 issued at discount to par at a price of 99.784% in September 2011 at 3.0%, due September 2016

    1,298     1,298  

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 11: Borrowings (Continued)

 
  January 31,
2013
  October 31,
2012
 
 
  In millions
 

$1,000 issued at discount to par at a price of 99.816% in September 2011 at 4.375%, due September 2021

    998     998  

$1,200 issued at discount to par at a price of 99.863% in September 2011 at 6.0%, due September 2041

    1,198     1,198  

$350 issued at par in September 2011 at three-month USD LIBOR plus 1.55%, due September 2014

    350     350  

$650 issued at discount to par at a price of 99.946% in December 2011 at 2.625%, due December 2014

    650     650  

$850 issued at discount to par at a price of 99.790% in December 2011 at 3.3%, due December 2016

    849     849  

$1,500 issued at discount to par at a price of 99.707% in December 2011 at 4.65%, due December 2021

    1,496     1,496  

$1,500 issued at discount to par at a price of 99.985% in March 2012 at 2.6%, due September 2017

    1,500     1,500  

$500 issued at discount to par at a price of 99.771% in March 2012 at 4.05%, due September 2022

    499     499  
           

    25,031     25,031  
           

EDS Senior Notes

             

$1,100 issued June 2003 at 6.0%, due August 2013

    1,106     1,109  

$300 issued October 1999 at 7.45%, due October 2029

    314     314  
           

    1,420     1,423  
           

Other, including capital lease obligations, at 0.60%-8.63%, due in calendar years 2013-2024

    614     680  

Fair value adjustment related to hedged debt

    343     399  

Less: current portion

    (5,656 )   (5,744 )
           

Total long-term debt

  $ 21,752   $ 21,789  
           

        As disclosed in Note 8, HP uses interest rate swaps to mitigate the market risk exposures in connection with certain fixed-interest global notes to achieve primarily U.S. dollar LIBOR-based floating interest expense. The interest rates in the table above have not been adjusted to reflect the impact of any interest rate swaps.

        HP may redeem some or all of the Global Notes set forth in the above table at any time at the redemption prices described in the prospectus supplements relating thereto. The Global Notes are senior unsecured debt.

        In May 2012, HP filed a shelf registration statement (the "2012 Shelf Registration Statement") with the SEC to enable the company to offer for sale, from time to time, in one or more offerings, an unspecified amount of debt securities, common stock, preferred stock, depositary shares and warrants. The 2012 Shelf Registration Statement replaced the registration statement filed in May 2009.

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(Unaudited)

Note 11: Borrowings (Continued)

        HP's Board of Directors has authorized the issuance of up to $16.0 billion in aggregate principal amount of commercial paper by HP. HP's subsidiaries are authorized to issue up to an additional $1.0 billion in aggregate principal amount of commercial paper. HP maintains two commercial paper programs, and a wholly-owned subsidiary maintains a third program. HP's U.S. program provides for the issuance of U.S. dollar denominated commercial paper up to a maximum aggregate principal amount of $16.0 billion. HP's euro commercial paper program, which was established in September 2012, provides for the issuance of commercial paper outside of the United States denominated in U.S. dollars, euros or British pounds up to a maximum aggregate principal amount of $3.0 billion or the equivalent in those alternative currencies. The combined aggregate principal amount of commercial paper issued under those programs at any one time cannot exceed the $16.0 billion Board authorization. The HP subsidiary's Euro Commercial Paper/Certificate of Deposit Programme provides for the issuance of commercial paper in various currencies of up to a maximum aggregate principal amount of $500 million.

        HP maintains senior unsecured committed credit facilities primarily to support the issuance of commercial paper. HP has a $3.0 billion five-year credit facility that expires in March 2017 and a $4.5 billion four-year credit facility that expires in February 2015. Both facilities support the U.S. commercial paper program, and the five-year credit facility was amended in September 2012 to also support the euro commercial paper program. The amounts available under the five-year credit facility in euros and British pounds are limited to the U.S. Dollar equivalent of $2.2 billion and $300 million, respectively. Commitment fees, interest rates and other terms of borrowing under the credit facilities vary based on HP's external credit ratings. HP's ability to have a U.S. commercial paper outstanding balance that exceeds the $7.5 billion supported by these credit facilities is subject to a number of factors, including liquidity conditions and business performance.

        Within Other, including capital lease obligations, are borrowings that are collateralized by certain financing receivable assets. As of January 31, 2013, the carrying value of the assets approximated the carrying value of the borrowings of $221 million.

        As of January 31, 2013, HP had the capacity to issue an unspecified amount of additional debt securities, common stock, preferred stock, depositary shares and warrants under the 2012 Shelf Registration Statement. As of that date, HP also had up to approximately $17.5 billion of available borrowing resources, including $16.1 billion in authorized capacity under its commercial paper programs and approximately $1.4 billion relating to uncommitted lines of credit. The extent to which HP is able to utilize the 2012 Shelf Registration Statement and the commercial paper programs as sources of liquidity at any given time is subject to a number of factors, including market demand for HP securities and commercial paper, HP's financial performance, HP's credit ratings and market conditions generally.

Note 12: Income Taxes

        HP's effective tax rate was 21.7% and 19.4% for the three months ended January 31, 2013 and January 31, 2012, respectively. HP's effective tax rate increased due to discrete items in the three months ended January 31, 2013, as described below. HP's effective tax rate generally differs from the

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Note 12: Income Taxes (Continued)

U.S. federal statutory rate of 35% due to favorable tax rates associated with certain earnings from HP's operations in lower-tax jurisdictions throughout the world. HP has not provided U.S. taxes for all of such earnings because HP plans to reinvest some of those earnings indefinitely outside the United States.

        In the three months ended January 31, 2013, HP recorded discrete items resulting in a net tax charge of $5 million, increasing the effective tax rate. These amounts consisted primarily of a tax charge of $150 million related to a past uncertain tax position offset by approximately $50 million of various adjustments to estimated tax provisions of foreign jurisdictions as well as $45 million of benefits associated with restructuring charges, various uncertain tax positions and valuation allowance adjustments. In addition, in January 2013, the American Taxpayer Relief Act of 2012 was signed into law. HP recorded a tax benefit of $50 million arising from the retroactive research and development credit provided by that legislation in the first quarter of fiscal 2013.

        In the three months ended January 31, 2012, HP recorded discrete items with a net tax benefit of $49 million, decreasing the effective tax rate. These amounts included net tax benefits of $28 million from restructuring and acquisition charges, and $23 million from reversals of accrued interest expense and penalties on uncertain tax positions, net of tax.

        As of January 31, 2013, the amount of gross unrecognized tax benefits was $2.8 billion, of which up to $1.6 billion would affect HP's effective tax rate if realized. HP recognizes interest income from favorable settlements and income tax receivables and interest expense and penalties accrued on unrecognized tax benefits within income tax expense. As of January 31, 2013, HP had accrued a net $209 million payable for interest and penalties. In the three months ended January 31, 2013, HP recognized $1 million of net interest income on tax overpayments, net of tax.

        HP engages in continuous discussion and negotiation with taxing authorities regarding tax matters in various jurisdictions. HP does not expect complete resolution of any Internal Revenue Service ("IRS") audit cycle within the next 12 months. However, it is reasonably possible that certain federal, foreign and state tax issues may be concluded in the next 12 months, including issues involving transfer pricing and other matters. Accordingly, HP believes it is reasonably possible that its existing unrecognized tax benefits may be decreased by an amount up to $175 million within the next 12 months.

        The breakdown between current and long-term deferred tax assets and deferred tax liabilities was as follows:

 
  January 31,
2013
  October 31,
2012
 
 
  In millions
 

Current deferred tax assets

  $ 3,743   $ 3,783  

Current deferred tax liabilities

    (263 )   (230 )

Long-term deferred tax assets

    1,580     1,581  

Long-term deferred tax liabilities

    (3,400 )   (2,948 )
           

Total deferred tax assets net of deferred tax liabilities

  $ 1,660   $ 2,186  
           

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(Unaudited)

Note 13: Stockholders' Equity

        HP's share repurchase program authorizes both open market and private repurchase transactions. In the first quarter of fiscal 2013, HP executed share repurchases of 19 million shares which were settled for $253 million in the first quarter of fiscal 2013. HP paid approximately $780 million in connection with repurchases of approximately 29 million shares during the three months ended January 31, 2012. As of January 31, 2013, HP had remaining authorization of $8.9 billion for future share repurchases.

Taxes related to Items of Other Comprehensive Loss/ Income

 
  Three months
ended
January 31
 
 
  2013   2012  
 
  In millions
 

Tax (expense) benefit on change in unrealized gains/ losses on available-for-sale securities

  $ (33 ) $ 5  
           

Tax (expense) benefit on change in unrealized gains/ losses on cash flow hedges:

             

Tax benefit (expense) on unrealized gains/losses arising during the period

    102     (152 )

Tax (benefit) expense on gains/losses reclassified into earnings

    (17 )   37  
           

    85     (115 )
           

Tax (expense) benefit on change in unrealized components of defined benefit plans:

             

Tax benefit on net losses arising during the period

        24  

Tax benefit on amortization of actuarial loss and prior service benefit

    (5 )   (10 )

Tax expense on curtailments, settlements and other

    (1 )   (84 )
           

    (6 )   (70 )
           

Tax benefit on change in cumulative translation adjustment

    18     14  
           

Tax benefit (expense) on other comprehensive loss/ income

  $ 64   $ (166 )
           

        The components of accumulated other comprehensive loss, net of taxes, were as follows:

 
  January 31,
2013
  October 31,
2012
 
 
  In millions
 

Net unrealized gain on available-for-sale securities

  $ 57   $ 87  

Net unrealized loss on cash flow hedges

    (264 )   (99 )

Unrealized components of defined benefit plans

    (5,000 )   (5,090 )

Cumulative translation adjustment

    (465 )   (457 )
           

Accumulated other comprehensive loss

  $ (5,672 ) $ (5,559 )
           

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(Unaudited)

Note 14: Retirement and Post-Retirement Benefit Plans

        HP's net pension and post-retirement benefit costs (credit) were as follows:

 
  Three months ended January 31  
 
  U.S.
Defined
Benefit Plans
  Non-U.S.
Defined
Benefit Plans
  Post-
Retirement
Benefit Plans
 
 
  2013   2012   2013   2012   2013   2012  
 
  In millions
 

Service cost

  $   $   $ 86   $ 74   $ 2   $ 2  

Interest cost

    140     141     172     176     8     8  

Expected return on plan assets

    (211 )   (198 )   (257 )   (208 )   (8 )   (9 )

Amortization and deferrals:

                                     

Actuarial loss (gain)

    20     11     87     60         (1 )

Prior service benefit

            (7 )   (6 )   (17 )   (21 )
                           

Net periodic benefit (credit) cost

  $ (51 ) $ (46 ) $ 81   $ 96   $ (15 ) $ (21 )

Curtailment gain

                    (3 )    

Special termination benefits

            3     1          

Settlement loss (gain)

    5             (28 )        
                           

Net benefit (credit) cost

  $ (46 ) $ (46 ) $ 84   $ 69   $ (18 ) $ (21 )
                           

        HP previously disclosed in its Consolidated Financial Statements for the fiscal year ended October 31, 2012 that it expected to contribute in fiscal 2013, approximately $674 million to its non-US pension plans and approximately $33 million to cover benefit payments to U.S. non-qualified plan participants. HP expects to pay approximately $124 million to cover benefit claims for HP's post-retirement benefit plans. HP's funding policy is to contribute cash to its pension plans so that it makes at least the minimum contribution required by local government, funding and taxing authorities.

        During the three months ended January 31, 2013, HP made $181 million of contributions to its non-US pension plans, paid $14 million to cover benefit payments to U.S. non-qualified plan participants, and paid $25 million to cover benefit claims under HP's post-retirement benefit plans. During the remainder of fiscal 2013, HP anticipates making additional contributions of approximately $493 million to its non-US pension plans and approximately $19 million to its U.S. non-qualified plan participants and expects to pay approximately $99 million to cover benefit claims under HP's post-retirement benefit plans. HP's pension and other post-retirement benefit costs and obligations are dependent on various assumptions. Differences between expected and actual returns on investments will be reflected as unrecognized gains or losses, and such gains or losses will be amortized and recorded in future periods. Poor financial performance of invested assets in any year could lead to increased contributions in certain countries and increased future pension plan expense. Asset gains or losses are determined at the measurement date and amortized over the remaining service life or life expectancy of plan participants. HP's next measurement date is October 31, 2013.

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Note 15: Litigation and Contingencies

        HP is involved in lawsuits, claims, investigations and proceedings, including those identified below, consisting of intellectual property, commercial, securities, employment, employee benefits and environmental matters that arise in the ordinary course of business. HP records a provision for a liability when management believes that it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. HP believes it has adequate provisions for any such matters, and, as of January 31, 2013, it was not reasonably possible that an additional material loss had been incurred in an amount in excess of the amounts already recognized on HP's financial statements. HP reviews these provisions at least quarterly and adjusts these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. Based on its experience, HP believes that any damage amounts claimed in the specific matters discussed below are not a meaningful indicator of HP's potential liability. Litigation is inherently unpredictable. However, HP believes that it has valid defenses with respect to legal matters pending against it. Nevertheless, cash flows or results of operations could be materially affected in any particular period by the unfavorable resolution of one or more of these contingencies.

Litigation, Proceedings and Investigations

        Copyright Levies.    As described below, proceedings are ongoing or have been concluded involving HP in certain European Union ("EU") member countries, including litigation in Germany, Belgium and Austria, seeking to impose or modify levies upon equipment (such as multifunction devices ("MFDs"), personal computers ("PCs") and printers) and alleging that these devices enable producing private copies of copyrighted materials. Descriptions of some of the ongoing proceedings are included below. The levies are generally based upon the number of products sold and the per-product amounts of the levies, which vary. Some EU member countries that do not yet have levies on digital devices are expected to implement similar legislation to enable them to extend existing levy schemes, while some other EU member countries are expected to limit the scope of levy schemes and applicability in the digital hardware environment. HP, other companies and various industry associations have opposed the extension of levies to the digital environment and have advocated alternative models of compensation to rights holders.

        VerwertungsGesellschaft Wort ("VG Wort"), a collection agency representing certain copyright holders, instituted legal proceedings against HP in the Stuttgart Civil Court seeking levies on printers. On December 22, 2004, the court held that HP is liable for payments regarding all printers using ASCII code sold in Germany but did not determine the amount payable per unit. HP appealed this decision in January 2005 to the Stuttgart Court of Appeals. On May 11, 2005, the Stuttgart Court of Appeals issued a decision confirming that levies are due. On June 6, 2005, HP filed an appeal to the German Federal Supreme Court in Karlsruhe. On December 6, 2007, the German Federal Supreme Court issued a judgment that printers are not subject to levies under the existing law. The court issued a written decision on January 25, 2008, and VG Wort subsequently filed an application with the German Federal Supreme Court under Section 321a of the German Code of Civil Procedure contending that the court did not consider their arguments. On May 9, 2008, the German Federal Supreme Court denied VG Wort's application. VG Wort appealed the decision by filing a claim with the German Federal Constitutional Court challenging the ruling that printers are not subject to levies. On September 21, 2010, the Constitutional Court published a decision holding that the German Federal Supreme Court erred by not referring questions on interpretation of German copyright law to the Court of Justice of the European Union ("CJEU") and therefore revoked the German Federal

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(Unaudited)

Note 15: Litigation and Contingencies (Continued)

Supreme Court decision and remitted the matter to it. On July 21, 2011, the German Federal Supreme Court stayed the proceedings and referred several questions to the CJEU with regard to the interpretation of the European Copyright Directive. The CJEU conducted an oral hearing in October 2012 and is expected to issue a decision approximately seven months thereafter, after which the matter will be remitted back to the German Federal Supreme Court.

        In September 2003, VG Wort filed a lawsuit against Fujitsu Siemens Computer GmbH ("FSC") in the Munich Civil Court in Munich, Germany seeking levies on PCs. This is an industry test case in Germany, and HP has agreed not to object to the delay if VG Wort sues HP for such levies on PCs following a final decision against FSC. On December 23, 2004, the Munich Civil Court held that PCs are subject to a levy and that FSC must pay €12 plus compound interest for each PC sold in Germany since March 2001. FSC appealed this decision in January 2005 to the Munich Court of Appeals. On December 15, 2005, the Munich Court of Appeals affirmed the Munich Civil Court decision. FSC filed an appeal with the German Federal Supreme Court in February 2006. On October 2, 2008, the German Federal Supreme Court issued a judgment that PCs were not photocopiers within the meaning of the German copyright law that was in effect until December 31, 2007 and, therefore, not subject to the levies on photocopiers established by that law. VG Wort subsequently filed a claim with the German Federal Constitutional Court challenging that ruling. In January 2011, the Constitutional Court published a decision holding that the German Federal Supreme Court decision was inconsistent with the German Constitution and revoking the German Federal Supreme Court decision. The Constitutional Court remitted the matter to the German Federal Supreme Court for further action. On July 21, 2011, the German Federal Supreme Court stayed the proceedings and referred several questions to the CJEU with regard to the interpretation of the European Copyright Directive. The CJEU conducted an oral hearing in October 2012 and is expected to issue a decision approximately seven months thereafter, after which the matter will be remitted back to the German Federal Supreme Court.

        Reprobel, a cooperative society with the authority to collect and distribute the remuneration for reprography to Belgian copyright holders, requested HP by extra-judicial means to amend certain copyright levy declarations submitted for inkjet MFDs sold in Belgium from January 2005 to December 2009 to enable it to collect copyright levies calculated based on the generally higher copying speed when the MFDs are operated in draft print mode rather than when operated in normal print mode. In March 2010, HP filed a lawsuit against Reprobel in the French-speaking chambers of the Court of First Instance of Brussels seeking a declaratory judgment that no copyright levies are payable on sales of MFDs in Belgium or, alternatively, that copyright levies payable on such MFDs must be assessed based on the copying speed when operated in the normal print mode set by default in the device. On November 16, 2012, the court issued a decision holding that Belgium law is not in conformity with EU law in a number of respects and ordered that, by November 2013, Reprobel substantiate that the amounts claimed by Reprobel are commensurate with the harm resulting from legitimate copying under the reprographic exception. HP subsequently appealed that court decision to the Courts of Appeal in Brussels seeking to confirm that the Belgian law is not in conformity with EU law and that, if Belgian law is interpreted in a manner consistent with EU law, no payments by HP are required or, alternatively, the payments already made by HP are sufficient to comply with its obligations under Belgian law. Hearings on the appeal are scheduled to be held in September 2013.

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(Unaudited)

Note 15: Litigation and Contingencies (Continued)

        Based on industry opposition to the extension of levies to digital products, HP's assessments of the merits of various proceedings and HP's estimates of the number of units impacted and the amounts of the levies, HP has accrued amounts that it believes are adequate to address the matters described above. However, the ultimate resolution of these matters and the associated financial 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.

        Skold, et al. v. Intel Corporation and Hewlett-Packard Company is a lawsuit filed against HP on June 14, 2004 that is pending in state court in Santa Clara County, California. The lawsuit alleges that Intel Corporation ("Intel") concealed performance problems related to the Intel Pentium 4 processor by, among others things, the manipulation of performance benchmarks. The lawsuit alleges that HP aided and abetted Intel's allegedly unlawful conduct. The plaintiffs seek unspecified damages, restitution, attorneys' fees and costs. On April 19, 2012, the court issued an order granting in part and denying in part the plaintiffs' motion to certify a nationwide class asserting claims under the California Unfair Competition Law. As to Intel, the court certified a nationwide class excluding residents of Illinois. As to HP, the court certified a class limited to California residents who purchased their computers "from HP" for "personal, family or household use." As required by the same order, the plaintiffs filed an amended complaint that limits their claims against HP to a California class while reserving the right to seek additional state-specific subclasses as to HP.

        Inkjet Printer Litigation.    As described below, HP is involved in several lawsuits claiming breach of express and implied warranty, unjust enrichment, deceptive advertising and unfair business practices where the plaintiffs have alleged, among other things, that HP employed a "smart chip" in certain inkjet printing products in order to register ink depletion prematurely and to render the cartridge unusable through a built-in expiration date that is hidden, not documented in marketing materials to consumers, or both. The plaintiffs have also contended that consumers received false ink depletion warnings and that the smart chip limits the ability of consumers to use the cartridge to its full capacity or to choose competitive products.

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Note 15: Litigation and Contingencies (Continued)

        On August 25, 2010, HP and the plaintiffs in In re HP Inkjet Printer Litigation, Blennis v. HP and Rich v. HP entered into an agreement to settle those lawsuits on behalf of the proposed classes. Under the terms of the settlement, the lawsuits were consolidated, and eligible class members each have the right to obtain e-credits not to exceed $5 million in the aggregate for use in purchasing printers or printer supplies through HP's website. As part of the settlement, HP also agreed to provide class members with additional information regarding HP inkjet printer functionality and to change the content of certain software and user guide messaging provided to users regarding the life of inkjet printer cartridges. In addition, the settlement provides for class counsel and the class representatives to be paid attorneys' fees and expenses and stipends. On March 29, 2011, the court granted final approval of the settlement. On April 27, 2011, certain class members who objected to the settlement filed an appeal in the United States Court of Appeals for the Ninth Circuit of the court's order granting final approval of the settlement.

        Fair Labor Standards Act Litigation.    HP is involved in several lawsuits in which the plaintiffs are seeking unpaid overtime compensation and other damages based on allegations that various employees of EDS or HP have been misclassified as exempt employees under the Fair Labor Standards Act and/or in violation of the California Labor Code or other state laws. Those matters include the following:

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(Unaudited)

Note 15: Litigation and Contingencies (Continued)

        India Directorate of Revenue Intelligence Proceedings.    On April 30 and May 10, 2010, the India Directorate of Revenue Intelligence (the "DRI") issued show cause notices to Hewlett-Packard India Sales Private Ltd ("HPI"), a subsidiary of HP, seven current HP employees and one former HP employee alleging that HP underpaid customs duties while importing products and spare parts into India and seeking to recover an aggregate of approximately $370 million, plus penalties. Prior to the issuance of the show cause notices, HP deposited approximately $16 million with the DRI and agreed to post a provisional bond in exchange for the DRI's agreement to not seize HP products and spare parts and to not interrupt the transaction of business by HP in India.

        On April 11, 2012, the Bangalore Commissioner of Customs issued an order on the products show cause notice affirming certain duties and penalties against HPI and the named individuals of approximately $386 million, of which HPI had already deposited $9 million. On December 11, 2012, HPI voluntarily deposited an additional $10 million in connection with the products show cause notice.

        On April 20, 2012, the Commissioner issued an order on the parts show cause notice affirming certain duties and penalties against HPI and certain of the named individuals of approximately $17 million, of which HPI had already deposited $7 million. After the order, HPI deposited an additional $3 million in connection with the parts show cause notice so as to avoid certain penalties.

        HPI filed appeals of the Commissioner's orders before the Customs Tribunal along with applications for waiver of the pre-deposit of remaining demand amounts as a condition for hearing the appeals. The customs department has also filed cross-appeals before the Customs Tribunal. A hearing on the application for waiver of the deposit was heard on January 24, 2013, and the Customs Tribunal ordered HPI to deposit an additional $24 million against the products order by March 14, 2013. The Customs Tribunal did not order any additional deposit to be made under the parts order.

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Note 15: Litigation and Contingencies (Continued)

        Russia GPO and Related Investigations.    The German Public Prosecutor's Office ("German PPO") has been conducting an investigation into allegations that current and former employees of HP engaged in bribery, embezzlement and tax evasion relating to a transaction between Hewlett-Packard ISE GmbH in Germany, a former subsidiary of HP, and the General Prosecutor's Office of the Russian Federation. The approximately €35 million transaction, which was referred to as the Russia GPO deal, spanned the years 2001 to 2006 and was for the delivery and installation of an IT network. The German PPO has issued an indictment of four individuals, including one current and two former HP employees, on charges including bribery, breach of trust and tax evasion. The German PPO has also asked that HP be made an associated party to the case, and, if the German PPO's request is granted, HP would participate in any portion of the court proceedings that could ultimately bear on the question of whether HP should be subject to potential disgorgement of profits based on the conduct of the indicted current and former employees.

        The U.S. Department of Justice and the SEC have also been conducting an investigation into the Russia GPO deal and potential violations of the Foreign Corrupt Practices Act ("FCPA"). Under the FCPA, a person or an entity could be subject to fines, civil penalties of up to $500,000 per violation and equitable remedies, including disgorgement and other injunctive relief. In addition, criminal penalties could range from the greater of $2 million per violation or twice the gross pecuniary gain or loss from the violation.

        In addition to information about the Russia GPO deal, the U.S. enforcement authorities have requested information from HP relating to certain transactions in Russia and in the Commonwealth of Independent States sub-region dating back to 2000.

        HP is cooperating with these investigating agencies.

        ECT Proceedings.    In January 2011, the postal service of Brazil, Empresa Brasileira de Correios e Telégrafos ("ECT"), notified HP that it had initiated administrative proceedings against an HP subsidiary in Brazil ("HP Brazil") to consider whether to suspend HP Brazil's right to bid and contract with ECT related to alleged improprieties in the bidding and contracting processes whereby employees of HP Brazil and employees of several other companies coordinated their bids for three ECT contracts in 2007 and 2008. In late July 2011, ECT notified HP it had decided to apply the penalties against HP Brazil, suspending HP Brazil's right to bid and contract with ECT for five years, based upon the evidence before it. In August 2011, HP filed petitions with ECT requesting that the decision be revoked and seeking injunctive relief to have the application of the penalties suspended until a final, non-appealable decision is made on the merits of the case. HP is currently awaiting a response from ECT on both petitions. Because ECT did not rule on the substance of HP's petitions in a timely manner, HP filed a lawsuit seeking similar relief from the court. The court of first instance has not decided the merits of HP's lawsuit, but has denied HP's request for injunctive relief suspending application of the penalties pending a final, non-appealable decision on the merits of the case. HP appealed the denial of its request for injunctive relief to the intermediate appellate court, which issued a preliminary ruling denying the request for injunctive relief but reducing the length of the sanctions from five to two years. HP appealed that decision and, in December 2011, obtained a ruling staying enforcement of ECT's sanctions until HP can be heard on the full merits of the case. HP expects the court of first instance to issue a decision on the merits of the case during 2013 and any appeal on the merits to last several years.

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Note 15: Litigation and Contingencies (Continued)

        Stockholder Litigation.    As described below, HP is involved in various stockholder litigation commenced against certain current and former HP executive officers and/or certain current and former members of the HP Board of Directors in which the plaintiffs are seeking to recover certain compensation paid by HP to the defendants, other damages and/or injunctive relief:

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Note 15: Litigation and Contingencies (Continued)

Autonomy-Related Legal Matters

        Investigations.    As a result of the findings of an ongoing investigation, HP has provided information to the U.K. Serious Fraud Office, the U.S. Department of Justice and the SEC related to the accounting improprieties, disclosure failures and misrepresentations at Autonomy that occurred prior to and in connection with HP's acquisition of Autonomy. On November 21, 2012, representatives of the U.S. Department of Justice advised HP that they had opened an investigation relating to Autonomy. On February 6, 2013, representatives of the U.K. Serious Fraud Office advised HP that they had also opened an investigation relating to Autonomy. HP is cooperating with the three investigating agencies.

        Litigation.    As described below, HP is involved in various stockholder litigation relating to, among other things, its November 20, 2012 announcement that it recorded a non-cash charge for the impairment of goodwill and intangible assets within its Software segment of approximately $8.8 billion in the fourth quarter of its 2012 fiscal year and HP's statements that, based on HP's findings from an ongoing investigation, the majority of this impairment charge related to accounting improprieties, misrepresentations to the market and disclosure failures at Autonomy that occurred prior to and in connection with HP's acquisition of Autonomy and the impact of those improprieties, failures and misrepresentations on the expected future financial performance of the Autonomy business over the long term. This stockholder litigation was commenced against, among others, certain current and former HP executive officers, certain current and former members of the HP Board of Directors, and certain advisors to HP. The plaintiffs in these litigation matters are seeking to recover certain

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(Unaudited)

Note 15: Litigation and Contingencies (Continued)

compensation paid by HP to the defendants and/or other damages. These matters include the following:

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(Unaudited)

Note 15: Litigation and Contingencies (Continued)

Environmental

        HP's operations and products are subject to various federal, state, local and foreign laws and regulations concerning environmental protection, including laws addressing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, the cleanup of contaminated sites, the content of HP's products and the recycling, treatment and disposal of those products. In particular, HP faces increasing complexity in its product design and procurement operations as it adjusts to new and future requirements relating to the chemical and materials composition of its products, their safe use, and the energy consumption associated with those products, including requirements relating to climate change. HP is also subject to legislation in an increasing number of jurisdictions that makes producers of electrical goods, including computers and printers, financially responsible for specified collection, recycling, treatment and disposal of past and future covered products (sometimes referred to as "product take-back legislation"). HP could incur substantial costs, its products could be restricted from entering certain jurisdictions, and it could face other sanctions, if it were to violate or become liable under environmental laws or if its products become non-compliant with environmental laws. HP's potential exposure includes fines and civil or criminal sanctions, third-party property damage or personal injury claims and clean up costs. The amount and timing of costs under environmental laws are difficult to predict.

        HP is party to, or otherwise involved in, proceedings brought by U.S. or state environmental agencies under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), known as "Superfund," or state laws similar to CERCLA and may become a party to, or otherwise involved in, proceedings brought by private parties for contribution towards clean-up costs. HP is also conducting environmental investigations or remediations at several current or former operating sites pursuant to administrative orders or consent agreements with state environmental agencies.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 16: Segment Information

        HP is a leading global provider of products, technologies, software, solutions and services to individual consumers, small and medium-sized businesses ("SMBs"), and large enterprises, including customers in the government, health and education sectors. HP's offerings span personal computing and other access devices; imaging and printing-related products and services; multi-vendor customer services, including infrastructure technology and business process outsourcing, application development and support services and consulting and integration services; enterprise information technology ("IT") infrastructure, including enterprise storage and server technology, networking products and solutions, technology support and maintenance; and IT management software, information management solutions and security intelligence/risk management solutions.

        HP's operations are organized into seven reportable business segments for financial reporting purposes: Personal Systems, Printing, the Enterprise Group, Enterprise Services, Software, HP Financial Services ("HPFS") and Corporate Investments. HP's organizational structure is based on a number of factors that management uses to evaluate, view and run its business operations, which include, but are not limited to, customer base, homogeneity of products and technology. The reportable business segments are based on this organizational structure and information reviewed by HP's management to evaluate the business segment results.

        The Personal Systems segment and the Printing segment are structured beneath a broader Printing and Personal Systems Group ("PPS"). While PPS is not a financial reporting segment, HP sometimes provides financial data aggregating the segments within it in order to provide a supplementary view of its business.

        HP has implemented certain organizational realignments. As a result of these realignments, HP has re-evaluated its segment financial reporting structure and, effective in the first quarter of fiscal 2013, created two new financial reporting segments, the EG segment and the ES segment, and eliminated two other financial reporting segments, the ESSN segment and the Services segment. The EG segment consists of the business units within the former ESSN segment and most of the services offerings of the TS business unit, which was previously a part of the former Services segment. The ES segment consists of the ABS and ITO business units from the former Services segment, along with the end-user workplace support services business that was previously a part of the TS business unit.

        Also as a result of these realignments, the financial results of the Personal Systems commercial products support business, which were previously reported as part of the TS business unit, will now be reported as part of the Other business unit within the Personal Systems segment, and the financial results of the portion of the business intelligence services business that had continued to be reported as part of the Corporate Investments segment following the implementation of prior realignment actions will now be reported as part of the ABS business unit. In addition, the end-user workplace support business, which, as noted above, was previously a part of the TS business unit and will now become a part of the ES segment, will be reported as part of the ITO business unit within that segment.

        A description of the types of products and services provided by each business segment follows.

        The Printing and Personal Systems Group's mission is to leverage the respective strengths of the Personal Systems business and the Printing business in creating a single, unified business that is

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 16: Segment Information (Continued)

customer-focused and poised to capitalize on rapidly shifting industry trends. Each of the business segments within PPS is described in detail below.

        Personal Systems provides commercial PCs, consumer PCs, workstations, calculators and other related accessories, software, support and services for the commercial and consumer markets. We group commercial notebooks, commercial desktops and workstations into commercial PC's and consumer notebooks and consumer desktops into consumer PC's when describing our performance in these markets. Described below are our global business capabilities within Personal Systems.

        Printing provides consumer and commercial printer hardware, supplies, media, software and services, as well as scanning devices. Printing is also focused on imaging solutions in the commercial markets. We group laserjet, large format and Indigo printers into commercial hardware and inkjet printers into consumer hardware when describing our performance in these markets. Described below are our global business capabilities within Printing.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 16: Segment Information (Continued)

        The Enterprise Group provides servers, storage, networking, technology services and, when combined with HP's Cloud Service Automation software suite, the HP CloudSystem. The CloudSystem enables infrastructure, platform and software-as-a-service in private, public or hybrid environments. Described below are our business units and capabilities within EG.

        Enterprise Services provides technology consulting, outsourcing and support services across infrastructure, applications and business process domains. ES is divided into two main areas: Infrastructure Technology Outsourcing and Application and Business Services.

        Software provides IT management, information management, and security solutions for businesses and enterprises of all sizes. HP's IT management solutions help customers around the world deliver

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 16: Segment Information (Continued)

applications and services that perform to defined standards and automate and assure the underlying infrastructure, be it traditional, cloud or hybrid. Our information management solutions include our Autonomy and Vertica platforms, which are designed to help customers get faster answers from all of their structured and unstructured information. Our security solutions provide customers with security at all levels of their enterprise—from the infrastructure through applications and information. HP's Software offerings have complementary support and professional services to provide an end-to-end solution.

        HP Financial Services supports and enhances HP's global product and services solutions, providing a broad range of value-added financial life cycle management services. HPFS enables HP's worldwide customers to acquire complete IT solutions, including hardware, software and services. HPFS offers leasing, financing, utility programs, and asset recovery services, as well as financial asset management services for large global and enterprise customers. HPFS also provides an array of specialized financial services to SMBs and educational and governmental entities. HPFS offers innovative, customized and flexible alternatives to balance unique customer cash flow, technology obsolescence and capacity needs.

        Corporate Investments includes HP Labs, the webOS business and certain business incubation projects.

        HP derives the results of the business segments directly from its internal management reporting system. The accounting policies HP uses to derive business segment results are substantially the same as those the consolidated company uses. Management measures the performance of each business segment based on several metrics, including earnings from operations. Management uses these results, in part, to evaluate the performance of, and to assign resources to, each of the business segments. HP does not allocate to its business segments certain operating expenses, which it manages separately at the corporate level. These unallocated costs include primarily restructuring charges and any associated adjustments related to restructuring actions, amortization of purchased intangible assets, stock-based compensation expense related to HP-granted employee stock options, PRUs, restricted stock awards and the employee stock purchase plan, certain acquisition-related charges and charges for purchased IPR&D, as well as certain corporate governance costs.

        Segment revenue includes revenues from sales to external customers and intersegment revenues that reflect transactions between the segments that are carried out at an arm's-length transfer price. Intersegment revenues primarily consist of sales of hardware and software that are sourced internally and, in the majority of the cases, are structured through HPFS as operating leases. HP's Consolidated Net Revenue is derived and reported after elimination of intersegment revenues for such arrangements in accordance with U.S. GAAP.

        To provide improved visibility and comparability, HP has reflected the 2013 changes to its reporting structure in prior financial reporting periods on an as-if basis, which has resulted in the transfer of revenue and operating profit among the Personal Systems, the EG, ES and Corporate Investments segments. These changes had no impact on the previously reported financial results for the Printing, Software or HPFS segments. In addition, none of these changes impacted HP's previously reported consolidated net revenue, earnings from operations, net earnings or net earnings per share.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 16: Segment Information (Continued)

        Selected operating results information for each business segment was as follows for the three months ended January 31:

 
  Printing and
Personal Systems
   
   
   
   
   
   
 
 
  Personal
Systems
  Printing   Enterprise
Group
  Enterprise
Services
  Software   HP
Financial
Services
  Corporate
Investments
  Total  

2013

                                                 

Net revenue

  $ 8,040   $ 5,884   $ 6,821   $ 5,792   $ 872   $ 946   $ 4   $ 28,359  

Intersegment net revenue and other

    164     42     163     127     54     11         561  
                                   

Total segment net revenue

  $ 8,204   $ 5,926   $ 6,984   $ 5,919   $ 926   $ 957   $ 4   $ 28,920  
                                   

Earnings (loss) from operations

  $ 223   $ 953   $ 1,084   $ 76   $ 157   $ 101   $ (65 ) $ 2,529  
                                   

2012

                                                 

Net revenue

  $ 8,652   $ 6,226   $ 7,030   $ 6,272   $ 887   $ 940   $ 29   $ 30,036  

Intersegment net revenue and other

    240     32     252     99     59     10     1     693  
                                   

Total segment net revenue

  $ 8,892   $ 6,258   $ 7,282   $ 6,371   $ 946   $ 950   $ 30   $ 30,729  
                                   

Earnings (loss) from operations

  $ 459   $ 761   $ 1,329   $ 145   $ 162   $ 91   $ (50 ) $ 2,897  
                                   

        The reconciliation of segment operating results information to HP consolidated totals was as follows:

 
  Three months ended
January 31
 
 
  2013   2012  
 
  In millions
 

Net revenue:

             

Segment total

  $ 28,920   $ 30,729  

Eliminations of intersegment net revenue and other

    (561 )   (693 )
           

Total HP consolidated net revenue

  $ 28,359   $ 30,036  
           

Earnings before taxes:

             

Total segment earnings from operations

  $ 2,529   $ 2,897  

Corporate and unallocated costs and eliminations

    (109 )   (153 )

Unallocated costs related to stock-based compensation expense

    (184 )   (174 )

Amortization of purchased intangible assets

    (350 )   (466 )

Restructuring charges

    (130 )   (40 )

Acquisition-related charges

    (4 )   (22 )

Interest and other, net

    (179 )   (221 )
           

Total HP consolidated earnings before taxes

  $ 1,573   $ 1,821  
           

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 16: Segment Information (Continued)

        In connection with certain fiscal 2013 organizational realignments, HP reclassified total assets between its EG and ES financial reporting segments. There have been no material changes to the total assets of HP's individual segments since October 31, 2012.

 
  Three months ended
January 31
 
 
  2013   2012  
 
  In millions
 

Net revenue:

             

Notebooks

  $ 4,128   $ 4,942  

Desktops

    3,321     3,206  

Workstations

    535     535  

Other

    220     209  
           

Personal Systems

    8,204     8,892  
           

Supplies

    3,893     4,079  

Commercial Hardware

    1,354     1,489  

Consumer Hardware

    679     690  
           

Printing

    5,926     6,258  
           

Printing and Personal Systems Group

    14,130     15,150  
           

Industry Standard Servers

    2,994     3,072  

Technology Services

    2,243     2,264  

Storage

    833     955  

Networking

    608     586  

Business Critical Systems

    306     405  
           

Enterprise Group

    6,984     7,282  
           

Infrastructure Technology Outsourcing

    3,736     3,980  

Application and Business Services

    2,183     2,391  
           

Enterprise Services

    5,919     6,371  
           

Software

    926     946  

HP Financial Services

    957     950  

Corporate Investments

    4     30  
           

Total segments

    28,920     30,729  
           

Eliminations of intersegment net revenue and other

    (561 )   (693 )
           

Total HP consolidated net revenue

  $ 28,359   $ 30,036  
           

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Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations.


HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of
Financial Condition and Results of Operations

        The following discussion should be read in conjunction with the Consolidated Condensed Financial Statements and the related notes that appear elsewhere in this document.

OVERVIEW

        We are a leading global provider of products, technologies, software, solutions and services to individual consumers, small- and medium-sized businesses ("SMBs"), and large enterprises, including customers in the government, health and education sectors. Our offerings span:

        HP's operations are organized into seven reportable business segments for financial reporting purposes: Personal Systems, Printing, the Enterprise Group ("EG"), Enterprise Services ("ES"), Software, HP Financial Services ("HPFS") and Corporate Investments.

        Our strategy and operations are currently focused on the following initiatives:

        The core of our business is our hardware and infrastructure products, which include our PC, server, storage, networking, and imaging and printing products. Our software business provides enterprise IT management software, information management solutions and security intelligence/risk management solutions delivered in the form of traditional software licenses or as software-as-a-service that allow us to differentiate our hardware products and deploy them in a manner that helps our customers solve problems and meets our customers' needs to manage their infrastructure, operations, application life cycles, application quality and security, business processes, and structured and unstructured data. Our Converged Infrastructure portfolio of servers, storage and networking combined with our Cloud Service Automation software suite enables enterprise and service provider clients to deliver infrastructure, platform and software-as-a-service in a private, public or hybrid cloud environment. Layered on top of our hardware and software businesses is our services business, which provides opportunities to drive usage of HP products and solutions, enables us to implement and manage all the technologies upon which our customers rely, and gives us a platform to be more solution-oriented, particularly in our focus areas of cloud, security and analytics, and to be a better strategic partner with our customers.

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        We offer one of the IT industry's broadest portfolios of products and services, and we are leveraging that portfolio to our strategic advantage. For example, we are able to provide servers, storage and networking products packaged with services that can be delivered to customers in the manner of their choosing, be it in-house, outsourced as a service via the Internet, or via a hybrid environment. Our portfolio of management software completes the package by allowing our customers to manage their IT operations in an efficient and cost-effective manner. In addition, we are working to optimize our supply chain by eliminating complexity, reducing fixed costs, and leveraging our scale to ensure the availability of components at favorable prices even during shortages. We are also expanding our use of industry standard components in our enterprise products to further leverage our scale.

        Our business has experienced a multi-quarter decline in revenue and operating margins. This decline in financial performance reflects a series of challenges facing our business. Many of those challenges relate to structural and execution issues, including the following: we need to align our costs with our revenue trajectory; we need to address our underinvestment in R&D and in our internal IT systems in recent years, which has made us less competitive, effective and efficient; we need to implement the data gathering and reporting tools and systems needed to track and report on all key business performance metrics so as to most effectively manage a company of our size, scale and diversity; and we need to rebuild our business relationships with our channel partners. We are also facing dynamic market trends, such as the growth of mobility, the increasing demand for hyperscale computing infrastructure, the shift to software-as-a-service and the transition towards cloud computing, and we need to develop products and services that position us to win in a very competitive marketplace. Furthermore, we face a series of significant macroeconomic challenges, including broad-based weakness in consumer spending, weak demand in the SMB and enterprise sectors in Europe, and declining growth in some emerging markets.

        We are addressing these challenges through consistency of leadership, focus, execution and, most importantly, superior products, services and solutions. During fiscal 2012, we implemented some leadership and organizational changes, including consolidating our personal computer and printing businesses under the same senior executive leadership, merging our global accounts sales organization into EG, and centralizing all of our marketing and communications activities. We also began implementing cost-reduction initiatives, including a company-wide restructuring plan we expect to be implemented through the end of fiscal 2014. In addition, we began making significant changes to our sales force to improve our go-to-market selling activities and reduce cost, and we renewed our focus on developing new products, services and solutions. We also began working to optimize our supply chain, reduce the number of stock keeping units (SKUs) and platforms, refine our real estate strategy, improve our business processes and implement consistent pricing and promotions. During fiscal 2013, we are focused on working through the anticipated disruptions expected to accompany the changes made in fiscal 2012 and continuing to implement our cost-reduction and operational initiatives.

        The cost-reduction and operational efficiency initiatives discussed above are also intended to facilitate increased investment in our business. We expect to invest savings from these efforts across our businesses, including investing to respond to market trends and customer expectations, strengthen our position in our core markets, accelerate growth in adjacent markets, and drive leadership in the three strategic areas of cloud computing, security and information management. Over time, we expect these investments to allow us to expand in higher margin and higher growth industry segments and further strengthen our portfolio of hardware, software and services to solve customer problems. However, the rate at which we are able to invest in our business and the returns that we are able to achieve from

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these investments will be affected by many factors, including the efforts to address the execution, industry and macroeconomic challenges facing our business as discussed above.

        The following provides an overview of our key first quarter fiscal 2013 financial metrics:

 
   
  Printing and Personal
Systems Group
   
   
   
   
 
 
  HP(1)
Consolidated
  Personal
Systems
  Printing   Total   Enterprise
Group
  Enterprise
Services
  Software   HPFS  
 
  In millions, except per share amounts
 

Net revenue

  $ 28,359   $ 8,204   $ 5,926   $ 14,130   $ 6,984   $ 5,919   $ 926   $ 957  

Year-over-year net revenue % (decrease) increase

    (5.6 )%   (7.7 )%   (5.3 )%   (6.7 )%   (4.1 )%   (7.1 )%   (2.1 )%   0.7 %

Earnings from operations

  $ 1,752   $ 223   $ 953   $ 1,176   $ 1,084   $ 76   $ 157   $ 101  

Earnings from operations as a % of net revenue

    6.2 %   2.7 %   16.1 %   8.3 %   15.5 %   1.3 %   17.0 %   10.6 %

Net earnings

  $ 1,232                                            

Net earnings per share

                                                 

Basic

  $ 0.63                                            

Diluted

  $ 0.63                                            

(1)
HP consolidated net revenue includes a reduction of approximately $0.6 billion primarily related to the elimination of intersegment net revenue and revenue from our Corporate Investments segment. HP consolidated earnings from operations includes amounts related to the amortization of purchased intangible assets, unallocated costs related to certain stock-based compensation expenses, restructuring charges, corporate and unallocated costs and eliminations, a loss from the Corporate Investments segment, and acquisition-related charges.

        Cash and cash equivalents at January 31, 2013 totaled $12.6 billion, an increase of $1.3 billion from the October 31, 2012 balance of $11.3 billion. The increase for the first three months of fiscal 2013 was due primarily to $2.6 billion of cash provided from operations, the effect of which was partially offset by $0.5 billion of cash used to repurchase common stock and pay dividends, and $0.5 billion net investment in property, plant and equipment

        We intend the discussion of our financial condition and results of operations that follows to provide information that will assist in understanding our Consolidated Condensed Financial Statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect our Consolidated Condensed Financial Statements.

        The discussion of results of operations at the consolidated level is followed by a more detailed discussion of results of operations by segment.

        For a further discussion of trends, uncertainties and other factors that could impact our operating results, see the section entitled "Factors That Could Affect Future Results."

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

        Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our Consolidated Condensed Financial Statements, which we have prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). The preparation of these financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, net revenue and expenses, and disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of our Board of Directors. Management believes that the accounting

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estimates employed and the resulting balances are reasonable; however, actual results may differ from these estimates under different assumptions or conditions.

        An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably possible could materially impact the financial statements. Management believes that there have been no significant changes during the three months ended January 31, 2013 to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended October 31, 2012.

ACCOUNTING PRONOUNCEMENTS

        The following is a summary of certain accounting pronouncements with application to our consolidated financial statements in future periods.

        In February 2013, the Financial Accounting Standards Board ("FASB") issued amendments to the FASB Accounting Standards Codification relating to the reporting of reclassifications out of accumulated other comprehensive income. The amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. We are required to adopt these amendments in the first quarter of fiscal 2014 prospectively, although early adoption is permitted.

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 impacted, and we expect will continue to be impacted, by fluctuations in foreign currency exchange rates. In order to provide a framework for assessing how each of our business segments performed excluding the impact of foreign currency fluctuations, we present the year-over-year percentage change in revenue performance on a constant currency basis, which assumes no change in the exchange rate from the prior-year period. This constant currency disclosure is provided in addition to, and not as a substitute for, the year-over-year percentage change in revenue on an as-reported basis.

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RESULTS OF OPERATIONS

        Set forth below is an analysis of our financial results comparing the three months ended January 31, 2013 to the three months ended January 31, 2012. Unless otherwise noted, all comparative performance data included below reflect year-over-year comparisons.

        Results of operations in dollars and as a percentage of net revenue were as follows:

 
  Three months ended January 31  
 
  2013   2012  
 
  Dollars   % of
Revenue
  Dollars   % of
Revenue
 
 
  In millions
 

Net revenue

  $ 28,359     100 % $ 30,036     100 %

Cost of sales(1)

    22,029     77.7 %   23,313     77.6 %
                   

Gross profit

    6,330     22.3 %   6,723     22.4 %

Research and development

    794     2.8 %   786     2.6 %

Selling, general and administrative

    3,300     11.6 %   3,367     11.2 %

Amortization of purchased intangible assets

    350     1.2 %   466     1.6 %

Restructuring charges

    130     0.5 %   40     0.1 %

Acquisition-related charges

    4         22     0.1 %
                   

Earnings from operations

    1,752     6.2 %   2,042     6.8 %

Interest and other, net

    (179 )   (0.6 )%   (221 )   (0.8 )%
                   

Earnings before taxes

    1,573     5.6 %   1,821     6.0 %

Provision for taxes

    (341 )   (1.3 )%   (353 )   (1.1 )%
                   

Net earnings

  $ 1,232     4.3 % $ 1,468     4.9 %
                   

(1)
Cost of products, cost of services and financing interest.

Net Revenue

        The components of the weighted net revenue change were as follows:

 
  Three
months ended
January 31, 2013
 
 
  Percentage Points
 

Personal Systems

    (2.3 )

Enterprise Services

    (1.5 )

Printing

    (1.1 )

Enterprise Group

    (1.0 )

Software

    (0.1 )

HP Financial Services

     

Corporate Investments/Other

    0.4  
       

Total HP

    (5.6 )
       

        For the three months ended January 31, 2013, total HP net revenue decreased 5.6% (decreased 4.3% on a constant currency basis). U.S. net revenue decreased 0.9% to $10.1 billion for the first quarter of fiscal 2013, while net revenue from outside of the United States decreased 8.0% to $18.3 billion.

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        The decline in HP revenue for the first quarter of fiscal 2013 was primarily the result of the following factors: we continue to experience weak global macroeconomic demand, particularly in Europe, the Middle East, and Africa ("EMEA"), a large customer market for us, with several key countries experiencing double-digit revenue declines; and a continued deterioration in our Personal Systems business, particularly in notebooks, due to the broad market contraction taking place. In Personal Systems we are seeing areas of progress on a regional basis, with growth in Asia Pacific driven by China and India.

        From a segment perspective, as mentioned above, in Personal Systems, we are experiencing the impact of a broad market decline, particularly with respect to notebook products. The net revenue decrease in ES was driven primarily by net service revenue runoff, softness in contract signings and contractual price declines in ongoing contracts. Net revenue in Printing declined as we continued to target strong returns for our unit placements consistent with our shift in focus from low-end to high-end printers. The net revenue decline in EG was due to several factors: continued global macroeconomic demand challenges, particularly in EMEA; new product and technology transitions in Storage and Industry Standard Servers ("ISS"); a continued decline in our Business Critical Systems ("BCS") business; and a competitive pricing environment. An analysis of the change in net revenue for each business segment is included under "Segment Information" below.

Gross Margin

        Total HP gross margin decreased by 0.1 percentage points for the three months ended January 31, 2013. From a segment perspective, the small decrease in gross margin was due to gross margin declines in Personal Systems, ES and EG being partially offset by gross margin expansion in Printing. The primary factors impacting gross margin performance in each of our segments are summarized as follows:

A more detailed discussion of segment gross margins is included under "Segment Information" below.

Operating Expenses

        Research and Development

        Total research and development ("R&D") expense increased in the three months ended January 31, 2013 due primarily to innovation-focused spending for storage and HP converged cloud, the effect of which was partially offset by a VAT subsidy credit and the elimination of R&D expense associated with the former webOS device business. R&D expense increased for EG, ES and Personal Systems, and decreased for Corporate Investments, Printing and Software.

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        Selling, General and Administrative

        Selling, general and administrative ("SG&A") expense decreased for the three months ended January 31, 2013 due primarily to lower field selling costs. We are starting to see cost savings from the restructuring program announced in May 2012. SG&A expense as a percentage of net revenue increased for each of our segments except for Software and ES, each of which experienced a decrease.

        Amortization of Purchased Intangible Assets

        The decrease in amortization expense for the three months ended January 31, 2013 was due primarily to lower levels of amortization expense as a result of the purchased intangible asset impairment taken in the second half of fiscal 2012 related to the Autonomy acquisition.

        Restructuring

        Restructuring charges for the three months ended January 31, 2013 were $130 million. These charges included $290 million of costs related to our fiscal 2012 Plan, partially offset by a $160 million reversal of restructuring accruals related to our fiscal 2010 ES plan and fiscal 2008 HP/EDS plan. Restructuring charges for the three months ended January 31, 2012 were $40 million. These charges included $29 million of severance and facility costs related to our fiscal 2008 restructuring plan, $7 million of severance costs related to our fiscal 2009 restructuring plan and $4 million of severance and facility costs related to our fiscal 2010 ES restructuring plan.

        As part of our ongoing business operations, we incurred workforce rebalancing charges for severance and related costs within certain business segments during the first three months of fiscal 2013. Workforce rebalancing activities are considered part of normal operations as we continue to optimize our cost structure. Workforce rebalancing costs are included in our business segment results, and we expect to incur additional workforce rebalancing costs in the future.

        Acquisition-Related Charges

        The decrease in acquisition-related charges for the three months ended January 31, 2013 was due primarily to lower retention bonuses associated with acquisitions completed in fiscal 2010 and 2011. For the three months ended January 31, 2013 and January 31, 2012, we recorded acquisition-related charges of $4 million and $22 million, respectively.

Interest and Other, Net

        Interest and other, net expense decreased by $42 million for the three months ended January 31, 2013. The decrease was driven primarily by lower currency transaction losses.

Provision for Taxes

        Our effective tax rate was 21.7% and 19.4% for the three months ended January 31, 2013 and January 31, 2012, respectively. Our effective tax rate increased due to discrete items in the three months ended January 31, 2013, which are described below. Our effective tax rate generally differs from the U.S. federal statutory rate of 35% due to favorable tax rates associated with certain earnings from our operations in lower-tax jurisdictions throughout the world. We have not provided U.S. taxes for all of such earnings because we plan to reinvest some of those earnings indefinitely outside the United States.

        In the three months ended January 31, 2013, we recorded discrete items resulting in a net tax charge of $5 million, increasing the effective tax rate. These amounts consisted primarily of a tax charge of $150 million related to a past uncertain tax position offset by approximately $50 million of various adjustments to estimated tax provisions of foreign jurisdictions as well as $45 million of benefits

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associated with restructuring charges, various uncertain tax positions and valuation allowance adjustments. In addition, in January 2013, the American Taxpayer Relief Act of 2012 was signed into law. We recorded a tax benefit of $50 million arising from the retroactive research and development credit provided by that legislation in the first quarter of fiscal 2013.

        In the three months ended January 31, 2012, we recorded discrete items with a net tax benefit of $49 million, decreasing the effective tax rate. These amounts included net tax benefits of $28 million from restructuring and acquisition charges, and $23 million from reversals of accrued interest expense and penalties on uncertain tax positions, net of tax.

Segment Information

        A description of the products and services for each segment can be found in Note 16 to the Consolidated Condensed Financial Statements. Future changes to this organizational structure may result in changes to the business segments disclosed.

        HP has implemented certain organizational realignments. As a result of these realignments, HP has re-evaluated its segment financial reporting structure and, effective in the first quarter of fiscal 2013:

As noted above, as a result of these changes, HP has created two new financial reporting segments, the EG segment and the ES segment. Also as noted above, HP has eliminated two existing financial reporting segments, the ESSN segment and the Services segment. Taking into account these changes, effective at the beginning of HP's first quarter of fiscal 2013, HP's seven financial reporting segments are Personal Systems, Printing, the Enterprise Group, Enterprise Services, Software, HP Financial Services and Corporate Investments.

Printing and Personal Systems Group

        The Personal Systems segment and the Printing segment are structured beneath a broader Printing and Personal Systems Group. We describe the results of the business segments within the Printing and Personal Systems Group below.

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Personal Systems

 
  Three months ended January 31  
 
  2013   2012   % Decrease  
 
  In millions
 

Net revenue

  $ 8,204   $ 8,892     (7.7 )%

Earnings from operations

  $ 223   $ 459     (51.4 )%

Earnings from operations as a % of net revenue

    2.7 %   5.2 %      

        The components of the weighted net revenue change by business units were as follows:

 
  Three months
ended
January 31, 2013
 
 
  Percentage Points
 

Notebook PCs

    (9.1 )

Desktop PCs

    1.3  

Workstations

     

Other

    0.1  
       

Total Personal Systems

    (7.7 )
       

        Personal Systems net revenue decreased 7.7% (decreased 5.8% on a constant currency basis) for the three months ended January 31, 2013. Our Personal Systems business continues to experience significant challenges due to the market shift toward tablet products coupled with particularly weak demand in the EMEA region. While Personal Systems also experienced revenue declines in the Americas region, the business did experience areas of growth both in the Asia Pacific region and with desktop products. The decline in Personal Systems revenue was driven by a 5% decline in unit volume along with a 3% decline in average selling prices ("ASPs"). The unit volume decrease was led by declines in notebook demand as a result of the market shift towards tablet products. Partially offsetting the volume decline was unit growth in desktops. The decline in ASPs was due primarily to unfavorable currency impacts and a competitive price environment. For the three months ended January 31, 2013, net revenue for consumer clients and commercial clients decreased by 13% and 4%, respectively. Net revenue for Notebook PCs decreased 16%, while net revenue for Desktop PCs increased 4%. Net revenue remained flat in workstations while net revenue increased 5% in the Other business unit. The net revenue increase in Other was related primarily to increased sales of extended warranties, the effect of which was partially offset by a decrease in third-party branded options.

        Personal Systems earnings from operations as a percentage of net revenue decreased 2.5 percentage points for the three months ended January 31, 2013. The decrease was driven by a decline in gross margin combined with an increase in operating expenses as a percentage of net revenue. The decline in gross margin was due to unfavorable currency impacts and competitive pricing pressure. Partially offsetting these unfavorable impacts to gross margin were lower component, logistics and warranty costs. Operating expenses as a percentage of net revenue increased due primarily to the revenue decline and increased marketing and R&D costs, the effect of which was partially offset by cost savings associated with our ongoing restructuring efforts.

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Printing

 
  Three months ended January 31  
 
  2013   2012   % (Decrease)
Increase
 
 
  In millions
 

Net revenue

  $ 5,926   $ 6,258     (5.3 )%

Earnings from operations

  $ 953   $ 761     25.2 %

Earnings from operations as a % of net revenue

    16.1 %   12.2 %      

        The components of the weighted net revenue change by business units were as follows:

 
  Three months
ended
January 31, 2013
 
 
  Percentage Points
 

Supplies

    (3.0 )

Commercial Hardware

    (2.1 )

Consumer Hardware

    (0.2 )
       

Total Printing

    (5.3 )
       

        Printing net revenue decreased 5.3% (decreased 4.6% on a constant currency basis) for the three months ended January 31, 2013, as we continued to shift our focus to higher usage printers from low-end printers. As a result of this shift, printer unit volumes declined by 11% while average revenue per unit increased by 3%. Net revenue for Supplies decreased 5% for the three months ended January 31, 2013, due to weak demand in all regions. These effects were partially offset by growth in large format printing supplies. Net revenue for Commercial Hardware decreased 9% due primarily to volume reductions of 6% along with lower average revenue per unit of 6%. These effects were partially offset by double-digit net revenue growth in the graphics services and managed print services businesses. Net revenue for Consumer Hardware decreased 2% while average revenue per unit increased by 14%. While low-end printer volumes declined, unit volume and average revenue per unit increased within high-end printers as a result of our continued focus on more profitable high-end printers. Additionally, the introduction of our new inkjet SMB printers has favorably impacted revenues and average selling prices.

        Printing earnings from operations as a percentage of net revenue increased by 3.9 percentage points for the three months ended January 31, 2013, due primarily to an increase in gross margin, the effect of which was partially offset by higher operating expenses as a percentage of net revenue. Gross margin increased due to our focus on higher-end inkjet printers combined with a higher mix of ink supplies, coupled with toner rate improvements due to lower discounting. These effects were partially offset by an unfavorable currency impact primarily driven by weakness in the Euro currency. Operating expenses as a percentage of net revenue increased due to the decline in net revenue and higher marketing expenses, the effects of which were partially offset by lower administrative expenses and cost savings associated with our ongoing restructuring efforts.

Enterprise Group

 
  Three months ended January 31  
 
  2013   2012   % Decrease  
 
  In millions
 

Net revenue

  $ 6,984   $ 7,282     (4.1 )%

Earnings from operations

  $ 1,084   $ 1,329     (18.4 )%

Earnings from operations as a % of net revenue

    15.5 %   18.3 %      

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        The components of the weighted net revenue change by business units were as follows:

 
  Three months
ended
January 31, 2013
 
 
  Percentage Points
 

Storage

    (1.7 )

Business Critical Systems

    (1.3 )

Industry Standard Servers

    (1.1 )

Technology Services

    (0.3 )

Networking

    0.3  
       

Total EG

    (4.1 )
       

        EG net revenue decreased 4.1% (decreased 2.7% on a constant currency basis) for the three months ended January 31, 2013 due primarily to the following factors: continued macroeconomic demand challenges, particularly in EMEA; new product and technology transitions in Storage and ISS; and a competitive pricing environment. Each of the business units within EG experienced year-over-year revenue declines except Networking. For the three months ended January 31, 2013, Storage net revenue decreased by 13%. This Storage decline was due primarily to revenue declines in traditional storage products, which include our tape, storage networking, and legacy external disk products. The decline was partially offset by strong growth in converged storage solutions, which include our 3PAR, StoreOnce, StoreVirtual and StoreAll products. BCS net revenue decreased by 24% for the three months ended January 31, 2013 mainly as a result of ongoing pressure from a declining UNIX market and lower demand for our Itanium-based servers. ISS net revenue decreased by 3%, driven primarily by unit volume declines, the effects of which were partially offset by favorable average unit pricing impacts from our Generation 8 products. TS net revenue decreased by 1% for the three months ended January 31, 2013, driven primarily by revenue declines in the consulting business, as a result of our decision to focus on more profitable services offerings. Partially offsetting the decline in consulting was slight growth in the support business. TS experienced weak demand in EMEA due to declines in certain key countries in the region. Networking net revenue increased by 4% for the three months ended January 31, 2013 due to higher market demand for our core data center products, the effect of which was partially offset by the impact of the divestiture of our video surveillance business in the first quarter of fiscal 2012.

        EG earnings from operations as a percentage of net revenue decreased by 2.8 percentage points for the three months ended January 31, 2013 driven by a decrease in gross margin coupled with an increase in operating expenses as a percentage of net revenue. The gross margin decrease was due primarily to a gross margin decline in the support business of TS and, to a lesser extent, in BCS. The decline in TS gross margin was due to the impact of eroding hardware sales in BCS, an increase in delivery costs and less profitable vendor support contracts. The increase in operating expenses as a percentage of net revenue was driven by an increase in administrative expense and R&D costs due to planned investments in the business, the effect of which was partially offset by cost savings associated with our ongoing restructuring efforts and a VAT subsidy credit related to R&D.

Enterprise Services

 
  Three months ended January 31  
 
  2013   2012   % Decrease  
 
  In millions
 

Net revenue

  $ 5,919   $ 6,371     (7.1 )%

Earnings from operations

  $ 76   $ 145     (47.6 )%

Earnings from operations as a % of net revenue

    1.3 <